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BySADIM News

Why young African airlines need to invest in owned aircraft fleet

Current Issues

As airlines take delivery of new aircraft, owners must be found for second-hand aircraft. In the past, airlines from developing economies have taken these, which has created a natural flow of ownership. This is changing as new and smaller airlines place orders for new aircraft direct with manufacturers, often taking advantage of Export Credit Agency (ECA) finance. This, together with concerns of oversupply of some aircraft types, particularly narrow body, could put aircraft values and lease rates under pressure.

These factors could have a significant impact on the demand for the second- hand fleet going forward. If values of aircraft are driven down, this could raise questions around financing these older aircraft, even if there is a willing customer, as the risk of financing such aircraft increases.

Aviation finance could provide an attractive opportunity to deploy large amounts of capital efficiently in ‘hard assets’.

Why invest in aviation financing?

  • Deploys large amounts of capital efficiently.
  • Relatively predictable returns although residual values, especially for older aircraft, can be volatile.
  • Aircraft – the underlying asset – is truly global in its recognition and usage.
  • Investment typically secured by a ‘hard asset’, supported by International regulations such as the Cape Town Treaty.
  • Highly mobile asset – helps with reclaiming and redeploying the asset in case of a default.

Direct Purchase vs. Operating Lease

We come across many governments and airlines in Africa struggling with fleet acquisition modalities and mulling over fleet financing alternatives. There has been an unending debate on which is the most suitable operating model; whether direct purchase or operating lease. When I first heard the phrase “if it flies or floats you should rent it” I though it was funny, that aside, the methods used for financing the purchase of or operating an aircraft are through Direct Purchase, or through an Operating Lease either or both options come with financing options.

Direct Purchase with Financing

In a direct purchase arrangement for commercial planes, the prospective operator or airline purchases the aircraft direct from the manufacturer or vendor, using a secured or unsecured loan or structured finance lease. Usually, a syndicate of banks come together to raise the required loan amount. The loan amount advanced for the aircraft can vary from 70% up to 90% (or even 100%, but rarely, and heavily dependent on the borrowers’ profile) of the value of the aircraft depending on the airline, profile of its guarantors and its available capital. In cases where the financiers put in less than 100% of the aircraft value, the manufacturer or vendor expects the purchaser to make the pre-purchase deposits. Most financing arrangements usually come with a term limit (up to 12 years) accompanied by mortgage style amortization and either fixed or floating interest rates.

Should an airline decide to go for direct purchase of an aircraft, there are several advantages for the buyer mainly;

  1. The airline/buyer acquires equity in fleet;
  2. The airline/buyer has full control over the configuration of the aircraft;
  3. Airline is able to gain significant taxation benefits (this can vary by country)
  4. Airline/buyer will experience increased operational flexibility.

On the other hand, there exits some disadvantages of direct purchase key of which are;

  1. There are restrictions included in loan agreements and term sheets;
  2. The financing agreement obligations heavily weighs down a company’s balance sheet;
  3. Residual value risk.

 Operating Lease

In an operating lease arrangement, the lessor acquires the aircraft from the manufacturer having made all the advance payments and financing arrangements for the aircraft at delivery. The operator/lessee, in this case a commercial airline will then leases the aircraft from the lessor. Aircraft is usually leased out at approximately 1% of the new aircraft cost per month as rental, however demand for the aircraft type, supply, operating environment and region of deployment are some other factors that lessors take into account during pricing. Monthly rentals aside, most lessors will ask 2 -3 months equivalent of rental fee in security deposit and maintenance reserves costs.

Nearly all lease agreements have a minimum lease period of 3 years to a maximum of 7 years for narrow body aircraft and a longer lease period can be expected for a wide body aircraft. In most cases at the end of the lease period airline/lessee returns the aircraft to the lessor. However, an airline may have option to renew lease or purchase aircraft at fair market value.

While the key benefit of operating lease is the huge reduction in capital investment required, other positive factors include;

  1. The lessor assumes aircraft residual value risk;
  2. Lead time to aircraft delivery for airline/lessee to start operation is short compared to purchase from manufacturer where this a waiting period of at least 9 months;
  3. The liability stays off balance sheet, having less impact of banking restrictions;
  4. Leases increase fleet plan flexibility.

