Uncertain Respite For Airlines

Doubts trail President Goodluck Jonathan’s budget proposal to waive duty on importation of aircraft parts 

The recent announcement by the federal government of a zero per cent tariff henceforth on aircraft spare parts imports by Nigerian airlines should be a timely lifeline for domestic operators. But it is one being met with grim reservation; as, the operators say, government had led them down that path before, with a similar pronouncement it made but never implemented.

Yet, they are hoping that this time, government will be sincere on its words. The operators have been begging government for years for this favour. Removal of tariffs, they argue, will enable airlines to boost their fleet with modern aircraft, while reducing the huge amounts expended on maintenance. Airlines will also be  able to pool resources and obtain loans with a single digit interest from foreign financial organisations to acquire planes and equipment.

The Fiscal Policy of the 2013 budget proposes a zero duty on aircraft and spare parts importation with the objective of scaling down capital flight on maintenance by about 50 per cent. It is expected to become effective from 1 January 2013. There are, however, doubts President Goodluck Jonathan would be able to muster the political will to see the tariff waiver through. In 2007, former President Olusegun Obasanjo also gave the impression that heavy tariff burden had been lifted off the shoulders of the Airline Operators of Nigeria, AON, when he approved exemption of customs duties payment on aircraft parts import. The relief was an implementation of the final report of the Presidential Task Force on the Aviation Industry, chaired by Air Vice Marshal Paul Dike in 2006, which recommended that government should waive custom duty on aircraft spare engines and test equipment. “This would reduce financial burden on the airlines,” the report stated. The approval, then described as a “big relief” by the AON Secretary-General, Capt. Mohammed Joji, was the outcome of consistent representations and appeals to the Presidency on the numerous problems confronting airlines on operational and maintenance costs. The problems include increasing fuel costs, multiple charges by various regulatory bodies, lack of maintenance infrastructure, poor financing and lack of modern equipment had killed the wings of many airlines.

Sadly, Obasanjo’s approval didn’t go beyond the mouth of the announcer; it was never implemented. The directive was disregarded outright by officials of the Nigeria Customs Service who claimed that the order was not properly spelt out.

Deba Uwadiae, an aviation consultant, told TheNEWS that domestic operators find it difficult to pay for maintenance on aircraft sent abroad for checks and, in some cases, had consequently forfeited aircraft to the maintenance firms. Nigerian registered aircraft had been impounded in Dublin, Ethiopia and Romania because of difficulties in settling the huge cost of maintenance. “Many engines are lying fallow in many overhaul workshops for lack of funds,” Uwadiae lamented.

Aviation safety analysts hope the presidential gesture will enhance the safety of passengers ultimately, as operators are expected to exploit the financial relief it offers and be sincere in the thorough maintenance of their aircraft. Sam Adurogboye, spokesman for the Nigeria Civil Aviation Authority, NCAA, also said the removal of import duties and VAT on aircraft and spare parts would result in the reduction of overhead cost for the operators. He explained that “most times, delay in maintenance is due to the high cost of securing spare parts and the delay in clearance even after such parts are on ground.”

The duty removal is not unconnected with certain conventions in the Civil Aviation Act, the Cape Town Convention on International Interests in Mobil Equipment, and the Protocol to the Convention on Matters Specific to Aircraft Equipment. The inherent goal of the Cape Town Convention is to facilitate asset-based financing and leasing of aircraft, aircraft engines and aircraft objects. The Convention actually empowers Nigeria, as a signatory, to enforce import duty exemption for local carriers. The kernel of the document is that it makes the asset, i.e. aircraft or engine part, the security for its acquisition. Lenders, financiers, lessors and other creditors are, consequently, assured of the required legal comfort to transact big-ticket businesses across the globe. This assurance ultimately eases, for local airlines, the acquisition of new aircraft and equipment, while reducing transactions cost by about 30 per cent.

Domestic operators are expected to take advantage of the opportunities that would be offered by the zero import duty, if it eventually rings true, to exploit the available large aviation market, which is largely untapped. Joji regretted that despite the huge potentials the aviation sub-sector has for creating jobs and increasing the country’s gross domestic product, aircraft maintenance has been a serious challenge to operators, since the country lacks a maintenance hangar. Airline operators are, therefore, left with no choice than to fly their aircraft abroad for maintenance at astronomical costs.

Airline operators maintain that it is the cost of importing aircraft and spare parts that has contributed largely to the rise in fares. They believe that if the zero per cent tariff policy is implemented, ticket prices for domestic flights would drop.

Nigeria remains one of the few countries that charge import duty on aircraft. The import duty for an aircraft is about 14 per cent. This translates, for instance, to about $4mn on an aircraft worth $30mn. Such bloated importation charges have ensured that the fleet of most domestic airlines remain sparse, with investors reluctant to commit substantial sums to the high-risk business.

—FUNSHO BALOGUN/TheNEWS magazine