Establishing an aircraft maintenance facility in Nigeria will not only save costs for airlines, but will enhance air safety and manpower development, writes Chinedu Eze
There are two key things an airline must provide to ensure safe flight. They are: an aircraft that is airworthy and crew that is fit to fly. So many other things come in-between. For the airport manager, he must provide landing aids, runway, runway lighting and terminal facility.
While it is said that airlines spend about 40 to 50 percent of cost of operation on aviation fuel, the second huge expense by airlines is cost of maintenance; which is done largely overseas. For Nigerian airlines, humongous amount of money is spent on maintenance, engagement of expatriate skilled manpower, including pilots, engineers, schedulers among others, especially with the current high exchange rate.
Ferrying the aircraft overseas for maintenance constitutes another challenge and more expenses, including allowances paid to pilots, hotel accommodation, fuelling and airport charges. So it will cost the airlines far less if they could carry out major maintenance of their aircraft locally, but there is no big maintenance facility in Nigeria.
Cost of Overseas Maintenance
Last week, industry experts met in Lagos on the invitation of Aviation Round Table (ART) where the need for Maintenance, Repair and Overhacul (MRO) facility was discussed. Discussants and presenters looked at the issues from different dimensions and at the end, agreed that having MRO facility in Nigeria is the key to survival and profitability of the airlines. They also explained why Nigeria has not been able to attract investors that could establish such facility.
The CEO of Aero Contractors Company of Nigeria Limited, Captain Fola Akinkuotu gave detailed consequences of overseas maintenance in his presentation and looked at what it would entail to establish an MRO facility in Nigeria and the numerous gains for the airlines.
Akinkuotu said the biggest ‘killer’ of airlines in Nigeria is this huge costs associated with C- Checks.
“This is because most airlines are unable to pay for the checks and eventually abandon the aircraft at the foreign MROs which usually refuse to release the aircraft to the airlines until all invoices are settled. You may want to ask if the airlines don’t know of the costs before sending out their aircraft in the first place. The truth is that in the agreement, the MRO may charge a very attractive standard C- Check fee of $500, 000. But when the aircraft gets to the facility and the actual work begins and panels are opened, there are usually findings, which are beyond the quoted cap that must be rectified. This is where the huge difference comes in that dramatically raises the final C check cost.
“On the domestic front, our Nigeria Civil Aviation Authority (NCAA) in its wisdom has imposed a calendar limit for a C- Check at every 18 months and depending on the scope of work to be performed, an average C- check costs $1million. By today’s exchange rate of N395/1US$, this can be said to be conservatively N395 million per aircraft every 18 months. 60 percent to 70 percent of this cost is labour costs while the balance is the cost of parts and engineering services associated with the C-Check,” the Aero CEO said.
He noted that this is a huge capital flight in the very scarce foreign currency that ought to remain in the country if such checks are performed locally.
“When the fact that the labour rates are significantly lower in this part of the world, compared to Europe, Asia and the Americas, the need to establish a standard MRO locally is beneficial in more ways than one. Not only would the airlines enjoy a significant drop in the cost of C-Checks, the pressure brought about by the demand in foreign currency to pay for the checks will reduce drastically by between 60 to 70 percent,” Akinkuotu said.
He disclosed that presently, Nigerian airlines collectively operate a fleet of about 65 airplanes. With an estimated N395million for C-check, that is N20.15billion of capital flight every 18 months (N13.43billion per annum), adding that considering other incidental costs of about N21.7million ($70,000) associated with each C-check done abroad, the cumulative for the fleet operated collectively is about N1.41billion every 18 months (N940million per annum).
Akinkuotu said on the part of the airlines, the significant savings not only increase their survivability, it also means that such capital can be applied to purchasing more equipment (aircraft) to strengthen their operations and schedule reliability. He said that this creates more jobs for our pilots, engineers and other category of airline staff, adding that the locally established MRO would be a beehive of activities where all shades of personnel are employed, as it would be assured of patronage all the year round. This he said helps in capacity building, expertise honing and unemployment reduction.
Establishing MRO in Nigeria
Akinkuotu said that globally, MRO facilities generate revenue of about $50billion annually.
“The initial high capital investment in establishing a standard MRO will pay off over a short period. The MRO also has the potential of being a foreign currency earner due to the lower labor cost compared to other parts of the world. This will not happen overnight. The quality of work performed and a very aggressive marketing strategy will attract other world airlines to patronise it. In the West African sub region, an estimated 100 aircraft operated by airlines within the region is waiting to be tapped.
