Challenging Times As Banks Slow Airlines’ Investment

The tough economic situation has slowed airlines’ expansion programme. Banks’ double interest rates are killing, while financial institutions that fund the sector are also feeling the heat; signposting a very difficult period for carriers. WOLE SHADARE reports

Hope Dims

Nigerian airlines’ last ray of hope for bank funding seems to be fading. The airlines passing through financial turbulence are finding it difficult to approach banks to rescue them following huge indebtedness to various financial institutions. Some of the loans are classified as nonperforming, but they have been refused fresh funding. Nigeria’s airline industry owes banks and government as much as $2 billion after funding rapid expansion with short-term loans, leaving some firms struggling, industry and financial sources say. In Nigeria, commercial banks, which are profit oriented and without huge financial base are reluctant to lend such long term loans to airlines and this has hampered air transportion in the country.

The situation is not helped with the risks associated with air transport in the country. So, lack of adequate funding has led to the short life span of many airlines, in addition to bad business plan and technical failure, it has also led to the many air crashes suffered by airlines. The airline industry in Africa’s most populous nation a few years ago saw explosive growth. The explosion then saw older domestic names such as Aero, Chanchangi and IRS fighting competition from new players such as Arik, Dana and Virgin Nigeria. Chanchangi, IRS and Virgin Nigeria have all gone into extinction. The expansion gave Nigerians a wider choice of airlines, many of them flying with relatively new and refurbished aircraft, helped reverse the country’s dismal reputation for air safety in the wake of a spate of crashes.

But as rivals fought to win market share while credit was easy to secure before recession, some used short-term bank loans to buy and order aircraft, funds they have borrowed at very high rates. Since Nigeria fell into recession, airline operators have faced an acutely tighter credit market. Banks are no longer lending money to airlines, as they are at the risk of losing billions of naira already invested in the sector. To compound their woes, many airline operators are sceptical on how to repay loans at very high interest rates. Bank interest rates are said to be over 25 per cent, making return on investment very cumbersome. This underscores the lack of expansion by the carriers, as they lack the capacity and capability to expand their businesses to compete with mega carriers.

Many airlines in Nigeria have borrowed money from Nigerian banks at very high rates of interest and for relatively short tenors, compounding other problems they have. “One particular airline owes a single bank N117 billion. That’s a lot. If it crystallises it would wipe out the capital of that bank,” former Central Bank of Nigeria (CBN) Governor, Sanusi Lamido Sanusi had said while extending over N200 billion to some airlines eight years ago. “The loan is performing, but if this airline were to default, I’d have to come and bail out this bank,” he added. Managing Director, Discovery Air, Captain Mohammed Abdulsalami, recently criticised the regime of double digit interest rate, which is the base lending rates approved by the Central Bank of Nigeria (CBN), saying it is the major reason banks are unwilling to fund the aviation industry.

He said the base lending rate approved for the banks for the sector is not favourable because no domestic airline can access loan from the bank to buy aircraft and is expected to pay over 20 per cent interest on such funds. The Discovery Air chief said airlines in other parts of the world access funds from financial institutions as low as between two and three per cent as interest, adding that this explains why airlines in developed countries don’t close shop so easily. He urged the Federal Government to provide soft loans to the operators, arguing that such financial intervention would enable them acquire new aircraft. He said: “Many domestic carriers cannot buy new aircraft because the interest rate charged by commercial banks is too high.

The reason the banks cannot lend huge loans to airlines is because they have a base lending rate determined by the CBN. “If airlines get soft loans from government, they could buy new aircraft from it. In the developed world, interest rate by banks to airlines is between one and two per cent. In Nigeria, where the interest rate is over 20 per cent, how do you expect domestic carriers to compete with foreign airlines that enjoy such credit facility from their governments and financial institutions? “If airlines could get such credit facility at two or three per cent interest rate, that would be free money to buy new aircraft. But, domestic operators will find it difficult to compete if they pay over 24 per cent interest rate on loans.

“They should ensure due diligence in giving out financial assistance to any airline to ensure that the money is utilised for the purpose it is given.” Nigerian carriers are in serious financial dire straits just as there are indications that lack of credit facility to airlines by financial institutions could adversely affect efficiency and expansion of the carriers. They are very overburdened and do not have the spine without finance to offer world class services.

Funding

In a paper presented at the Air Finance Africa Conference and Exhibition in Johannesburg, in April, titled Challenges in Syndicating Aviation Finance Deals for Africa by Samuel Mugoya of Africa Export-Import Bank (Afreximbank), it showed that despite its slow start, African airlines are beginning to source credit facilities easier now than in the past. Few years ago when Nigeria joined the Cape Town Convention, which eased leasing for airlines in the country and also made it possible for such airlines to access funds from international financiers,there was obvious fresh breath in the operation of these airlines.

Perhaps that was what gave fillip to the rise of Nigeria’s biggest carrier, Arik Air and the establishment of the defunct Virgin Nigeria, just few years after it was established. Air transport sector then benefitted from international financing. Mugoya, in his presentation at the conference, said that the total reported syndicated loans for African airlines was about $93 billion, from January 2013 to first quarter of 2016, according to Bloomberg. There was also $7.3 billion-total reported syndicated transport sector deals (including airports, rail, logistics, ports, shipping etc.), representing 8 per cent of total syndicated deals during the period and $1.3 billion total reported airline financing syndicated loans, representing 18 per cent of transport Sector transactions an 1.4 per cent of African syndicated deals during the period. He noted that African aviation debt market is relatively small, reflecting the African airline landscape, adding however, that Africa’s gross domestic product (GDP) has been growing consistently for the last 20 years, outperforming the global economy But indications show that the airline industry in the continent is not growing in the same pace as only five African carriers offer more than 65 per cent of the total capacity; largely from Ethiopia, South Africa, Egypt, Morocco and Kenya in a continent of 55 countries.

“All major manufacturers share the view that Africa’s fleet will more than double until 2035,” observed. Mugoya disclosed that within this period Airbus forecasts that demands for aircraft in the continent would include 1,117 deliveries and 100 retirements of narrow body and wide body aircraft for the period. Boeing predicts 1,170 deliveries for the same period. Embraer forecasts deliveries of 240 70- 130 seat regional aircraft and 140 turboprop regional aircraft for the 2015-2034 period.

Airbus and Boeing also expect over 1,100 wide body and narrow body deliveries until 2035 with only 137 firm orders today.

Financial challenges

Mugoya identified low margin, highly leveraged balance sheets, high dollar exposure, significant capital expenditure and high fuel costs as some of the challenges faced by African carriers.

He also observed that airlines in the region are exposed to intemperate economic environment, economic and political upheavals, uncertainties caused by political transition and undulating fortunes of tourism in the continent.

Conclusion

Mugoya noted that high tax regime, including ticket taxes, flown segment related fees, landing fees and parking fees, passenger service charge, as in Nigeria, Value Added Tax (VAT) and other charges lead to high cost structure and dampen revenues for airlines.

Wole Shadare