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1. Aircraft Lease Opportunities in
Emerging Economies
UNIVERSITÉ DE GENÈVE - EMBA PROJECT
September 15, 2018
Alex Izinyon
Izy Air Ltd.
alex.izinyon2@izyair.com
+44 7404553638
Gilles Glatz
The FlyingFox LLC
fox@theflyingfox.aero
+41 79 2392676
Jean-Marc Jakob
Orionway
jmjakob@orionway.com
+41 79 511 78 16
Kristina Stephan
Green Top International
kristina@kristinastephan.com
+974 5039 5094

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ACKNOWLEDGEMENTS
Supervisor Professor Sebastian Raisch, on the structural and contextual accuracy of our research
Jacques Grivel, CEO Fundo for providing the base of this hopefully interesting paper
Francois Bouteiller, CEO Plane and Simple and ex-CEO NAS Air for his technical assistance
Jonathan Moxley, CEO, Return Solutions, for his insights on bonds and financial details
~
Students are solely responsible for their own project proposals and conclusions, the university
and its departments are not accountable for the latter under any circumstances.
~
CONFIDENTIAL – NOT FOR CONSULTATION

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Table of Contents
Abbreviations.................................................................................................................................. 4
Executive Summary........................................................................................................................ 5
Introduction..................................................................................................................................... 6
Chapter 1 - The airline industry: No plane, no gain ..................................................................... 10
Chapter 2 - The Aviation Economic Cycles ................................................................................. 13
Chapter 3 - The leasing................................................................................................................. 18
Chapter 4 - Methods...................................................................................................................... 22
Chapter 5 - Analysing the Country: Nigeria................................................................................. 25
PESTEL Framework in Nigeria ............................................................................................ 34
PESTEL Traffic Light Model................................................................................................ 53
PESTEL Conclusion.............................................................................................................. 56
Chapter 6 - Analysing the industry: Aircraft leasing.................................................................... 57
Porter’s Five Forces on Aircraft Leasing Industry with Focus on Nigeria ........................... 60
Five Forces Traffic Light Model........................................................................................... 66
Five Forces Conclusion......................................................................................................... 67
Chapter 7 - Analysing the company: Fund strategy & business model........................................ 68
SWOT.................................................................................................................................... 72
TOWS.................................................................................................................................... 74
Business Model Canvas......................................................................................................... 76
Discussion and Lessons Learnt..................................................................................................... 78
Bibliography ................................................................................................................................. 80
Appendix 1 - Investment Teaser for Nigeria Aviation Leasing and Nigeria Air.......................... 84
Appendix 2 – Large Aircraft Checks............................................................................................ 85
Appendix 3 – Aircraft Type Comparison ..................................................................................... 86
Appendix 4 – 6 NPV scenarios of calculations for leases in mature and developing markets..... 87
Appendix 5 – Anatomy of a lease................................................................................................. 88
Appendix 6 – Interview with Fundo Founder & CEO, Jaques Grivel.......................................... 89
Appendix 7 – Nigerian Airlines Fleet Details............................................................................... 90
Appendix 8 – Aircraft leasing company league table................................................................... 91

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Table of Figures
Figure 1: Swiss pension funds size in billion CHF (Swisscanto Prévoyance SA, 2018) ............... 6
Figure 2: UN 2050 and 2100 Populations Projections Africa ........................................................ 8
Figure 3: IATA Supply Chain Returns vs. Invested Capital ........................................................ 12
Figure 4: Evolution of aircraft values over time........................................................................... 15
Figure 5: Production stage prices.................................................................................................. 16
Figure 6: Typical US Ex-Im Bank Structure ................................................................................ 20
Figure 7: EETC Structure ............................................................................................................. 21
Figure 8: Passenger Statistics (National Bureau of Statistics, 2017)............................................ 26
Figure 9: Nigerian operators’ domestic sectors/week................................................................... 28
Figure 10: Estimated airline revenue comparison Nigerian vs. international operators............... 29
Figure 11: Nigerian domestic & international routes from Kano/Abuja...................................... 30
Figure 12: Nigeria main international routes................................................................................ 31
Figure 13: USD / NGN 10-year history........................................................................................ 40
Figure 14: Inflation rate history.................................................................................................... 41
Figure 15: Nigerian population age structure ............................................................................... 42
Figure 16: GNI vs. airline success................................................................................................ 44
Figure 17: Financial Inclusion ...................................................................................................... 45
Figure 18: Literacy Rate by State ................................................................................................. 46
Figure 19: Corporate Bonds.......................................................................................................... 56
Figure 20: Aircraft financing sources ........................................................................................... 57
Figure 21: Number and size of big lessors in 2005 ...................................................................... 58
Figure 22: Number and size of big lessors in 2017 ...................................................................... 58
Figure 23: Airlines borrowing rates.............................................................................................. 59
Figure 24: 10 years delivery size in USD outlook Avolon........................................................... 65
Figure 25: Porter’s Five Forces of the Aviation Leasing Industry ............................................... 67
Figure 26: Fundo world presence ................................................................................................. 68
Figure 27: JetBonds’ Business Model Canvas.............................................................................. 77

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Abbreviations
A/C Aircraft
ASK Available Seat Kilometre
CBN Central Bank of Nigeria
ECA Export Credit Agency
EETC Enhanced Equipment Trust Certificate
EXIM Export - Import Bank
EASA European Aviation Safety Agency
FAAN Federal Airports Authority of Nigeria
GDP Gross Domestic Product
GMO Global Market Outlook
IATA International Air Transport Association
IDERA Irrevocable Deregistration and Export Request Authorization
JOL Japanese Operation Lease
IMF International Monetary Fund
LTV Loan to Value
MRO Maintenance, Repair and Overhaul
NAMA Nigerian Airspace Management Agency
NCAA Nigeria Civil Aviation Authority
NGN Nigerian Naira
NPV Net Present Value
PWC PricewaterhouseCoopers
RMB Chinese Renminbi
RPK Revenue Passenger Kilometre
RSK Revenue Seat Kilometre
SCB Standard Chartered Bank
SNA Standard for National Account
SPC Special Purpose Company
SPV Special Purpose Vehicle
UN United Nations

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Executive Summary
Based on an idea born from a passion for aviation and finance, Jacques Grivel, founder and CEO of
Fundo, a Swiss institutional asset manager, devised a project called JetBonds. The aim is to create an
asset backed portfolio of debt collateralised by second hand aircraft, acquired at a discounted price from
established big leasing companies serving first tier airlines. These assets would then be deployed in
emerging economies where perceived risks are priced into the leasing rates, bringing higher yields in an
otherwise low return environment. OECD countries are facing pension issues caused by an aging
population and low yields in investment grade financial product. For the purpose of this study, we
focused on Nigeria, following the Government’s announcement of the launch of a leasing company and
a national airline. We discovered that Africa’s heavyweight in terms of economic power and population
has been a graveyard for airlines in the past. Economic, geographic and social advantages have been
eroded by institutionalized corruption.
On a worldwide basis, it is an industry where the main players, the airlines, had never paid any returns to
investors except during the past two years. On the other hand, all actors present in the air transport
business value chain, from catering to leasing have done fairly well in this cash intensive industry where
the cost of capital means survival. For airlines leasing is increasingly becoming the flexible solution of
choice for both fleet adjustment and balance sheet health. Based on predefined scenarios of acquisition
of used single aisle narrow body jets such as the widely popular Boeing 737 series and Airbus A320
family, we computed the Net Present Value of those investments. Even in an environment flooded with
cheap liquidity and uncertainty in residual values, we concluded that the investment model is profitable
if the strategy and timing are right. The leasing industry has become extremely competitive in mature
economies in recent years. Stepping into this business without a clear strategic model addressing a niche
market would be risky endeavour
This study shows that instead of entering the Nigerian market as a lessor, JetBonds should offer
financing solutions through the proposed Nigerian Government-backed African Leasing Company by
issuing debt instrument. An equity stake and a presence on the board of directors would allow Fundo to
stay actively involved and informed. The risk on remarketing the asset can be mitigated on concentrating
on a single-aisle narrow-body aircraft in high demand and distribution worldwide.

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Introduction
OECD countries are facing the challenge of an aging population, huge pension fund's liabilities coupled
with very low interest rates and yields on classes of assets investors are allowed to hold. The scope of a
pension fund mandate is not to enter specific markets or sector, but to allocate large amounts of capital
efficiently generating steady cash flows. At the time of writing this paper, the combined assets of Swiss
pension savings totalled approximately USD 900 billion, the Swiss National Bank interest rate is
negative (-0.75%) and the USD Libor 1 month at 2.08%. The hedging aspects of currency or interest
rates differentials are beyond the scope of this study.
Figure 1: Swiss pension funds size in billion CHF (Swisscanto Prévoyance SA, 2018)
Fundo SA, one of the largest independent private Swiss pension fund managers, seeks to develop its
presence in the aircraft (A/C) leasing business with “JetBonds” hereinafter referred to as the Fund or as
the “lessor”, a debt instrument collateralized with used aircraft.
The purpose of this project is to analyse the risks and opportunities of aircraft leasing in emerging
economies, taking Nigeria as a test case, and estimate the Net Present Value (NPV) of such an
investment based on several scenarios. From the key findings, we will identify the main strategic actions
the Fund should take to successfully compete in the aircraft leasing market in emerging economies.

