The past two decades have witnessed a substantial development of air transport services in Africa with the annual growth in passenger and freight traffic on African routes consistently remaining above the world average.
The International Civil Aviation Organisation (ICAO) puts the average annual growth in passengers and freight in Africa from 1972-82 at 11.3% and 13.3% respectively, compared to a world average of 7.4% and 7.5%. The number of passengers carried on international scheduled services to, from and within Africa between 1977 and 1982 reached a total of 18.7m, while Africa’s traffic RPKs between 1978-83 grew by 67% compared to a world average growth rate of 38%.
But despite this growth, in global terms, the continent’s volume of air traffic remains modest and Africa does not feature prominently in the big league of civil aviation. Europe, with less than twice the population of Africa (including the USSR) has more than 12 times as much aviation activity. On routes linking East and West Africa to Europe aircraft operate 18% to 40% fewer hours per day than North Atlantic carriers.
At present, the individual output of British Airways, Air France, Pan Am and Lufthansa each exceeds the total output of African operators. In 1980 scheduled air traffic of African members of ICAO represented only 2.69% of the world total. In 1982 Africa’s total revenue passenger miles was just 2.8% of the world total of 675.6 billion RPMs.
The world recession, low commodity prices, insufficient foreign exchange, weak domestic economics, huge external debts, high fuel prices and interest rates, competition from larger, better-equipped foreign carriers and inadequate co-operation among themselves have all adversely affected the performance of African airlines. Unit operating costs in Africa are higher, too. In comparison with North Atlantic carriers airlines on the West Africa-Europe and East Africa-Europe routes in 1983 experienced 31% and 37% higher operating costs, respectively. Maintenance and overhaul costs on these routes were 12% above the world average and over 20% above comparable figures for North Atlantic operations.
Since 1970, fuel prices in Africa have increased more than 13 fold and on some African routes are 37% above the world average. Fuel costs on air services within Africa represent over 37% of total operating costs, compared to a world average of 25.4%.
Of the 70 international air carriers based in Africa in 1983, employing almost 92,000 people, 48 offered scheduled services while 19 of the remaining 22 were all-cargo carriers. In addition, Africa was served by 48 scheduled airlines – from Europe (27), the Middle East (10), Asia and the Pacific (6), Latin America and the Caribbean (3) and North America (2). This excludes the many non-scheduled carriers, mainly based in Europe, operating charter flights to many parts of Africa, particularly to tourist destinations.
Today, Africa’s state carriers constitute nearly a quarter of IATA’s membership. North African countries account for a major share of the region’s total passenger-kilometres, highlighting Africa’s very unevenly distributed air traffic. In 1983, EgyptAir performed more than 3,251 million international scheduled passenger-km; Air Algérie over 2,025m; Royal Air Maroc 1,665m and Tunis Air 1,546m. In comparison, Air Rwanda carried only 9,674 passengers in 1981.
Air Afrique, the 24-year old multinational airline owned by 10 French-speaking African countries and the French airline UTA, performed 2,083m international scheduled passenger-km in 1983 and distinguished itself as the continent’s foremost cargo carrier, notching up a total of 187.3m scheduled freight tonne-km. But mid-1984 debts of US$234m, resulting in large staff and salary cuts, have plunged the airline into industrial turmoil.
Nigeria Airways’ domestic passenger and freight services have been adversely affected by the nation’s general decline in economic activity, high fares, and stiff competition from private airlines and have witnessed a decline. The airline’s African routes, however, saw a sharp rise in passenger and freight traffic in 1983 owing to the Government’s mass expulsion of illegal immigrants, but the rise on its other international routes was much smaller.
