Reprieve as dry-lease option beckons for carriers

Prospecting in the African continent is difficult ostensibly operating with barely enough working capital. With the Federal Government’s softening of the ground again for dry-leases, WOLE SHADARE writes that it is imperative to take advantage of these lease arrangements to empower Nigerian airlines

Reprieve

Nigerian airlines face a huge reprieve from aircraft lessors as they are prepared to return to  favourable aircraft lease arrangements with dry leases.

The willing carriers are set to return to a cost-effective way of acquiring aeroplanes more than ten years after lessors took dry lease off the country’s carriers because of so many infringements and violations of lease rentals.

The country’s carriers are facing a dilemma with dry leasing aircraft, primarily due to past breaches of lease agreements and the associated high risk perception among lessors. This has made it difficult for them to access cost-effective dry leases, hindering fleet expansion and operational efficiency. 

Huge burden

Nigerian airlines and the Nigerian government are losing a lot of money because airlines, before now, could only do wet leasing (Aircraft, Crew, Maintenance and Insurance (ACMI). Under such an arrangement, so much foreign exchange is taken out of the country, with airlines not making much money.

The Managing Director of Aero Contractors, Capt. Ado Sanusi said, “That is why the airlines are doing ACMIs. You see a lot of foreign aircraft, foreign crew flying in the country. It is not good for our economy. It is not good for the country. That is wet leasing. I think the government should have a deliberate policy in ensuring that a leasing company is domesticated in the country, either through the Ministry of Finance or through any of the Ministry’s operations.”

“The company should be incorporated under the supervision of the Ministry. This is to ensure that they are done. They can do it with international banks. They can do it with international financiers, international leasing companies, collaborate with the Ministry of Finance and bring in aircraft,” Sanusi advised.

He said that for the aviation industry to move forward, the government has to get involved one way or another, noting that it is through the government’s intervention that the industry can have a focus and move forward. To put an end to the paucity of operating equipment in Nigeria, Sanusi said the government should support and participate in the funding of a leasing company in order to reduce the current capital flight from Nigeria.

New chapter

All that is to change as Nigeria has entered the compliance rule, with many lessors willing again to dry lease aircraft to airlines willing to lease aircraft from them.

The Minister of Aviation and Aerospace Development, Festus Keyamo, plays a crucial role in enabling Nigerian airlines to access dry-leased aircraft. 

He has been actively working to remove barriers and create a more favourable environment for leasing, including addressing international insurance requirements and legal frameworks to allow lessors to repossess aircraft from defaulting airlines. 

His efforts include signing the Irrevocable Deregistration and Export Request Authorisation (IDERA) and engaging with aircraft manufacturers and lessors.

The Minister’s focus is on making it easier for Nigerian airlines to acquire aircraft through dry leases, where they lease only the aircraft and handle its operation, rather than wet leases, which include crew, maintenance, and insurance.

He has collaborated with the Nigeria Civil Aviation Authority (NCAA) to ensure compliance with regulations and standards, further enhancing the attractiveness of Nigeria for aircraft lessors.

Lamentation

Airline operators in Nigeria had at various times lamented the high cost of aircraft acquisition made difficult by high cost of leasing and made worse by the fact that the country was blacklisted by lessors with dry lease, a more painful business model for them.

International aviation financiers and lessors view Nigeria as a high-risk country, making them hesitant to engage with Nigerian airlines or impose stringent conditions. 

Many airline operators’ past actions gave the country a bad image. They necessitated aircraft lessors to block Nigeria from dry lease agreements, categorising the country as high risk of getting their equipment back when needed.

The situation opened the door for a wet lease, which costs so much per bloc hour as the airlines pay the foreign crew and maintain the aeroplane, with the crew reserving the right to ferry the airplane back to its owner in the event of a default.

The two major types of aircraft leasing are dry and wet leases. Dry leases involve the lessor providing only the aircraft, while the lessee is responsible for crew, maintenance, insurance, and operational control. 

Wet leases involve the lessor providing the aircraft, crew, maintenance, and insurance, meaning the lessor retains operational control.

Wet leasing is a very costly type of leasing whereby the airline makes a huge monthly payment to the lessor, takes care of the crew. In Nigeria, the crew, both cockpit and cabin, is expatriate, which increases expatriate quota and also increases forex payments.

Financing difficulties

Financing the purchase, or leasing of an aircraft and related assets can take several forms including but not limited to a loan from a bank or other financial institution, secured by a mortgage over the aircraft purchased; the lease involving either an operating lease or a finance lease; and, a capital markets transaction through the issuing of bonds or notes secured by a mortgage on the aircraft.

The most common forms of financing peculiar to the Nigerian aviation sector are secured loans and leases. The secured loan structure involves a lender granting a loan to an airline or leasing company to purchase an aircraft, with the loan secured by way of a mortgage or other security interest over the aircraft.

With this structure, the ownership of the aircraft resides with the airline (owner) or leasing company and the aircraft is operated either by the airline or is leased to another party.

This difficulty encountered by operators to finance leases and high interest rates on loans to finance aircraft purchase has a serious depletion in the number of aircraft in the fleet of airlines. In total, the operating aircraft of all scheduled airlines is less than 38.

The number of new aircraft coming into Nigeria has slowed considerably, to say the least. This year, the proportion of new aircraft added to the European fleet is roughly 30 to 40 per cent.

Airlines need critical mass to expand their operations and cut considerably, flight delays and cancellations, which are fast taking the joy out of air travel.

Fleet reduction is further compounded by the difficulty of bringing their airplanes that went for maintenance back to the country, due to foreign exchange scarcity.

Last line

Without government support or intervention in some ways, the aviation industry anywhere would find it difficult to move forward because the sector is the catalyst of any nation’s economy and therefore cannot be sidelined by the government.

Wole Shadare