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25October2014

 

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Our Aviation Sector is Experiencing Very Lopsided Development

The N300bn intervention fund was wrongly applied because there was no need to give individuals or institutions funds through banks, as they could package facility granting application. Consequently, this fund ended in the coffers of the defunct Air Nigeria. The Aero version went into a sinking ship where the load (debt) was heavier than the structure (business) could carry.

Today AMCON is struggling to ameliorate. The Arik version came at a time all the fuel suppliers could not justify further extension of the volume of outstanding fuel credit. Flights were cancelled to the extent it affected senators, ministers, and presidential assistants, causing N3bn to come out as intervention. The truth about FAAN bills where the union attempted to fight to save their colleagues is unknown. Arik said it was not indebted to FAAN; who knows the truth?

The intervention procedure of buying aircraft for domestic airlines is unclear. I perceive another wrong application of good intentions. Aircraft acquisition is a product of fleet expansion, upgrade, or additions based on the needs of specific airlines at a stage: What type of aircraft is required?  for what route? And for  which operator?

The airline operating tourist flights to Obudu and Yankari, the airline linking Akure, Kebbi, Ibadan, Gombe, Ilorin, to Abuja, Lagos, Kano, and Port Harcourt, the airline linking Sao Tome, Malaba, Doula, Calabar to Port Harcourt, the airline shuttling Abuja to Kano, Abuja to lagos, and Abuja to Port Harcourt, the West African cities linkage to the Lagos hub, the intercontinental carrier from Lagos, Abuja, Kano, Port Harcourt, mixed market operators, or all comers operations jumping from one module to another?

If an operational module has been identified and research of availability of passengers and cargo identified, the frequency and capacity required must be determined. This then determines the size and type of aircraft. The safety envelope of categories of airports and the facilities they offer must be critical inputs, too. We should not jump into lopsided amelioration again.

No person or institution should be given money to buy aircraft. When the operator identifies the aircraft that suites its operations, the operator should get NCAA to inspect and approve. The government should pay through its bank and retain the title of ownership while the airline is only the operator. The insurance must be paid by the title owner and he retains the right of first loss payee. Furthermore, the scheduled maintenance checks must be financed or funded by the owner when the maintenance by calendar or by hours is due.

Payments for salaries, training, spare parts, and line maintenance must be on an open requisition program to avoid default. These are budget items. Fuel credit scheme must be such that payment is automated between the banks and the fuel company on presentation of audited vouchers. Monthly payment on the aircraft from the sales must be automated to avoid default on lease rentals. All of the above will ensure there is no hiding to create excess capacity in one route because of high traffic while under-developing other routes.

Everybody wants to operate London–Lagos, Abuja, Kano, Port Harcourt, Dubai and New York. They buy the aircraft and discover they would carry breakeven load on a route and fly loss on the next route. Lack of research and preparedness to invest in route development is the bane of our government and airline investors.

There is need to gazette the waivers for the Federal Ministry of Finance to pass customs duty waivers to the customs for implementation. If an operator imports brake units or engine; the customs officer at the port will use his gazette and published tariff, not newspaper or television pronouncements. I say this because it happened before. Then Chief Michael Ani was Minister of Finance. We went to him to complain that customs at the airport were asking for duties on aircraft, aircraft tyres, brake units and so on after the military president’s pronouncements. The minister had no document from the Presidency.

I salute the current managers of our aviation from the minister to the heads of NCAA, FAAN, NAMA, NCAT, NIMET etc. My advice to them is that remodeled airports, lights and navigational aid need of airlines should be paid for and used so they can get income from the utilisation to meet their budget to maintain/upgrade these facilities.

In my opinion, in the history of Nigerian aviation, the current NCAA management has handled safety oversight in the best professional method so far. Regulating airlines is proper. My advice is this: an operator may want to operate two or three aircrafts to tourist sites only but a small operation like tourist flights, courier delivery flights, ambulance flights hub and spoke services will not need the same engineering and operations offices, personnel and equipment like ARIK air or AERO.

The process of certifying operators to issue them AOC must try to identify applicants’ need of infrastructures suitable to the airline’s operations. They become a burden after the exercise. The statutes of NCAA require certain offices to be established and occupied, whether relevant or not to the airlines type of operations. This is the reason we have very few airlines with AOC because you must meet same requirements irrespective of your type of operation.

Does a small operator who does not wish to operate all routes but a scheduled passenger and cargo carrier hires a director of flight operations, hires a chief pilot, hires safety pilots, hires operations manager, and hires flight dispatchers, just like Aero or Arik? An AOC applicant can tick his choice of type of operations while filling the application but at inspection and certification of facilities, he must have all required offices and infrastructures (see part 9 of Nigerian car 2006) or the certifying inspector marks x, which means failure. The common denominator to every flight operation is safety.

