How forex scarcity threatens airlines’ insurance payment

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Stories by Louis Ibah

A fresh crisis is brewing in Nigeria’s domestic airline industry as operators say the scarcity or high cost of foreign exchange (forex) is frustrating efforts to pay insurance premium on aircraft used in the country.Lloyd’s of London, the world’s leading insurance market, has also issued a warning to Nigerian airline operators saying it might be forced to blacklist the country in the face of continued failure of some operators to fulfill their obligations of paying their premiums to the insurer regularly. Insurance cover is a mandatory requirement by the Nigerian Civil Aviation Authority (NCAA) for all airline operators in the country which must include the aircraft, passengers and other third party liabilities in case of an air crash.

The root of the crisis
Most airlines in Nigeria charge passenger fares in naira (the local currency). However, the inability of the local insurance and re-insurance industry to fully handle in the past, huge risks associated with air crashes given their low capitalisation which mars the speedily payment of compensation or indemnity to airlines and victims, has forced most Nigerian airlines into getting their aircraft insured abroad, especially with Llyod of London.
This often entails either getting forex at official rate from the CBN or changing the naira earned from ticket sales into either the dollars or pound sterling at parallel market rate. In recent months, the value of the naira against the dollars for instance has crashed to N470 to $1, thus making it very exorbitant to source for the dollar at the parallel market. Chairman, Airline Operators of Nigeria (AON), Capt.  Nogie Meggison told journalists that the scarcity of forex was responsible for the inability of airlines to pay mandatory premiums to foreign underwriters. “The airlines say they have Naira; but that they can’t pay the premiums due to forex constraints,” said Meggison.
But the other factor is that the Nigerian aviation industry is ranked among “the high risk countries” meaning that airline owners in the country could pay a triple of what is paid in other countries. And because of an existing local content law which tends to prohibit airlines dealing directly with foreign insurance firms, what local airlines do mostly is to hire Nigerian insurance brokers to assist get insurance for their aircraft abroad.

Weak local insurers
The Nigerian insurance market is grossly unable to effectively underwrite risks in aviation because of the high exposure of an average $500million 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 cannot cope considering the enormous volume of financial resources needed to cover all those aircraft of which the total coverage value will be in excess of $6bn.
Representatives of Lloyd’s of London market who were in Nigeria recently, still maintained  that the Nigerian aviation industry  is a high risk market. They however noted that local airline brokers are not paying their premium.
To this end, they cautioned that in view of the fact that airlines brokers in Nigeria have in recent times failed to pay their premiums the Lloyd’s market might have no other choice than to blacklist the country.

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The demerits
According to Nogie Meggison with local underwriters not able to handle the risks in the industry, any attempt by Llyod to blacklist Nigeria will certainly have far-reaching consequences for the aviation industry.
In his explanations, the Lloyd’s market accounts for about 92 per cent of reinsurance businesses of airlines globally, while 5 per cent is handled by the Russian market, Cyprus and others, while a mere 2 per cent is retained in other countries by their local firms.
“Virtually 100 per cent of the aircraft being operated in Nigeria are re-insured in the Lloyd’s marke,” said Meggison. “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 added. According to him,  it will take a lot of time for Nigerian airlines to switch to the secondary market of Russia and China, whose premium rates he said would have skyrocketed if Lloyd was to blacklist Nigeria.
Meggison explained further, “A blacklist will certainly have a negative impact on the Nigerian economy arising from the inability to acquire aircraft from lessors with no insurance, total suspension of operations by airline charter and oil support helicopters, job losses, and other sectors being reinsured by Lloyds market such as oil rigs, vessels, high rise buildings, airports and terminal buildings etc.
“Similarly, a downgrade or outright blacklist will mean very high premiums due to high risk levels.” he added.