So many years have been spent talking about it with absolutely nothing on ground to show for it. There is no better time to bring about the establishment of this much talked about MRO facility than now. The very scarce foreign currency; and the large demand for, and the falling value of the local currency are a guarantee that airlines will definitely patronise it, provided it has the approval of the NCAA. Action speaks louder than words,” he said.
Funding and Leasing
The Aero Contractors boss explored how MRO could be established in Nigeria and recommended the quickest and cheapest way to set up one. He said all that is required is to survey suitable facility, enter into Memorandum of Understanding (MoU) or other pertinent forms of agreement to ensure that the required hangar space, equipment and tools relevant to the proposed type of maintenance activities are secured.
“This is the ideal way of setting up an MRO; but it is very capital intensive since everything must be provided anew. It costs approximately $32m. Most business minded organisations rarely follow this approach to setting up an MRO businesses because the cost associated with this option tends to be on the high side, or even prohibitive. One of the reasons MRO projects in Nigeria had been slow to evolve, or even fail in infancy stages is because most of the past attempts at establishing MROs in Nigeria had followed this option, resulting in futility of efforts and eventual abandonment of the project,” he remarked.
He said the general idea is to start by renting or leasing existing facilities, loaning tools and assets required getting the job done. This enables the MRO generate revenue and reputation to ensure future financial resources, which could then be invested in providing the needed assets and facilities.
According to him, this method allows the MRO to gradually anticipate and eventually contemplate growth in form of building new facilities, acquiring new tools, equipment and relevant assets required for sustaining the business model envisioned at the onset of the project.
“This is the most practical option for establishing MROs; and there are few organisations in Nigeria that have adopted this approach. The funds required for any strategy adopted can be sourced in the following ways: Direct Initial Investment by establishing partners or owners of the MRO; MRO revenues, which are reinvested back into the business; private placement to raise the required capital or approach institutional investors for venture capital funding; establishment of the MRO as a full-fledged, registered company (different from the airline) to obtain loan from a bank.”
Akinkutou said the investor that wants to establish MRO will have to consider these elements: building of hangar, cost of building and equipment; term loan and total set cost which he put at – $32million- 9% over 15yrs – $55million.
“At an estimated revenue projection of $33million every 18 months ($520,000 for each C-check) projected annual profit is $6.8million. Ability to pay off the loan in 10yrs is the most difficult funding strategy considering the capital intensity,” he said.
The stakeholders who attended the breakfast meeting last week said Nigerian would have had a standard MRO facility in the country if government has laws that provide incentive for such capital- intensive projects.
In fact, the industry stakeholders had berated the federal government for what they described as “wrong-headed policies, lack of vision and self-centredness”, which they said have been responsible for the retrogression of the aviation industry over the years.
The stakeholders including airline operators, airport managers, analysts, pilots, engineers and others accused government of being responsible for non-establishment of MRO facility anywhere in the country.
They noted that the lack of MRO facility in the country is a major setback, which is partly responsible for the high demand of foreign exchange in the industry, lack of developed technical manpower and the inability for Nigeria to carry out C-checks and D-checks (aircraft maintenance) locally.
Specifically, the Chief Executive Officer of Bi-Courtney Aviation Services Limited (BASL), Capt. Jari Williams said ferrying aircraft overseas for mandatory maintenance encourages capital flight and berated government for its lack of policy that would have encouraged local establishment of such facility in the country.
Williams noted that for any organisation to establish a viable MRO in the country, the federal government must give the initiator subvention, tax waivers, pioneer status and Free Trade Zone (FTZ).
The BASL CEO recalled that when he was the Managing Director of Akwa Ibom International Airport (AKIA), he tried for six years to attract investors to develop and put on stream the Uyo Airport MRO, but there was no favourable policy that would provide traction for investors to put their money into the facility.
He remarked that a new idea or project might not succeed if the initiator does not belong to a particular group, stressing that this should not be if the aviation industry must move forward.
He hinted that Aero Contractors would have established an MRO because of the experience gathered over the years for providing services in the oil and gas industry.
Williams said government’s complacence could discourage any investment in the country and noted that lack of commitment by government to the MRO facility in Uyo is one of the reasons why the project has remained uncompleted.
He added that while the Uyo MRO was under construction, a survey was carried on the number of Boeing airplanes in Africa and it was discovered that the area has a lot of 737 aircraft.
Nigeria should overcome the hiccups of the past, the lack of commitment and unfavourable policies but zero in now and provide the incentives that would attract the establishment of MRO facility and enhance air transport in Nigeria.