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Commercial aircraft lease is a legal arrangement availed to airlines and other aircraft operators (lessees)
by leasing companies (lessors). Its main advantage is to lessen the financial burden on the airlines’
balance sheet while procuring new aircraft or adjust capacity over shorter terms.
Because of the relatively low default rate and stable returns in an otherwise low-yield environment,
attractive opportunities emerge in the aviation financing sector for investors looking to deploy large
amounts of capital efficiently. Cash is flowing into this sector from sovereign funds, institutional
investors and private equity.
Aviation debt provides an opportunity for investors to access investment grade products collateralized
by long-lasting assets which range from 20-25 years for aircraft. Unlike real estate these assets can be
relocated quickly in case of default or political issues and are considered relatively resilient to market
stress.
Acceleration in the ongoing shift of financing from the traditional aviation banks in the West to new
players from the East is a reality. Direct aircraft financing or debt issuance represent opportunities for
new entrants to earn attractive yields, provided the choice of asset type (the aircraft), the structure and
the timing of entry are right. Currently aircraft manufacturers have record orders reflecting a period of
strong orders buoyed by both new aircraft types and continuing emerging markets’ demand.
The structure of a lease agreement provides specific obligations, some of which are a combination of a
security deposit and monthly lease rate based on the aircraft value and its depreciation schedule. In order
to compensate for the risk involved, the lease rate should reflect the sum of all risks associated with the
multiple business layers, including the macroeconomic aspect. There is a practice of increasing the
security deposit depending on legal and operational considerations of the specific country and lessee.
Some problems faced by lessees in developing countries will include poor historical past performance of
local airlines, inexistent credit rating, difficulties in exporting hard currencies back to lessors or high
interest rate and currency mismatch between the income and its liabilities (airfare sales and lease
payment). Legal aspects and cost of recovering and remarketing the asset should the lessee default will
also impact the deposit amount and rent required by lessors to compensate for those factors.

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Yield being a function of perceived risk, developing countries should offer better returns. Nigeria, the
largest African economy, was selected as the test market for this study for many reasons. Its
190,632,261 inhabitants make it not only Africa’s most populated nation but also the 3rd highest in
urban density (Index Mundi, 2016). According to United Nations (UN) Data (United Nations, 2017),
population estimates and future projections for 2050 and 2100, as shown in Figure 2 below, put Nigeria
on course to becoming the world’s fourth most populated country. This provides Nigeria with a sizeable
opportunity to grow its presence regionally and internationally and develop a potential hub, connecting
African travellers.
Figure 2: UN 2050 and 2100 Populations Projections Africa
The IATA (International Air Transport Association) Vision 2050 also reports that “the 26 megacities of
the world, with populations more than 10 million, account for more than 20% of air travel worldwide”
and “there are 62 urban agglomerations with populations of 5 million or more, which generate 40% of
air travel worldwide” (Bisignani, 2011). Nigeria’s population growth and urban density coupled with its
ideal geographical location offer a clear competitive advantage in the industry.
On a continental scale, the African Development Bank (AfDB) has called for bold actions to improve
connectivity, market access, and cost reduction in the aviation sector (African Development Bank
Group, 2017). In the past ten years, The AfDB has provided around USD 1 billion to the sector through
infrastructure and airlines’ financing.

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Today, the same two hours flight from Lilongwe to Johannesburg costs three times as much as London
to Rome due to costs mainly related to taxes, fees and charges and airport levies. Opening intra-African
aviation and lifting remaining traffic restrictions remains a priority nearly 20 years after the
Yamoussoukro Declaration was signed by 40 countries.
At the 2018 Farnborough Air Show in the UK, Nigeria had announced its political will and intention to
create an African focused leasing company and an aircraft maintenance centre to help the start of a
national carrier, Nigeria Air (see Appendix 1 - Investment Teaser for Nigeria ALC).
While many older airlines were government-owned at some point, this has shifted dramatically through
liberalisation, especially in the mature markets (North America and Europe). In emerging economies,
the role of government-controlled airlines is still significant and even dominant in the fast-growing
Middle East regions.
First, we will look at the airline industry in general and focus on the value chain, in which the leasing
activity plays an important role. We will then turn our attention to the aircraft as an investment to
identify its value over time and determine an NPV based on different factors such as price, desirability,
performance, residual value, etc. Based on the NPV results we then look at the different risks that will
have to be reflected on the interest rate applied to the lease rate. The Fund’s potential clients are
operators or leasing companies seeking to expand in size without the investment rating or the wish to
access the capital market directly.
The approach is a top-down model where the country level is analysed by a PESTEL, then narrowed
towards the aviation leasing industry competitiveness using a Porter’s Five Forces analysis. Through a
SWOT and TOWS, the strategic capabilities of the Fund will help extract the most suitable, acceptable
and feasible strategic options. These strategies will be complimented with a Business Model Canvas will
help the Fund develop a viable business model to enter the targeted market. The PESTEL analysis
outlines the importance of the political intentions rather than the underlying socio-economic situation of
a country as far as the outcome of the industry is concerned. The Porter 5 Forces analyses reveals a
crowded but diversified leasing industry worldwide. The current focus is on Asia in an extremely
competitive market. Africa seems up for the grab with weaker competition.

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Chapter 1 - The airline industry: No plane, no gain
Over the past 45 years the net post-tax profit of the worldwide airline industry has averaged a meagre
0.1% of revenues. Over this period shareholders have seen no return to compensate them for their risk
taking, even destroying value at a rate of USD 19 billion per year between 2000 and 2009 (Bisignani,
2011).
In 2017 the world of air transport reported earnings of 9.9% on invested capital for 2016, which
exceeded its cost of capital (estimated at 6.6%). Considered normal for almost any other industry, this
was only the second time in history that the airlines have globally attained this benchmark, the first
being in 2015. The industry’s 2016 net profit was USD 34.8 billion on revenues of USD 705 billion
leaving only a thin buffer against cost increases, shocks, or unforeseen changes in the economic
environment. For only the second time on record, in 2016 the air transport industry paid its investors a
normal reward for risking their capital (IATA, 2017b). Who, in his/her right mind, would invest in this
industry and expect an acceptable return?
A century ago, a farmer would buy a cow, own a small pasture in which that cow would graze. The
family would tend to this investment to make sure it would last as long as possible, not fall sick and
produce milk on a daily basis. At the end of its useful life, the cow would be butchered in the backyard
and provide meat to its owner.
Today, farmers go to a bank, borrow money on which interest is charged, buy cattle through a breeder,
mortgage sizeable plots of land, buy imported feed from big agrochemical companies, use unionized
labour to run the daily business, outsource expensive veterinary services to ensure health and
compliance regulations are met. They invest in highly standardized milking and processing equipment if
the product is to be commercialized. They are paid a minimum price for milk and meat is sold almost at
cost to bulk distributors after the animal has been butchered in an approved facility. In many countries
the highly leveraged farming industry is subsidized by the government at the expense of taxpayers.
National interest is perceived being at stake.

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Except for the farmer, all attached agro-related businesses are making healthy profits and as long as the
farming business is alive they will strive. If the farmer falters, the government quickly injects money or
protects the business from bankruptcy. Imported feed becomes subsidized as well as exported milk and
meat. In the name of national interest.
____________________________________________________________________________________
parasite parəsʌɪt noun
1. An organism which lives in or on another organism (its host) and benefits by deriving nutrients
at the other's expense.
____________________________________________________________________________________
Aviation works in a highly regulated business environment of which compliance with its regulations is
of paramount importance. Maintenance is vital to safety and all other activities from financing to
catering are essential to the final consumer product, a contract of carriage sold as a flight ticket.
In the case of full service or legacy carriers, most of these specialized services are outsourced or have
been spun off from the original airline for a variety of reasons including compliance, financial, liability
or regulatory reasons. All these actors, such as compliance related services (CRS), travel agents, lessors,
amongst others are now feeding on the airlines with substantial results, draining its cash and possibly
keeping them barely alive.
Looking at the return ratios as shown in “Figure 3 - IATA Supply Chain Return vs. Invested Capital”
(Bisignani, 2011), they differ markedly along the supply chain. In the middle of these profitable
businesses, the leasing industry is doing fairly well displaying a 9.3% return and the future trend is
bright. The forecast over the next 20 years of new aircraft deliveries is estimated at USD 4.2 trillion in
delivery prices and the annual requirement will rise from USD 110 billion to over USD 200 billion over
the next ten years, averaging USD 170 billion per annum. At the end of the forecast period, Airbus and
Boeing will still account for over 90% of total delivery dollars (Forsberg, 2017).

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Figure 3: IATA Supply Chain Returns vs. Invested Capital
The overall air transport value chain is critical since the leasing industry benefits from it. It is critical to
remember that the final product is an airfare. Passengers do not purchase leasing agreements. Leasing is
only one of the many co-products of the aviation industry. Cash flow giants, airlines today are less
inclined to load their already highly leveraged balance sheet with illiquid assets and prefer the flexibility
of fleet adjustment given by leasing companies. Only a handful of airlines are rated “investment grade”
by rating agencies. Leasing companies have a higher investment grade giving them access to cheaper
financing and allowing bulk orders with manufacturers at highly discounted conditions.
The aviation industry in general is closely related to Gross Domestic Product (GDP) and follows a
cyclical trend of contraction and expansion (FRED Economic Data, 2015). For the investor the NPV
will highly depend on factors such as the timing of investment and divestment, the type of aircraft and
the cost of capital. Aircraft prices tend to follow industry cycles and large aircraft orders attracting
significant undisclosed discounts may complicate aircraft valuations. Aircraft have an economic life of
approximately 25 years, punctuated by different service intervals. Typically, every 6-year-old aircraft
will have to undergo a thorough, long and expensive maintenance check, called the “D” check ( see
Appendix 2 - Large Aircraft Checks). It is generally at this stage that the first owner, whether an airline
or a leasing company will sell its asset to reinvest in more efficient and modern technology to keep its
competitive advantage.

