By UCHE USIM
Yemi Dada, the Managing Director/Chief Executive of IRS Airlines is a young, blunt and experienced aviation professional. With full private sector background, he is successfully piloting the affairs of the airline through the turbulence of the Nigerian aviation terrain. In an exclusive interview with Daily Sun, Dada, an electrical computer engineer by training, noted that airline business is not an all-comers’ affair, urging government to raise the entry bar so that only serious-minded players can come in.
He also commended the Federal Government on the planned removal of import duties on aircraft and spare parts with effect from 2013. The IRS boss, however, called on the Federal Government to also look into other areas like aviation fuel, charges, runway lights and the incredible bottlenecks in accessing long-term fund from the Nigerian banks at low interest rates.
The IRS chief executive noted that the much-publicized N300 billion intervention fund for the aviation and power sectors was not designed to inject fresh capital into the airlines, contrary to the belief in some quarters. He explained that the loan was a refinancing facility for the banks’ credit to the airlines to enable them get a breathe of fresh air. Also in this interview, Dada speaks about the airline, x-rays the industry, offers the recipe for reduced air fares and revamped industry. Excerpts:
IRS has been around for a little over 10 years. The company was incorporated in 2001 and started operation in March 2002, with Boeing 727 airplanes. They were five of them initially but with the 22 years rule, only two of them could come in before the rule came into force and so the airline had to re-strategize after operating the 727s for a while. We found out that they were a bit expensive to operate due to their size and fuel consumption capacity especially as fuel price was rapidly increasing. So, we checked a few airplane types that could match our pockets in terms of price of acquisition and that could operate efficiently within the market situation at the time. That’s how we came up with the Fokker 28 Mark 4000. We operated these for about a year and found out that the Fokker-100 was very suitable to the market. We then added Fokker-100 to the Fokker 28s which we were already operating. That brought our fleet size to about five. Of course, over the years, we’ve standardized more on the Fokker 100 than the 28. Now we operate on a fleet of five, which are purely Fokker 100s. Three of them are serviceable (in operation) while the other two are undergoing C-Check at the moment. The company has gone through two re-branding phases and right now, we’re in the process of expanding our operations to cover regional and international routes. As you know, we just signed an MoU with Turkish Airlines to give us the kind of experience that they have on a cooperative basis to assist us with training and putting high quality into our system. The MoU will also give us an in road into the international market.
It’s combination of several factors. So many people go into business for several reasons. The reason IRS was set up was to provide quality service to passengers and also make it a business that is successful at doing that. The commitment of the founder, Alhaji Ishaku Rabiu, is very resolute. He has a passion for providing air transport service. Even where others will back down and refuse to invest, he has continued to invest in the promise of a better tomorrow for the business. In the same vein, he has been able to put together a very good team that keeps the airline well balanced in terms of balancing the safety aspect with the financials. That has been the key success of IRS airlines.
But again, over the years and having survived this, we’ve cultivated a core of loyal passengers who will always look out for us. That is a beautiful blessing in this business you cannot imagine.
The industry, as it is today, is one that has taken shape from natural attrition, that is, people who’re operating in the industry have not been really committed, got out of the business naturally to say the least. So, the remaining people in the business now as you can see are very serious contenders. And the reality of the situation is that based on the number of passengers who travel in Nigeria, I think about four to five airline size is about the right number airlines that should operate in the industry without causing over capacity. Again, the growth only comes naturally and if the economy does not begin to grow in double digits, with the growth of passenger in single digit, about five airlines is just about enough to sustain the airlines.
So, on the economic front, it’s very good that the number of airlines is kept at about the same level without allowing new entrants to come in and distort the market, whilst strengthening the ones already in business to ensure that they continue to grow. That’s the only way we can have a very good and strong aviation industry. If we continue to raise the entry bar, only serious players will be the ones that can come in.Not that we foreclose anyone from coming in, but let the entry barrier be raised so that only serious contenders are in business. Once people that are really not serious come in, they’ll affect the serious ones no matter what happens. They’ll disorganize the market. So, it’s instructive that the regulators look at that and ensure that the entry bar is set appropriately.
I think it’s just one aspect of the many parts government has been looking at. This administration has really taken keen interest in aviation and the Aviation Minister has really been working very hard , looking at several dimensions to the problem and not looking at it from just one side. And that has allowed her to see clearly where several problems have arisen. The waiving of import duty and VAT on imported aircraft is welcome, especially as government is pushing for a policy to ensure that airlines re-fleet with new airplanes. This means that airlines can bring new airplanes into the country with ease and that means, there will be stronger carriers. It’s a good way of saving airline’s money after buying new equipment.
