A PAPER PRESENTED BY MR. AHMED KURU, MANAGING DIRECTOR/CHIEF EXECUTIVE OFFICER, ASSET MANAGEMENT CORPORATION OF NIGERIA (AMCON) AT THE 10TH ANNIVERSARY LECTURE OF AVIATORS AFRICA MAGAZINE ON SATURDAY DECEMBER 7, 2019 AT RADISSON BLU HOTEL IKEJA, LAGOS
The Publisher/CEO and management of Aviators Africa Magazine
Captains of Industry in Aviation Sector
Gentlemen of the Press
Ladies and gentlemen.
Let me join the organisers in welcoming you all to this “Aviation Leadership CEOs Roundtable” where matters of mutual concern especially will be discussed. I want to believe it is a no holds barred interaction because the aviation industry in Nigeria is nowhere near where it belongs in Africa. The organisers have asked me to specifically focus attention on “Aircraft Financing: The Issues & Challenges of Asset Management Corporation of Nigeria (AMCON).
I will briefly provide an abridged overview of AMCON and how it ended up as a major player in the aviation sector in Africa’s most populous nation. For the purpose of this gathering and for the benefit of some participants that are here from outside of Nigeria, I would like to take your minds back to the global financial crisis of 2008/2009, which had adverse effect on the Nigerian economy. Recall in 2008, at the onset of global financial crisis, there were foreign portfolio withdrawals of credit lines and investment from Nigeria. The stock market also collapsed leading to loss of about 80% of its value just as there was a major banking crisis due to poor risk management that led to increase in the non-performing loans of the banks.
AMCON was basically created as an interventionist agency – to Acquire Eligible Bank Assets (EBA) from Eligible Financial Institutions (EFI) and to purchase or otherwise invest in equity securities on such terms as the Corporation deems fit in accordance with the provisions of the Act. AMCON was also to efficiently manage and dispose EBAs acquired by the Corporation in accordance with the provisions of this Act; and obtain the best achievable financial returns on EBAs or other assets acquired by it having regard to: protecting or enhancing the long-term value of assets; cost of acquiring and dealing with assets; AMCON’s cost of capital, and other costs and guidelines or directions issued by the CBN.
For us at AMCON, we believe that forums like this one organised by the management of Aviators Africa Magazine should be encouraged and supported because our country needs all the developmental discussions, financial and technological wisdom in the world to enable us steer the economy of our nation to the very top where it belongs. In doing so, we cannot also overemphasise the critical role of the aviation sector. I am particularly impressed that a media house, Aviators Africa Magazine is taking the initiative to drive this campaign.
In my opinion, the aviation sector, which is a critical component of the transport bouquet is perhaps one of Nigeria’s most challenging sectors; especially in the light of the massive need for infrastructure development in air, rail, road and sea transport to ensure seamless movement of people and cargo. Regardless of the mode of transport – air, rail, road or sea, the aviation (transport) sector has proved to be a catalyst for the economic development of nations. It is the wheel that drives economic activities.
The air transport sector facilitates trade, tourism; boosts productivity in the economy; improves efficiency in the supply chain; it is an enabler for investments; can spur innovation, facilitate commerce and provide fast and reliable delivery of cargoes and services.
CHALLENGES OF AIRCRAFT FINANCING:
From what we now know, there are serious issues in aircraft financing because our people dabble into the business of aviation with the wrong capital mix. On the other hand, the banks who are the primary source of funding also have short term views about the business. Banks that have attempted to fund the business in the past neither had the deep expertise nor carried out proper due diligence before committing their funds. The banks lack both the financial capacity as well as the expertise in personnel to critically analyse the business and its associated risks before throwing their money into aircraft/aviation financing.
Because the banks do not understand the business, it is easy for any ‘sharp businessman’ with dubious intentions to approach them with dodgy proposal to float an airline just to get loans that he knows will go bad shortly after. Such cases abound in the industry. No wonder Nigerian banks, having watched the trend of the short lifespan of aviation investment shy away from further funding.
The previous management of Arik with out carrying out serious feasibility studies some years back bought two A340 planes for $260million dollars and within four years, it was discovered that the planes are commercially obsolete. So even with that huge capital outlay, the two planes were not able to operate to generate the money to service the huge debt, not to talk of making profit. This is just one of many.
