Nigeria - The Strategic View - Aviation 2017

George Etomi highlights the many concerns of Nigeria’s aviation sector, including fluctuations in the naira leading to higher costs of operation, the drop in oil prices and the infrastructural deficit

Contributing firm

1. Currently, what are the main issues (strategic and political) affecting those in the aviation sector in your jurisdiction?

A.    Strategic Issues

i. Inadequate Capacity

Within the Nigerian aviation industry, the majority of international flights are conducted by international carriers, which can be attributed to the fact that most local airlines do not have the capacity to provide international air travel for passengers.  This lack of capacity is due to a number of considerations, some of which include the high cost of aviation fuel and aircraft maintenance.

In addition to this, Nigeria does not currently have a fully functioning maintenance hangar and, as such, all local airlines incur higher costs to effect mandatory maintenance checks and necessary repairs abroad.  Depending on the age and model of the aircraft, it can cost between $200,000 and $500,000 to send a single aisle aircraft overseas for mandatory C-checks which must be conducted every 18 months in accordance with the Nigerian aviation regulatory requirements.  Some local airlines therefore struggle to comply with the required checks due to the high cost.

ii.        Infrastructural Deficit

In 2010, Nigeria achieved a Category 1 air safety rating from the U.S. Government under the Federal Aviation Administration's (FAA) International Aviation Safety Assessment (IASA) programme.  In addition to this, in March 2016, Nigeria was given a pass mark under the ICAO Universal Safety Oversight Audit Programme (USOAP).

Despite having achieved these safety rankings, there are, however, still infrastructural challenges in most of the nation’s airports.  The previous Minister for Aviation spearheaded some renovations at the nation’s airports during her tenure.  In 2012, the President launched an Aviation Master Plan, a set of intervention projects for the expansion and renovation of the nation’s airports.  There has, therefore, been some improvement in the infrastructure at some of the nation’s airports, such as modernised security scanners installed at various passenger and baggage handling points.  The airports have also benefitted from upgraded Air Navigational Services as well as aerodrome and ground aids.

It is hoped that once the relevant upgrades and renovations are completed, the nation’s airports will improve to international standards, making them more attractive to foreign airlines, and this would in turn enable Nigerian airports to achieve the status of being an aviation hub in the West Africa sub region.

B.    Political

i.        Geographical Spread of Airports

In 1979, a decision was taken to build 21 airports in the country.  The spread of airports geographically was made based on political considerations as opposed to the economic viability of situating those airports in the particular areas.  Consequently, the majority of the nation’s airports are underutilised and are not economically viable.  There are currently 26 airports in Nigeria and, out of these, only a third have three or more flights a day.  Fewer than 50% of the remaining airports have more than one flight a day.

Certain state governments in Nigeria undertook the task of financing and building airports within their state.  One such state is Akwa Ibom state, situated in the oil-rich region of Nigeria, which has had great success in the setting up of an airport within the state.  The state government was also successful in encouraging local airlines to run flights to and from the state and there are currently a minimum of four flights into the airport daily.

Another state in the process of setting up an airport is Bayelsa state, which is also in the oil-rich region of the country, this being another factor which would promote the success of the airport, as such routes would appeal to the foreign investors and workers in the industry and also encourage further economic development within the states.

ii.          Inconsistencies in Legislation Leading to Difficulties in Transmission of Proceeds for International Airlines

Following the fall in oil prices from a peak of $115 per barrel in June 2014 to under $35 at the end of February 2016, the value of the Nigerian naira continued to fall at alarming rates until it was officially devalued to N320 to $1 in June 2016, the rate of the naira however still continues to fall.  For Nigeria, where over 70% of its revenue comes from the oil industry, this fall in price meant a fall in profits from oil exportation.  This, coupled with the problems with extraction of crude oil and other economic factors, caused a fall in the influx of the dollar into the economy, causing foreign reserves to reduce drastically and, in turn, caused the naira to lose value.

Foreign airlines in Nigeria have in recent times encountered difficulty in repatriating their revenue generated in Nigeria to their countries, due to a number of changes in the Central Bank of Nigeria’s (CBN) foreign exchange policies introduced pursuant to the fall in value of the naira.  Subsequent changes in policy have allowed foreign airlines to repatriate their funds; however, due to fluctuations in the naira, this is now at a significantly higher foreign exchange rate compared to the exchange rate at the time the tickets were sold, thereby causing massive losses to airlines.  It is estimated that foreign airlines have lost N64 billion (sixty-four billion naira) due to this.