Cost of airplanes
Several factors determine the cost of an airplane. These include the cost of acquisition. If it’s not new, the type of maintenance you’re doing among others.
Why airlines are dying
The primary cause of airlines demise or their major challenge remains economic. Passengers that are travelling need to have what we call disposable income, which means they must have fed themselves, clothe themselves and housed themselves and have enough money to fly. Unless and until this category of people are in the majority, the number of flyers will not be as many as we expect. We’re a country of about 160 million people but we have passenger movement of about 14 million per annum from last statistics. If we were to compare ourselves with Brazil that is 180 million people, their first six airports alone have passenger movement in excess of 40 million, which is more than double what we have in our entire country. You can see that there’s so much difference between what we do and what they do. The disposable income as calculated by the World Bank is about N200 billion per annum, while that of Brazil is 800 billion more than ours and they’re only 20 million more than us. It is that economic issue that really needs to be tackled first and foremost. So, we need to now get creative to tackle it. Do we want to put money in people’s pocket and create inflation in the process or do we want to put measures around the cost of flying which will reduce it and make it more affordable. To address all these, we need to look into high cost of fuel, taxes and charges and cost of finance. Once these are tackled, it should stimulate traffic in the aviation sector. There’s no point going to bring in airplanes, putting seats in the market and people cannot afford to fly. That will only lead to more deaths of airlines. It’s a combination of many things that government needs to do. The biggest contributor to the price of ticket is the high cost of Jet A1 (aviation fuel). If it can be reduced or either subsidized directly or indirectly, automatically, cost of air fares will go down. Aviation fuel is about 40-50 percent of airlines’ operational cost.
The cost per litre varies from point to point, that is airport to airport. It’s between N168 to N190 per litre depending on the location you’re buying from in Nigeria.
This is also dependent on several factors. Aircraft fuelling is regulated. We’re guided by regulation. The quantity of fuel that you buy is the quantity that you necessarily burn. You need trip fuel, procedural fuel and you also need regulatory fuel diversion, for holding too. So, at any point in time, we always have fuel of close to N2 million in the tanks of each of the airplanes.
In practical terms, if we must keep the airlines in business and grow the aviation sector, one of the key issues is funding which government is already trying to tackle. It’s a primary constraint. If airlines are able to get funds with the proper lenor, it’ll really help. I mean real long term funds like 15-20 year loans with low interest rates and not the short terms we got from banks before now. That will reduce our pressure on repayment. That will reduce our cost of funding and it’ll also reduce the amount of money you have to apportion to each ticket to repay it within the period. That will enable us get better airplanes, which will give you better cost savings when you’re using fuel. So, you’ll not be using as much fuel as you would require if you were using older airplanes. Again, if you’re able to use the cost of the fuel again, the quantity of fuel you’re using is reducing, the cost of fuel you’re using is reducing, that will give you practical savings as well. If you reduce some of the taxes and charges, it’ll help. The airline is the only means of transportation in Nigeria that contributes to VAT. And that VAT is the collection from the passengers that is supposed to go back to the government. If you remove that, the passengers do not pay that as part of the cost of their tickets. We still have what we call the five percent ticket sales charge, which goes to government agencies like the Nigerian Civil Aviation Authority (NCAA), the Nigerian Airspace Management Agency (NAMA), the Nigerian Meteorological Agency (NIMET), the Nigerian College Aviation Technology (NCAT) etc. At the same time, we have the Bilateral Air Services Agreement (BASA) fund that is used for the development of the industry. If we’re going to be developing the industry, let’s look at the BASA funds, which is coming from the foreign airlines and dedicate that to the developing the industry. 95 percent goes back to the pockets of the passengers and that reduces the burden on them. Since the airlines are paying the NCAA for the services anyway; anybody goes to NCAT pays, anyone that uses NAMA’s equipment pays for the terminal navigational charges. Let them charge the airlines and their contributions and royalties are ploughed back into the development of the industry. Again, we need to look at the infrastructure generally.
For example, in Lagos here, runway 18L has not had runways lights for years. That means we have to keep travelling between the domestic and international terminals and burning a lot of fuel in the process when you’re operating after sunset.
