How risk, others cost local airlines N10b premium yearly
• Air Peace, Arik among highest payers globally
The volatile nature of the air travel business environment in the country has been blamed for the high insurance premiums local airlines pay on aircraft and passengers estimated to be in excess of N10 billion yearly.
Whereas local airlines pay at least 400 per cent more in insurance premium than an average airline in Europe and America, the abysmally low capacity of Nigerian insurance companies ensures that at least 80 per cent of premium goes to foreign insurance firms.
Indeed, the perennial capital flight is a burden struggling local airlines have to shoulder. It takes a huge toll on revenue in an industry where the profit margin is less than five per cent and is fast pushing the airlines to the brink of collapse.
Air travel business globally is capital intensive and dollar-denominated. A fatal aircraft accident is enough to ruin an airline because the industry, as often said, is terribly unforgiving of any carelessness, incapacity or neglect. Hence, since the Warsaw Convention of 1929, aviation insurance has been made mandatory for operators, to provide coverage for hull losses as well as liability for passenger injuries, environmental and third-party damage caused by aircraft accidents.
The higher the risk, the higher the premium. The Nigerian environment is currently regarded as a high-risk business setting within the global insurance community and leasing companies, no thanks to “high likelihood of an air accident and airline closure.”
Indeed, between 2002 and 2012 was a disastrous period for air travel when aircraft were literally falling off the sky. If that was a distance away, current unrests in some parts of the country remain an albatross.
The Guardian learnt that insurance premium on an average aircraft is put at between one to two per cent of the entire value. But in addition to the “high risk” Nigerian setting, local airlines pay about eight per cent to have their fleet and passengers insured.
For instance, a 1990s (fairly used) Boeing 737-300 aircraft that is the bride of the Nigerian commercial airspace sells for about N1.359 billion ($4.5 million). At the rate of eight per cent premium, each aircraft is insured with N108.7 million yearly.
Currently, there are eight operating local airlines in Nigeria. They are Air Peace, with 13 aircraft fleet-size; Arik Air has 28, with 10 now in operation; Aero Contractors has 10, with two currently serviceable; First Nation has two, with one in operation; Azman Air has four; Dana Air, five; Med- View Airline, four; and Overland Airways seven airplanes.
With a total of 46 functional aircraft in local operations as at today, the airlines pay over N5 billion in fleet insurance yearly, with another N5billion on passenger coverage for about 10 million annual traffic.
The Managing Director of Air Peace, currently the leading carrier in the market, Allen Onyema, said the charges were indeed killing and the situation explained why airlines could hardly survive for long in Nigeria.
Comparatively, according to Onyema, his airlines pays as premium four times what legacy carriers like British Airways, United, Emirates and so on pay overseas.
“That is part of the reason it is so difficult for airlines to operate for so long here. We have had 150 registered airlines since 2000 and only eight are in operations today. All 142 could not have got it all wrong. It says a fundamental thing about our operating environment,” Onyema said.
Aviation lawyer, Pekun Sowole, is of the view that the odds are against the local operators given the nature of the aviation insurance market, volatile environment and the inability of firms to underwrite aviation insurance.
Sowole noted that globally, no single insurer has the resources to retain a risk, the size of a major airline, or even a substantial proportion of such a risk. In other words, insurance companies often collaborate by percentages given the huge sum involved. In the case of a fatal accident, a passenger or victim is entitled to about N30.2 million ($100,000) compensation.
The lawyer said: “The industry market is competitive and you negotiate the premium. That is why we cannot compare the Nigerian aviation insurance market with that of the United States (U.S.). In U.S., there are about one million aircraft to insure, Nigeria has about 30 airplanes, so, how will the premiums in both regions be competitive?”
According to the 2014 report from General Aviation Manufacturers Association (GAMA), there are 362,000 general aviation aircraft worldwide, and 199,000 (or roughly 55 per cent) are based in the United States.
“Again, our environment is plagued by high insecurity with chances of accidents happening. You have the Boko Haram, Fulani Herdsmen, kidnappers and so on, coupled with the unfriendly business environment. So, there is a high likelihood of airlines shutting down. All of these are considered in insurance policies and given the average cost of an aircraft, the premiums are often on the high side,” Sowole said.
The Managing Director and Chief Executive Officer, Anchor Insurance Limited, Mayowa Adeduro, said the challenge was not really lack of collaboration among insurance firms but a matter of financial capacity that would allow local insurance companies to provide coverage for airlines operators in the country.
Adeduro said that in a situation where an average airline passenger is worth N70 million coverage, “how easy is it for local insurance firms to render such policy?”
Apparently in agreement with Adeduro, the Director General of the Chartered Insurance Institute of Nigeria (CIIN), Richard Borokini, who spoke to The Guardian on how governments can be of support to the sector, said “it is by insuring all assets to boost the financial ability of the sector in many ways.”
Borokini also suggested the enactment of a law to compel all professionals to appreciate the role of insurance in all their dealings, adding that this is one of the ways to make indemnity business viable as it is in other countries of the world.
The President of the Aviation Safety Round Table Initiative (ASRTI), Gbenga Olowo, said if all aircraft in the country were just about 46, less than the fleet-size of South African Airways or British Airways, then it would not be out of place for operators to start considering partnership.
Olowo said that with partnership deals and possible merger, the local airlines would stand a chance of emerging stronger and more competitive to negotiate and drive a viable aviation industry.