This uncertainty has led to a number of airlines ceasing their operations in Nigeria and in turn job losses for their Nigerian staff, and it has also led to an increase in the cost of fares, as some fares to international destinations have increased drastically in recent times.  In addition to this, passenger load has reduced, and a number of airlines have also reduced the frequency of their flights or resorted to using smaller planes to accommodate the reduction in passengers.

iii.        High Barriers to Entry

Airlines operating within the sector face difficulties that prevent them from expanding into the global aviation industry.  Issues such as the complexity of obtaining permits from the Nigerian Civil Aviation Authority (NCAA) and the lack of facilities within the country to maintain aircraft make it harder for new and smaller airlines to enter into the sector.  In addition to this, the high cost of mandatory C-checks and the high costs and scarcity of aviation fuel are further issues that are prohibitive to newer and smaller airlines entering into the market.

2.     Where has your jurisdiction seen the most growth in the aviation sector over the past 12–18 months? And, if any, where do you anticipate growth coming from during the next 12 months?

There has been growth in the aviation sector in the southern oil-rich region of Nigeria, as evidenced by the success of the Akwa Ibom airport and the ongoing plans to situate an international and cargo airport in Bayelsa state.

In addition to this, the Nigerian government has planned to offer concession to four viable major airports in the country through Public-Private Partnerships.  Private sector involvement will help ensure that the nation’s airports are of high international standard with world-class facilities.

3.     Does the GDS distribution model continue unchallenged as the most popular model for flight distribution?

The Global Distribution Systems (GDS) model has been the norm for distributing airline data and booking flights.  In Nigeria, travel agencies make use of GDS as a means to sell tickets, which enables them to offer tickets from different airlines at competitive prices.  Local airlines usually make use of their own reservation systems for booking tickets; however, Nigerian airlines that travel to international destinations also make use of GDS in order to enable travel agents in different regions to sell their inventory.  However, passengers are not able to book tickets beyond the routes travelled by such airlines, as they often do not have strategic partners with whom they work.

4.     In your jurisdiction, does airport capacity require boosting and, if so (and even if not), what plans and/or processes are in place to address this (or increase or re-organise airport capacity, as the case may be)?

Nigeria’s aviation sector currently suffers from a major infrastructure deficit and has historically had issues relating to lack of maintenance.  In addition to this, the nation’s airports currently service significantly higher levels of passengers than anticipated when the airports were built, and as such the facilities have proven to be inadequate for the numbers of passengers passing through the airports.

There are currently plans underway to build a new terminal building at the Murtala Mohammed International Airport, Lagos, which is the most frequented international airport in the country; this is expected to be completed in 2016.  It is expected to boost the airport’s existing capacity of fifteen (15) million passengers to a thirty (30) million passenger capacity according to the Federal Airport Authority of Nigeria (FAAN).

5.     Does the national “flag” carrier carry the most passengers into and out of the national airports and: (a) if so, what competition exists and how significant is it? and (b) if not, what are your thoughts on the reasons for this, and why do competing airlines have higher load factors?

Nigeria does not currently have a national flag carrier.  There have been a number of previous national carriers, the first being Nigeria Airways Limited, which operated as the official national carrier of Nigeria until 2003.  The airline was subsequently managed by a number of different organisations and was rebranded over the years as Virgin Nigeria, Nigerian Eagle Airlines and Air Nigeria, and fluctuated between foreign, local and regional routes, and finally ceased operations in September 2012.

There are a number of Nigerian-owned airlines which operate international routes such as Arik Air and Medview airlines.  However, international airlines still dominate most international routes from Nigeria, even though the passenger load is mainly Nigerian.

6.     What trends, in terms of regulatory intervention and involvement, has your jurisdiction observed over the past 12–18 months in relation to airline acquisitions and alliances?  Do you anticipate a change in the regulatory environment of your jurisdiction during the coming 12 months, and if so, how?

The Asset Management Corporation of Nigeria (AMCON), a government-owned corporation, was established in 2010 to revive the Nigerian financial system by efficiently purchasing the non-performing loans of Nigerian banks and putting them to economic use in a profitable manner.  In recent times, AMCON, acting within its powers, has purchased the non-performing loans of some major airlines from Nigerian banks through debt/equity swaps, thereby giving AMCON ownership and control over the acquired airlines.  This nature of acquisition by the government is a move to enable airlines to settle their indebtedness and to prevent them from going moribund.  There is currently no foreseeable change in the regulatory environment in Nigeria with regard to airline mergers, acquisition and alliance and these remain novel to the Nigeria aviation sector.

