PRINCESS ETUK spotlights Nigeria’s aviation crisis, pointing out the need for government to stabilise forex, support local airlines, and reduce the industry’s heavy dollar dependence
The Nigerian aviation industry is currently grappling with significant financial challenges, primarily due to the depreciation of the naira and escalating operational costs. These issues have led to increased airfares, grounded aircraft, and a strained relationship with international lessors and financiers.
Many lessors prefer payments in U.S. dollars to maintain financial stability. However, the naira’s depreciation has made it increasingly difficult for airlines to meet these obligations. Historically, Nigerian airlines have not been major clients for lessors, typically leasing a maximum of three to four aircraft from a single lessor, whereas airlines in other regions might lease up to 50. This limited engagement means lessors are less inclined to offer flexible payment terms to Nigerian carriers. Consequently, airlines often resort to leasing from Eastern European or North African countries, which may present their own set of challenges.
The naira’s devaluation has had a profound impact on the aviation sector. With the exchange rate reaching approximately N1,600 to $1, airlines are compelled to use more naira to obtain the necessary dollars for lease payments. This situation has led to increased airfares. For instance, routes like Enugu, Port Harcourt, and Owerri have seen fares ranging from N150,000 to N250,000, depending on booking times. These elevated fares reflect the increased operational costs stemming from unfavourable exchange rates.
A significant portion of an airline’s operational cost is attributed to aviation fuel, known as Jet A1. Its price has surged dramatically, with reports indicating prices between N1,180 and N1,550 per litre in various airports. For example, at Bayelsa International Airport, the price is as high as N1,550 per litre. Given that small-body aircraft require about 1,300 litres for a one-hour flight, the fuel cost alone can amount to approximately N1.2m for such a journey. This escalation in fuel prices has inevitably led to higher ticket prices, with one-way domestic flights averaging between N200,000 and N250,000.
Aircraft maintenance and insurance are other critical areas affected by the naira’s depreciation. Conducting a C-check, a comprehensive maintenance procedure, now costs between N393m and N785m per aircraft, depending on the exchange rate. Additionally, Nigerian airlines face higher insurance premiums compared to their counterparts in other countries. While airlines in Ghana or the U.S. might pay between $200,000 and $300,000 to insure a Boeing 737-300 aircraft, Nigerian airlines pay about $1m annually for the same coverage. This disparity is due to the perceived high-risk environment in Nigeria, leading to increased operational costs for local carriers.
Foreign exchange scarcity
The scarcity of foreign exchange further complicates the financial landscape for Nigerian airlines. The Central Bank of Nigeria provides only a fraction of the required forex, compelling airlines to seek alternative, often more expensive, sources. This situation hampers their ability to pay for leases, maintenance, and other dollar-denominated expenses. Industry stakeholders have called for government intervention, emphasising the need for policies that support the aviation sector. Such support could include facilitating access to forex and providing financial assistance to help airlines navigate these challenging times.
Aircraft leasing challenge
The international aviation community perceives Nigeria as a high-risk environment for aircraft financing. This perception is influenced by factors such as fluctuating exchange rates, difficulties in aircraft repossession, and challenges in meeting leasing obligations. As a result, international lessors and financiers are hesitant to engage with Nigerian airlines, or they do so under stringent terms. Addressing these issues requires collaborative efforts between the government and regulatory bodies to create a more favourable environment for international partnerships.
Aviation analyst and member of the Aviation Round Table, Olumide Ohunayo, laid bare the complexities that airlines face. “If they have offices in Nigeria, then you go to one of the West Coast countries; probably you’re going to start looking at using other currency as a means of payment. But, in order not to tilt their financial books, they all insist on the dollar,” he said.
According to Ohunayo, flexibility in leasing terms is rare and usually reserved for long-standing clients from countries with convertible currencies. “Except in case your currency is convertible internationally, if you are a long-time customer, then they can bend some of those rules, looking at other means of payment, and maybe asking an institution here to take over the convertibility of your currency.”
But Nigeria’s airlines don’t carry that kind of weight. “But once you’re not in big time, they will just, like every other business, strictly buy the books to keep safe and ensure that they do not lose. And I think that’s what we’ve been having. Nigerian airlines are not big customers of the lessors,” Ohunayo added.
“Maximum is three or four aircraft that you’ll get from one of the lessors when some other airlines get about 10, 12, or even 50. So, we’re not big time, and because we’re not big time, I doubt if they will really bend some of those rules for us. And as you notice, most of our airlines were going to all these Eastern European countries and North African countries to lease aircraft.”
These leases are in dollars, but the airlines operate in naira.
“But working on the business, if they have to release the aircraft based on dollars, and you’re operating in naira, the only option you have is to convert that Naira to dollars and then use that to pay for your leased aircraft,” Ohunayo explained.
“That was what was the problem in the past, because when airlines applied for such money from the CBN, it took a long time before they got approval, and that was the payment of the lease and was causing issues with the lessor. But now that the naira has been floated and it lost a lot of value to the dollar, you have to use more naira now; you have about 1,600 to get one dollar.”
