Nigerian Airlines: Evaluating Cost Effectiveness Of Lease Rentals

The rush

Every year, and most especially as the year begins to come to an end, many airline operators are in frenzy about how to cater to their travelers. During this period, many operators engage in the acquisition of aircraft either by outright purchase, which is rare at this clime or through the lease.

The popular mode of acquisition, which is popular amongst airline operators in Nigeria, is either through wet lease or dry lease that is usually for a very short period that allows airlines to ‘rent’ aircraft from lessors or other airlines who have surplus aircraft and could afford to let them out on either or a short or long leases.

 

Some Nigerian airlines

Understanding different lease options

While differences exist among these various leasing structures, they nevertheless share common characteristics such as ownership of the aircraft not residing with the airline or leasing company, and at the end of the lease term, the airline or leasing company returns the aircraft to the lessor, although in some circumstances an option and or right to purchase the aircraft is granted.

The two most common forms of lease in Nigeria’s aviation sector are operating and finance leases. Under an operating lease arrangement, the owner or lessor acquires or owns the aircraft leased to an airline or other lessees and substantially retains all the risks and rewards related to ownership of the aircraft.

At the end of the lease term, possession of the aircraft reverts back to the owner or lessor who can either re-lease or sell it. Operating leases usually come in two forms, a so-called ‘dry lease’ or a ‘wet lease’. Under a dry lease, only the aircraft is provided by the owner or lessor with the lessee responsible for operating, maintaining, insuring, and providing the crew for the aircraft. With a wet lease, however, the owner or lessor retains operational control of the aircraft, operates its flights, provides crew, maintains the aircraft, and ensures that it is adequately insured.

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The cost of providing these services is borne by the lessee under the lease. The wet-lease option is typically adopted when the owner or lessor is an airline or a leasing company that has some expertise in operating aircraft.

Cost-effectiveness

All over the world, airlines have been known to lease aircraft but how cost-effective are these leases, especially when put into consideration the huge forex outlay for such venture and how profitable it would be for a Nigerian airline for instance that earns revenue in naira to pay so exorbitantly for lease rental that runs into several thousand of naira per bloc hour or throughout the duration of the deal?

Foreign airlines in flight

An airline top executive, who spoke to Aviation Metric under a condition of anonymity, warned that airlines should be careful in the way they are wet leasing aircraft because of the rising cost of dollars, noting that as long as airlines sell tickets in naira, it would always be difficult to source dollars to pay the leasing fees.

He disclosed that the acquisition of aircraft was dependent on the business model of airlines, saying, “I know that some of the existing aircraft are going to maintenance but they should be careful as the dollar is unstable, so as they sell tickets in naira the dollar may rise that it will become very expensive to pay for the lease rentals.”

Another airline owner, who equally did not want his name in print, said he wondered how some airline owners are outdoing each other with many wet-leased aircraft, especially for the Yuletide season. He said the huge cost of leasing airplanes could be worth all the investment if there are good returns on such investments because of the volatile unstable exchange rate and availability of foreign exchange.

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A former Assistant Secretary-General of Airline Operators of Nigeria (AON), Mohammed Tukur, agreed that it becomes very difficult to purchase aircraft on the shelf, adding that since it takes a longer time to buy brand new aircraft, the only option left would be for the operators to look for a stop-gap to continue to provide air services to its customers.

Tukur, however, stated that airlines needed to engage someone who is too much of a maverick in aircraft financing or leases to always get cost-effective lease options, just as he wondered if the high traffic at Christmas could make up for badly negotiated aircraft leases.

He said it was usually difficult to know if the airlines made the right choices over their deals as many of the carriers’ books are not open to scrutiny and won’t come out publicly to disclose that.

Some Nigerian airlines

Ibom Air, Air Peace make quick dash

Not a few are beginning to see the high rate of aircraft acquisition in the last few days as passenger demands are expected to surge during the Yuletide.

While Ibom Air and Air Peace have leased aircraft, others are still perfecting deals for aircraft acquisition. Since COVID-19 broke out, many operators are yet to bring back their airplanes from storage while others have lost a considerable number of their aircraft as they find it extremely difficult to finance aircraft acquisition because they cost so much.

Many of the operators are hit hard by the lack of a good business model,  scarcity of Foreign exchange, and the harsh operating environment. Some new entrants are adequately filling the gap. Value Jet and some others that have been licensed by the Nigerian Civil Aviation Authority (NCAA) and Dana Air which returned to service after about three months are making the inadequacy of some airlines not to be felt at the moment.

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For emphasis, Ibom Air, Akwa Ibom State-owned airline, last week, took delivery of two new A320 aircraft in preparation for the commencement of regional flight operations. Many are of the view that Ibom Air had reached a stage where it had to continuously add to the number of aircraft in its fleet due to high demand and the need for expansion.

Also last week, Air Peace acquired two Airbus A320 airliners to boost its domestic and regional operations, specifically for the Yuletide. There are indications that Arik and other are thinking in that direction as well.

Aircraft financing in Nigeria

There are a number of challenges to aircraft financing in Nigeria including but not limited to multiple charges by the regulator, high operation costs including bank interest rates, multiple taxations, and a lack of understanding of the sector by local financial institutions.

These factors have led to the loss of various local airlines and a reduction in operating aircraft in Nigeria from 90 in 2015 to less than 60 in 2021.

Last line

Nigerian airlines

As Nigeria’s infrastructure continues to expand and be upgraded, the demand for air transport will increase. To satisfy this demand, there will be a need for significant investment in aircraft fleets.

Wole Shadare