‘Why under-capitalised carriers default on financial pact’

As air travel volume has more than doubled in the past 15 years in response to a growing global economy, airlines are finding it increasingly difficult to meet up with their financial obligations, Woleshadarenews has learnt.

In Nigeria particularly, the carriers’ under-capitalised status has made them to default on aircraft lease, maintenance and to the various aviation agencies.

Many of them are grossly under-capitalised to less than N500 billion; a situation that has led to call by experts that the Nigerian Civil Aviation Authority (NCAA) should call for the audit of all the carriers to ascertain how healthy they are.

A former Assistant Secretary-General of Airline Operators of Nigeria (AON), Alhaji Mohammed Tukur, told our correspondent that Nigerian carriers would continue to default on financial obligations to many organisations because of their weakness and how fragmented they are structured.

He said this has prevented lenders from extending credit facilities to many of the country’s airlines, adding that where they do, the interest rate ranges from 15 to 20 per cent.

He wondered how any serious firm would thrive under high interest rate and stringent conditions attached to the loan.

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His words: “The present interest rate regime in Nigeria is not good for aviation. Take the over 20 per cent interest; you can’t do any business with that. So we need to do something about that.”

 

He said that many banks are yet to know how the industry operates, especially the value of the equipment (the aircraft) and that explained why the past funding of aircraft for airlines were not particularly successful.

Airlines and lessors, he noted, benefit from a diverse funding landscape, with capital provided by banks, through export credit agencies and capital market entities such as insurance companies, pension schemes and investment funds.

Historically, commercial banks have been one of the main sources of finance to the aviation market. However, the development of innovative capital market products has enticed new investors into the space over the past few years.

The proposed Basel IV regulations could increase the amount of capital banks are required to hold against aviation (and other long-duration illiquid) assets and, therefore, could act to reduce banks’ participation in the market.

Export Credit Agencies (ECAs) and, on occasion, manufacturers also provide finance. ECAs are quasi-governmental institutions that guarantee loans to purchase products manufactured domestically in a bid to increase exports.

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These loans became popular following the 2008 financial crisis, as they allowed access to relatively cheap finance at a time when bank lending was scarce.

Since then, it was understood these loans have become less popular as the prescribed terms (as set out in Aircraft Sector Understanding) have become less competitive in comparison to other sources of funding.

Tukur equally noted that airlines’ penchant to default has affected their remittances to the various aviation agencies like the Nigerian Civil Aviation Authority (NCAA), the Federal Airports Authority of Nigeria (FAAN) and others.

Aviation analysts had advised that the Federal Government should cause banks to offer low interest rates on loans given to airlines to keep them afloat, adding that some governments abroad took such initiative to save airlines from collapse.

They noted that the quickest reform government could make is to provide low cost capital for the airlines, nothing that it was nothing new as governments in other countries had done it.

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This is coming as Boeing and Airbus in 2016 delivered a combined total of $122billion worth of aircraft.

This amount is expected to rise to $185billion by 2021.
Airlines typically operate on low margins and, as a result, look to external sources to raise funding in order to replenish their fleet.

Leasing agents have become a core part of the aviation industry. Leasing reduces the initial capital outlay for airlines, provides access to the latest technologies and models, and allows airlines to flex the size of their fleet to mirror demand. In 2016, approximately 40 per cent of demand for funding came from lessors.

Tukur noted that aviation is a highly regulated industry, stressing that investor capital is often protected by international agreements such as the Cape Town Convention, which protects investors in the event of default by ensuring swift recoveries.

Following default, the Cape Town Convention permits the borrower a defined period (usually 60 days) to return the aircraft to the creditor.

Wole Shadare