How foreign exchange, high cost of fuel’s crippling Nigeria’s aviation industry – Dare Osamo

With airlines running on losses and the cost of flight tickets soaring daily, the Nigerian aviation sector seems to be on life support machine. In this interview with Ayodele Olalere, Mr. Dare Osomo, an aviation industry expert with several years of experience in the  sector, spoke on why many Nigerian airlines are going under.

Could you tell us about yourself?
My name is Dare Osamo, I am from Kogi State.  I read business administration in  Yabatech, went to Lagos State University, LASU, and later went for my MBA.  I have my background in Business Administration, then I became a chartered accountant. Over these periods, I have had the benefit of working in various sectors of the economy. I have worked in the capital market, mainstream banking, advisory, and lately oil and gas. In the course of my career in the bank, I had the privilege of managing some very good accounts. So, that’s where I developed my passion for oil and gas. Now I am in the aviation leg of the oil and gas sector, I am married with kids.

How would you compare the aviation sector in the last six years and now?
The Aviation sector is a very interesting sector of the economy. If you look at it, the inter modal connection system in Nigeria, the road takes about 80% and the aviation takes 20%. They are so significant that without the sector, nothing can efficiently move. The aviation sector in Nigeria is an evolving industry. Nigeria has one of the most underdeveloped aviation sectors compared to our peers. The income per mileage is so low, airfare seems to be on the high side but when you compare it to other countries, the income per mileage in Nigeria is extremely low,  if we compare it to Egypt, Venezuela and other countries with our size and demographic variables. We are very low in that sector because Nigeria is a poor country. Out of about 100 million people, only ten percent are currently flying. So, there’s room for the industry to grow. You can imagine how many states you can fly to in Nigeria; less than 20 percent.

 

Talking of the major routes like Lagos, Abuja, Calabar, Kano, Portharcourt, and maybe some new ones like the Akwa Ibom, Enugu and others, why don’t we currently have flights that can take us from Lagos to Ibadan?

You know the number of people that ply the road from Lagos to Ibadan on daily basis is higher. Imagine if there are small carriers that can take everybody from Lagos to Ibadan on the same route. These are some of the things that are lacking in the industry. The penetration itself is not there because of a lot of factors. One, the entry capital required for the industry is extremely high. A lot of people come into the industry and were forced  to leave because of the capital required. For some, it’s either they don’t have the right capital to set up the airline or when they set up the airline, they don’t use the proper aircraft or just the market is not there. Once you take up to the sky, it is either you make a profit or loss. So, if you make a flight ten times a day and you don’t break even, it means you have lost money ten times. So, if you like, book an aircraft that instead of making 20 million aira, you make 10 million naira. It’s  always difficult for a flight to break even, because  the capital of setting up an airline is extremely high. I deal with the sub sector of aviation where we provide fuelling services. Since we provide services to the main sector, whatever that is happening there will directly affect us too. So, in the aviation sector, cost of funding is extremely high.
For instance, if you want to buy an aircraft, you don’t need a six years facility, you should go after a  facility with twenty to twenty-five years  tenor compared to other climes where they have thirty to forty years  facility at single digit. But in Nigeria, the best of capital come at double digits. How do you break even with that kind of suffocating  cost of capital? And the worst is that you will ask to pay back in four or five  years in Nigeria. Before you even know it, you are already incurring losses. There is no infrastructure in Nigeria. As at today, for the sector where we play; into plane sector, we move all our product from the port to the terminal with bridgers. We all know the state of our road network in Nigeria. However, there ought to be a pipeline that will  move products from Apapa to the airport, but there is none functioning anywhere in Nigeria.So, you have to rely on trucking, sometimes you can be on the road for five days. There are wear and tear on the bridgers and the general cost of operation is extremely high. If you look at airport community itself, power  used to be an issue. We ran a company for  almost five years on diesel twenty four hours a day. You can imagine how much I was spending, millions every month just to run the business in the airport community.
Aside from the power issue, infrastructure is another challenge in our sector. Basically, it is like your conventional car; no matter how big or beautiful your car is, if you don’t have the right quality fuel in the car, it can’t move. Just like that too in aviation. No matter the class of aircraft you are flying, a gulf stream or the best aircraft, without the right fuel, you can’t go anywhere. Sometimes when you get to airport and they announced that flight is delayed for 30 minutes, sometimes, it may have to do with fuelling being a major problem. Unlike the conventional car where you can manage and say “let me buy two liters”, there’s no way you can do that on the sky. So, if you need a full tank, you must take a full tank before you leave Lagos to Abuja. For an aircraft designed to airlift 50 people, if your load factor is 25 or 50 percent, I.e  instead of carrying 100 people, you carry 50 people, you are still going to burn the same amount of fuel. Lastly, how many people can afford air ticket? Sometimes you see some commercial flights  and their load factor is as low as 25 percent but because they already scheduled flight, they must take off. So, in doing that, they will incur full cost for that flight  without a profitable load factor, and that is why there  are some airlines that are making losses.

