Aviation

Airlines face imminent shutdown over insurance premium defaults

Published

10 years ago

December 14, 2016

Nigeria’s domestic aviation sector is under fresh financial pressure following the introduction of a new 5% federal levy on air tickets, intensifying concerns over rising operating costs, fragmented taxation, and expensive aircraft leasing arrangements that airlines say are threatening industry sustainability. The new levy, introduced as part of aviation revenue reforms, is collected alongside existing statutory charges imposed by multiple agencies. Airline operators say the additional deduction further compresses already thin profit margins in an industry already weighed down by high jet fuel prices, regulatory fees, and foreign-exchange–linked obligations. Industry stakeholders warn that the cumulative effect could push up ticket prices, dampen passenger demand, and worsen liquidity challenges for domestic carriers already struggling with cash flow constraints. Rising Tensions Between Regulators and Airlines The financial strain has coincided with renewed friction between the Nigeria Civil Aviation Authority (NCAA) and the Airline Operators of Nigeria (AON), following disputes over the remittance of statutory charges and the delivery of regulatory services. Operators say the situation reflects deeper systemic liquidity stress across the sector, where airlines are increasingly unable to meet overlapping obligations imposed by aviation agencies while maintaining operational stability. A Layered and Fragmented Tax System At the centre of industry complaints is what operators describe as a “multi-layered and excessive” taxation structure involving the NCAA, the Federal Airports Authority of Nigeria (FAAN), and the Nigerian Airspace Management Agency (NAMA). Airlines such as Air Peace, Ibom Air, and United Nigeria Airlines are subject to a range of compulsory charges, including the 5% ticket levy, passenger service charges, value-added tax on tickets and aviation inputs, and other operational deductions collected at different stages of the value chain. Industry players argue that the system creates cash flow distortions because several charges are collected upfront or deducted at source, leaving airlines with reduced working capital for day-to-day operations. Beyond ticket-based deductions, carriers also face landing fees, parking charges, overflight fees, navigation levies, and ground handling costs. Combined with jet fuel, which accounts for a significant share of total operating expenses, analysts say profitability on many domestic routes has been severely constrained. Leasing Constraints and Foreign Exchange Pressure Airlines’ challenges are compounded by difficulties in aircraft acquisition and leasing, which remain essential for fleet expansion in the absence of strong local financing options. Most carriers rely on wet and dry lease arrangements from international lessors. Wet leases, which include aircraft, crew, maintenance, and insurance, allow quick capacity deployment but are costly and typically paid in foreign currency. Regulatory limits also restrict their use to short-term arrangements. Dry leases offer more operational control and long-term stability but are increasingly difficult to secure. International lessors often view Nigeria as a high-risk environment due to concerns over aircraft repossession and currency volatility, resulting in higher insurance premiums, security deposits, and financing costs. As a result, airlines are frequently forced into short-term leasing agreements, exposing them to exchange-rate fluctuations and operational disruptions that contribute to flight delays and cancellations. Fuel Costs Deepen Financial Strain Jet A1 fuel remains one of the largest cost drivers in the sector, further squeezing margins across domestic routes. With fuel expenses, taxes, and leasing obligations combined, industry analysts say many airlines are operating with extremely narrow or unstable margins. Operators warn that without coordinated policy reforms, sustained profitability and expansion in the sector will remain difficult. Calls for Structural Reform Aviation stakeholders are calling on the federal government to streamline overlapping charges, review the newly introduced 5% levy, and consider removing VAT on aviation inputs to ease cost pressures. They are also advocating for reforms to centralise fee collection processes, improve transparency in regulatory charges, and support more stable aviation fuel supply mechanisms. In addition, industry groups are pushing for the development of a local aircraft leasing framework to reduce dependence on expensive international markets. Outlook While policymakers continue to explore potential incentives, including tax relief measures and leasing reforms, airlines say they are already adjusting operations through capacity cuts, route optimisation, and tighter financial controls. For now, Nigeria’s domestic carriers remain under significant pressure, navigating what industry players describe as one of the most financially challenging periods in recent years.

By Odunewu Segun

The threat Lloyd’s of London to blacklist airline operators in Nigeria for failing to meet up with the payment of their insurance premiums may cripple the industry unless the federal government intervenes, National Daily has gathered.

Lloyd, the world’s leading insurance market had issued a warning to Nigerian airline operators that it may be forced to blacklist the country in the face of continued failure of some operators to pay their premiums regularly.

The company’s representatives, who were in Nigeria recently, noted that the Nigerian market was a high risk market with the volume of business modestly small and airline brokers not paying their premiums.

Lloyd warned that in view of the fact that airlines brokers in Nigeria had in recent times failed to pay their premiums, it may have no other choice than to blacklist the country.

Speaking on the implication for Nigeria’s aviation sector, Chairman of Airline Operators of Nigeria (AON), Nogie Meggisson, said the development may have far-reaching consequences for the aviation industry and the country. He said the airlines claimed they had naira but could not pay premiums because of foreign exchange constraints.

The AON chairman said a blacklist would lead to over 300 per cent rise in premiums because of the high risk and as such Nigeria should do anything possible to avert it.

“We are not keeping to payment dates. Domestic carriers have a four-month backlog on payment. It will be funny to wait until there is an incident before the airline tries to pay its premium.”

He said virtually 100 per cent of the aircraft being operated in Nigeria are re-insured in the Lloyd’s market because of the high exposure of an average $500m for just one airplane to cover hull, war and third party liability.

“When this figure is multiplied by the number of aircraft operating in the country it becomes clear that Nigerian insurance companies can’t cope considering the enormous volume of resources needed to cover all those aircraft of which the total coverage value will be in excess of six billion dollars.”

“Hence, Nigeria can’t afford to be blacklisted as a nation because this will have very grave and deleterious consequences, as the entire domestic airlines will shut down since airplanes can’t be operated without being insured,” he stressed.

He therefore appealed to the federal government to urgently make foreign exchange available for its members in other to avoid being blacklisted. “This can be done by forging a joint working group with the Federal Ministry of Finance and the Central Bank of Nigeria to brainstorm and cross-fertilise ideas on how the nation can take exigent steps to forestall a potential backlash on the Nigerian economy and totally avoid the blacklist in the interest of safety and economic prosperity of the country.’’