11 January 2013

Nigeria: Confusion Over Aircraft Acquisition Plan for Airlines

The Ministry of Aviation has announced that it would acquire 30 aircraft for domestic carriers in order to sustain their operations. But pundits in the industry believe it is an ill-advised move, while others insist that government is on the right path.

When the notion of acquiring aircraft for Nigerian airlines was mooted by the Ministry of Aviation, many people did not take it seriously because to them, it was an aberration. But when the plan was repeatedly made public by the ministry spokespersons, industry observers and others began to react, airing their views, which were for most parts, opposed to the plan.

But some airlines top officials said that those who are critical of the plan are hasty. The reason being that they did not understand it. They noted that before government made this plan public, it did not also make public the comprehensive plan and strategies to actualise this objective.

Questions Begging for Answers

Without doubt, the aircraft acquisition programme raises a lot of fundamental questions. Where is government going to get the funds it would use to buy the aircraft from? How are the airlines going to benefit from this plan and what are the criteria for allocating the planes? Do the airlines need the aircraft type that government wants to acquire for them? Is government going to set up an aircraft leasing company and what is the mode of pay back? What will happen to the beneficiaries (airlines) if they are unable to pay for the aircraft?

These are some of the questions begging for answers by those who are anxiously waiting for government to make its intentions clearer. Besides, the decision to acquire aircraft for the airlines is seen by industry critics as a knee-jack approach to and was triggered by the tragic accident of the Dana Air flight J9 992 that took place in Lagos on June 3 2012.

Aviation decision makers in government came to the conclusion after the accident that the major reason why there is a relatively higher rate of air accidents in the country is because Nigerian airlines fly old aircraft which they do not adequately maintain because the country does not have a Maintenance, Repair and Overhaul (MRO) facility, so they find it difficult to cough up the huge sums needed to carry out overseas maintenance of their aircraft by industry standards.

Also, when an aircraft is taken away for maintenance it is not certain when it will return from service. It is placed on a queue and in the event the funds for maintenance is not promptly, remitted this may cause further delays. Decision makers further recognised that when aircraft is old, it requires maintenance more frequently than newer one and requires more money for maintenance.

Although many also believe that there is no difference between old and new aircraft once properly maintained, the challenge really is in maintenance. So the Minister of Aviation, Stella Oduah, believed that if new aircraft was made available to the airlines it would help them grow and stabilise their operations, because they won't less resources on maintenance, at least in the near term.

Moreover, the new aircraft will be fuel-efficient, so they would spend less funds on fuel and overall, this could shore up their profitability which would sustain their business. The minister, many said, was well intentioned, but her actions do not dovetail with any recommended standard practice.

The Nigerian environment, also, makes her plan unrealistic because experience has shown that Nigerian airlines do not keep to agreements with government. Many industry observers are extremely sceptical about its viability.

Funding for Aircraft Acquisition

But the Special Adviser (Media) to the Minister, Joe Obi, explained to THISDAY that the funds that would be used to acquire the aircraft would come from the aviation intervention fund, which was already reflected in the 2013 budget.

"The money will come from aviation intervention fund. The minister was not satisfied with the way past intervention funds given to the airlines was spent. So the Ministry of Aviation is partnering with the Central Bank of Nigeria (CBN) and the Bank of Industry (BOI) to make the money available to the airlines.

"The difference really between the disbursement of this intervention fund and the one in the past is, instead of giving the airlines cash it will be used to acquire aircraft for them," Obi said.

He remarked that it is a major government concern that domestic airlines should have good equipment, which is the operating aircraft in their fleet, and this could be done by using the intervention fund to provide them with new aircraft.

"Government will determine what each airline needs with very stringent conditions attached to the acquisition of the aircraft. I assure you that no airline that will benefit from this programme will not have the capacity to refund the money used in acquiring the aircraft. There will be pay back guarantees and collateral. It will be a surer investment to assist domestic airlines to grow by providing them the equipment," he said

The Minister told THISDAY in a recent interview that government might source the money for the aircraft from the airline intervention fund or from the Bilateral Air Service Agreement (BASA) fund, but indications show that government has settled on acquiring the airplanes from the aviation intervention fund. She explained how the money would be sourced.

"We tapped into the existing intervention fund but did it in a different way where the impact will be positive. That essentially means to get the Central Bank of Nigeria's approval to have a change in the usage and to get the Ministry of Finance to approve that process, as well. We have done both now so we are waiting for the final approval.

