Airlines foreign exchange earnings and spending not scarcity of foreign exchange

THE present travails of the Nigeria Aviation industry, particularly the airlines are not about scarcity of fuel and the lack of foreign exchange; their travails stem from management structure, single ownership and poor financial management of local and foreign earnings, the recurring debts portfolios and the diversion of earnings to invest in other businesses.

While the government service providers particularly had been the cash cow being exploited by the airline operators and the politically exposed persons in government, the NCAA too remained particularly passive on matters of Economic Regulation and Oversight of all the operations.

 Of particular importance is the NCAA neglect of its responsibility to continuously monitoring the earnings and spending of these airlines and airports operators to ensure their compliance to the Economic Regulations as prescribed in the National Civil Aviation Regulations (NCARs) Part 18.10.5 for airline operators and Part 18.7.5 for airport operators.

The non-compliance to these provisions by both the operators and the regulator has resulted into the accumulation of debts by the airlines to the service providers like FAAN, NAMA, NAHCO, SAHCOL, Fuel Marketers, etc, including financial institution such as the Banks, Insurance Companies, Federal Inland Revenue Services; Aircraft and Space Vendors; Staff Salaries in Arrears. It has also nearly collapsed the operation of the sector with severe consequences on the economy.

While the debts of most of the airlines have been recurring since 2008, the debts of some of them to the government service providers remained unresolved till today. In some questionable cases, government intervention funds were disbursed to some of the airline operators to offset their debts to banks and service providers.

These debts are still recurring in the airlines present travails. The questionable intervention funds of about N200 Billion seemed to have been facilitated by some politically exposed individual without verifying the debt portfolios of the recipients and without the knowledge of the Ministry of Aviation. There was still a questionable part of the intervention fund facilitated by the United Bank of Africa (UBA) for the defunct Virgin Nigeria Airline which was transferred as loan to Air Nigeria Airline at 2%; a very low rate at the time the fund was disbursed as against the 6% approved by the CBN on the intervention fund to the beneficiaries. This questionable intervention fund was unresolved by the National Assembly Committee on Aviation headed by Senator Hope Uzodinma before he was removed as the head of the committee.

The NCAR’s Part 18.10.5 requires the NCAA ‘’to continuously monitor the Financial Health of Licensed Airline Operators for the purpose of ensuring their financial capability for safe and sustainable services’’. The provision in the regulations on the other hand mandates  the Airlines ‘’to  ensure proper transparency and prudent financial management and to submit to the NCAA on monthly basis, all financial data and records of their operations in a form and manner prescribed by the NCAA’’.

The NCAA is further required to ‘’evaluate the financial returns and make copy of the evaluation to the airline management which may make a representation to the NCAA. Furthermore, upon receipt of the airline representation, the NCAA shall review and communicate its decisions to the airline’’. There has been no evidence that these have been sufficiently adhered to by any of the airline operators and the regulators in the last 8 years.

Similarly, the NCAR Part 18.7.5.1 on Airport Operations requires the NCAA to monitor the Financial Returns of all Airports, Air Navigational and Aero Meteorological Service Providers. While the Services Providers are required ‘’to submit a 5-year Business Plan to the NCAA, they must also submit Yearly Financial Returns at such intervals and the formats as may be prescribed by the NCAA.

The Financial Returns shall include but not limited to Income and Expenditure, Profit and Loss Statements, Cash Flow Statements, Insurance Policy as evidence of payment of premium and other returns that may be required by the NCAA. These provisions could not be adhered to because of interference from political officials in the industry and some elected members in the National Assembly.

The level of huge recurring debts of the airlines to all the Service Providers are evidence which suggests that the provisions of NCARs part 18.7.5 and 18.10.5 have not been substantially complied with by the operators and the Regulators. Available FAAN statistics on Passengers Traffic and Air Traffic (2014/2015) and the information on Fuel Sales Return from the Fuel Marketers Returns show that the Estimated Foreign Exchange Earnings by some major operators (Airlines, FAAN, NAMA, NCAA) in the aviation sector mainly on international flights operations only would include.