At times, you see that a plane would crash and they will say it was because they don’t have enough fuel. What do you say to that?
The aviation sector is one of the most regulated sectors in the whole world. If you drive through the breadth of Lagos today,  you would probably see like 100 accidents. It could be minor or major but if a prop engine crashed anywhere in the world today, you will hear in the news. So, it remains the safest.
Back to your question where you said plane crashes because of lack fuel. There are a lot of things that could be responsible. One, negligence because for every flight to take place, you need certain volume of fuel to get to your destination. However, when you are flying, a lot of things can come up. Maybe due to weather, you may have some delay in the sky, your engine consumption rate may increase because of the flight altitude. Sometimes when you fly higher, you may have to burn more fuel. Flying at certain altitude burn certain level of fuel but for aircraft running out fuel, it could be negligence and equipment malfunction.
For example if you are fuelling an aircraft, you don’t necessarily fuel based on liters, you fuel based on weight. An aircraft of certain class must take  certain volume of fuel of the same. So, if the equipment malfunction, which is very rare, assuming your meter is not working. Instead of dispensing 50kg for instance, it may be dispensing 40kg.You cannot rule out human error when it comes to mechanical issues but those are rare issues because equipments in the aviation sector are well maintained and highly calibrated but you cannot rule out error when it comes to mechanical issues but it is a very rare issue. Operators in the sector are trying to address it, making sure that the technical and mechanical equipments are top notch, go for maintenance all the time, calibrations are done.
On the side of the aircraft operators, they have equally put in place a process that checkmate whatever fuellers are selling to them. For example, if you are to give them five tonnes of fuel, they equally have a way of measuring the volume of kilogrammes you have sold to them. For example, if  before the tank-up, the weight of  an aircraft is 10 tonnes, they tank up with three tonnes. So, after fuelling, it is expected that gross weight should be 13 tonnes. So, those measurements are in place before they sign off on your dispensing invoice. So, those are some of the controls put in place to make sure that these avoidable human errors are minimised. When problem happens on the road, you can call LASTMA officials but when problem happen on the sky (God forbid), it’s always fatal.

Recently, the oil prices have been going up and we know that your sector is also using 28-1 if I am not mistaking. Fuel is also what constitutes the price of the air ticket. So, I would like to ask, what do you see as the solution for an economy so dependable on oil?
The harsh reality is that a  reasonable businessman is in business to create value and in the process makes money except you are running a non-profit organisation. Ideally, it is expected that all costs to a large extent should be transferred to the consumer. I can say that as far as fuel price keep going up, ultimately the flap will be borne by consumers. There’s no way because business can only absorb these costs  for so long. The reality is this: The price of jet fuel is outside the control of anybody in Nigeria. We are dealing with a lot of variables, the global oil price, season, because during winter, the production at the refinery tends towards the domestic white products, the PMS,  AGO and the  domestic gas use in heating homes. So, the volume of jet fuel being produced  is sometimes reduced. So, naturally demand and supply law comes into place. People tend to put premium on jet fuel during this season.
Vessels charge a premium on cargoes. If you noticed recently, Nigeria has been experiencing deficit in jet fuel supply because it’s all about price. You have so little product and  many buyers. So, the price keeps soaring, maybe during winter. During summer, a lot of people fly around so naturally global consumption may double because people are flying all over the place. At all times, the price of jet fuel is always fluctuating. That’s why you have it up today and down tomorrow but on the average, it’s always going up.And the FX situation in Nigeria is another tragedy. I am sorry to say Foreign Exchange, FX,  today is 500 naira per dollar and we are are buying most of FX from black market, as banks cannot meet domestic and trade need for FX. You need FX and you can’t get from the banking sector, you have to buy from the parrarel market. At the end of the day, by the time you do your cost matrix you discover that price per litre of product will keep going up.  Here is an irony; the importer has already brought in their own products, the airline operator has already fixed their own market price. You can’t be going to the airport everyday and they are saying the ticket has increased. There’s going to be riot, so the operator can absorb that variance to an extent. Now who bears the brunts? It is the fuellers like us because we are the ones buying jet fuel, processing it and selling it to the airline operators. Now the airline owner will tell you, “look, I cannot increase my ticket price everyday”. The man that imported products will tell you, “I have already imported my product. So, what do we do? We sacrifice our margin and that is why we see many people that are going into plane operation, they are running at a loss. There is a contract you must service. The terms of the  contracts are so stringent that if you keep on disappointing an operator, before you know it,  you are off and some of these contracts are not gotten on yearly basis; some of them, you get them bi-annually. So, you don’t want to lose your contract. All you do is just keep on remaining in the business, absorbing losses here and there until you now see some correction whereby you can make profit.