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Chapter 2 - The Aviation Economic Cycles
From the lessor’s point of view, the strategy of acquisition of aircraft type and its NPV at time of
purchase is highly dependent on timing (cyclical industry) and expected residual value at divestment.
Some factors are known and can be modelled but the unknown future impact of the arrival of Russian
and Chinese aircraft in 2020 (see Appendix 3 - Aircraft Type Comparison) in the market can only be
guessed. In forming an investment policy to maximize return, choosing the right aircraft (value
retention, liquidity, return, popularity, geographical distribution etc.) should be the lessor’s core strategy.
Cycles in the aviation industry are well documented throughout history. As a rule, airlines go bust when
demand is low such as in recessions. Operators tend to default in groups and sensitively modify the
supply/demand equilibrium affecting the resale value at that particular time, further depressing asset
(aircraft) values if a sale is needed to reduce an airline or a lessor’s book exposure. Lessee’s default risk,
interest rates and asset price volatility are closely correlated. At the time of writing, the economy is
flooded with liquidity as a result of current monetary policies and historically low interest rates. In
September 2018, Emirates’ CEO Tim Clark reported dealing with a strong US dollar, weakness of many
emerging economies and higher fuel prices while “evaluating capacity growth for 2019” (Aviation
Week Network, 2018).
The value of an aircraft and its NPV
Aircraft valuation starts with the manufacturer’s list price on which a discount will be applied. These
discount figures are undisclosed but can be calculated from the manufacturer financial report and
estimated during the period under review over the whole production. For single aisle the average list
price discount has been estimated at around 43% during the last eight years.
In 2013, Ryanair place an order for 175 aircraft worth USD 15.5 billion at list price. The industry
benchmark Boeing 737-800, a 189-seat jet is listed at USD 89.1 million. Large orders attract steep
discounts and industry appraisers valued each unit at about USD 40 million on this particular deal.
Market values calculated by appraisers on the Boeing 737 MAX and the Airbus 320neo (both featuring
the latest fuel efficient technology and listed in 2017 at around USD 110 million) confirmed the discount
by reflecting over 50% depreciation in the first year (Convey, 2018).

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Table 1: A320neo Appraisal Values
Table 2: B737 MAX Appraisal Values
The theoretical value of an aircraft is the NPV of the combined future cash flows that can be generated
by leasing it over its useful life. Technically and economically it may be different since when a positive
net cash flow cannot be generated anymore due to maintenance costs, the economic life of the aircraft
ends. The cash flows will also diminish over time as the aircraft ages, becoming less attractive and more
sensitive to external factors such as oil prices fluctuations, technical and performance requirements
amongst other variables. As it becomes less desirable for 1st
tier airlines, the lessor faces six basic
choices depending on the economic cycle, the age of the aircraft and the timing of the decision:
1. Re-lease for another term (generate income and defer capital gain)
2. Sell the aircraft (capital gain)
3. Mothball the aircraft (defer the capital gain/but incur maintenance / storage costs)
4. Conversion to freighter (incur conversion costs but generates future income)
5. Part out the aircraft (capital gain)
6. Scrap the aircraft (loss)
According to Boeing (Ackert, 2012) the average life of a commercial passenger jet is 25 years and
freighters reach 37 years (or two more D checks). The above choices will impact the residual values
used for the computation of the expected NPV at the time of acquisition. An aircraft that is in high

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demand, produced on a large scale and geographically well distributed will fetch a higher resale price
either parted out or as whole unit on a new/different lease contract. The price of the aircraft expressed
over time as a percentage (inflation adjusted) of the initial aircraft value becomes less predictable with
age as the graph below shows.
Figure 4: Evolution of aircraft values over time
Cyclical or unique events such as market collapse, war, pandemics and other short-term disruptive
factors are not taken into account.
Factors influencing the aircraft retention value are of two main types:
1. Market driven (Manufacturer order book and backlogs, market penetration, production stages /
product life cycle, surplus/shortage, secondary market opportunities and financing environment.
2. Performance driven (Aircraft specifications, aircraft economics, family and technology)
At the moment the world of the single-aisle jets is a duopoly between Airbus and Boeing with a
negligible share divided between Embraer and Bombardier. Chinese and Russian manufacturers may
add some unknown dynamic to the equation in the medium-term (adding uncertainty to the residual and
future values of current models) as their fleet reaches the market.
Depreciation is based on two main drivers:
1. Age of aircraft and its main components
2. Modernity or technical standard of the aircraft

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It is essential to bear in mind that since the market is not transparent. Important deviations may be
expected both at the purchase and at the sale and the value curve includes four random variables that are:
1. The world economy
2. The aircraft family (manufacturer, single aisle, etc.)
3. The aircraft type (A320, B737, etc.)
4. The individual serial number (history, age, maintenance status, general condition)
The production stage
When applied to secondary markets, freighters conversions or emerging economies that are government
protected or sponsored, the technology may not play such a big role as it would in the Low Cost or
hyper-competitive world. Looking at the production stage and life cycle of an aircraft, late built model
of a series (late 737NG or A320 not featuring the fuel efficiency of the MAX or neo) will incur higher
depreciation during the first 6 years on a competitive market compared to the new models (737 Max and
A320neo) much more desirable.
Figure 5: Production stage prices
The niche market
The market identified by the Fund is based on the acquisition of those late series (B737 non-MAX and
A320 Non-neo) from a previous major lessor (typically after the first leasing term 5-6 years or first D

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check / major check) at a price already adjusted for the faster depreciation. They would then be leased to
operators in markets that are not sensitive to high efficiency or latest technology. A combination of
lower capital cost and still modern aircraft with low direct operating costs are in greater demand by 2nd
and 3rd
tier airlines and start-ups with short or inexistent credit history.
Some older aircraft with higher operating costs may also become desirable when flying protected routes,
subsidized networks or/and low monthly hours because of lower capital cost and depreciation in
absolute value.
“Appendix 4 – 6 NPV scenarios of calculations for leases in mature markets” is a model of NPV
calculated using different years of manufacture and technology and purchased at the different time in
their economic life. For simplicity the following has been adopted:
● Lease terms: 6 years, renewable three times (to the end of the useful economic life of 24 years)
● For accounting purposes, leasing companies have adopted a straight-line depreciation over a 25
year period ending with a 15% residual value as an industry standard (Ryanair, 2018). In 25-year
time, it may even become a liability depending on environmental regulations. No deviations will
be made for Adjusted Market Value (actual conditions of an individual aircraft) since it is serial
number specific.
● 2 scenarios will be used:
1. Aircraft residual value = 15% (rounded off at USD 5 million)
2. Aircraft residual value (worst case scenario) = zero
We did not cover the case of a change in environmental regulation that would add an unknown
salvage cost.
● For simplicity, and in agreement with Fundo, the discount (risk free) rate adopted is the 10-year
USD Treasury bond at the time of acquisition and applied over the contract tenor.
● Each period of lease takes the average value of the aircraft during that period, taking into account
depreciation.
● Inflation has not been factored in the residual value.

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Chapter 3 - The leasing
An aircraft financial lease is a contract between three parties: A lender (providing funds to the leasing
company), the leasing company (owner of the aircraft) and the lessor (the operator). For the leasing
company, its cost of capital must at least be covered by the rent it receives from the lessor (see Appendix
5 - Anatomy of a lease)
Typical lease solutions available
1. Operating lease
2. Financial lease
3. Export Credit Agency (ECA) deals
4. Secured Bonds – Enhanced Equipment Trust Certificates (EETC) for airlines, operating leasing
securitisation, export credit bonds, German Pfandbriefe
5. Specialised financing– Islamic finance and other specialized or tax oriented tailored deals
1. Operating lease
The simplest way is to lease an aircraft from a leasing company. A contract is established between the
lessee and the lessor over a tenor and at an agreed monthly rental fee. The aircraft remains on the
lessor’s balance sheet, can be depreciated and is generally paid by debt. The asset does not appear on the
airline’s balance sheet.
Lessors typically make monthly or quarterly lease payments. At the end of the contract – which is
typically four to eight years – the airline returns the aircraft to the leasing company. This method offers
the most flexibility to fleet adjustment for the airline. The possibility to add a call option exist.
Japanese Operating Leases - with or without Call Option
Japanese Operating Leases (JOL) are structures where Japanese investors – often small and medium-
sized companies – own the aircraft. Japanese investors are typically interested in using JOLs to defer
taxes as well as any return. JOLs are usually leveraged with debt.
JOLs typically have 12 year terms. They usually have a call option (JOLCO) where airlines have the
right but no obligation to buy the aircraft at the end of the lease. Purchase is expected by the investors

20. PAGE | 19
and airlines would need to be careful not to disappoint them if they wanted to return to this market.
Despite the expected outcome of the call option, it is not considered a financial lease and the asset
remains on the lessor’s balance sheet.
2. Financial lease (aircraft backed loans)
Airlines (and leasing companies) also regularly borrow money from banks. Loans can be structured as
simple mortgages or as finance leases (which are different to operating leases as the airline gradually
pays off the loan until they own the aircraft). It is very rare for an operator to be able to borrow the
entire value of an aircraft. Airlines typically put in about 15% of the aircraft’s value with banks
financing 85%.
Banks will often syndicate larger deals to a wide range of investors to spread the risk. Bank deals can
vary from a single aircraft loan to large billion dollar syndicated deals financing whole portfolios.
The aircraft appears on the airline’s balance sheet and can be depreciated as an asset. The loan appears
as liability. Since airlines rarely generate profits, the depreciation factor is seldom used as a tax tool.
3. Export Credit Loans (finance lease)
Most government credit export agencies supported asset-based aircraft transactions use a finance lease
structure. The financing structure, a special purpose company (SPC) or vehicle (SPV) is typically
established in a tax-neutral jurisdiction to act as:
● the borrower under the credit agency supported financing,
● the owner of the financed aircraft
● the lessor of the financed aircraft to the operator (lessee).
The owner of the SPC/SPV grants the credit agency priority in case of default. This is particularly
important in emerging markets where finance can be less readily available. This type of government
support depends on where the aircraft or components are manufactured, rather than where the operator is
based. They are a cheap source of money but time consuming and require more background and
compliance check than leasing companies (OECD 2011 Aircraft Sector Understanding). Fit for planned
airline expansion or leasing company acquisition but unfit for a short-term airline fleet adjustment.