Ohunayo noted that this depreciation directly affects airfare: “And that is reflected in the fares and even the economy generally. But then, the fare is still not too bad, because we know that what has always been the benchmark here is that an hour flight should be about a hundred dollars, which was what it was in the past.
“A hundred dollars is now N150,000 to N60,000. But you can get an hour flight if you book early below N100,000, maybe about N90,000, if you book early. So, the fare right now is not too bad, and I think because of the demand, some of those routes have not really reflected the rate of exchange.
“But when you go to routes like Enugu, Port Harcourt, and Owerri, you will see that those routes show the exchange rates, because the least you will get on those routes is about N150,000 to N160,000, no matter the time you book. And when you go to that same site, about 24 or 48 hours after that flight, they’re doing about N250,000. So, some routes reflect the exchange rate, while some don’t.”
He added, “So, maybe it’s the competition; maybe it’s the demand of the passengers. All these combined affects the price of the ticket. But the airlines have a way of balancing it out.
“Nobody operates to lose. So, all this would have been factored into the current operation. And as expected, it is the fares that they will use to recoup their money and pay for all the opportunity expenses, including the cost of losing the aircraft.”
Dollar dependency
A spokesperson for one of Nigeria’s airlines, who asked not to be named, echoed the sentiments, pointing to the deep-rooted dollar dependency in the industry. “Everything we do in Nigeria, especially the airlines, everything they do, they get it in dollars. The parts we buy here are in dollars. And the 8th generation is not helping matters.”
He went further to draw a parallel to the banking sector, adding, “Just like when I was in the bank too. When I was in the bank, you know, there are some funds that you finance in dollars. And when they want to pay you, they want to pay you in naira. It’s not fair enough, man. You know they will lose money. They will lose that fund.
“So that’s exactly what is happening. So, if you, for instance, are buying in dollars. And you’re operating; you know, you’re not going for consumption now. You’re buying commercial to resell. You’re not reselling at those dollars you’re buying. So, you’re going to lose money.”
The airlines try to manage this by aligning fares with the forex rate.
He explained, “How you can mitigate this is maybe when you try to push it a bit. You look at the prevailing exchange rate. So, it can be nearer to what is obtainable. I mean, if, when you even do that, people will not be complaining, your fares are high, your prices are high.
“So, it’s a lot of challenges for operators in the industry. And so that’s how you’re going to coin it, you know, maybe in your background.”
Our respondents compared the aviation sector to Nigeria’s export struggles: “So, most of these commodities, agricultural commodities, like cocoa, cashew nuts that we export… They set the price for cashew nuts. They set the price for all of this, and all this is dollar denominated.”
The currency pressure affects not just leasing and parts but day-to-day fuel consumption. “The least price in Air Peace starts from N100,000. But those are special fares. But if you want to book immediately, you are now looking at between N150, 200, 250, and N300,000. If you look at the exchange rate, how much are they buying fuel?
“For each aircraft, I think we buy this aviation fuel for N1,400, and we take about 1,000 litres for 55-minute or one-hour trip.”
The spokesperson noted that many operators are sustained by sheer will: “People that are in the industry really, they’ll tell you that what is keeping them is just passion.”
Government intervention
Manufacturing, they say, is not a viable solution — yet: “Manufacturing aircraft is a tall order. We don’t have the capability to manufacture those things. But if you look inwards, to be honest, there are people that can do this, internally, locally. But we don’t have the government support.
“So where are these engineers now? It’s not all of them that are dead. There are still some. But they can’t come out because Nigeria will happen to them.
“To say that now the solution is for us to manufacture planes is a tall order. They won’t. But the thing is for the government to come in.
“Just the way it’s supporting the present administration now, especially the minister, they can pull resources. They can get banks to finance the industry. And when your dollar is stable, a lot of things will begin to happen.”
Also speaking anonymously, some aviation experts reiterated the currency dilemma: “The airlines pay the leasing company in dollars, so as a domestic airline, the challenge is raising the funds to pay them in dollars when you are doing business in naira.”
“And if you don’t have a satisfactory load factor, how do you then raise enough money to pay them? Because when you do a lease, there’s already a fixed amount that has been agreed that you would pay per flight, so whether you fill the aircraft or not, that fixed amount has to be paid.”
The experts warned of a ripple effect if passenger numbers fall: “So in the case where the airlines are struggling to fill their aircraft, if there’s a passenger debt, the airlines too will struggle to pay the lessors because they don’t have enough money, and even the source for the dollars will be another challenge.”
Operational costs, they say, drive fares more than leasing companies do: “There are different ways it will affect airfares. It’s not the lessors that affect the airline’s fares. The lessor is just doing business based on the use of the aircraft. But the factors that affect the fares of the airline are operational costs.”
Fuel, forex, and naira devaluation all play a role: “Another challenge is the fact that for me to be able to source the dollars to pay the lessor, considering the fact that we already have a scarcity of forex. And then you also have the challenge of the naira, which keeps being devalued.
“So, for instance, today now the rate is ₦1,200; a week later, the price might be ₦1,500. You find out that the airline needs to raise a shortfall of N300,000 to pay those dollars. So, it’s a recurring decimal. It’s a continuous challenge.”
