‘Best intervention for local airlines is well-capitalised aircraft leasing company’
United Nigeria Airlines (UNA) ventured into the air transport sector in the middle of COVID-19 disruptions. Barely 12 months later, the price of aviation fuel ballooned with a knock-on effect on operating cost that plunged the entire sector into crisis. At the commemoration of its second anniversary recently, Chief Operating Officer (COO) of UNA, Osita Okonkwo, recounts the survival strategy of the start-up airline and lessons learnt. He gave a fresh insight into hurdles of the local sector and sundry issues. WOLE OYEBADE was there.
United Nigeria started operations in the middle of the pandemic and high uncertainties. How smooth is the journey?
You are right about the timing. We commenced our inaugural flight on February 12, 2021, from Lagos to Enugu and that happened just a few days after we obtained our Air Operators Certificate (AOC). It was during the pandemic and the aviation industry had just been opened for business. Before the inaugural flight, we had actually started our processes about two years earlier.
We got our aircraft in 2019, took them to Mexico for C-check, had our staff sent to South Africa for training but they were caught up there by the pandemic for almost eight months. Instead of coming back in November 2019, they came back in November 2020. We spent almost one year in Mexico, with two engineers and four aircraft. It was like this will never happen because we faced a lot of difficulties and incurred costs without any plans for them. Maintenance checks were supposed to be done in just three months and all the aircraft would be back to the country.
However, those challenges were a blessing in disguise because it gave us time to plan, to know ourselves and to review our plans. At the end of the day, we were able to start, just a few days after we got our AOC. Since then, we have flown every day of the year. We started with four planes, went to six destinations and now we have increased our routes to nine. So far, we have carried close to 800,000 passengers.
Lessons have been learnt and what we have done is to build some of these lessons into our plans for the future. The space we are in is one that is very difficult, competitive and uncertain. Whether you are talking of ground operations, airport facilities, aviation fuel, access to foreign exchange, ability of lessors and manufacturers and sellers to do business with Nigeria, all these things make the industry more challenging.
Secondly, we were pleasantly surprised by the reaction of the travelling public when we came onboard. We were warmly received not just as an addition but also like a partner that has come to make things different or to add to the service delivery. We know that there is room for improvement. In United Nigeria Airlines, we claim to be a learning organisation. We have a good relationship with the agencies and they have been very supportive and we use this opportunity to express our gratitude to them.
When we came in, we went out of our way to learn from those who have been there before us. We were among the first to advocate for the Spring Alliance, which is a collaborative framework to help passengers have a seamless experience when there is disruption. It has been very helpful but there is room for improvement. We are here for the long haul irrespective of what anybody tries to say.
The cost component of aviation fuel rapidly jumped from about 30 to 65 per cent of airline revenue within a few months of your operations. How did you manage this disruption of business plan?
After the aircraft, the second major component is the operating cost, which is basically fuel. Consumables, spare parts handling charges, all relate to particular operations. When we started, fuel was N200 plus to N300.
As of December 2021, we were buying fuel at N350. Suddenly, it rose to N500, and that was when the Airline Operators of Nigeria (AON) started shouting. Then, it peaked at around N790 and N800 now.
You know that 99 per cent of inputs into an aircraft are denominated in foreign exchange. What we have seen is escalating cost of operation. It is escalating at a very rapid rate. There was a reaction on the airfare side from N23, 000 and N30, 000, it moved to N50, 000 and N70, 000. Now what we are seeing is that because of the economic situation in the country, nobody is flying at N70, 000.
So, airlines have reacted irrespective of claims that they were colluding to fix prices. This is market force-driven and survival-driven. Now, you can see that you get tickets for N40, 000, but I can assure you that people are underwriting those costs. The good thing is that if you are looking at the long term, you try as much as possible to keep moving, hoping that it will balance. The airline is not a one-year business, it is a long-term business. The focus of any airline is to manage costs.
What is the fleet capacity of United Nigeria Airlines?
We are still operating our four CRJs, owned by us, and we supplement with leasing from time to time during the peak period. We have plans to expand our fleet. It is being slowed down because of the current situation of forex. We had contracts with manufacturers and lessors but it has not been fully operationalised because of lack of access to forex. This year, we are going to increase the tempo a little bit and make sure that by the end of the second quarter, we will bring in the new fleet that we have already committed.
Operators routinely ask for government’s intervention, one of which is the call for the Aviation Bank. Given your background in finance, do you share in that position?
If you look all over the world, there is no country that has a bank for aviation. If you look at our infrastructure, agriculture, and industries, they failed completely. They are struggling and money is being pumped into them every now and then. What is needed is for the banks to develop specialists in aviation and have desks in their different banks. It is usually a stage of development. What we require is an aircraft leasing company that will be well capitalised and supported by both external and internal investors to act on behalf of operators to lease aircraft.
There is a need for intervention, especially when an event happens that is militating against the industry. The other element is foreign exchange. There is nothing wrong in allocating forex to airlines. There is a need for that kind of allocation and the operators are asking for it, which I think is legitimate.
There has lately been a rash of leased airplanes with foreign crew in local scheduled services. What is the motivation for this leased equipment instead of outright purchase?
First, we need to understand that there are two different types of aircraft leasing: dry lease and wet lease. What most lessors do with Nigeria is wet lease. They man their aircraft and if there is a problem they take out their aircraft. They control it and its operations. In dry lease, they give you the aircraft, you control it and you pay them. So, for now, many are comfortable with wet lease. Leasing is a financing option and you can have an operating lease or a finance lease. Whichever one, it gives you room to do your business growth, rather than saving all the money to buy one day.
The other consideration is insurance. There is no capacity internally to do big aircraft insurance in Nigeria. So, many lessors are not operating in Nigeria because of insurance. It is killing business because even if you want to do indigenisation, you cannot do that with another person’s assets. Even if you buy an aircraft today, it is a requirement that you have to insure it, even if you pay with your money to Boeing, Embraer or whatever.
The insurance must cover Boeing even though they have sold it to you. They must be party insured in that transaction. So, you can’t escape the international requirements of the business and limiting it locally will not help lessors.
So, what people do is they can do local, just to satisfy all righteousness, you still have to go outside and take another one to satisfy the manufacturers. Nobody will give you an aircraft today – sell or lease – that will accept local insurance, especially if it (purchase value) is above $200 million. The other ones we have like Embraer, there is no problem, because the capacity is there. They will syndicate 15 insurance companies, no problem. But when you start going to $600, $500 million, forget it.
What are the most important lessons you have learnt in two years of operations?
One of the lessons learnt is that it is important to be mindful of the operational set up and cost of operations. And to what extent do you go to make the customer happy without compromising the viability of the business? We learnt that it doesn’t make sense to be competing on fares. There is no heroism in flying an aircraft. The only heroism there is sustaining the operations of an airline. Instead of competing on fares, airlines should be focused on what they are doing, make sure you get the customers to a level that they are comfortable and happy with you.
Secondly, we have to rely on the government or the Central Bank of Nigeria (CBN) for forex. However, there are things that can happen here. You wait until it comes or you pay for whatever price you get. But even at that, you have to be very careful because there are certain vendors or manufacturers who will not want you to move money from another account to theirs. It is not allowed. So, first you have to get money into your account and then you have to transfer.
Many of these sources don’t want to transact into Nigeria. They want to transact outside the country. Then, you make your private arrangements. The other lesson is that the team you have is what matters – from lowest to the highest. They are very crucial to the execution of the flight plan. It means that we have to pay attention to our human capital development and we should delay our expansion plans.