7.     What trends are being observed in relation to new technologies – such as UAVs/drones – and what impact are these technologies having on the aviation regulatory environment?

Recent trends have observed proliferation in the use of new technologies such as UAVs/drones in Nigerian airspace.  This has led the aviation regulatory body, the Nigerian Civil Aviation Authority (NCAA), to issue a statement on May 8, 2016, prohibiting the launch of remotely piloted aircraft (‘drones’) in Nigerian airspace without a permit from the NCAA and the Office of National Security Adviser (ONSA).  The NCAA has issued guidelines and requirements for grant of a permit for aerial aviation services (PAAS).

The following is a summary of the certification procedure:

  • application for grant of a PAAS is made to the Director General of NCAA;
  • NCAA will publish the notice of application in the Official Government Gazette, the fee is borne by the applicant; and
  • security clearance is undertaken by ONSA.

A PAAS is valid for three years and an annual licence fee must be paid to the NCAA.

8.     Legal issues in the “lease-to-part out” market.  A major market development is the interest of investors purchasing mid–end life aircraft on lease for the purposes of making returns on a leasetail and component margin model.  What challenges are inherent in this segment of the aviation finance market, and what techniques and disciplines are required to manage the risks involved?

At the mid-end life phase of aircraft, airline companies and financiers are increasingly looking towards next-generation aircraft, which may cause local leasing companies to encounter more difficulty than expected in remarketing their mid-life aircraft.  New generation aircraft deliveries will have huge financial implications on aircraft leasing companies with older technology aircraft in their fleets.

The following are the inherent challenges in this sector of the aviation finance market:

  • increase in cost of maintenance due to outdated aviation equipment and noise compliance issues;
  • high cost of aircraft parts recovery, scrapping and recycling services for mid-end life aircraft that cannot be returned to service;
  • parts availability impedes the operations of these mid-end life aircrafts, which are rapidly becoming economically unfeasible;
  • issues of compliance with relevant recycling law or regulation;
  • second-hand part market issues; and
  • value depreciation.

Although most of the Nigerian airlines lease aircraft for their operations, the above-listed issues make it financially challenging for them to benefit from the lease-to-part-out financing model with the exception of Arik Air.  This is due to the fact that Arik Air takes delivery of brand new aircraft, whereas other Nigerian airlines that lease aircraft for their operations are unable to take advantage of the lease-to-part-out market due to the inherent challenges.  Most airline companies would therefore consider the viability of purchasing new generation aircraft.  The following are the techniques and disciplines required to manage the risks involved:

  • compliance with environmental standards and safety regulations;
  • partnership with mid-end life aircraft leasing companies having core expertise in risk management of mid-end life aircraft;
  • quality and reliability assessment;
  • cost and benefits evaluation;
  • maintenance issues; and
  • skilful negotiation of mid-end life aircraft “return conditions”.

As the Nigerian Civil Aviation Authority (NCAA) tackles the inherent challenges on ageing aircrafts by improving its regulations, such systems of aircraft finance will then play a greater role in the Nigerian aviation sector.

9. Manufacturer support in the new cycle of new OEM products, e.g. MRJ, E2, C-series, etc. In an increasingly sophisticated and competitive environment, in what way is the type of OEM financial and product support for this new era of aircraft more complex and far-reaching than in previous cycles?

Currently, there are no Original Equipment Manufacturers (OEMs) operating within the Nigerian aviation sector.  Aircraft and their parts are usually obtained from foreign OEMs, suppliers and lessors.  OEM support is based on the relationship between the airline and the manufacturer; for example, Arik Air has a fleet that largely comprises Boeing aircraft by virtue of a long-term business relationship, which enables Arik Air to take advantage of new aircraft and equipment being produced.

Due to the sharp decline of oil prices and its effect on the country’s economy, a number of airlines began to experience higher costs and, as a result, some airlines began to face difficulties in fulfilling their obligations.  As a result, the OEMs were forced to institute proceedings to recover aircraft or aircraft parts.  Before the Cape Town Convention (Cape Town Convention means the Convention on International Interests in Mobile Equipment as modified by Protocol on Matters Specific to Aircraft Equipment, which came into force on the 1 April 2004), recovery was a slow and painstaking process due to injunctions imposed by the courts in Nigeria to preserve the status quo, pending the outcome of the matter.  As such, many aircraft became grounded, which cost both the airlines and the OEMs millions of dollars.

The Convention made a number of remedies available to the creditor (including a lessor) in the case of default by the debtor (including a lessee).  One such remedy is the deregistration and export of an aircraft (or equipment).  This remedy is augmented by the procedural counterpart embodied in an ‘Irrevocable De-Registration And Export Request Authorisation’ (IDERA), which must be signed and submitted by the debtor as a standing directive to honour the request for deregistration by the holder of the IDERA. 

