10th August, 2021
Mr. Dare Osamo is a Chartered Accountant of over ten years with an MBA in Financial Management and background in Energy Consulting, Structured Finance, Capital Market, Credit Analysis, Auditing and Asset Management. In this interview, he spoke extensively of the Nigerian Aviation industry, its challenges and way forward, the oil and gas industry, among others. Excerpt.
How would you compare the Aviation sector in the last six years, how would you rate it 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 sector 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, Port Harcourt, and maybe some new ones like the Akwa Ibom, Enugu and others. Do 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. 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. 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 N20 million, you make N10 million. It’s always difficult for a flight to break even, because of 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 year 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/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 knew 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 is 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 the power issue, infrastructure is another challenge in our sector. Again, let me say the sector where I play is where we provide fuelling for aircraft. Basically 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 in 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 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 they are some airlines are making losses.
Sir, you’ve talked about money. Now at times, you see that a plane would crash and they will say they don’t have enough fuel. Why do they say that? What will you say could be responsible?
Aviation sector is one of the most regulated sectors in the whole world. If you drive through the breath of Lagos today, you would probably see like 100 accidents. It could be minor or major but if a prop-engine crashed anywhere on 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, this is very, 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 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 checkmates 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 kilograms you have sold to them. For example if before the tank-up, the weight of an aircraft is 10 tonnes, they tank up with 3 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 control put in place to make sure that these avoidable human errors are minimized. When problem happens on the road, you can call LASTMA officials but when problem happen in 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 air ticket. So what do you see as the solution for an economy so dependent on oil?
The harsh reality is that a reasonable business man is in business to create value and in the process make money except you are running a non-profit organization. Ideally, it is expected that all costs to a large extend 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 ends tend towards the domestic white products, the PMS, AGO and the domestic gas use in heating homes. So the volume of jet fuel being produced sometimes reduced. So naturally, demand and supply law comes into place. People tend to put premium on jet fuel during this season. There are lots of frozen on the high sea, vessels charge premium on cargoes. If you notice 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. FX today is 500 naira per dollar and we are buying most of your 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 parallel 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 brunt? 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 everyday”. We sacrifice our margin and that is why we see many people that are going into-plane operation, 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. If you look at the price of product ex-depot, it’s extremely high. For you to set up a 2000 metric tonne-depot; you need almost a billion naira and where do you get that? You see at commercial rate, they are charging 30 percent. Before you know it, you just keep on working, your profit just keep going into cost of fund, into absorbing the variance in the cost of product and settling overhead. So it’s an interesting industry, an industry where we find ourselves and we will continue to remain there until maybe, we get it right in Nigeria.
Your company in 2020 as per COVID-19, how did you cope?
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; other sectors 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 have to sack 90 percent of our staffs 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, aircrafts 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 have 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 onboard of 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 have never witness 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 certain things because you don’t 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 8 to 2.5 billion. A reasonable operator won’t allow anybody to put bad fuel in your machine except you are not a good business man. That is number one. Number two is that when accidents happen 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 number of times; sometimes for a year. For example, if I fuel an aircraft today and accident happen 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 move 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 into-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 her own jet fuel instead of importing? What are the challenges?
There are two dimensions to that. International flights are always well organized. For the next one year, you can know the flight time and flight plan of an international airline. When they tell you they will come by 10am on November 2023. God willing if there is no force majeure, 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 region 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-go 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 stock, the back-up should not run out stock. With a bit more cooperation among the fueller, 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 subsidized 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 began to function. Hopefully, by the time Dangote come on board, may be we can have a more sustainable local production that will help our industry.
You import fuel. Now that the price of 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, filtrate it 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, nothing stops-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 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.
Impact Energy, what has been the success so far?
Impact Energy, so far, like the typical Nigerian coy 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.
Who are your major clients, your major customers?
Basically we operate in the oil and gas space, aviation support business. Of course we have to render our services to all the aviation companies. We do not do into plane service. We are into lubricants, and other aviation consumables. So we render services to all the local airlines. In the oil and gas sector, we equally have good principals that we supply products to, meeting their energy needs and their demand but ultimately, our focus is to, from where we are now begin to build a brand that comes to stay and we will be able to fight for space. This itself we believe we can do by God’s grace based on the knowledge we have gathered overtime and the crop of staff that we have.
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 business man you have to be optimistic that things will get better. That’s what is keeping us.