21. PAGE | 20
The SPC borrows funds with a maximum Loan-to-Value (LTV) not exceeding 85% of the net invoice
and obtains the balance of the aircraft purchase price from commercial financial institutions or other
sources. These remaining 15% can be a deal killer if the borrower has no rating since the value of the
collateral (aircraft) is already fully mortgage. As the owner of the aircraft, the SPC enters into a lease
agreement with the lessee.
Figure 6: Typical US Ex-Im Bank Structure
4. Aircraft backed bonds
They were first issued in the 1990s after deregulation. They can basically be split between bonds issued
by airlines (typically enhanced equipment trust certificates or EETCs), by operating lessors and
securitizations by manufacturers. Airline deals have one lessee (the airline itself). Aircraft leasing
securitizations can have lots of lessees – giving them diversity.
Enhanced Equipment Trust Certificates (EETC)
In the typical EETC aircraft lease securitization, the issuing entity which is a SPC/SPV and a subsidiary
of the sponsor airline, owns a portfolio of aircraft and releases them to the sponsor airline. The
transaction is similar to a corporate bond offering by the sponsor airline, but the operator is able to
obtain a better rating on the EETCs than it could on its own corporate bonds. The securitization features

22. PAGE | 21
provide liquidity facilities by a highly rated bank to ensure the payment of interest during an aircraft
remarketing period (up to 18 months) following a default by a lessee.
Figure 7: EETC Structure
5. Specialized deals
Dubai Aerospace Equipment, a leasing company backed by Dubai’s Sovereign Fund, and other Islamic
Funds provide financing compliant with Islamic laws, for example. Deals can be as creative as the
lender wishes as long as they comply with the regulations and jurisdiction they take place or compete in.
Due to the international nature of air travel, they tend to be rare as they become very complex and time
consuming.
Tax oriented deals also exist under the form of sale-leaseback operations or off-balance sheet loans and
are tax jurisdiction dependent.

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Chapter 4 - Methods
The inception of this research was born after meeting the CEO & Founder of Fundo, Jacques Grivel.
The preliminary questions asked led to the situation identification which was not limited to the Fund
alone but to institutional investors in general seeking better yields. An analysis of Fundo’s challenges is
provided in chapter 7 “Analysing the company”. The challenges are publicly available as secondary data
and show trends of low to negative yields on government bonds. Our hypothesis is premised on the
proposition that higher risks, adequately mitigated from emerging economies, may provide higher
returns. Albeit with the task of selecting the right market that matches the risk appetite. Our research
seeks to adopt thorough analytical, qualitative and empirical research, I order to create a model aimed at
assessing aircraft leasing markets of developing economies. We do this by analysing through primary
and secondary sources, the multiple business layers of the business environment of the emerging market
from country analysis, to industry analysis and analysis of the Fund.
This work does not seek to predict or forecast political or economic changes to emerging countries or
governments, nor provide a “one-size-fits-all”. It does, however, seek to test our hypothesis of matching
opportunities in the aircraft leasing market of such countries to the Fund’s capabilities, based on the data
collected and analysed. The complexity of collecting the relevant data depends on the market or country
of focus, the access to key stakeholders in the sector and quality of such data.
We selected a prime opportunity in an emerging country, Nigeria, but encountered difficulties in
assessing the data relevant to the government’s plans in creating the leasing company and national
carrier Nigeria Air. It was clear that primary data was required directly from the Nigerian government
and all participants of the creation of the leasing company. Based on these factors, we chose a research
design that focuses more on qualitative analyses that are exploratory. Exploratory research designs are
used to identify problems and opportunities, establishing priorities based on the identified problems or
opportunities, gaining insight prior to developing an approach and collecting data on the problems
associated thorough conclusive research. Exploratory research is ideal for initial stages of decision-
making which helps the researcher gain adequate understanding of the problem. It is used in the absence
of tested models or concepts.

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Data Collection Process
This project adopts a specific research strategy which is multifaceted in order to conduct our analyses on
verified and reliable data. This enhances the overall quality of our project, provide valuable guide to the
Fund and add value to this field of study.
Primary Sources
Due to the difficulty we faced in acquiring some pivotal data on the test country Nigeria we collected
raw data or primary data. By reference to primary data we mean data collected for the first time. The
method of collecting our primary data was principally through interviews. Our interview questions were,
however, guided by questionnaires created to collect data relevant to our research question of identifying
opportunities and challenges within the country for the purposes of aircraft leasing. Our interview with
the Nigerian Minister of Aviation was conducted at the 2018 Farnborough Air Show, the interview was
oral and brief, and lasted for approximately five minutes. The Ministry of Aviation was also generous
enough to introduce us to the consortium creating the leasing company. Our interview questions to the
consortium were much more comprehensive and conducted through telephone conferences and email
exchanges. These were also guided by the same questionnaire created. Some answers to our questions
were answered directly, while some answers came from secondary materials provided by the Ministry of
Aviation referenced below in the secondary sources section. With regards to the Fund primary data
collected from orally interviews with the CEO & Founder of the Fund were done over multiple informal
meetings which centred more on clarifying the objectives of the Fund and refining the research
questions. Samples of the questionnaire used on the Fund is provided in Appendix 6 - Interview with
Fundo Founder & CEO, Jaques Grivel.
Secondary Sources
We had access to multiple secondary sources of data. By reference to secondary data we mean data that
already exists in accessible records or collated by various bodies. We had access to secondary data on
the Fund and its core capabilities. We also had access to general business data on Nigeria as a country
from government sources, known indexes such as the Gini Index and Non-governmental sources like
IATA, the World Bank, African Development Bank provided general data on Nigeria. With regards to
Industry data on aircraft leasing, the Nigerian Ministry of Aviation provided teaser documents and a
comprehensive report from the Oxford Business Group on the Aviation industry in Nigeria which

25. PAGE | 24
provided in-depth market data on the Nigerian Aviation industry. A copy has been annexed to our
project as Appendix 1 - Investment Teaser for Nigeria ALC. We had access to computerised databases
and specialised industry data on aircraft leases from stakeholders such as Boeing, Banks and external
data-syndicated from top consultancy firms such as PWC and Ernst & Young on aircraft leasing
investment opportunities. Other sources were collected from well-known newspapers, internet and
website sources as well as academic and business publications.
We found most secondary data helpful. The challenge faced on primary data was the industry specific
lack of transparency. To mitigate these gaps, we referred directly to Nigerian Ministry of Aviation. We
found that all our primary and secondary sources of data complemented each. Our verification process
of secondary data involved a joint scrutiny of the accuracy and reliability of the data.
Approach to Data Analysis
In our analyses we worked as a team by dividing the sections of our work amongst each other. After
collecting the data, we carried out join analyses of all sections in order to challenge each other’s analyses
and findings. We avoided conducting statistical analysis involving quantitative measures as we found
these aspects are within the core competence of the Fund. Our analyses were therefore qualitative and
analytical based on inductive and deductive logical reasoning. We challenged each other’s analyses firstly
based on the verification of the data, then the interpretation of the data as it relates to the research question.
Where we found the interpretation inadequate we sourced for similar data from other sources and repeated
the whole process again.
We had an ongoing feedback from several experts named in the acknowledgement section. Based on the
feedback received, our research findings were more refined and edited multiple times. We believe the
feedback process was crucial in eliminating major irregularities in our research findings and methods.

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Chapter 5 - Analysing the Country: Nigeria
West Africa’s mightiest nation has been a graveyard for airlines. Nigeria Airways imploded in 2003
with just one Boeing 737 and more than USD 500 million in debt. Between 2000 and 2017, an average
of eight airlines per year ceased operations which brings the total of 141 over the period, certainly an
unmatched achievement in the world. In a prohibitively expensive operating environment, Nigeria’s
operators are challenged by local service providers’ fees (airport authorities, air traffic control,
Government authorities, catering, handling). Those Government approved (monopoly) fees are simply
passed on by the airlines to the ticket price directly impacting the customer, the level of service and the
final value.
On the other hand, both handling agents (there are only two in Nigeria) have been in business since 1979
for NAHCO (Nigerian Aviation Handling Company PLC, 2018) and 2009 for SAHCOL (Skyway
Aviation Handling Company Limited, 2015) incorporated in 1990, which was an emanation of the
defunct Nigeria Airways and sold to a private group. The Government, directly through its institutions
or indirectly through the sale of business licenses, is extremely present on the aviation scene. Sir Richard
Branson stepped in with Virgin Nigeria, a brave attempt to bring reliable, good-value air transport to the
nation. It closed down in September 2012 after eight years of battling with institutionalised corruption.
“We fought daily battles against government agents who wanted to make a fortune from us” (Calder,
2018).
Key Statistics 2017
The annual total number of aircraft that landed at or departed from Nigerian airports in 2017 stood at
214,258 movements, which shows a slight growth by 0.61% compared to 2016. Lagos, Abuja, Port
Harcourt and Kano airports served over 90% of total passengers. 73% of international travellers and
38% of domestic passengers flew to or from Lagos, which remains the largest airport for both
international and domestic traffic. Abuja International Airport was the second-largest airport by
movements in 2017. Although the number of movements increased slightly, the number of passengers
travelling through Nigerian airports has decreased by 8.03%.