In such a situation, in as much as we blame the investor for not knowing the right planes to buy, the banks also have a share of the blame. If they had expertise, they would have guided against the purchase of commercially obsolete planes. Ladies and gentlemen, the $260million dollars, Arik management wastefully spent buying the two aircraft at that time was enough to buy telecommunications operating licence like MTN, Globacom and others did.
If due diligence was carried out, that money would have been enough to buy four or five of other specification of commercially viable aircraft that would still be flying today and making money for the company, meaning that the loan would also not have gone bad. But as I speak with you, the multimillion-dollar investments are parked at the airports and could be regarded as scrap.
The cost of overhauling the engine of one Arik’s Boeing (B737-700 or 800) series is equivalent to the cost of buying a classic B737 – 300. It is not prudent at all. Arik under the erstwhile management before AMCON intervention did not maintain reserves. Under the current team, AMCON has overhauled over eight B737 engines and carried out more than 15 Checks with many more in shops. Airline management is not a business for those that are not prudent. Without sounding immodest, I can tell you that we are quite proud of these achievements at Arik.
There is also the issue of over invoicing of plane purchases by airline owners who prefer to take their profit upfront to the detriment of the business. Again, because the banks do not understand the business, they let airline owners get away with such sharp practices because once the aircraft is over invoiced, the collateral the bank is holding is deficient. It will only be a matter of time before the business fails.
Financing aviation is also challenged with high interest rate regime because almost everything in running the business is imported. There is lack of good corporate governance principles in the sector as most of the airlines operate as a one-man-business. Critical decisions are taken by one man whose decision cannot be questioned or challenged by a Board like is the case in organised environment. There is the issue of high cost of fuelling the aircraft as well as the different charges that make the business unattractive. We can go on and on.
Today, convincing the banks to invest in aviation is difficult, which is why the CBN should consider incentives that will encourage banks to fund aviation in Nigeria because it is such a critical sector of any economy. The apex bank should also motivate banks to go into airline asset securitisation, just as the government should create the enabling environment that would enable airlines to set up leasing companies in a well-tenured manner. The government can consider the idle pension funds for this venture so that operators will enjoy long-term credit.
Indeed, airlines in Nigeria find it extremely difficult to survive in this clime because of some of the issues highlighted above. It is therefore not surprising to some of us when you take a look at what I call ‘Nigeria’s aviation burial ground,’ you would be greeted with a long list of defunct airlines most of whose lifespan did not exceed 10 years.
Talking about ADC Airlines, African Trans Air, Bellview Airlines, Dasab Airlines, Harco Air Services, Kabo Air, Okada Air, Nigerian Airways, Slok Airlines, Sosoliso Airlines, Wings Aviation and Vergin Nigeria. The tombs also contain the remains of Afrijet Airlines, Air Nigeria, Afrimex, Albarka Air, Axiom Air, Al-Dawood Air, Capital Airlines and Chrome Air Services. The list is endless. To manage an airline in Nigeria, the realities are that investment is huge, but the profit margin is small. Airline’s survival requires discipline on the part of the owners and managers as well as sound corporate governance principles.
With a population currently estimated to be nearly 200 million and with the abundant human and natural resources of Nigeria, the prospects in the aviation/transport sector is huge and promising. Nigeria is naturally endowed geographically to be a global hub. And with the abundance of water and land mass we can create a harmonious rail, sea, road and air transport sector to the benefit of our people and the growth of our economy.
Nigeria seats at a strategic geographic position in Africa. It is like the pipe stand of a gushing fountain. It is perfect for a hub. It is large and has a growing, mobile population potentially making it comparable to New York, Dubai, etc. It is therefore gratifying to note that various governments, at state and the Federal levels are investing massively in rail, airport infrastructure, roads and bridges. Some of these include the Airport road to the MMIA, Lagos; the new terminal and upgraded runway at the Nnamdi Azikwe International Airport, Abuja; the on-going upgrade of the Enugu State International Airport; Upgrading of the Asaba Airport and various ongoing rail projects.
I thank you very much for listening.
Ahmed Kuru, FIoD, FCIB