Nigeria's Aviation Industry Losing Millions Of Dollars To Administrative Unconsciousness (3)

Feature Article Nigeria's Aviation Industry Losing Millions Of Dollars To Administrative Unconsciousness 3
DEC 14, 2023 LISTEN

In the first part of the series, ODIMEGWU ONWUMERE examined the improper finances that have put the Nigerian airline at risk. In part two, he discusses the recent discovery of a significant amount of water in the fuel tanks of some aircraft. This discovery has raised safety concerns in the industry. In the concluding part, he urges the authorities to prioritize organizing the aviation industry before enforcing insurance requirements. This is because operators in the country pay higher premiums compared to their foreign counterparts and also have to deal with the challenge of paying in dollars while using the local currency, which puts stakeholders in a difficult situation

In addition to dealing with financial difficulties and discovering water in the fuel tanks of specific aircraft, the aviation industry in Nigeria also experienced assertive measures taken by the Nigeria Civil Aviation Authority.

In August this year, the authority pledged to impose penalties on airlines and other service providers lacking adequate insurance coverage for their aircraft and aviation equipment.

This warning was taken seriously, as the regulator emphasized that compliance with the Nigerian Civil Aviation Regulations (Nig. CARs) 2022 is mandatory for all operators.

In a letter sent to airlines and related service providers, signed by the Director General of NCAA, Captain Musa Nuhu, the directive outlined the obligation to maintain adequate and valid insurance coverage, submit copies of valid insurance certificates to the authority, and provide evidence of premium payment and other policy documents, with a minimum coverage period of three months.

The warning, however, had an ironic element, as investigations revealed that Nigerian airlines had higher insurance costs compared to their counterparts in Ghana, South Africa, and other African countries.

Operators informed stakeholders that the perception of Nigeria as a high-risk environment and the excessively expensive insurance premiums demanded by local insurance companies had led to an escalation in aircraft insurance expenses.

Checks conducted in 2022 revealed that Nigerian airline operators had expressed their dissatisfaction with the necessity of paying insurance fees that ranged from 8 to 10 percent of the value of the aircraft.

In contrast, airlines operating in Ghana, South Africa, and other African countries paid a significantly lower percentage of 2 to 3 percent.

However, there are views suggesting that is a limitation on the total insurance coverage for aviation, which is set at a maximum of 5 percent of shareholding funds. This limitation has nonetheless prompted experts in the insurance industry to urge the National Insurance Commission (NAICOM) to review the regulation.

The industry professionals argue that revising this regulation would not only promote growth in the Nigerian aviation sector, but also boost economic activities within the country.

While the Nigerian airline operators are gnashing over the payment of aviation insurance, airlines in both Europe and the United States are required to pay an insurance rate ranging from 0.5 percent to one percent in order to insure identical aircraft.

To illustrate, airlines operating in Nigeria must pay an annual insurance fee of around $1 million for a B737-300 aircraft, while airlines in Ghana or the US pay between $200,000 and $300,000 to insure the same type of aircraft.

The call by industry operators for a review of the cost of aviation insurance in the country took place at a conference in Lagos focused on Aviation and Cargo, with the theme of 'The Role of Insurance Regulation in the Growing Aviation and Cargo Business in Nigeria'.

Aviation insurance is however considered a specialized type of coverage and is known for its high premiums due to the elevated level of risk in the industry.

During their presentations at the conference, insurance experts expressed the need to reconsider the limited insurance coverage for the sector as stated in the law.

Mr. Leo Aka, representing the CEO of the National Insurance Commission (NAICOM), called for an increase in capital injection.

This would allow for more local retention and licensing of domestic reinsurers, addressing the significant challenges currently faced by Nigerian aviation insurance.

The specialists stated that in the past, they have encountered situations where the reinsurer from another country was unable to fulfill claims. They also suggested that Nigerian insured individuals should have a limit on the amount of aviation coverage they can obtain due to the risks involved.

Specifically, they advised that airlines should not exceed 5% of their shareholders' funds in terms of coverage in order to protect their interests. Mr. Edeki Isujeh, the Managing Director of an insurance company, discussed the issue of insufficient access to the dollar for premium payments and urged the insurance regulator to work together with the Central Bank of Nigeria to establish a dedicated channel.

He mentioned that there are many players in the industry who don't have dollars to pay insurance premiums but have naira instead, which poses a problem for the insurance industry. He questioned where they would obtain the dollars from.

Buttressing the issue, Nigerian airlines follow the regulations set by the National Insurance Commission (NAICOM) by insuring their aircraft locally and with international insurance companies like Lloyd.

However, this practice results in double insurance, which experts estimate costs Nigerian carriers over N300 billion annually.

