Nigeria Aviation Soars
Lately, working partners of the aviation sector such as banking, insurance and multilateral development institutions have been showing more than a passing interest in the industry. Hitherto, the aviation business was regarded as a high risk, with uncertainties on investment returns. Bureaucratic and administrative bottlenecks, caused mainly by crippling influence from government officials, and a lack of autonomy for the Nigerian Civil Aviation Authority, NCAA, deterred local and international investors.
Since the NCAA gained its autonomy last year, there has, however, been a gradual reversal of the trend with investors indicating positive interest in the sector. In this direction, a major threshold was crossed in the first week of last month when the CIT Aerospace Company hosted the NCAA in Dublin, Ireland, in a forum that marked an endorsement of the Nigerian aviation industry as being worthy of the highest levels of investments in aircraft and equipment. In tune with convention requirements of the International Civil Aviation Organisation, ICAO, the NCAA has registered with the Mobile Asset Registry in Dublin. The process conformed with a requirement of the Cape Town Convention put in place to protect operators and the leasors of aircraft. In short, it basically protects aviation investments.
In Nigeria, the Convention on International Interest in Mobile Equipment, otherwise known as the Cape Town Convention, is embedded in the Civil Aviation Act 2006 passed into law by the National Assembly in compliance with section 12 of the Nigerian constitution.
With the NCAA registration at the Mobile Asset Registry, financial institutions, aviation analysts posit, are assured of protection of their interests, while airlines can cash in on the advantage by investing in modern, safe and efficient equipment on affordable terms. As things stand, the Nigerian Civil Aviation Regulations, NCARs, empowers the NCAA Director-General to take effective action to help creditors when lessees default. According to an NCAA official, “if an investor comes into Nigeria in partnership with any operator either in way of investing or bringing in an aircraft, the investment is protected since the legal intricacies that block recall or withdraw of an aircraft have been removed.”
If an aircraft is leased out and there’s a default, the NCAA will de-register it accordingly, upon notice without the need for the investor to seek legal redress or be subjected to complicated legal intricacies that could cause delay in obtaining permission to move out the plane. The step is most important to investors which are predominantly foreign-based companies, the foremost being the CIT group which is a leading aircraft financing company in Europe involved mainly in buying and leasing aircraft to companies all over the world. CIT, which has transacted business across all continents except Africa, has always been cautious of utmost protection of its interests and investments, which it could not, until now, guarantee in Nigeria and Africa as a whole.
Globally, with the deregulation of the civil aviation industry, there has been a growth in renting or ‘leasing’ of aircraft by airlines from other companies. Between 1999 and 2005, for example, the number of international scheduled airlines which used leased aircraft grew by 20 per cent. In 2001, about than eight out of every 10 of the 532 international scheduled airlines worldwide used leased aircraft while over 45 per cent of all transport category aircraft currently in service with scheduled airlines are leased. The growth of aircraft leasing is considered beneficial to the aviation industry in some respects as it encourages the establishment and development of new and independent carriers.
With the new development, the stage appears set for the encouragement of fleet replacement of old aircraft with modern, new generation models. The enabling environment is already attracting aircraft manufacturers, leasors and banks, which are taking advantage of the Cape Town Convention using aircraft assets as collateral. Hopes are rising that the Nigerian aviation vision of working with international leasing companies and local banks to introduce affordable aircraft leasing schemes for local and regional airlines will turn to reality. The development is expected to create an enabling environment that will encourage the establishment of safer and more profitable low-cost airlines and attracting new customers, while affording the public the opportunity to travel by air in larger numbers.
Now that a financier’s risks have been reduced by the creation of a uniform international rule for the recognition, registration, assignment and enforcement of security in the event of default, Nigerian airlines can, more than ever before, tap into the perks that were, hitherto, beyond their reach. One of such advantages is America’s EXIM bank’s offer of a 1/3 reduction in the exposure fee it charges airlines in countries where the Convention and Protocol have come into force provided that the appropriate declaration required to be made by the country of origin of such airlines is made.