How did your company cope in 2020 as per COVID-19?
2020 has come to change the world, and life itself will never remain the same again. Aviation sector was the most affected sector of the economy; every other sector were still surviving at a point. At the peak of Covid, less than five percent of the world was flying. Where I worked before, we had to sack 90 percent of our staff because there’s nothing to be done. We provide services to the aircraft and the aircraft is not flying. We are not just talking of one month non flying, aircraft run on cash. If they don’t fly in a week, some operators don’t have enough cash reserve for more than one week. What they do is, the ticket they sell,  are used in running their business. So, after one week of not flying, they are already running out of cash. It’s like starting an airline all over again. That’s why you see that the number of airlines that went under globally is unbelievable. Some airlines that had been in operation for more than 50 years packed up because of that covid. Even now, the flying public is not yet back, they are still developing flying and health protocols; you need to have vaccination passport here and there. People are afraid to go places, etc. So, the load factor globally is low and even the insurance, which is a key component of the industry has gone up. The insurance man will say “look! If I give you my aircraft with the low load factor and break even, I may have to increase my premium”. Not everybody can fly everywhere now, even some that want to fly, there are protocols of certain countries that prevent you from entering. So, it becomes an issue. Then hopefully with the coming up of onboard vaccination and every other thing, maybe by Q1 of 2022, it can return to normalcy but for me, I am looking at maybe 2023, so that throughout this year, the number of people that will be on Covid vaccination will increase and they will probably increase the flying  percentage .

Another flip side to this is that ultimately, the sector is going to benefit from it because people will want to go places. For some us who had never witnessed an outbreak of pandemic like this will say “before I die, let me go places”. There’s another school of thought that says as this thing goes down, the number of flying public will increase because people will want to explore certainty because you dont know when the next outbreak will happen. Covid has really messed up the aviation sector.

Do you have cases of adulterated jet fuel?
Certainly not in our company! This is another contentious issue in the industry. This is my take and I will stand from the point of an operator. There’s no way you can have issue of adulterated fuel deliberately. An aircraft costs average of N800million  to N2.5 billion. A reasonable operator won’t allow anybody to put bad fuel in your machine except you are not a good businessman. That is number one. Number two is that when accident happens up there, it’s always calamity; it is always very disastrous. So, nobody will deliberately consent to buying bad fuel. Of course, there are rumours but for me, on our side as a company, what we do is to sell  dry jet and quality fuel and some customers and airlines have their own testing kits at the point of fuelling that will tell you the parameters of the jet fuel. Based on IATA standards, if I fuel an aircraft, I am expected to keep my samples for a certain length of time, sometimes for a year. For example, if I fuel an aircraft today and accident happens in the next eight months or one year, they will still come back to audit me. Even though they have used up my fuel and moved on, they will still come back and audit me as a fueller. So, people are very mindful of quality. Another thing is the same fuel you are using in Nigeria is the fuel that another aircraft that flew from Far East will take. So, quality is one of the most important criteria in plane fuelling business and nobody jokes with quality. The assurance system by airline operators in Nigeria is one of the best around.We have Nigerian IATA auditors, leading assurance works globally across continents. Airlines won’t even sign you on when they know that you have compromised your quality.

Why can’t Nigeria produce their own jet fuel instead of importing it? What are the challenges to this?
There are two dimensions to that. International flights are always well organised. For the next one year, you can know the flight time and flight plan of an international airlines. They will tell they will come by 10am in  November 2023. God willing if there are no force majuere, if there are no significant issues, they will still meet that time.  An airline will rather prefer certainty than taking chances on  country or locations where they perceived stock out; scarcity. As an international operator, they do a survey of the global stock, what is available in certain regions of the world and based on this make their schedule. Remember, when it comes to  international flight, delay is always expensive. They have legal protocol well developed that if you unjustifiably delay flight, you are subject to a lot of damages unlike Nigeria. They want to avoid that those penalties. What they do is that they rather go for certainty by going to other regional countries. But what we are doing here in Nigeria is make sure that we demonstrate capacity, we have the stock and by the time you are able to demonstrate capacity  overtime, you build their confidence on what you can do. What international flights do now is  that they don’t just sign one fueller. You have your category A and you back it up with another one. So, if your Category A fueller runs out of stock, the back up should not run out of stock. With a bit more cooperation among the fuellers, even if you run out of fuel, they can tell you ‘I have run out of stock or I am having equipment on ground. Can you take my slot for me?’ That’s why you see lately, we’ve been able to reduce the number of stock out.