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Figure 8: Passenger Statistics (National Bureau of Statistics, 2017)
Key Players
The key local players are Arik, Air Peace, Medview, Dana, Azman and Aero Contractor. The first three
airlines operate both domestic and international flights and the remaining three operate only domestic
routes. The median age of the is slightly over 20 years (Speed News, 2018). Basic operator data and
fleet information is provided below (Airfax, 2018) (see details in Appendix 7 - Nigerian Airlines
Airfleet Details).
Arik Air
Arik Air is based in Lagos and started operations in 2006. It currently operates a fleet of seven Boeing
737 that were built between 2001 and 2009. This medium range airliner jet fleet is complemented by a
fleet of five Bombardier CRJ 900/1000 aircraft manufactured between 2006 and 2014. Arik Air also
operates four Bombardier Dash 8 - Q400 Turboprop aircraft built between 2009 and 2014. Arik Air fleet
is 10 years younger than the country average. The company operates 626 flights per week.
Air Peace
Air Peace is presently operating a fleet of ten Boeing 737 that were built between 1992 and 1999
together with a fleet of three Brazilian Embraer ERJ 145 that were manufactured in 1999. Air Peace

28. PAGE | 27
recently incorporated a long-haul aircraft, Boeing B777 for its international network. Their average fleet
age is slightly over 20 years, which is roughly the country’s average. Air Peace operates 692 flights per
week with the combination of it three fleets.
Med-View Airline
Med-View, the third major actor on both local and international routes operates a long-haul aircraft, but
its fleet is considerably smaller. It was founded in 2004 and operates 168 flights per week with three
Boeing 737 medium-range jets built between 1997 and 1998 and 1 long range Boeing 777 manufactured
in 2002 out of Lagos.
Dana Air
Dana Air, based in Lagos, was founded in 2008. It operates exclusively domestically with the oldest
fleet in the country, Three McDonnell Douglas MD-82/83 built between 1986 and 1992 (average 30
years) operate a total of 112 flights per week. There are very few operators left with this type of aircraft,
creating difficulties in finding experienced qualified staff.
Azman Air
Azman Air was founded in 2010 but only started operating in 2014 out if its Kano base. It is the only
company in Nigeria that does not have its main base in Lagos. The company currently operates 166
flights per week with a fleet of four Boeing 737 built between 1997 and 1998.
Aero Contractors
One of the oldest Nigerian operators, Aero Contractors was founded in Lagos in 1959. With a combined
fleet of around 20 helicopters and 15 fixed wing aircraft from Dash 8 to Boeing 737-400/500, it was one
of the largest domestic and international operators in Nigeria. Aero Contractors was considered one of
the most reliable airlines with an excellent safety record until it suspended operations on September 1,
2016. After downsizing its fleet and reducing costs, Aero Contractors resumed operations on December
23, 2016. It currently operates two Boeing 737 built between 1991 and 1993 and plans to incorporate
other Boeing 737 aircraft in the near future.

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Passenger Statistics and Airline Revenue
As Nigerian operators are not IATA members, information from their BSP (Billing Settlement Plan) and
statistical information are not readily available. These airlines are not stock listed either, so the financial
information is not published. The major foreign airlines that fly to Nigeria do not publish revenues per
route as part of their confidential strategy plan. An extensive ticket price study determined by average
load factors and average fare resulted in a revenue estimation of the published routes and frequencies.
Current market size estimation was done by adding all published airlines’ capacities flying city pairs and
compiled on a weekly basis. The unit of measurement used is RSK (Revenue Seat Kilometre) and ASK
(Available Seat Kilometre) values. The number of seats offered multiplied by the distance is the ASK.
The statistical information obtained was then used, assuming an 80% load factor to estimate the number
of passengers as no statistical information is available as the tickets are not sold via IATA. In regulated
market like Nigeria, no airline should be flying below cost or with less than an 80% load factor.
Therefore ASK x 0.8 is RSK. The method used is “OD” traffic only (origin destination). No “Hub-and-
spoke” analyses were made as this concept is almost non-existent in Africa except for Ethiopian Airlines
(Addis Ababa Hub), South African Airways (Johannesburg Hub) and Royal Air Maroc (Casablanca
Hub). Figure 9 below displays the weekly domestic sector flown by Nigerian operators and in Figure 10
compares the estimated revenues between Nigerian and international operators.
Figure 9: Nigerian operators’ domestic sectors/week

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Figure 10: Estimated airline revenue comparison Nigerian vs. international operators
Local operators play a minority role in the regional or international scene. The domestic market is
shared between Arik Air and Air Peace competing internally, and to a lesser extent, regionally. The
Lagos – Abuja – Port Harcourt triangle is the backbone of Nigeria’s air transport. Smaller domestic
routes are flown with an average of one flight per day and per carrier to and from Lagos, Abuja, Port
Harcourt and to a lesser extent Kano.

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Figure 11: Nigerian domestic & international routes from Kano/Abuja
(weekly flights & seat availability)
The network will shortly be limited by the weak and inefficient domestic infrastructure. Operators
concentrating on this market will face higher risks than operators with more diversified international
destinations. Currently none of the operators are part of any of the three major airlines’ alliances: Star
Alliance, OneWorld and SkyTeam.
International airlines (Ethiopian, Turkish Airways, British Airways, Air France / KLM, Lufthansa,
Delta, South African, Kenya Airways, Rwandair, Egyptair, Air Ivoire, Emirates, Etihad and Qatar)
operating international medium and long-haul flights to and from Nigeria generate 6.6 times more
revenues than the local airlines combined. They serve close to 4 million passengers (National Bureau of
Statistics, 2017). Figure 12 shows Nigeria main international routes.

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Figure 12: Nigeria main international routes
Domestic ticket prices range between Nigerian Naira NGN 18,000 and 38,000 per hour per sector.
Applied to a 150-seat aircraft, the RSK is currently USD 0.12, a very good figure by industry standards.
International fare prices in Africa are still very high, however, mainly due to inefficiency and corruption,
but does not generate high profits. Infrastructure, punctuality and reliability are still major issues, but
with the increased oversight of the government and preparation for future IATA-IOSA certifications,
most carriers are now starting to improve the overall quality and safety in the Nigerian Air Transport
industry (IATA, 2018a).
In 2016, Africa had its best safety performance in a decade, with an accident rate of 2.30 accidents per
million sectors. This was a substantial improvement compared with accident rates of 7.36 in 2015 and
9.73 for the five-year period from 2011 to 2015. African governments also need to accelerate the
implementation of ICAO’s safety-related standards and recommended practices (SARPS). As of the end
of December 2016, only of the 48 sub-Saharan African countries had at least 60% SARPS
implementation (IATA, 2017b).

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Future Demand
Future projections show a domestic and regional demand spurred by a growing middle class combined
with replacement needs of an aging fleet. Market for replacement is estimated at five unit per year over
the next three decades. We estimate that fifty aircraft will need to be replaced through leasing or
purchase and thirty new aircraft will be needed to feed the growing domestic market over the next ten to
twenty years. Over the next ten years, the development of city-pairs traffic could result in a combined
fleet expansion between the six main players leading to an estimated total of up to one hundred aircraft.
Population growth, Gini index, poverty, inequality and other parameters used for the forecast are also
harvested and compiled by statistical offices facing lack of funds. The combined sum of these empirical
errors may lead to erroneous results. Based on the 2018 Global Market Outlook (GMO) (Boeing, 2017),
the forecast from both manufacturers and IATA plans for a steady increase in passenger traffic over the
next 20 years (2017-2036), with a given distribution across the world based on today’s knowledge or
expectations. Looking back at Boeing and Airbus 2000 forecast (the year being selected not to reflect a
major external shock such as 9/11, SARS and other short-term crisis), both predicted a steady traffic
growth for 10 years at 5.2% followed by a mature rate at 4.6%, averaging 4.9% in for the period 2000-
2019.
Since the airline traffic is directly linked to the number of seats available (also known as ASK), and that
the supply of new aircraft being produced is fairly inelastic on short to medium-term, we can argue that
the only variable is the load factor when looking at projected Revenue Per Kilometre (RPK). Therefore,
only a percentage change in the load factor or the number of aircraft being sent to storage in a time of
economic downturn will affect the accuracy of the RPK since the number of seats being added over time
is known by manufacturers producing their GMO or Global Market Forecast.
It is interesting to note that in 2000 after Airbus announced its A3XX project that would become the
A380 and Dubai already heralded its aviation ambitions in 1996 with the opening of Terminal 2 in 1998
and further developments, no one saw the future coming. Today Dubai International Airport is the
world’s busiest international airport with 88 million passengers, 400,000 aircraft movements and the
highest in terms of large aircraft (A380, B777) movements. Doha handles 40 million passengers and
270,000 movements, and Abu Dhabi another 25 million passengers and 210,000 movements. Airbus

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also predicted that the Middle East would account for 3% of the VLA (Very Large Aircraft). Today,
Emirates alone operates 103 of the 226 A380s built so far. Comparing airport ranking between the 2000
forecast for 2019 and the 2018 actual figures, Dubai, Beijing and Shanghai did not even appear on the
horizon and are today in the top 10.
These trends were unpredicted in 2000 even though the political intentions were known. Reverting to the
model used by manufacturers, if the GDP had been used to predict the trend, looking at the UAE figures
from 1972 to 1998, the 2000 manufacturer’s outlook seems logical. Most years between 1990 and 1998
showed negative GDP growth rates (Al Sadik, 2001). Based on past known figures the future could only
have been perceived as grim.
Comparing Nigeria and UAE GDP growth over the 1972 - 2016 period, shows that they are closely
following oil price variations, since both economies are heavily dependent on crude export. Based on
this observation, we can deduce that the GDP approach may not be the most accurate and can lead to
inaccurate forecasts in geographic distribution of aircraft demand.
Dubai’s aviation growth came from the will of one man: Sheikh Zayed bin Sultan Al Nahyan. It is the
political will that made it happen. Nigeria announced its ambition to launch an African leasing company
and a national carrier opening up to 40 international destinations and a similar number of domestic
routes. Could it be that there is a similar trend as seen in the UAE but on a different scale and strategy?
Could Lagos become the hub of Western Africa? The likelihood of this happening in the short-term is
low, but high in the medium to long-term, simply based on demographics, geographical position and
economic outlook. That is provided that political intentions are implemented at government level.

