The Ministry of Aviation recently notified the industry that the federal government’s plan to establish an aircraft leasing company is still in progress. Chinedu Eze writes that the initiative will significantly improve the capacity of Nigerian airlines and could bring down airfares.
The Minister of Aviation, Senator Hadi Sirika recently announced that the federal government has progressed in its plan to establish an aircraft leasing company and make it easier for Nigerian carriers and others in West Africa to lease aircraft. The government said the leasing company would provide opportunities for Nigerian and African airlines in order to boost fleet size; alleviate the problems of aircraft leasing and the attendant high insurance premium charges.
The Ministry of Aviation said the aircraft leasing company has been structured as a joint venture between the government and the private sector, adding that its business objectives would be to initially lease aircraft from international lessors and subsequently sub-lease to African airlines and in the future acquire and own its aircraft.
“Government is considering providing financial guarantee and ensuring fiscal incentives to facilitate the success of the leasing company,” the Ministry said.
The government also said it is an advanced stage in the procurement phase and that a preferred partner has been selected and negotiations would soon commence, adding that the next move would be to commence negotiations with the preferred bidder.
Difficulty in Aircraft Leasing
Before now it has been very difficult for Nigerian carriers to lease aircraft because of trust issues between the lessors and the Nigerian carriers. This has forced Nigerian airlines to buy and own their aircraft at a huge cost and this is also why many Nigerian operators acquire older equipment because it is what they could afford; except now that Air Peace has blazed the trail by acquiring new aircraft.
But in his early public statement when he took over as the Director-General of the Nigerian Civil Aviation Authority (NCAA) last year, Captain Musa Nuhu, had promised that the agency would smoothen the process of aircraft leasing and also bring down insurance premium on that score.
He said Nigerian airlines might soon begin to lease aircraft without high insurance premium and rigid, outrageous leasing rates, as the federal government had stepped in to rebuild the relationship between airlines and lessors.
Nuhu confirmed that after series of default on leasing agreements by some Nigerian carriers, lessors had stopped giving out their aircraft to operators despite the fact that Nigeria is a signatory to Cape Town Convention, which enables airlines of member countries to lease aircraft at low rates.
The inability to lease aircraft has led to a reduction in the number of operating aircraft before the COVID-19 lockdown and heightened the cost of airfares, as a number of operating aircraft was not meeting the demand of passengers, forcing airlines to cancel and delay flights, besides the exorbitant airfares.
Nuhu had said the agency would guarantee lessors that it would protect their equipment leased to Nigerian carriers and with the new assurance, lessors could now give out their aircraft to Nigerian operators at relatively lower rates.
“We will work with Nigerian airlines that lease aircraft and if there is any disagreement we will intervene and resolve the issues without having serious negative consequences on the Nigerian aviation market.
“Of recent, there was an airline in Northern Ireland that has issues with an operator in Nigeria over leased engines, we stepped in, intervened and we were able to resolve it and the engines were returned to the lessor.
“Honestly, from that singular act, I got a lot of positive responses from the international community.
People are more relaxed to do business with Nigerian airlines, knowing that if their equipment got stuck in Nigeria; they are able to get their equipment back with the help of the regulatory body,” he said.
The Director-General had said it would rebuild the confidence lessors have in Nigeria and could now lease aircraft to Nigerian airlines without stringent measures that described Nigeria as a risky environment, which ups the insurance premium and leasing rates.
“If we continue to intervene for a long time, it is going to make it easier for Nigerian operators to lease equipment, be it aircraft, engine or whatever, it will also come at a competitive global rate rather than adding premium because Nigeria is considered a high-risk market. These are part of the things we are doing,” Nuhu said.
Root of Distrust
However, aviation economist and the Managing Director, Flight and Logistics Solutions, Amos Akpan, told THISDAY that there was a negative perception about the country in the global business transactions, noting that transactions with Nigerians carry a high possibility of fraud and corruption.
“This false propaganda makes those leasing aircraft to Nigerian airlines install unnecessary, difficult clauses which are not found in their lease agreements with airlines from other countries. The situation is tilted against the Nigerian to the extent that when the lessor is in default, he gets away with it because of the preconception that the Nigerian should be in default.
“The Cape Town Convention addressed this anomaly. The convention stipulates that all aircraft lease agreements be registered with the Civil Aviation Authority (CAA) of the contracting states.
“It further stipulates in case of default by the lessee in the agreement, the CAA shall grant permission to the lessor to fly out her aircraft to a destination of her choice. Simply put, if the lessor applies to NCAA, she shall be granted permission by NCAA to ferry out her aircraft.