As per why Nigeria is not producing its own jet fuel, it is a multi-dimensional problem. The local refineries are in comatose or functioning at abysmal capacity. Just like we can’t produce enough PMS for our local consumption. You know jet fuel too is a derivative of hydrocarbon. So, if you don’t produce certain product, it is not economical for you to refine jet fuel. Jet fuel is not subsidised like your PMS hence it is assumed to be for big men. Pricing for Jet fuel is purely dictated by market forces. It’s not regulated so the business will have to cater for itself until our refinery begins to function. Hopefully, by the time Dangote comes on board, maybe we can have a more sustainable local production that will help our industry.

You import fuel. Now that the price of the dollar has increased, how are you able to access forex as a business person?
It’s been a tough one and that is why everybody in the industry is making so much losses. As at today, you cannot bring fuel without using the parallel market, which is 500 naira per dollar. By the time you do your cost matrix, the landing cost alone should be about around 260, 270. That is getting the product to coastal, you still have to freight it to your facility at the airport,  and  add value. Aside this, whether you make profit or not, you still have to pay FAAN their N2.50k. It is statutory payment. By the time you calculate all these costs, you are landing at almost an unbelievable rate.  The cost of Jet fuel  will keep on rising as long as we have to rely on parallel market. However, what I think the government should do is that they dedicate a funding line because if you are funding an airline and expended about fifteen million dollars to acquire your fleet size, knowing full well that jet fuelling itself is about 75 percent of the operational cost of all the airlines, all you need to do is to put a line in place because no matter how big is your aircraft, no matter how beautiful the machine, if you don’t have fuel, it cannot fly.
Commercial planes are designed to fly not on ground. Anytime you are on ground, you are losing money. Common sense is supposed that there ought to be something they have  to do, as you are buying new aircraft, make sure that there’s money to be able to import fuel like the operator. But what do we see? Operators like us have to struggle on our own, source for money at the bank at high rate, then you have to come down to the aboki to buy dollar. At the end of the day, you are almost making nothing and you are running cost. Lately it’s been difficult, unbelievably tough for the operators in the into plane sector.

Sir, I also saw in your profile that you have experience in the capital market. Given what the current state of the economy is right now, will you advice anybody to buy stocks or shares?
Well lately, the Nigerian capital market is  some how strange because that’s only sector now that is actively outperforming the money market. How much do you get on your fixed deposit? one to two percent but if you buy some choice shares, some do have as much as 20 percent return per annum. Dividend yield and capital gain. So, the stock market is growing and if you equally look at the effect of the pension fund, unlike before when the sector was being developed by the foreign portfolio, for variety of reasons, they have left with their money and ran away because of the devaluation and everything but what the pension fund now did is to come on board and fill that vacuum. So, from their investable funds, they brought out some and that is why you can see that some shares have done considerable gain in their value enough to give decent returns to their investors. We hope that, that can be sustained but that itself is a function of the policy of the government because by the way the pension fund is being designed, you can not invest more than a certain percentage of your portfolio in the capital market.
What they ought to do is to liberalise the percentage and maybe you can do like  extra 10 percent. If they do that, that means there will more money that will come into the sector andthey can  gradually take out the foreign portfolio.
With local funds and  portfolio, we can develop the capital market and that itself is encouraging.For example, with a well developed capital market , it will be possible to buy shares for kids and say in the next 20 years, this is the money you will use to go to the university. If you have a good and functional capital market, you can say “okay, I have a ten years old girl, I am going to buy shares for you so by the time you get to the university, it should have done this, instead of keeping your money in fixed deposit where you are given some returns that is even negative. It’s another sector we need to develop because that is where wealth can be built for all. In some develop economy, once you own certain classes of shares, it is assumed that you can live well after retirement, you can earn decent returns and Nigeria has the potential of doing that. Look at how many companies are being listed on the floor. Maybe the listing requirements should be made more liberal, so that other businesses can come on board and raise capital for their operations.
Federal government is crying out everyday and saying “we are making more efforts to ensure that we create an enabling environment for businesses to thrive”, CBN is also saying “we are doing our part to ensure that there’s more money in the economy to strengthen”. You will agree with me that there’s inflation everywhere and the cost or prices of things have gone up. In your own view, how would you describe the government’s effort in making sure that the economy is on the right line?
It’s high time the government realized the fact that there’s a limit the government itself can grow the economy. All what the government need to do is put enabling environment,  the ease of doing business; how can I easily access funds, how is the FX regime, our monetary policy, how are they functioning? Then, of course, improved security? So that people know that when they bring in their money, they can stay alive to realize their investment. Just make sure the enabling environment is put in place to support the general economy.
There is a lot of Nigerians with ideas but the environment itself is hostile. Look at power, how much do you spend on power? You look at the road network, every other thing – it’s expensive. Running a business in Nigeria is an Herculean task and you don’t want to suffer with your money, you want your money to work for you. So, that’s what the government should focus on rather than trying to grow the economy.
If the enabling environment is equally there, Nigerians are entrepreneurial. People will come up with ideas, start their own business and a lot of things to sustain themselves. That’s how an economy grow. Not relying on federal government jobs that will never come and when they come, it only goes to certain people. That’s just my candid view about Nigeria.