Fortunately, the bank is no stranger in the Nigerian aviation terrain and is, indeed, credited with having a bias for the sector. It is believed to be a major back-up or source for Arik Airlines and is believed to have a relationship with other Airlines. The Nigerian aviation industry has, therefore, already been witnessing a season of delivery of brand new aircraft, anchored on the Cape Town Convention as sealed up conclusively by the Dublin, Ireland, Mobile Equipment registration.
The NCAA beats its chest that Nigeria has demonstrated a readiness to fully join the fleet renewal club. This enthusiasm is based on its records that apart from Arik that has taken possession of new aircrafts, others like Chanchangi, Bellview, Aero Contractor and Virgin Nigeria are also in the process of following suit. It revealed that on the domestic routes, local operators now operate new Dash 8 Q200, the B737 300, 400 and 700 series and the CRJ200 and CRJ900 models. On the international routes can be found new Boeing 767 (until recently). The authority confirmed that in April 2007, a brand new Boeing 737-700 and a 2 CRJ 200 were delivered. Before the year ends, more are expected. A Nigerian operator has also signed up three Boeing 777 and four Boeing 787 Dreamliners. These are in addition to numerous brand new helicopters and business jets.
The CIT group, in pursuit of its awakened business interest in Nigerian aviation, has agreed to join forces with the NCAA to organise an administrative forum that will bring together banks and insurance companies to throw light on benefits waiting to be tapped in the aviation business.
Notably, the ‘high risk’ status of Nigerian skies informed the high premium paid on aircraft. While what obtains in Europe is put at less than one per cent, the unofficial figure is up to16 per cent, although Dr. Harold Demuren, the NCAA Director-General, put the figure at 12 per cent on the haul, paid by Nigerian airlines. The DG had earlier embarked on negotiations with Lloyds of London on how to reduce the insurance premium.
Due to their low capitalisation levels, Nigerian banks and insurance companies have always played the role of mere brokers to their much stronger foreign counterparts. In spite of recapitalisation, banking sector sources were quick to admit that Nigerian banks are still unable to provide the funding required by aviation in Nigeria, because the sector is extremely capital intensive. On the brighter side, however, because of the recapitalisation of the banking industry, it has become more attractive even to foreign banks. Therefore, an increased number of foreign banks and financial institutions is now eager to do business with Nigerians through the recapitalised banks. Collaborations are, therefore, being structured out based on a new-found confidence in the industry towards attracting more direct foreign capital.
Commenting on the role of banks and financial institutions in the aviation industry at an Allied Business Leadership Conference held in Dakar, the Group Head, Aviation and Telecommunications at First Bank Nigeria plc, Mr. Babatunde Dada, posited that financial institutions have vital roles to play in assisting airlines to tackle their financial challenges. In his view, financial institutions could play the role of providing credit facilities for outright equipment purchase and leasing while also acting as “risk transferors” in structured deals for operators. “Given that financial institutions in many African countries already have more developed structures in place than many other sectors, they can also be investors in the industry, as they are relatively more developed and can, therefore, ensure best practices, afford competent management and structure financial statements better to afford optimal returns,” he said. Financial institutions, Dada pointed out, are also in a position to provide financial advisory services, mergers & acquisitions and balance sheet structuring for airlines and are now more empowered to access foreign financing.
Airlines, on their part, were advised to increase their capacity by increasing their safety and security levels in a bid to giving confidence to prospective investors. It is believed that once there is confidence in the aviation industry, banks will ultimately rush in uninvited.
Generally, regarding the future of African aviation, Boeing forecasts that African airlines will require a total of 425 new planes before 2004 and 2024, to cater for traffic growth and replacement of older aircraft. Boeing puts the value of these 425 new aircraft at $34 billion while Airbus envisages that African airlines will require about 641 new aircraft between 2004 and 2023 to cater for traffic growth and older aircraft replacement. Airbus places the value of the 641 new aircraft at $60 billion. On the Nigerian scene, with varying substantial investments sunk into the realisation of the Murtala Muhammed Airport 2 terminal by Oceanic Bank, First Bank, Zenith Bank, BankPHB, UBA and Union Bank and with aviation desks emerging in various financial institutions to boot, the ground is already being laid for higher heights in aviation investments. If the momentum is sustained and there is no political instability or policy reversal to cause drawback, industry experts asserted, it is only a matter of time before the Nigerian aviation industry soars high into brighter skies.