Some of the shortcomings with leasing are;

  1. Lessee/airline remains exposed to lease rate fluctuations;
  2. Lessor is at liberty to impose restrictions on aircraft usage;
  3. Airline is obliged satisfy lease contract requirements (administrative, reporting, maintenance);
  4. Airline has no equity in fleet.
ByMichael Otieno

Digital Marketing: Are African airlines doing enough?

airlinedigitalmarketingIf you are a Chief Marketing Officer for an airline in Africa, there are many reasons why we should expect your marketing plans to have moved from the limited-in-reach and expensive traditional avenues such as brochures, magazines, billboards, print, radio, television etc to include digital marketing avenues as a key component of your communication planning.

With shrinking margins, non existent profit, ever increasing operating costs, cost of aircraft lease/purchase, world fuel prices beyond airline control etc how does an airline “spare” more funds for digital marketing?.

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ByMichael Otieno

Why what they say about you online matters

Online Reputation Management: Why what they say about you online matters

Does your organization actively manage its reputation online?

A few years ago, I got an invitation to be part of a turn around team for one of the regional carriers in Africa. Naturally excited about the opportunity and knowing very little about that airline I went straight to my best information source at hand – Google.

The search results were least to say mortifying; ranking highest on the search result was “Here is why you should not fly airline WXYZ” complete with a blog posted under the airlines’ domain with a .net and .org extensions. Whoever posted and managed this blog had a sad story to tell about their experience with the airline. This person gave a blow by blow account of his experience with the airline and its staff in a Stephen King kind of script.

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BySebina Muwanga

African challenges to low-cost carrier airlines

mangoOpinion:The business model of discount/no frills/budget airlines or Low Cost Carriers (LCCs) is based on low fares with limited services to keep costs to a minimum.

LCCs employ several cost cutting measures to ensure that their operating costs are less than those of traditional or Full Service Carriers (FSCs). The most common are; online ticket sales and check in, charges for checked in baggage and on-board refreshments, utilizing cheaper un-congested secondary airports, etc.

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BySebina Muwanga

Aviation, Ebola and state responsibility under the Chicago Convention

icaoThe current Ebola outbreak has so far claimed close to 5,000 lives. Unlike previous outbreaks confined to remote African villages, Ebola has this time round found its way into Europe and the United States due to the ease with which people can travel thousands of miles and interact socially within hours, thanks to aviation.

Whereas the chances of contracting a disease like Ebola in an aviation environment (airport/airplane) are remote, there is a real possibility of infected persons flying thousands of miles and carrying the same with them to their destination. This is worsened by the fact that passengers are screened for symptoms of disease upon arrival, not before departure.

From my own personal experience, I have flown twice out of Entebbe International Airport (to Nairobi in 2009 during the outbreak of Swine flu, and to South Africa last month after Ebola had already made headlines in West Africa) during outbreak periods. I was away for five days on both occasions and was welcomed upon my return to Uganda with sanitizers, health forms, temperature checks and interviews by health personnel. I was not screened before departing Entebbe in 2009. I was screened at Jomo Kenyatta International Airport upon disembarking but was not screened on my way out of Nairobi. Last month, I was only screened when I flew back into Entebbe five days later. There was no such screening at O.R Tambo International Airport.

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BySebina Muwanga

MH17 and liability for death under the Montreal Convention 1999

The world is yet to recover from the shock of Malaysia Airlines Flight MH17. It was a very sad day for aviation and I sincerely hope the culprits shall be brought to book.

I have taken time to read the Montreal Convention (The Convention) and liability of carriers in such situations. Malaysia is one of the 107 states that are parties to the Convention.

The carrier is liable under Article 17 of the convention for the death of passengers if the accident that caused the death took place on board the aircraft, or in the course of any of the operations of embarking or disembarking. Contributory negligence or any wrongful act or omission on part of a passenger exonerates the carrier from any liability.

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BySebina Muwanga

Emirates Airline not to blame for death of obese Tanzanian

ek777OPINION: For the record, I am neither an employee nor spokesperson for Emirates Airline. This article is written in my capacity as a lawyer and aviation professional.

It was stated in that article that, “Family members of the late Sande Jacob Mremi, a resident of Dar es Salaam, pointed a finger to Emirates Airlines for failing to board him for treatment in India.” They further alleged that Emirates reneged on its contractual obligation by failing to board the obese passenger who had paid US$13,800 and was in possession of a confirmed ticket.

According to the article, the deceased weighed 250 kilograms. Emirates Tanzania managers said the airline would have to “uproot” at least six seats in order for engineers to create a seat that would permit the deceased to fly safely and comfortably.

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