Impact Energy. What has been the success so far?
Impact Energy, so far, like the typical Nigerian is here to stay. It’s been tough but we’ve been able to make some traction from where we started. By God’s grace, next year, we will be 10 years and over this period, we’ve been able stay alive. That’s the most important thing. As a business, being alive itself is a success story in the Nigerian context, in our own small space, creating value. How do we create value? We make sure that we are delivering services to our customers in order to make life better for them and that’s been our success story. In terms of naira and kobo, it has not been. The money has not been there, there’s time of say, increased market share, visible in market and equally developing deeper knowledge of the whole economy. We know that we can build on where what we are doing now.Like a typical Nigerian company, we are equally affected by the global micro economy challenges and constrains. But we are trusting God that 10 years to come, it will be another decade to build on what we have achieved so far, then become a household brand in Nigeria.

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Between the banking sector and this one, how would you compare?
The banking sector for me is like a training ground. I had the benefit of working in the corporate finance group which was renderingadvisory services to businesses. Banking is different, it’s a good training ground but when you come to the business line, it’s another thing altogether. The business world is different from banking. Banking is regulated. There are are templates, things you can do, things you cannot do, it’s very regulated but here in business, everyday is different, every hour is different, customer is different. So you keep on evolving, you keep on learning but the knowledge in banking has been great. It has been a great tool for us to do what we are doing.
It has equally created a network of contacts and friends we can do business with because overtime, we’ve been able to have the benefits of meeting with good clients who are now doing very well in their own sphere. That is even one of the inspiration of setting up Impact Oil because we’ve seen how business is been done , so we can leverage on their knowledge. The banking and business are two different things. Banking is more organized but the business world is a different thing. I am not going to change it for anything because at the end of the day, the business will allow you to create more value, empower more people unlike banking which is just a personal development and career growth. But here, people work with you, they feed their families, you are a part of the value system that is growing the economy.  That itself is satisfactory, it’s no much of money. We know that money will come down the road but for now, we are part of a growing system, we are part of the value chain that is growing the economy. That is our satisfaction.

The aviation sector has had challenges since the past three years. Have you ever thought of quitting due to the challenges?
We’ve faced challenges where you will think oh! what am I doing here? We were almost at that point sometimes. Especially when you come to  business where people are very vicious. I have the benefit of floating a business with some people, you  know the business world is a terrible place. People are wicked, people are not sincere, people are manipulative, they will do anything to bring you down out of envy and a typical Nigerian man is greedy. A typical Nigerian man believes that he should take everything to himself, which I don’t believe, especially when they believe money and power is everything rather than create value. Our concept is to have a platform where everybody around us is successful, but I discovered that I have had a situation working with people whereby you are working hard to grow a brand and they do is to destroy it and destroy the process because they want to take over but we are leaving them to their conscience and posterity. On our own, we have done our bits by sowing the seed that bring to life the brand.  So, we are leaving them to God, who is the ultimate judge of everybody but quitting, NO!

Have you faced challenges?
Absolutely. You have to think about everything especially when the bulk stops on your desk. You have to think how will the business survive, how you will carry your employees along, how do you make your vendors happy, how do you break even? You know, it’s a lot but the beauty of it is that we wake up every day and say we are up again. So, every day is different and there’s the hope of what the next day will bring. As a businessman, you have to be optimistic that things will get better. That’s what is keeping us.