If you get airport to operate for certain hours, for example, Yola cannot operate beyond certain hours, that is, after sunset. Enugu cannot operate after sunset, same with Owerri Airport. In fact, most of the airports in the country cannot operate after sunset and so you begin to operate schedules that are really profitable to you because you need to meet up the challenges and limitations of the airport. Those issues need to be corrected again so that you have the flexibility of planning your operations and schedule recovery and maximizing the use of the airport. Again, security is a major challenge because nobody now wants to fly at night. Between Lagos and Abuja is still manageable but if you’re flying into other cities at night, nobody wants to go. Some people don’t even want to come from those cities to Lagos because of fear of their lives. When you look critically at these things, they begin to add up to the high operational cost challenges we’re facing. If you’re able to fly your airplanes for longer, it’ll be very good. Right now, you’re flying your airplanes for at best between 6am and 8pm. So, between 8pm and 6am the following day, your aircraft is parked on the tarmac, when it ought to be working. In Nigeria , you use your airplanes for about 2,000 hours per annum. That type of airplane flies in Europe or elsewhere for about 4,000 per annum. So, you’re effectively utilizing it for about 50 percent of what it is supposed to be useful for. As it’s doing that, the cost per seat reduces. The number of seats it operates continually reduces. Indeed, there’re so many factors you could put together and you have an affordable air transport system and the airlines will be doing better.
Mismanaged intervention fund
Yes! Management might be a problem with some airlines. We cannot rule that out. However, the structure of that fund itself was a problem. It was designed to free banks from the shackles of bad credit that they had extended to the airlines. These are airlines that were owing earlier. So, the fund was not to put fresh capital into the airlines as some people thought. Now, a lot of the debt those airlines were owing was also as a result of poor loan management by the banks. Some of the banks offered incredibly high interest rates, loans that were granted that were bad from day one. These were loans that you know were not possible for them to repay easily, but you know that if you’re a man that is drowning, even if they give you a sword you’ll grab it to make sure that you survive. So, airlines did all that sorts of things to ensure that they survived but the banks were piling up interests, working against regulation and all that. Even when the banking rule says if an airline has not paid over a given period of time, freeze the facility, but don’t accumulate interest, but they were busy accumulating interest upon interest. So, it became unsustainable because these monies were not coming and the airlines could not even pay the principal. And now, you’re compounding principal on interest and the debt continued to grow in leaps and bounds. So, the intervention fund was a loan that freed the airlines from fake money and the real money at the same time but the airlines still had the burden. So, the loan did not really save the airlines but just helped to reduce the tightening of the noose around their necks but still it did not solve the problem the airlines had. The problem can only be solved if you give airlines money to create real assets, rather than working with the assets that you have to pay monies that really did not exist. So, I’ll not call that part of the problems of the airlines, rather, I would say it’s a policy that was not properly formulated.
We have a lot of plans for our customers going forward. We always plan but we plan cautiously. We’re looking at expanding but on a very cautious basis. We want to cover significantly the domestic market. We’re looking at expanding to cover both East and West coasts of Africa . Where we have the rights, we might extend services to some parts of South Africa . Also, with our MoU with Turkish Airlines, we’re looking at a situation where we can codeshare and interline passengers to Istanbul and points beyond. As you know, Turkish Airlines services about 200 cities in over 90 countries. So, Istanbul has become a very important connection for people that are going to far East. They have very young, good and modern airplanes. They offer very good services too and equally have excellent cargo facilities for traders who are going to China as well. So, these are some of the things we hope that we’ll be able to achieve in the next one year working with Turkish Airlines. We’ll feed them traffic from all these routes as we’re expanding and to also be able to reciprocate and in some cases, operate some of the flights ourselves. In some parts also, we’ll codeshare with them to destinations where we cannot reach. It should be ready in the next one year because there are some steps we need to take and some other things we need to fine-tune. Turkish Airlines is a member of a very big alliance and there are certain conditions that have to be met in terms of agreements to be able to work with them on the commercial side. On the side of training and other areas, those ones can start to make immediate impact. But, those are internal issues for us that will begin to materialize with better services for the people.
The main challenge that we have is that of funding but again we’re working with government to look at how that can be solved. The financial institutions in the Nigeria have not demonstrated the understanding of our business enough; or better still, have not demonstrated the capacity to be able to provide the type of funding we need. So, working with government, we’re trying to get some kind of soft loan that will enable us to expand, modernize our fleet and of course bring in the efficiencies that spoke about earlier. That’s our biggest challenge at the moment and once we’re able to overcome that, every other thing will fall in line. We’ve passed through the learning curves, we’ve been doing this for over 10 years. We know where the key points are and of course we’ve made our mistakes along the line and it has only helped us to learn. Right now, we’re not kids anymore in this business. The mistakes were, like I said earlier, acquiring the wrong type of aircraft for the market and things like that. now, we have a better process of arriving at what type of equipment we use, the time to deploy it, what we need to build capacity in-house rather than going out to buy and a host of other to help us manage our cost and improve our revenue.