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PESTEL Framework in Nigeria
The PESTEL analysis is an extension of PEST (Politics, Economics, Social and Technology) which is
frequently applied in the business sector to study the influence of such factors on strategic choices
(Thomas, 2007). By using the PESTEL framework, we shall categorise the macro-environmental factors
of the aircraft leasing industry in Nigeria (Johnson, Whittington, Scholes, Angwin, & Regner, 2014).
The present situation is analysed based on inputs and figures widely used by both the aviation and
finance industry. Key indicators such as GDP, macroeconomics, cycles and future global social,
technological and environmental trends are questioned. Based on the past industry forecast, we found
that although the trend and growth rate were correctly predicted, the regional diversification was not
always accurately anticipated. In 2000, both Boeing and Airbus GMOs did not anticipate the rise of the
Gulf carriers as major global players, for example.
P - Politics
Since the independence of Nigeria as a Federal Republic in 1999, the state has held a somewhat direct
involvement in the aviation industry, which has in some cases created politically higher exposure
depending on the specific business. In recent years, airlines such as Aerocontractors and Arik Air were
taken over by the state due to the insurmountable debt owed to the state from government loans and
credit support.
The government of Nigeria plays a very important role in the aviation industry as a direct economic
actor, as a supplier of airport services under Federal Airports Authority of Nigeria (FAAN), navigational
services under NAMA and direct regulation and collection of revenues under the Nigeria Civil Aviation
Authority (NCAA). These government bodies serve the airlines in the Nigerian aviation industry and as
a result there is a high state involvement in the movement of aircraft within the Nigeria airspace and as a
result high political exposure. The Hon. Minister of State (Aviation) has pushed ambitious moves to
develop the aviation industry by proposing the privatisation of the three largest airports in the country,
the creation of a national carrier as well as a state leasing company despite the economic slowdown of
the country.
Until recently, the involvement of the government revolved around the provision of these services and
regulation of the industry, but recently the government’s decision to set up an aviation leasing company

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and the establishment of aerotropolis or airport cities through Public Private Partnership arrangement
amongst others are indicators that the government is becoming more of a competitor in the leasing
industry (Federal Ministry of Transportation Nigeria, 2017). In May 2018, the Infrastructure Concession
Regulatory Commission of Nigeria awarded the Federal Government of Nigeria a certificate authorising
the commencement of the creation of a MRO (Maintenance, Repair and Overhaul) facility and aviation
leasing company to support the upcoming national carrier (ICRC Media & Publicity Unit, 2018).
In recent times, the growth in passenger traffic has led lessors to lease their aircraft to operators in
emerging economies, which adds some political risks on the part of the lessor. The AON Risk Map
Report of 2018 provides data on political violence, political interference and corruption which it claims
has increased in recent years. The report notes Nigeria's dependence on its oil and gas sector risks of the
existence of high levels of corruption which continues to limit investor confidence and potential GDP
growth (Aon Risk Solutions, 2018). The report which ranks political risks on a six-point scale (low;
medium low; medium; medium high; high; very high) has recorded an increased political risk in Nigeria
and increased the rank of Nigeria from high risk to very high risk.
Despite the political stability of Nigeria as a democratic nation, there are characteristics of sudden
changes in governmental policies that have affected long-term strategies of foreign companies in Nigeria
in various industries. These frequent changes in government policies and programmes negatively affect
corporate long-term planning (Mark & Nwaiwu, 2015). These changes were attributed to party politics,
possibly inducing conflicts and wars, growing levels of crime and terrorism, kidnapping, bomb blasts
amongst other threats. The present risks that may arise out of the political environment of Nigeria for
lessors are:
Privatisation of airports
In September 2017, the Federal Government had announced the commencement of the process
eventually leading to the privatisation of the four profit-making airports out of the 22 in the country.
Concessionaires would be required to invest and improve the infrastructure. They would pay concession
fees and return the airport to the Government at the end of a specified period (Oxford Business Group,
2018). Privatisation efforts have not resulted in improved service or efficiency in many cases. The

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success of privatization must be measured by service levels and cost effectiveness and not by financial
gains for governments or investors (IATA, 2017c).
Political Interference
In a situation where the lessee is highly politically exposed or has strong ties to the government, there
may be difficulties in repossessing the aircraft under lease. The lessor must therefore eliminate such risk,
which will however come at a high cost.
Security
Nigeria was ranked third position on the 2017 Global Terrorism Risk index (Institute for Economics &
Peace, 2017), this, however, only applies to specific northern regions of Nigeria affected by attacks from
Boko Haram. This risk exists for operators flying to these parts of the country, albeit no such aviation
issues have occurred in these regions. Some international carriers have avoided flights into international
airports in the north, even though risks in such locations are remote and may be insured.
Government policies
There may be uncertainty in the consistency of policies when there is a change of governance after every
four years. With different political agendas, government focus and economic development targets,
investors may be affected. This may also have an effect on leasing companies that have aircraft located
in Nigeria.
E - Economics
Aircraft manufacturers and IATA amongst others are basing their future outlook on general and regional
growth to forecast the evolution of demand for the next 20 years.
The forecast model used by both Boeing and Airbus uses a wide array of data and statistics published by
international bodies (Boeing, 2017) and extrapolate the trend for the years to come. However, when it
comes to Sub-Saharan Africa these numbers come from statistical offices, lacking general resources and
data (Jerven, 2010). They can only measure what is measurable using the tools they can afford. This is
where the problem of African statistics starts. Regarding economic data, the GDP is calculated using
guidance from the UN System of National Accounts (SNA). First published in 1953, revised in 1968,

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harmonized in 1993 and reviewed in 2006, these guidelines should allow meaningful comparison across
countries (United Nations Statistics Division, 2008), based on the economic activities recorded. The
World Bank Manual for GDP computation make use of a “non-human interpolation when data are
missing”.
Most African countries measure their GDP annual growth on a “base year” that may be 20 to 30 years
old. It means that many activities that now have economic significance (cellular phone, internet,
alternative banking, etc.) are not accounted for. On November 5, 2010, Ghana revised GDP increased
85% overnight, bringing the per capita figure from USD 600 to 1,100 and moving the country to a
middle-income country. Due to legal (trafficking, smuggling), political, fiscal (tax burden), compliance
(regulations) or practical (size of activity) reasons some activities escape standard means of the survey.
They are excluded from GDP computations and future trends.
OECD countries tend to have a low percentage of such deviation which is around 15% from published
GDP but developing countries have a much higher share of Non-Observed Economy (NOE). In the case
of Zimbabwe, DR Congo and Nigeria, it is estimated to be close to 60%. When updated overnight with a
new base year or change in SNA, the new higher GDP figures do not mean that the country or its
population is richer. It is simply considering economic activities unaccounted for in the past and
calculating the growth on a different year.
According to IATA estimates published at the end of 2017, “many of the fastest-growing markets are
achieving a compound growth rate of more than 7.2% per year, meaning their market will double in size
each decade. Most of these markets are in Africa, including: Sierra Leone, Benin, Mali, Rwanda, Togo,
Uganda, Zambia, Senegal, Ethiopia, Ivory Coast, Tanzania, Malawi, Chad, Gambia and Mozambique”
(IATA, 2017a).
GDP
Nigeria is considered to be an emerging market by the World Bank and has been identified as a regional
power in Africa (African Development Bank Group, 2017). Its economy became the largest in Africa in
2014, overtaking South Africa and becoming the 22nd-largest economy in the world with a GDP of
USD 569 billion. As global economic power continues to shift away from advanced economies to

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emerging economies, Nigeria's economy is projected to rank amongst the world's top economies by
2050 with GDP of USD 6.4 trillion in a PricewaterhouseCoopers (PwC) study (Ali & Hampson, 2013).
The country's oil reserves have played a major role in its growing wealth and influence. The recovery in
crude prices and production will help drive growth and provide fiscal space as the government pursues
important structural reforms to diversify the economy away from oil.
In 2017, Nigeria’s main cash cow is oil (USD 39 billion) representing 96% of total export. GDP in
Africa’s biggest crude producer expanded 0.8% last year compared with a contraction of 1.6% in 2016
following the oil price (African Development Bank Group, 2017).
The Intra-African trade
In terms of intra-African trade, Nigeria is the third biggest player after South Africa and Namibia; its
share grew 8.5% in 2017. According to the Afreximbank, intra-African trade is growing at a steady rate
of 4.8% but still representing only 15% of the total trade (African Export-Import Bank, 2018) (Europe
intra-EU trade is 67%). Free Trade Areas are blooming across the continent and Nigeria is becoming a
major player in the cement and agro-business.
Economic outlook
Foreign Direct Investment advances slightly, driven by a favourable investment climate and broad
macroeconomic stability. Foreign Portfolio Investment (FPI) increases moderately, due to strong foreign
investor interest. However, a slowdown is expected in FPI in late 2018, driven by uncertainty ahead of
the elections. Production is forecast to increase in all sectors (Kambou, 2018).
Financial challenges
Nigeria still faces significant challenges, including foreign exchange shortages, disruptions in fuel
supply, power shortages, and insecurity in some parts of the country. Revenue mobilization efforts are
insufficient; at 5%, the value added tax rate is amongst the lowest in the world, and revenue
administration is inefficient (The Economist, 2018). Poverty is unacceptably high; nearly 80% of
Nigeria’s 190 million people live on less than USD 2 a day, even though according to the World Bank

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data, Nigeria’s Gini Index is roughly at par with the US at 0.43. It may be argued that the validity of this
data is questionable.
Forex and hard currency availability
The Nigerian currency, Naira (NGN) is pegged by the Central Bank of Nigeria (CBN) to 365/USD.
Recent history suggests that election cycles are associated with increased foreign exchange demand
(outflow). The parallel market is expected to reach 386 NGN/USD ahead of the 2019 elections. Interest
rates are expected to drop to 12% shortly followed by an increase back to 14% prior to elections.
Between 1959 and 2016 the CBN has attempted to manage its currency through 15 different systems
oscillating between pegs and float. Over the past 10 years the NGN has gone through a severe
devaluation. Nigeria’s latest currency woes can be traced back two years ago, when President Buhari
first took over. Despite dwindling foreign reserves led by the fall in global oil prices, CBN governor
Godwin Emefiele at first refused to devalue the currency. But in June 2017 the CBN finally gave in,
adopting a flexible exchange-rate policy determined by market forces. To nobody’s surprise, the NGN
immediately fell sharply against the USD (Doya, 2018).
The CBN is back in the market now, stepping up its interventions over the past year, supplying banks
with USD, closing the gap between the black market and official rate. By easing the dollar shortage, the
CBN is likely hoping to convince Nigerians, and foreign investors, that the naira’s most nervous days
are over.
Forex and the Chinese SWAP deal
Since 2016 the NGN free floats, resulted in a devaluation compared to the USD of 75% in 10 years
(2008=120 NGN/USD, 2018=360 NGN/USD. The latest trend in forex management has so far stabilized
the currency with the CBN intervention and a target at 360 NGN/USD. This measure has a positive
impact on the stability but drains the market of hard currencies, mainly the USD.