"However, there is a paradigm shift there. The money will not go to the operators; the money will go to the aircraft manufacturers, who will in turn, bring these aircraft for us here and we have criteria again that the potential airline operators must have to scale through.

"It has to do with the professionalising their operations. It has to do with good governance, it has to do with several things, including ownership structure, because we want efficient and functional airlines, as that is the only way we can have safe aircraft flying in our airspace. This is what we promised Nigerians and that is what Nigerians will get," Oduah said.

Unresolved Operational Issues

The Managing Director of IRS Airlines, Yemi Dada, told THISDAY on Tuesday that the intention of the Federal Government was good because it wants to help the domestic airlines grow but there is a lot of misunderstanding.

"There is a lot of misunderstanding in the industry, but what government wants to do is trying to provide support to the airlines to acquire aircraft. There are stringent qualifications, which include the airline having Air Operator Certification (AOC) and solid technical partners.

"We need to exercise patience so that government will finalise its plan. The announcement came out too early with lack of specifics in place but it is a good plan and government has good intention," Dada said.

There seems to be technical challenges to this plan, although laudable. A top official of a major airline wanted to know how the aircraft government intends to acquire would suit the plan of different airlines in the country.

"Every airline has a business plan. You cannot dump aircraft on them. For example, Aero Contractors operates largely Boeing 737 aircraft and it has engineers trained for this aircraft type; it has spares for the aircraft. Now, if you bring Embraer, new aircraft demands new risk analysis. What is the marketability of the aircraft? Will the passengers like the aircraft?"

The official said that the business plan of a normal airline may be that it operates two or three different aircraft types and it has spares for these aircraft types.

"The airline has also done its route analysis and research and decided on the aircraft it would be operating, so how can it add another different aircraft type to its fleet which it does not have the technical personnel and spares for?" the official queried.

But THISDAY investigations revealed that government does not intend to dump any aircraft type on the airlines. When the financing is made available, the airlines will decide on which aircraft they want to operate and government would facilitate the acquisition with the aircraft manufacturer. In this regard, there are two or three manufacturing companies that are in advanced stages of negotiations with government for the aircraft acquisition initiative.

Enforcing Agreements

However, doubts continue to linger over the capacity of the airlines to keep to the terms of the agreement with government. Many believe that the airlines would renege on the payment terms for the aircraft, just as they did in the past with the intervention fund.

"What is the collateral for aircraft? What is the ownership arrangement? With the aircraft be leased to or owned by airlines? In the event of accidents, who becomes liable for the aircraft? Will the government act as the lessor? What is the depreciation factor and who is going to support the airplanes with spare parts in the event of default?" the source also asked.

Industry expert and former Secretary General of Africa Airlines Association (AFRAA), Nick Fadugba, warned government in a recent interview with THISDAY on how it exposes itself to airline debts. "If the government is going to provide $1 billion or $500 million in guarantees for aircraft financing, who is going to negotiate these deals with the aircraft manufacturers and leasing companies?

"Is there anybody within government that can negotiate in terms of aircraft prices and contractual terms and conditions? We don't have that kind of competence within government. Only a few airlines in Nigeria have various degrees of skills in this complex area.

"But if the government is going to lend public funds to airlines, which will be secured by aircraft assets, then the government should ensure that it has the capacity to spend on aircraft residual values and aircraft remarketing to minimise its exposure," he advised.

Fadugba further explained: "This is because what the government is getting into now is aircraft asset-based lending. And this is a very complex and potentially risky area in which even seasoned leasing companies around the world have lost money when they got it wrong."

Nonetheless, he maintained that in principle, all the airlines in Nigeria should be given every possible support. "However, there are legitimate concerns that the debt exposure of Nigerian airlines is very high. Besides, that the debts is not being serviced regularly by the beneficiaries of the intervention fund. So to now talk about a $1 billion aircraft guarantee fund requires us to exercise caution."

Copyright © 2013 This Day. All rights reserved. Distributed by AllAfrica Global Media (allAfrica.com). To contact the copyright holder directly for corrections — or for permission to republish or make other authorized use of this material, click here.

AllAfrica publishes around 2,000 reports a day from more than 130 news organizations and over 200 other institutions and individuals, representing a diversity of positions on every topic. We publish news and views ranging from vigorous opponents of governments to government publications and spokespersons. Publishers named above each report are responsible for their own content, which AllAfrica does not have the legal right to edit or correct.

Articles and commentaries that identify allAfrica.com as the publisher are produced or commissioned by AllAfrica. To address comments or complaints, please Contact us.