The budget allocation to aviation by the Federal Government is very low. Aviation is the preferred and fastest mode that moves people and goods between states and continents. We allocate very little to aviation in comparison to what it offers. This is the reason airlines still pay fees to NCAA for their aircraft, training and maintenance organizations to be inspected and certified suitable for use.

 

Funding Domestic Airlines By Bank Loans

 A lot of people will argue that airline proprietors took money from the bank to invest in airlines but never paid back. They never invested the money in airlines. They used it to live large while the airlines collapsed.

There are two sides to a coin. The bank must have had a lot of loopholes, a very loose lending policy or officials conniving for this to happen. It is also possible that the companies operated in environment that ensured negative returns on investment (loss).

 After so many tightening measures on lending and policy adjustments on airline funding, all scheduled domestic operators cannot close their end of year account report with a positive balance sheet. They do publish audited accounts that show positive balance sheet. However, at the time the account was closed, how much was outstanding to: aviation fuel companies, aircraft lessors, FAAN bills, NCAA bills, navigational bills, spare part suppliers and interest on loans? Very ironic that a company declares profit yet owes unpaid debts from same operations, sometimes including staff allowances and salaries.

If you produce a tin of milk at the cost of N10, you cannot sell it at N8 and claim to be in business. This is the simplest illustration to summarize the economic operations of Nigerian airlines.

The ticket price of an hour’s flight is N25,000. After paying taxes and surcharges, they go home with N10,000 from which they pay loan with interests, salaries, maintenance, aircraft lease, training etc.

How profitable are their operations? They carry 90 per cent of the capacity they provide from Lagos to Abuja Monday to Wednesday mornings. They return from Abuja to Lagos same mornings of Monday to Wednesday with 40 per cent of same capacity. Same trend happens between Thursday and Friday evenings from Abuja to Lagos. Same aircrafts need to be utilized beyond that route to meet a minimum required hours of usage. Movement of passengers follow same pattern on the kano–Abuja and Port Harcourt–Abuja route. The developed routes replicate this pattern in Nigeria. Every airline operating today except (Overland, Wings, Associated, Capital) based their feasibility and routes schedule on this pattern.

The consequence of this pattern is that the airlines provide excess capacity on particular routes in specific times. Five airlines provide 680 seats on the Lagos to Abuja route on Monday morning between 7am and 9am to carry 350 passengers amongst themselves. This is the number one reason people cite for current operators to merge.

 Funding and Economics

 If we study passenger profile and classification within Nigeria, the airlines maybe recycling passengers as follows:

· Ministry and parastatal workers on official trips to supervise, monitor or attend duties across cities in the country.

· Company officials chasing contract sales or marketing across cities

·Businessmen chasing deals

· Students at resumption or close of school periods

· Festivity movements once a year (Easter, Eid-el-Fitri, Christmas)

From 11 commercial scheduled airlines with AOC in 1999, we have constricted to five airlines in 2013 and there is no chaotic overflow of passengers at MM2, GAT Ikeja, Aminu Kano, or Nnamdi Azikiwe in Abuja. Aircraft still depart with less than 60 per cent capacity.

We probably are not noticing the increase in comfortable bus services on these same routes. A large number of patronage is going to these bus services. They are not safer. They are available, affordable, and giving improved services to passengers. They make profits as operators. They repay bank loans. Investors have returns on investments.

Preemptively, they fill the vacuum for local air cargo movements. They have trucks and warehouses that move goods to all cities in the country and West Africa, whether perishable or time-definite.

Nigerian aviation cargo movement is simply described as one-way traffic: haul in cargo from abroad and ferry the cargo aircraft back empty. Take CBN cargo and drop in a domestic airport and return empty.

Take cargo charter to drop in any west or central African city and return empty. The mango or pineapple in Yola is yet to break the Asian and Indian monopoly in Europe or Gulf States. Some Indians in Dubai offered to take our natural pineapples at 50 per cent less than the price of their chemical-grown pineapples. Worse still, I should deliver and return to collect money after sales. We can’t get our investors to buy bulk, get adequate storage and break their monopoly. Instead, they buy estates in Dubai where they only enter with tourist visa even as home owners. Check how foreign operators like Cargolux and DHL are exploiting our air cargo markets.

 Funding by Our Local Banks

The silent code that local airlines have not been given facility to buy aircraft or develop a route since 2009 is yet to be disproved. It is only in Nigeria that banks audaciously offer facility for airline to acquire aircraft and develop a route with a tenor of 18 to 36 months on a double digit interest facility — the same conditions and tenure they offer to rice, cement and petrol importers.

The banks aviation desks actually analyze and present the feasibility report for this facility. Same bank officials go to courses abroad. They relate with colleagues abroad. No bank will give airline facility abroad to acquire aircraft and develop a route on less than 10 years tenure. The interest cannot be more than 3 per cent per annum. The scenario is worst when local airline investors source foreign direct investment. Thereafter, local banks that need to warehouse and conduit the repayment of this facility ask us to secure the foreign facility with equivalent amount of deposit or collateral worth 150 per cent of the value of the fund. They add theirs to the interest rate such that you’ll now pay between 7 per cent and 12 per cent interest from 3 per cent. They need to make profit from rendering us services.