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Figure 13: USD / NGN 10-year history
The situation has led to a shortage of USD leading CBN to sign a bilateral currency swap agreement in
May 2018 with the Peoples Bank of China to help the liquidity issues faced by Nigerian traders and
Chinese manufacturers and “protect… from the harsh effects of third currency fluctuations (understand
USD),... and enhance financial stability and promote broader economic cooperation between the two
countries” (Udo, 2018).
The agreement includes finance trade and direct investment between China and Nigeria and have an
NGN 720 billion (USD 2 billion) maximum limit and a 3-year term. Since 28% of the aircraft leasing
funds originate from China (Daga & Hepher, 2018b), the experiment could very well extend into that
sector shortly rendering the leasing market attractive to Chinese lessors and Chinese aircraft. In general,
leasing contracts are linked to the aircraft trading currencies which is the USD. However, the terms may
differ if the lessor or lessee seeks hedging or agree on payment in another currency. Since the naira is
probably not one of them, the risk could be hedged in Chinese Renminbi (RMB).

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According to Standard Chartered Bank (SCB), the usage of RMB has expanded 21 fold since 2010 and
the currency has appreciated by 25% against the USD over the past 10 years. SCB also predicts that
28% of China's international trade will be denominated in RMB by the year 2020. The RMB made it to
the list of top five most used currencies.
Inflation and interest rates
Nigeria’s inflation rate decreased to 11.6% in May of 2018 from 12.5% in the prior month and slightly
above market expectations of 11.4%. It was the lowest inflation rate since February 2016. The inflation
rate has been declining since reaching more than 18.7% in January 2017.
Figure 14: Inflation rate history

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Ease of doing business
Based on Transparency International and the Mo Ibrahim reports, Nigeria ranks low in investors and
business people’s opinions. Plagued by corruption and red tapes, the intricacies of Nigeria and many
developing economies can be seen either as a threat when coming from a culturally different background
or an opportunity depending on the local knowledge and risk management experience. From a financial
and political perspective, Nigeria is clearly seen as a risky country to invest in or engage in business.
Based on the recent reports, the situation is not improving (Mo Ibrahim Foundation, 2017).
S – Social
On the social part of our PESTEL analysis, we will concentrate on the effect that the demographic
information as well as current and expected income levels, may have in the air transport industry of
Nigeria. We will also discuss religious beliefs, educational levels and labour situation like
unemployment and labour unions.
Demographics
Nigeria’s demographics (Index Mundi, 2016) consist of 190,632,261 inhabitants which makes Nigeria not
only the biggest African population but also the 3rd highest density. The major cities are Lagos 13.1
million, Kano 3.6 million, Ibadan 3.2 million, Abuja 2.4 million, Port Harcourt 2.3 million (data 2015).
2017 estimates show that the urban dwellers represent 49.4% of the total population and the growth rate
of urbanization is 4.3%, which is double the population growth rate of 2.43%. 100 million Nigerians live
in cities. With a fertility rate of 5.07 children born per woman, the average family consists of almost seven
people that need basic care and education before considering travelling. The age structure below is shown
below.
Figure 15: Nigerian population age structure

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The total dependency ratio is 88% (83% of children and 5% of elderly family members). A significant
figure as only two persons out of ten support the remaining eight, affecting the ability to travel.
With a low life expectancy of 53.8 years, the 54-65 year-old potential airline passengers are missing. The
rise of a middle class, a phenomenon that is known to be the backbone for the creation of a new travelling
class in Asia, South America and Europe using Low Cost Carriers is slowly taking place. Nigeria has a
pension fund since 2004, but still lacking proper implementation and structure (Abdulazeez, 2015).
Income Levels
VFR (Visiting Friends and Relatives) is a majority of Air Transport is based on disposable income.
IATA studies show that the disposable income and propensity to travel increases sharply once the
country has reached a sufficient GNI (middle income countries – above USD 1,100) before levelling out
at about USD 15,000 per capita. Experiences in India, and South-East Asia have however confirmed an
extreme sensitivity to price.
The average income level, especially by age or social group cannot be positively evaluated with the data
available at the moment. We have based our research on the International Monetary Fund (IMF) Nigeria
country report 2018, that describes with great details the economic situation of the country. However no
income level data can be assessed except for the Gross National Income (International Monetary Fund,
2018).

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Figure 16 below shows a comparison between countries based on their GNI and the size of the national
operator. Neither the number of visitors nor the GNI seem to play a role in the fleet size. However, all
sizeable airlines have a hub and offer connecting flights with the exception of Angola. A hub requires
modern infrastructure and organized ground services.
Figure 16: GNI vs. airline success
We believe that the average income level has little influence on the development of airlines in Africa.
We have compared GNI per capita of the countries with successful African airlines like Ethiopian,
Kenya Airways, Royal Air Maroc, Egyptair and TAAG Angola. The highest GNI per capita (USD
4,170) country, Angola, runs only one airline with 13 aircraft and on the other side Ethiopian Airlines
with the lowest GNI per capita (USD 767) boasts a strong and successful airline with a fleet of 95
aircraft.

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Although economic and social indicators are the ingredient of a successful airline industry, it is not the
recipe. A broader framework including the political and legal dimension are required for a lasting
outcome.
Financial exclusion
More than half of Nigerians has no access to payment systems. The Government is accelerating the
ongoing plans to revise the financial inclusion strategy. The target aims at reducing exclusion from 41%
overall (80% in the North) to 20% by 2020. Key priorities include developing reliable and inclusive
wholesale and retail payment systems, mobile money and agent expansion, combined with creation of a
harmonized biometric citizens’ database (International Monetary Fund, 2018).
Figure 17: Financial Inclusion

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Education
Airline clients are generally literate, pointing to the southern part of the country plus two cities in the
Centre-North: Kaduna and Kano. Literacy rates by state are listed in “Figure 18 - Literacy Rate by
State” below based on 2017 data.
Figure 18: Literacy Rate by State
> 90% 80–90% 70–80% 60–70% 50–60% 35–50% < 35%
The most populous and politically influential ethnic groups are: Hausa & Fulani 29%, Yoruba 21%, Igbo
(Ibo) 18%, Ijaw 10%, Kanuri 4%, Ibibio 3.5%, Tiv 2.5%. Tribalism is a major factor in socio-political life
in Africa and Nigeria is no exception. Africans are used to speaking in different dialects or languages, but
in the case of Nigeria, it has the advantage of English being both the official and the aviation language.
The principal religious groups are: Muslim 50%, Christian 40%, indigenous beliefs 10%. The country
has lived through some unrest originating in the far northern regions that do not seem to adversely affect
Nigeria’s daily business volume.
Labour unions
Labour unions are well represented in Nigeria, occasionally able to organize a strike in a sector (e.g.
transport) and even call for nationwide movements and protests. Labour unions pose a threat to the

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assets of a Lessor and disturb repossession as they have, illegally, the means to block access to the
aircraft and its records. Power of labour organizations may affect the operator’s performance and quality
of its maintenance.
T – Technology
Technology is a crucial part of the growth of any emerging economy and because the aviation industry is
internationally networked, Nigeria must keep up its technological advancements to compete in this
industry. Areas of importance are the technology availability to consumers of the airline industry, online
digitization of maintenance operations of lessees and analysing the aircraft fleet age to allow for
sustainable growth.
Telecommunications and Information and Communication Technology (ICT)
The Ministry of Budget and National Planning released a report in February 2017 (Ministry of Budget &
National Planning, 2017) to put forth the economic and recovery growth plan (ERGP) of Nigeria which
includes the subsectors of ICT as well as tourism. This will benefit the airline industry since many rely
on their consumers to purchase tickets through their mobile phones and apps. However, many travellers
still depend heavily on local sales offices or travel agents to purchase tickets. This current state of affairs
is linked to low credit card and alternative banking (mobile phone payment widely used in Tanzania,
Kenya, South Africa, Morocco) penetration rates (Adeshokan, 2018).
Maintenance
Another important technological factor to be considered is how MRO procedures are performed,
updated and documented by the operator. Digitization of maintenance allows real-time access to aircraft
status. If local operators cannot finance such technology, this may be a risk for the lessor to consider.
Maintenance records, compliance and monitoring systems are the prime reasons for African operators to
be blacklisted and barred entry into lucrative European and Western markets by the European Aviation
Safety Agency (EASA) or FAA.

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Fleet Age
As Nigeria develops its aviation industry and if local airlines choose to compete on a regional and
international level, they may need to consider the fleet age and technological advancements in their
aircraft. Under the Nigeria Civil Aviation Regulations, Part 4, Paragraph 4.2.1.2, article three states that
a commercial aircraft cannot be imported and registered if it is more than 22 years old. (Nigeria Civil
Aviation Regulations, 2015). Older aircraft will be cheaper to purchase upfront, so it might make more
financial sense to start an airline or expand in this way. However, newer aircraft are more fuel-efficient,
further decreasing operational expenses. Environmental laws in Nigeria may also affect future
operations. Countries have imposed night bans to minimize noise disturbance or charge noise fees on
older, noisier aircraft which are all addressed in the environmental section below.
E – Environment
The aviation industry in Nigeria has not prioritized the environment in the past. The environmental laws
and restrictions are currently quite limited. However, they must be considered on the long-run should
Nigeria decide to implement any new laws or restrictions in compliance with international global
standards. This will also affect operators using aircraft on regional or international routes.
Environmental laws in Nigeria
The existing law and regulations on aviation environment protection practice in Nigeria are under the
Nigerian Civil Aviation Policy 2013 and the National Environmental Standard Regulations Enforcement
Agency Act 2007 (NESREA), “however, these national laws and regulations have been observed to lack
commitment for implementation of international regulations on reduction of aviation emission”
(Murgan, 2018). Unfortunately, this allows Nigerian operators to continue to use high-emission aircraft
without any sanctions. Although this will not affect operations in the short-run, even if fuel consumption
is higher with older aircraft, the risk of international standards being implemented - be it for
environmental, political, competition or economic reasons - must be considered seriously. Even
countries with limited means to comply are the prey of lobbyists to push newer, more expensive
technology.