Osita Okonkwo, the Chief Operating Officer of United Nigeria Airlines, stated that this insurance policy makes it difficult for Nigerian airlines to lease aircraft as some lessors are hesitant.

If lessors do agree to lease to Nigerian operators, they often require wet lease agreements where they manage the aircraft, including maintenance, crew, and insurance (referred to as ACMI). This is different from dry lease agreements where the airline is solely responsible for managing the equipment.

The focus of regulators on insurance, along with the ongoing scarcity of foreign exchange in Nigeria, has worsened the airlines' situation. This is because they are obligated to make insurance payments in foreign currencies.

There is a public presentation that the National Insurance Commission has set a precedent by also passing a law that mandates all airlines in Nigeria to use a local insurance firm for insuring their aircraft.

This law has made it difficult for airlines to find affordable alternatives overseas. It is important to note that Nigerian insurance companies cannot collectively insure a new aircraft in the country, so they must rely on foreign insurance companies, resulting in higher insurance costs for airlines.

Barr Allen Onyema, the chairman of Air Peace, the largest airline in Nigeria, explained that insuring a single aircraft in Nigeria costs as much as insuring over three aircraft in other countries.

Onyema attributed this to Nigeria being perceived as a high-risk environment and expressed frustration over the requirement for airlines to solely insure their aircraft in Nigeria, despite the insufficient capacity of local insurance companies. Moreover, foreign airlines are owed funds by the Nigerian government, which they have been withholding.

According to IATA's report in June 2023, Nigeria has trapped $812.2 million of foreign airlines' funds, placing it among the top five countries globally with the highest amount of blocked airline funds.

These countries, including Bangladesh, Algeria, Pakistan, and Lebanon, collectively account for 68% of the blocked funds. Nigeria's weak balance of payments and declining exports over the past decade have resulted in a shortage of foreign currency.

Consequently, investors are facing difficulties in withdrawing money from Africa's largest economy, leading to economic instability.

The scarcity of foreign exchange has caused the devaluation of the naira, negatively impacting businesses dependent on imports and creating challenges for Nigerian companies in obtaining the necessary currency for trade.

Nigeria is currently grappling with challenges stemming from a shortage of foreign exchange and a significant devaluation of its local currency, the Nigerian naira. Experts in the industry have expressed concerns about how this situation will impact airlines, particularly when it comes to paying insurance premiums in a strong currency.

A source from an airline shared their worries with ch-aviation, stating that if the naira continues to depreciate as it has been, it could spell trouble for all parties involved. The issue of insurance has become a major concern, and since operating an aircraft without insurance is not possible, they have no choice but to persist and find the necessary funds to obtain insurance.

This is no easy task for them. The losses they have suffered were primarily in dollars. Assuming they acquire dollars at a rate higher than the official rate set by the Central Bank of Nigeria (CBN), which was N400 to a dollar, they would be getting it for N680.

The difference is significant. Now, the situation has worsened and is progressing rapidly. Recently, Nigerians were buying a dollar for N1200, but it was being quoted at N890 on the platform.

Local airline operators have indicated that they are being forced to pay higher prices for aircraft insurance and other services denominated in dollars due to a shortage of foreign exchange. Mr. George Uriesi, the Chief Operating Officer (COO) of Ibom Air, and Captain Ado Sanusi, the Managing Director of Aerocontractors, stated that operators are experiencing increased expenses because of the ongoing devaluation of the naira compared to the United States dollar.

Uriesi presented that at the AviaCargo Chinet Conference 2023, the third edition held in Lagos. While speaking at the conference, the COO mentioned that this situation has led to higher insurance premiums for the airlines.

He showed interest in how certain airlines were handling the situation. The COO stressed that this was a major challenge for operators, as it was necessary for the airlines to properly insure their aircraft and other equipment before putting them into service.

He also mentioned the difficulties faced by operators in accessing dollars through the official window of the Central Bank of Nigeria. According to reports, in 2017, Nigerian airlines paid an average of $1 million annually to insure a B737-300 aircraft, while Ghanaian or American airlines paid between $200,000 and $300,000 to insure the same type of aircraft.

However, Ben Ujoatuonu, the Managing Director of Universal Insurance Plc, supported the policy and stated to journalists that airlines should adhere to the local content rule and insure their risks in Nigeria. He emphasized that this approach would contribute to the growth of the local market and decreases the necessity for foreign exchange in the global market.

Those who know better say that it is a crying shame for Nigeria that the insurance event unfolded as the Max Air aircraft, identified as a Boeing B737-300 with registration mark 5N-MHM, was observed having water drained from its fuel tanks, capturing the attention of the world.

The incident was truly horrifying, causing potential air passengers to be scared, which resulted in them sharing the video on social media.