OEMs are able to take advantage of this remedy as Nigeria is one of the countries that has ratified this Convention (the Aircraft Protocol (which applies specifically to aircraft and aircraft engines) took effect on 1 March 2006 when it was ratified by eight countries including Nigeria).  Furthermore, Article 54(2) of the Convention effectively gives the creditor relief without court action.  Once presented with the IDERA, the NCAA is obligated to deregister the aircraft and allow the same to be exported.

10.  The advent of cheaper oil and the knock-on effects. What are the consequences that arise as a result of the unexpected purchasing power of a number of third/fourth-tier airlines? What will challenge lessors and suppliers in particular as they are faced with speculative judgments on an airline’s longer-term financial viability?

The Nigerian economy, similar to that of most oil-producing countries, has experienced adverse consequences following the advent of cheaper oil prices.  There has been a decrease in purchasing power in our aviation sector, which is currently heavily reliant on foreign exchange.  Over 75% of our national revenue is derived from oil exportation and, as such, financiers looking at the effects of lower oil prices would be faced with the twin difficulties of lower purchasing power and foreign exchange rates.

Firstly, difficulty in the supply of crude oil for exportation and lower prices per barrel result in lower profits, which leaves the country with less disposable income and lower purchasing power.  Secondly, the value of the naira has seen a significant drop against the dollar, making it more expensive to conduct business within the aviation sector because the sector is heavily reliant on foreign exchange and most transactions are conducted in dollars.

As a result of these factors, coupled with the higher costs of imported aviation fuel, the cost of operating an airline within the country has increased.  Furthermore, customers are being subjected to even higher ticket prices as airlines attempt to pass off high operation costs, thereby leading to a fall in demand for air travel across the country.

11. Iran and the market return.  What remain as barriers, including sanctions-related issues to navigate, where Iran and aerospace and aircraft transactions are concerned?  What sort of jurisdiction is Iran from a risk perspective, and what techniques from a supply perspective are likely to be needed so that Iran's potential and promise for OEMs, lessors, suppliers and service providers is realised and does not become the latest example of a disappointing gold rush?

Iran has been plagued by sanctions by the U.S. Office of Foreign Assets Control and by the international community under pressure from the U.S. through the United Nations Security Council.  As such, the Iranian aviation sector was cut off from access to spare parts and maintenance practices.  This undoubtedly resulted in an ageing and increasingly unsafe aircraft fleet, including those that were privately owned.  January 2016 saw a relaxation of decades of sanctions on the Iranian aviation sector.  This meant that U.S. OEMs and other manufacturers that were previously banned from entering into aircraft and aerospace transactions with Iran became free to transact, insofar as the transactions were strictly linked to civilian air travel.

However, there remain a number of barriers to these transactions.  These include the need for companies doing business with Iranian aviation companies to perform extensive due diligence on their Iranian customers, to prevent exports falling into hostile hands.  As a result of this, there could be untold delays and increased costs incurred before any transaction is concluded, thereby causing a deterrent to investment.

Furthermore, some U.S. suppliers may be reluctant to export to Iran because most aircraft parts are interchangeable between war planes and civilian planes.  Providing aircraft parts that find their way unto war planes would fall foul of sanctions that remain in place against exportation for military purposes.  In addition, there are certain airlines and businessmen that remain under sanction by the U.S., thereby making any form of interaction with these airlines fraught with risk.  Once a sanction has been imposed, there is a high level of difficulty in removing it.

Other challenges include the high costs associated with replacing, repairing and maintaining Iran’s current fleet.  Following the advent of low oil prices, there has been a negative effect on the spending powers within the Iranian aviation sector.  Financing becomes a resulting barrier as many airline financing houses would be wary of possible sanction snapbacks.  In addition, the influx of international carriers has occasioned an increase in competition for local carriers.  It follows that many OEMs and suppliers would be more willing to supply to foreign international carriers as an avenue into the Iranian market without the risk of falling foul of sanctions.

The key to realising potential would be to allow and make provisions for a rebuilding of trust.  Such trust may be achieved by the OEMs, lessors and suppliers taking steps to obtain a more intimate knowledge of the airline company they would be dealing with and providing support throughout the transaction and beyond.  The most important form of support could possibly be to create a presence within the country and in close proximity to the airline, which would ensure proper monitoring of the operations of the airline and constant timely support.

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Published 10/02/2017
Aviation Law 2017