“There have been instances that NCAA successfully implemented the Cape Town Convention protocol. Also, there are instances where the Nigerian courts have barred the NCAA and the Lessor from implementing this protocol in Nigeria,” Akpan explained.
He said the major problem was that the lessors refused to lend to Nigerian operators after series of failure of some airlines to abide by tenets of agreements signed when they leased the aircraft.
Some airlines in Nigeria had gone to court when the NCAA attempted to help lessors recover their aircraft.
The Cape Town Convention on International Interests in Mobile Equipment, or Cape Town Treaty is an international treaty intended to standardise transactions involving the movable property.
The treaty creates international standards for the registration of contracts of sale (including dedicated registration agencies), security interests (liens), leases and conditional sales contracts, and various legal remedies for default in financing agreements, including repossession and the effect of particular states’ bankruptcy laws.
The treaty came into force on 1 April 2004 and has been ratified by 57 parties. The Aircraft Protocol (which applies specifically to aircraft and aircraft engines) took effect on 1 March 2006 when it was ratified by eight countries: Ethiopia, Ireland, Malaysia, Nigeria, Oman, Panama, Pakistan, and the United States.
Benefits of Proposed FG’s Leasing Company
Akpan told THISDAY there would be invaluable benefits if the government in collaboration with the private sector establishes an aircraft leasing company. He said there would no more be those stringent conditions give to Nigerian airlines by international lessors. He added that this would remove the hassles in identifying the applicant because enough information would be available about the potential lessee; so the lessor would no more depend on referrals.
“Having a leasing company locally will have immense benefits for Nigerian carriers. One, we won’t be exposed to lessors overseas with their stringent conditions, which are difficult to meet. The idea of identity will not be a problem anymore because the lessors would like to know who they are giving their aircraft so they usually engage the services of referrals but in Nigeria, this will not be difficult. Your bank knows you; the leasing company will be able to identify you. So you eliminate the distrust on whom you are dealing with.
“Do you know that in the past Nigerian companies register companies in the countries where they hope to lease aircraft from and use those companies to lease the aircraft; just to overcome the problem of identity? So this hurdle will be scaled when a local leasing company I established,” he said.
Akpan also stated that such a leasing company would enhance the leasing of engines, other aircraft parts, even handling equipment, remarking that Nigerian handling companies liaise with foreign partners in order to lease heavy-duty equipment, but now it would be easier for such Nigerian handling companies.
“Another benefit is that it will be easier for the leasing company with government backing to access foreign exchange than by individual companies. This will be a big advantage. In addition to that local companies can interact easily. A lot of bottlenecks will be eliminated and negotiations will be done at the level of knowledge,” he said.
Reinforcing Cape Town Convention
In addition to establishing a leasing company, the former CEO of Aero Contractors, Captain Ado Sanusi, suggested that government should also reinforce the Cape Town Convention, which would assure the leasing companies that whenever there was a default on leasing aircraft by airline operators it would step in to recover the aircraft.
He said the government must have to inform the judiciary about the Cape Town Convention it signed and why courts should not stop the recovery of aircraft by the lessor after a default, noting that once there is a default, the lessor must recover his aircraft and the issue should be resolved afterwards.
Industry experts said leasing is the easiest way commercial airlines acquire aircraft in other parts of the world and major airlines, including well-known mega carriers, operate largely leased aircraft.
Current Challenges
Former Director-General of the Nigerian Civil Aviation Authority (NCAA) and current Rector, International Aviation College, Ilorin, Benedict Adeyileka, highlighted challenges currently faced by domestic airlines in leasing aircraft.
Adeyileka, stressed that getting forex remains a challenge for the airlines, disclosing that while waiting to obtain dollars for the payment the leasing window may elapse, as other airlines may also be leasing aircraft from the lessor.
“If you have your naira to lease aircraft, the regulator and your bank will be the problem. They will be the stumbling block because of the scarcity of dollars. Another problem you will face is the exchange rate. The exchange rate is very high that you must have a lot of money in naira to earn the dollars that will enable you to lease,” he said.
Adeyileka pointed out that another major challenge was the leasing conditions, which is stringent for Nigerian carriers because Nigeria is designated as high country risk.
“You may even have the money but the lessor will not allow you to bring the aircraft to Nigeria. Even if he allows you, he will slam high returns to it that you won’t be able to pay. When you look at what you could be generating with the aircraft, you will find out that you won’t be able to raise the leasing cost.
“Then, another issue is that when you lease the aircraft, NCAA has its own stringent conditions that you must face. The officials will do pre-inspection of the aircraft and on the arrival of the aircraft they will carry out post-arrival inspection in which the inspector can ask you for anything about the aircraft, including manufacturing documents,” Adeyileka said.