Way out
Local airline operators want the Minister of State Aviation, Senator Hadi Sirika to take proactive measures to bail airlines out of the crisis. “Mr. Sirika as a matter of urgency should come to the aid of domestic airlines operating in the country by forging a joint working group with the Federal Ministry of Finance and the Central Bank of Nigeria to brainstorm and cross-fertilize ideas on how the nation can take exigent steps forestall a potential backlash on the Nigerian economy and totally avoid the downgrade/blacklist in the interest of safety and economic prosperity of the country,” said Meggison.
The major reason why numerous compensation have not been paid to the victims of the many air crashes in Nigeria like the Sosoliso, EAS, Bellview, ADC, and Dana Airline is due to the weak capitalisation of the local insurance industry.
Already, airlines plying local routes are crying that they may be heading towards an all-time-low profit for the financial year ending 2016 due to escalating cost of insurance, forex and fuel.
Industry analysts have expressed the concerns that with the attainment of Category One Safety Rating by the United States Federal Aviation Administration, Nigeria should be considered a low risk country and that premium paid on insurance by local airlines should  therefore rank among the lowest in the world.
However, one good option that analysts have suggested to achieve lower insurance premium for aircraft in Nigeria and one that will allow timely payment by airlines is a further consolidation of insurance companies to enable them boost their capitalisation to underwrite the huge risks associated with aircrafts some of them costing between N1billion to N20billion.

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Arik Air  introduces new Airbus 340 aircraft on London route

Arik Air says to  cope with the demands of its international passengers on the London – Heathrow and New York JFK routes, it has leased a wide-body Airbus 340-300 from Portugal to supplement its wide-body fleet of two A330-200 aircraft. The airline also said it will be increasing its flight frequencies to key domestic destinations ahead of the Christmas and New Year festivities to cope with passenger demands.
According to the  Managing Director of Arik Air, Mr. Chris Ndulue, the airline’s decision to increase flight frequencies on the domestic routes is predicated on the need to ensure that many Nigerians are able to travel home to share the joy of the season with family and friends.
“For many of our guests, the Christmas and New Year period is a time when families wish to be reunited at the end of a busy year and Arik Air is very pleased to announce that on many of our domestic routes, the airline will be scheduling additional flights and operating larger aircraft to cater for the increasing demand,” said Ndulue.
“Arik Air connects 18 destinations within Nigeria, 10 in West/Central Africa and three international destinations enabling the airline to bring more Nigerian families together this festive season than any other carrier.
“Instead of the average 100 daily flights normally operated, Arik Air will, during the festive period, increase its daily flights to an average of 120,” he  added.
Last week, the Nigerian Civil Aviation Authority (NCAA) sanctioned Arik Air for its inability to ferry passengers’ luggage over 48 hours after the airline’s arrival at the Murtala Muhammed International Airport, Lagos, from London. Arik Air was ordered to pay each passenger whose luggage was left behind in London $150. The NCAA said the airline had violated the Montreal Convention of 1999, which makes it mandatory for passengers and their luggage to arrive at the same time at their final destination or airport and under normal circumstances, the passengers ought to have arrived with their luggage.

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NANTA lauds aviation sector reforms

The National Association of Nigeria Travel Agencies (NANTA) has applauded the efforts of the Federal Government in resolving the crisis in the aviation sector, noting that with the right policies, the sector could assist ongoing efforts to resuscitate the ailing economy.
Speaking during a breakfast meeting with journalists in Lagos recently, the President of NANTA, Mr. Bankole Bernard, said in the last one year, the government had taken practical steps to address the myriads of problems in the aviation industry, notably the rot in infrastructure at some of the nation’s airports, the inability of foreign airlines to repatriate their incomes out of the country, the scarcity of foreign exchange to domestic airlines, waiver of duties on imported aircraft parts, fixing the bad runway at the Abuja airport, and stemming job losses in the industry.
The NANTA boss who said the Federal Airports Authority of Nigeria (FAAN) gets $50 on each passenger that boards an international flight, and $10 on passengers flying on the domestic route, lamented the exit of some carriers out of Nigeria, saying the country was losing massively from the trend.  “Whenever a foreign airline is leaving the country, or a domestic airline shuts down, it is Nigeria that is the loser; jobs are lost and revenues are also lost,” Bernard said.
He said given the need to boost revenue from the non-oil sector, it would be in the best interest of the country if the aviation and tourism sectors were merged into one ministry.
“All over the world, it is the aviation sector that drives tourism. In 2017, tourism needs to be given the right attention so that we can derive maximum benefit from it. And to do this, we need to merge aviation and tourism into one ministry so that as we are developing the aviation industry, the tourism potential of the country is also harnessed and marketed to the outside world,” said Bernard.
Under a recession we need to do things that will jump-start the economy, and tourism has the potential to do this,” he added.
He noted that NANTA is proposing a good training programme with the Nigerian Institute of Tourism and Hospitality for members in order to boost their skills in marketing and attracting tourists into the country.
He suggested a similar  training needs to be extended to the Nigerian Immigration officers at the international airports so that they will know how to handle foreign tourists coming into the country through the airports.

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