• Sales of 2.5million liters/day to Foreign Airlines at $0.60 per liter ($400, million)

• FAAN Passenger Service Charge at $50 per passenger on about 3.5 Million outbound International Passengers (2014/2015 FAAN Passengers Traffic Statistics) ($150 million)

• FAAN Landing and Parking Charges on 25,000 Foreign Airlines Aircraft at average of $1500 per aircraft. ($62, million) (2014/2015 FAAN Air Traffic Statistics

• NAMA ATC/Air Navigational Service Charges on about 100,000 Inbound, Outbound or Overflying International Flights at average of $600 per flight. ($60 million) (2014/2015 FAAN Air Traffic Statistics)

• NCAA Security Charges of $20 per passenger on 2.5 Million Outbound International Passenger ($50, million)

• NCAA/Ministry Charges on BASA Royalties and Commercial Agreement with Foreign Airlines on about 2.5 Million Inbound and Outbound Passengers at average of $80 per seat. ($280 million)

• Foreign Exchange Earnings on Inbound Passenger and Cargo from about (4) airlines operators on Regional, Continental and Intercontinental at average of $2.5million per week. ($130 million)

Estimated Total Earnings in Foreign Exchange annually ($1.132 billion)

(Note: The Foreign Earnings of other Aviation Service Providers such as NAHCO, SAHCOL, ASL, are not included).

The Estimated Foreign Exchange Required for spending Annually by the Airline Operators for the payment of offshore services to sustain operation would include:-

• Fuel consumption of 4million litres/day or 4 Million Liters x365Days litres or 1.46 billion liters annually imported at $0.5/litre ($730 million).
• Airline Offshore Maintenance Cost on average of 10 aircraft per annum at $2.0 million per aircraft, plus additional $20 million for crew training and spares. ($40, million)
• FAAN overseas training workshop/seminars for staff including extacodes requirement, and the purchase operational equipment     ($10, million)
• NCAA overseas training workshop/seminars for staff including extacodes requirement, and the purchase operational equipment      ($10, million)
• NAMA overseas training workshop/seminars for staff including extacodes requirement, and the purchase operational equipment       ($10, million)
• AIB overseas training workshop/seminars for staff including extacodes requirement, and the purchase operational equipment   ($5, million)
• NCAT overseas training workshop/seminars for staff including extacodes requirement, and the purchase operational equipment        ($10, million)
• NIMET overseas training workshop/seminars for staff including extacodes requirement, and the purchase operational equipment. (It is expected that NIMET would get the additional forex from other government agencies such as NIMASA(the Marine and Water transportation) and the Ministry of Agriculture and Environment where it extends its meteorological services to ($5, million)

Total Estimated Foreign Exchange Spendings                                                       ($840 million).

Estimated Balance from Foreign Exchange Earnings Annually $1.132 Billion minus $312 Million Annually

From the Estimated Forex Earnings, it would appear that the Services Providers make more forex earnings than the airline operators especially the fuel marketers, NCAA and FAAN. We must however, be mindful that these earnings are the benefits of the various BASA between the federal government and countries of the foreign airlines. Therefore BASA must be seen as the commonwealth of Nigerians that should be shared to the operators according to their operational needs.

Furthermore, in allocating foreign exchange spending to the Support Services Providers and Marketers, we must be mindful that if the Airlines do not fly, the other operators would not be in market to make the earnings they are making on the foreign airline. If the fuel marketers who presently are importing fuel do not supply fuel the airlines would not fly. They should therefore be given the first consideration over the other operators.

Secondly, Forex Earnings so earned must be domiciled in an Aviation Operational Sustenance Account with CBN to support Airline operations and they should in turn be given the naira equivalent. It could however, be used for the specifics listed in the Operators Business Plan approved annually by NCAA in accordance with   Part 18.7.5 or 18.10.5 etc to support  operations. When the needs arise, it could be used for any airline‘s capital project provided it is at least in its 3 years consecutive Business Plan approved by the NCAA and the National Assembly in consultation with other operators.

Government should Audit the airlines and other operators Foreign Exchange earnings and spending in the last 5 years to determine their genuine annual forex needs. In accordance with NCARs Part18.10.5, the airlines should develop their Business Plan on foreign exchange earnings and spending that would sustain their annual operations.

Government should review the NCAR Economic Regulation to enforce all first line operators to domicile their foreign exchange earnings and spending in an account with the Central Bank of Nigeria (CBN); CBN can open a window for operators who want to collect naira equivalent but can only collect from forex sustenance account only with the approval of the NCAA and subject to the operations requirements in the Business Plans submitted for that year

This arrangement would reduce the demand for forex by airlines from CBN and CBN would have sufficient forex to offer foreign airlines to repatriate their earnings to their home countries. Annual excess in forex earnings would also grow for capital projects for front-line operators as loans. Again based on their business Plan submitted, evaluated and approved by NCAA, government may provide recoverable intervention funds for front-line operators. Such government recoverable intervention funds would be in the 5 years Business Plan and not an annual requirement at impulse, or at the beck and call of politically exposed operators.

This piece was sent in by John O Ojikutu

CEO Centurion Securities and member Aviation Round Table (ART)