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CORSIA
The Nigerian Civil Aviation Authority has also stated that by 2021 Nigeria will join the International
Civil Aviation Organisation in the implementation of the pilot phase of the Carbon Offsetting Reduction
Scheme for International Aviation (CORSIA) (Ihua-Maduenyi, 2017). This plans to address CO2
emissions from international aviation through aircraft technology; operational improvements;
sustainable alternative fuel for aviation and a global scheme known as the CORSIA. However, the
reality is that the ability of the local operators to meet these targets may be unrealistic.
Noise pollution
Noise pollution is a first world issue. Many European airports enforce night ban on noise grounds. The
USA, generally considered immune to such problems, have capitulated in the Greater Los Angeles area
following lawsuits by airport neighbours during the last decade. The trend is clear, and Nigeria has been
working on implementing noise restrictions to meet international standards set by ICAO.
Implementation and enforcement of such noise limits may both benefit and be disruptive to the aviation
industry. Compliance in not always implemented towards the goals originally intended. Often, they are
used to single out competition using older, noisier aircraft. The aviation authorities may also decide to
implement such laws to promote their local operations and make it more difficult for competition to
access the airport, unless their noise limits are met. One of the risks a lessor may be facing is a limit on
emission that would only allow aircraft of the latest generation to be operated. The same has happened
in Europe with noise levels. (Banning late departures or enforcing night bans and levying noise taxes on
Middle Eastern airlines).
L - Legal
The legal environment of Nigeria provides both opportunities as well as constraints or challenges for a
prospective leasing business. Depending on how the leasing company is to be structured, if it is to be an
offshore leasing company or a domestic leasing company. The Industry practice is for leasing companies
to be created in tax beneficial jurisdictions that lease a fleet of aircraft globally. These, however, comes
with consideration of the specific legislation and regulatory structure of the country the aircraft may be
leased to operate.

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Regulatory Bodies
The key regulatory bodies in Nigeria are:
• The Federal Ministry of Aviation
This is headed by the Minister of Aviation and responsible for the implementation of the
country's international obligations, creation of policies that affect the industry, and the
establishment of airports (Nigeria Civil Aviation Regulations, 2006).
• The Nigeria Civil Aviation Authority (NCAA)
This is the key industry regulatory body responsible for licensing such as Air Transport License
(ATL), Airline Operating Permit (AOP), Air Travel Organiser’s License (ATOL), as well as
safety certifications like the Air Operators Certificate. It is also responsible for aircraft licensing
and registration, as well as the collection of specific statutory charges.
• The Federal Airports Authority of Nigeria (FAAN)
This is the government body created to develop, maintain and provide airports throughout
Nigeria including facilities for navigation, ground handling of passengers and cargo. With the
recent move to concession the airports in Nigeria, it is uncertain how the legal structure of
FAAN will be handled.
• The Nigerian Airspace Management Agency (NAMA)
This is the body responsible for the air navigation services and air traffic control. Similar to
FAAN the move of the federal government to concession the major airports may also include air
traffic control and as such, there is uncertainty regarding the legal structure of NAMA.
Lessors leasing aircraft to customers in Nigeria have to be familiar with the International Treaties that
have been ratified by Nigeria especially those regarding the registration of their interest in the aircraft
and local laws that may be applicable to such a leasing entity such as the tax laws. The lessors also have
to be familiar with the key regulatory bodies that govern the operations of aircraft within the region.
International Treaties & Legislation
The global treaties that have been ratified by Nigeria as a State are the Chicago Convention (1944), the
Geneva Convention (1948), the Cape Town Convention (2001) and the New York Convention of 1958.
Nigeria has ratified the Chicago, Geneva and Cape Town Treaties under the Civil Aviation Act (2006).
Nigeria is also a party to the Yamoussoukro Decision of 1999 for the creation of a Single African Air

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Transport Market. Presently only 23 states in Africa have signed the declaration (IATA, 2018b) of the
40 Governments that were present. The challenge in implementation of the African Open Skies decision
is due largely to the fear of unfair competitive behaviour when the decision is applied (Schlumberger,
2010) and gaps in the implementation of the decision.
The Cape Town Treaty Implementation
The legislative provisions under the Civil Aviation Act (2006) and the Nigerian Civil Aviation
Regulations, Parts 1-20 (2015) provides for establishment of a public aircraft registry which governs for
the registration, deregistration and export of an aircraft. Where lessors lease an aircraft to a Nigerian
operator or customer, in line with the Cape Town Treaty, the NCAA has made it mandatory for the
lessee to file an Irrevocable Deregistration and Export Request Authorization (IDERA) in favour of the
lessor, which gives the power to the lessor to export the aircraft without recourse to the lessee where
there is a default.
By virtue of the Cape Town Treaty, a security interest in an aircraft operated in Nigeria is recognised by
the authorities, however, where the aircraft is leased to a local operator, it may be imminent for the
lessor to also register the interest at the Corporate Affairs Commission. This is to protect the aircraft
from other creditors in the event of a bankruptcy of the operator. Under Section 414 of CAMA, where
insolvency proceedings are commenced against a company, no assets can be attached at that time.
Local Court Intervention
Where there is need to repossess the aircraft in case of a default the lessor is permitted to repossess the
aircraft through exercise of the IDERA. The lessee may, however, delay the repossession efforts through
court by seeking an injunction restraining the lessor from repossessing the aircraft pending the
determination of the case brought by the lessee. The lessee if influential may also seek the intervention
of the regulatory authorities, however, even though the NCAA or other authorities abide by the
Irrevocable Deregistration and Export Request Authorization (IDERA) filed, they remain bound by any
Court Order from the Courts, which has the powers to detain an aircraft.

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Statutory Fees
The lessor may also pay attention to all of the service providers of the aircraft, especially MROs. Nigeria
has also ratified the Geneva Convention which places priority of a charge over an aircraft out of which
expenses have been incurred in preserving or salvaging the aircraft (ICAO, 1948) Despite these
provisions, regulatory bodies such as the NCAA, NAMA & FAAN may take priority for enroute
charges, parking charges or other statutory fees that may have been accumulated on the aircraft. It is
therefore pivotal for lessors to monitor statutory payments to the relevant authorities.
Taxes Applicable to Leasing Companies
The taxes applicable to leasing companies with aircraft in Nigeria are:
• Stamp duty
This is calculated at fixed rates or ad valorem and is an application for all instruments or
documentation related to an act to be performed in Nigeria (Laws of Nigeria, 2003). This may be
the responsibility of the lessee and may affect the cost of leasing for the lessee.
• Withholding tax (WHT)
This is a tax applicable to rental payments on an aircraft situated in Nigeria. It is classified as an
advance payment of income tax deductible at source. The rate of 10% is taxable on dividends,
interest & rents on an aircraft. The payments are to be withheld by companies or individuals
making payments, in this case a lessee (Laws of Nigeria, 1995). The lease rental rate should
therefore be grossed up to cover such tax.
• Income Tax
The Companies Income Tax is chargeable on Non-resident Companies that derive some income
from Nigeria. The Federal Inland Revenue Service (FIRS) may apply a deemed profit rate of
20% on the turnover derived from Nigeria, which is then taxed at a rate of 30%.
• Capital Gains Tax
This tax may be applicable where there is a chargeable disposal of an asset like an aircraft at the
rate of 10%.
The key regulatory bodies have been identified as key stakeholders that may have relevant impact in the
ability of a lessor to repossess an aircraft in the event of a breach. Regulatory concerns of the lessor
resolve around the following key factors:

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Confiscation
Even though Nigeria is a signatory to the Cape Town Treaty and has ratified the treaty, the lessor might
still face the risk of confiscation or difficulty to export the aircraft where there is a default by the lessee.
This is possible where the lessee proceeds to court to get an Order to frustrate the export of the aircraft.
Even though the outcome may be in the favour of the lessor, especially where an IDERA has been
executed and filed at the NCAA Registry, the delayed court process of litigation may eventually
frustrate repossession efforts.
Increased Taxation
The taxes applicable to lease payments have not been increased from inception. There may be a low risk
of increase of such taxes prior to now, however, with the government drive to increase revenue collection
with less focus on oil & gas, there may be a government incentive to increase taxes.
Regarding taxes, it is crucial for the lessor to make sure that any taxes, VAT duty levies are borne by the
lessee, and that the lease paid is clear of such charges. The lessor is only responsible for taxes in its own
home jurisdiction based on income and must also investigate any double taxation treaty.
Civil Aviation Authority
The NCAA is responsible for the oversight of the aviation related activities. It grants licenses to ground
and flight operators against fees that must be passed on to the final product. Generally issued on
monopolistic or duopolistic basis they affect value to the airfare. This may also affect repossession of
the aircraft as should be a consideration of a lessor.
PESTEL Traffic Light Model
The country level factors extracted from the PESTEL will now be summarized into a tailor-made Traffic
Light Model that itemises the key risks and opportunities extracted from all layers of the business
environment. These serve as metrics that indicate the level of impact such a factor has on the business
exposure of the Fund investing in the Nigerian leasing industry. Each factor has a measure that is rated
green, yellow or red with further comments on the level of risk or available opportunity.