 Multiple Designation

The issue of designating foreign airlines to two or three airports in Nigeria is very sensitive. One argument is that we signed to an open sky that allows this type of multi-designation. We did not develop our airlines to reciprocate this type of operations. Air France, British airways, KLM etc can operate from Lagos, Abuja, kano, Port Harcourt, Enugu, etc while Arik can only operate into Heathrow, New York or one airport designation per country.

The second opinion is that our domestic airlines would have been encouraged to enter into agreement with these foreign airlines to carry passengers to domestic destinations beyond Lagos and Abuja. This would mean increased flight frequency and passenger load for domestic airlines.

 We now seem to encourage them against our domestic carriers. They use B747-400. It is competition from the likes of Emirates that makes them change to new aircrafts. We don’t have safety oversight responsibilities on their aircraft. They charge very high fares per seat per flight. Their government uses interest rate reduction on facilities, insurance premium pegs, and tax waivers during environmental impact on business to encourage them. Aircraft spares are allowed to move in and out speedily without duties or taxes on them. They call it AOG. Most spares are on exchange program not purchased.

Aviation Fuel

This is not subsidized. The cost is high. The airline charges about N800 per ticket as fuel surcharge. A Boeing 737 burns about 3500 litres from Lagos to Abuja costing about N180 per litre. Currently, fuel accounts for 45 per cent of the cost of operating an hour’s flight in Nigeria. Next time you board an aircraft from Abuja to Lagos, clock when the engines starts and when the engines are turned off. It will be a minimum of 1 hour 15 minutes or 75 minutes. Calculate the fuel cost for that trip yourself.

 

 Suggested  Solutions

 

· Funding for domestic airlines must be long-term with single-digit interest

· Airline operators or investors must determine aircraft type that enables them develop their route with low cost of production: low fuel burn, manageable fleet size, easy-to-break-even load capacity, and disciplined adherence to operational expense subjects.

 

· Build maintenance facility and get Boeing, embraer, Bombardier, Airbus to equip and support us with training.

· Encourage route networks outside of Abuja, Lagos, Kano, Port Harcourt, Enugu, kaduna.

·Educate the public to appreciate short flights with turbo-engine propeller aircrafts. They are safe and economical to operate on our network than the jet-engine aircraft.

·Pay attention to developing the cargo sector with our farmers.

 

· Let us think of the airports from Calabar up to Banjul covering West Africa as available for our airlines to use. This region should be our domestic turf.

· Keep up on the development and upgrade of infrastructures.

· Develop aeropolis towns to boost aviation activities.

·  Make mm2 our regional airport. Expand GAT apron to remain domestic. Provide coaches for passengers and cargo linking international, mm2, and GAT every 15 minutes.

· Ministers should not change head of aviation parastatals before their contract tenure ends except for corruption or proven misconduct.

· Each Head of aviation parastatals should write his five-year programme for the organisation he is contracted to manage. His five-year tenure should be tied to the programme or his programme tied to his tenure

·Government should not make an airline pay NAMA, pay NCAA, pay FAAN, pay Fuel taxes, pay VAT, pay state revenue tax, pay federal revenue tax, pay duties on aircraft and pay duties on aircraft spares. This is multiple taxation. Airlines pay government agencies revenue tax, pay government revenue tax, pay value added tax on services:

ü NAMA – Nav fees and domestic terminal charges

ü NCAA – 5 per cent of every airline revenue

ü FAAN – 1000 domestic, 5000 international

ü VAT – 5 per cent of every airline revenue

ü State government tax e.g. LIRS

ü Federal government tax FIRS

ü Fuel Tax

·Attention should be given to insurance. Insurance companies should not categorize Nigerian aviation to pay same premium like Somalia, Sudan, CDR, Afghanistan etc. This must be addressed. Nigeria is not a war zone.

·Remodelled airport buildings should include facilities commensurate to its new looks. It is not right to come from an hour flight into a fine terminal and wait one hour for your luggage. The toilets, the air conditioners, the information systems, the transfer desks and coaches should be brought up to date.

· Importing aircraft brakes, tyres, engine oils, and aviation fuel should have a two-year deadline. We can build, assemble, and refine these items in Nigeria. The defunct Nigeria Airways workshop could do brakes and tyres. Are we going forward?

In Nigeria, liars, praise singers, touts have better relations with leaders. Those that say the truth are rebels, opposition, or troublemakers. This is our country; let us help our leaders with correct inputs to decision making.

 

Amos Akpan

Capital Airlines

General Aviation Terminal

Murtala muhammed Airport

Ikeja. Lagos.