Airlines pivot to new funding models as bank loan rates surge

…United Nigeria Airlines launches first commercial paper in industry’s history

Nigerian airlines are turning to capital markets and state government partnerships to ease a working capital squeeze as high borrowing costs and rising operating expenses put pressure on their finances.

United Nigeria Airlines Company Limited has become the first domestic carrier to issue commercial paper, launching a N20 billion first tranche under a N100 billion programme, according to its September 2026 investor presentation.

The move offers an alternative to bank loans that analysts say now attract interest rates of between 29 and 35 percent, while commercial paper typically costs 22 to 26 percent.

Domestic carriers are accumulating substantial short-term liabilities, including more than N60 billion tied up in aviation fuel (Jet A1) financing. Their reliance on high-cost bank loans has added to the pressure on working capital.

According to its September 2026 investor presentation, which outlined its financial performance and five-year expansion strategy, the commercial paper will be issued in two series, with tenors of 270 days and 364 days. The proposed issuance is the first under the airline’s N100 billion commercial paper programme.

The transaction has Meristem Capital Limited as lead arranger, while Cordros Advisory Services Limited, Coronation Merchant Bank Limited, FCMB Capital Markets Limited, FSL Advisory Limited and Quantum Zenith Capital & Investments Limited are dealers. The airline is seeking to strengthen its financial position and expand its domestic, regional and international operations.

United Nigeria Airlines has also secured ratings from two rating agencies. Agusto & Co. rated it A3 for the short term and BBB- for the long term, with a stable outlook, while DataPro assigned the airline short-term and long-term ratings of A1 and BBB, respectively.

BusinessDay’s findings show that airline operators are also partnering with state governments to gain access to financing and guarantees. Financial institutions may be more willing to lend to state governments because of the legal and contractual obligations associated with government borrowing.

Airlines are using these partnerships to address challenges including inadequate maintenance facilities, a global shortage of aircraft and insurance constraints, which affect their ability to secure dry-leased aircraft from lessors.

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Some state governments have launched airlines that operate through existing carriers while completing their own certification processes.

Finding alternative models

BusinessDay’s findings show that Aero Contractors is working with Cross River State to operate Cally Air, the state’s airline. The state has two Boeing 737 aircraft operated by Aero Contractors, and the airline is in talks with the Cross River State government to acquire additional aircraft.

The latest example is the partnership between Enugu Air and XEJET. Enugu Air has designated XEJET as its operational partner while it completes its Air Operator Certificate (AOC) process.

XEJET has completed a variation of its operational approvals to include the EMB 170 aircraft in its Operations Specifications (OpsSpecs), in line with the Nigeria Civil Aviation Authority’s (NCAA) five-phase certification procedure.

Ibom Air, the Akwa Ibom State-owned airline, has partnered with Airbus and ordered 10 Airbus A220-300 aircraft. It has already received two aircraft. Ibom Air is also establishing a maintenance, repair and overhaul (MRO) facility intended to serve the African market, following the examples of EgyptAir, Ethiopian Airlines and Kenya Airways.

Ibom Air is also working with Airbus Consulting on a maintenance strategy covering the next six to eight years, which includes plans for full-scope A220 maintenance.

For Enugu Air, the airline said it is prioritising operational stability and service delivery before considering commercial paper as a source of funding.

Okey Nnake, chief financial officer of Enugu Air, said the airline is currently funded by strategic long-term partners whose financing arrangements match the long-term nature of aviation assets.

“Commercial paper is an excellent financing option that we will keep in view for the future. However, it also requires a mature foundation, including multi-year audited financial statements and established credit ratings,” Nnake said.

He said the airline would consider the instrument after establishing a consistent operational track record. Its immediate priorities, he added, were premium service delivery, operational excellence, route stabilisation and safety.

While commercial paper marks a milestone for domestic aviation financing, analysts emphasise that market debt is a funding tool rather than a complete solution to the industry’s long-term fleet financing needs.

Samuel Oyekanmi, head of research at Norrenberger, said commercial paper offers a cheaper alternative to bank lending rates of 29 to 35 percent, with commercial paper typically priced between 22 and 26 percent. However, he cautioned against using short-term market instruments to finance long-term assets.

“Commercial paper is cheaper. I’d call it a smarter use of the market than a fundamental fix. CP suits working capital and bridging, not aircraft. If CP proceeds fund fleet expansion, the airline will have to keep refinancing, and a bad market or a weak quarter could close that door,” Oyekanmi said.

Alex Nwuba, president of the Aircraft Owners and Pilots Association of Nigeria, commended the move but urged carriers to engage professional advisers to access international structured finance and leasing arrangements.

“Commercial paper can provide short-term working capital, but it does not resolve the underlying pressures of fuel prices, foreign exchange, and maintenance. Financial engineering and professional funding advisory should be as important to an airline as fleet planning and route development. The objective should be to secure capital at the right cost, for the right duration, and against a credible repayment plan,” Nwuba said.

Samuel Caulcrick, former rector of the Nigerian College of Aviation Technology (NCAT), highlighted the risk of currency mismatches, noting that airlines earn revenue in naira while heavy maintenance and aircraft leases require US dollars.

“Going to the market gives an airline room to breathe compared to rigid, high-interest local bank loans, but it is not a cure-all. Because Nigeria lacks major local MRO facilities, an unprogrammed engine swap requires massive USD liquidity. If an airline spends market capital on expansion without keeping a disciplined cash reserve, a single grounded engine can trigger a revenue death spiral,” Caulcrick said.

Olumide Ohunayo, director of research at Zenith Travels, praised United Nigeria Airlines for taking the lead in capital market financing, saying the model could attract other carriers if supported by strong revenue.

“With revenue growing toward N90 billion, this move shows United Nigeria Airlines is ready to invest and grow. Every option carries risk, but taking this path brings down funding costs. Other airlines should examine this model, especially when single-digit bank loans remain out of reach, while aiming for longer tenors to allow sufficient operational breathing room,” Ohunayo said.