Re-equipment programmes
Today, African carriers urgently need to acquire new planes which drastically cut down on fuel costs and meet new noise regulations in Europe and the US. Passengers also desire more comfortable wide-bodied aircraft. McDonnell Douglas calculates that by 1998 African airlines will need 80 110-passenger seat short-range, 41 160-seat short-range, 26 200-seat medium-range, 11 270-seat medium-range, 19 270-seat long-range, five 400-seat medium-to-long-range and five 600-seat medium-to-long-range jet aircraft. Industry sources put the total cost of these 187 units at between US$5bn and US$6.25bn.
The continent’s surfeit of 707s and DC-8s are prime contenders for replacement and Boeing and Europe’s Airbus Industrie are locked in a herculean battle to push sales of their respective 767ER and A310. Both manufacturers have embarked on major sales drives throughout Africa each stressing the advantages of their different ranges of airliners and, significantly, offering complete financial “guidance”.
The US ExIm Bank played a vital role in EgyptAir’s recent purchase of three 767ERs and Ethiopian Airlines’ purchase of two 767ERs. Boeing hopes these sales will sway other countries in favour of the aircraft. As a further incentive it points out that Ethiopian Airlines, recognised as one of Africa’s most successful operators, will soon offer complete technical support to other African airlines which acquire the 767, as it does in the case of 707s, 720s, 727s and 737s.
In August 1983, ExIm Bank said it would guarantee a US$49.3m private loan to Air Algérie to enable the airline to purchase three Boeing 737s. The airline was asked to make an initial cash payment of US$8.7m, in return for a loan to be provided by the Private Export Funding Corporation (PEFCO), New York. So far, Airbus has sold 16 A300s and six A310s in Africa, the main customers being EgyptAir, Libyan Arab Airlines, Nigeria Airways, Air Algérie and Air Afrique.
McDonnell Douglas (MDC) went to great lengths to help Zambia Airways secure finance to purchase a new long-range DC-10 last year, making it the sixth African airline to select this wide-body. MDC hopes the Zambian transaction will lead to other members of the Southern African Transportation Co-ordinating Commission (SATCC) ordering the trijet and, to encourage this, it supports the establishment of a regional DC-10 maintenance centre based in Lusaka. Tellingly, Zambia Airways almost opted for the 767ER, but the finance package cobbled together by IACO, Ireland, and Chemical Bank, USA, clinched the deal in favour of the DC-10.
A few years ago, Nigeria decided that loans to purchase new aircraft for the national airline should be arranged locally, but this proved unsuccessful and foreign banks were subsequently asked to arrange a syndicated loan to overcome fleet financing difficulties. Eventually, a US$70.25m loan was co-ordinated by Chase Manhattan, National Westminster and five other banks to enable the much-delayed purchase of four 737-200s for use on Nigeria Airways’ domestic services.
Last year, Nigeria obtained export credits totalling US$206m from a German, French and British banking consortium to finance the purchase of four A310s. The credits, repayable over 10 years, attract a 10% rate per annum and include provision for the financing of spare parts to the value of 18% of the total contract price.
This year, Kenya Airways is expected to take a firm decision on whether to buy new wide-body aircraft or to refurbish its ageing narrow-bodies. It has already obtained a preliminary commitment from ExIm Bank on a proposed financing package to cover the purchase of two 767ERs. AIr Zimbabwe also desires a wide-bodied jet, but has recently been incurring heavy losses and has insufficient capital reserves. It is understood that the airline is scouting round for a suitable finance package to finance the purchase of long, medium and short-haul aircraft.
The Economic Commission for Africa and ICAO say that the commercial transport fleet operated by Africa’s international carriers rose from 363 aircraft in 1978 to 525 in 1983, an increase of 45%. The number of jet aircraft increased by 72%, rising from 201 to 346, including 57 wide-bodies, which now comprise two-thirds of the total fleet. The most commonly operated types were the 737 (86), 707 (72), 727 (52), 747 (23) and Airbus A300 (21). The 121 freighter or combi aircraft comprise 23% of the region’s fleet, among the highest proportions in the world.
As for Africa’s 110 seat-and-under turboprop aircraft needs this lucrative market is still wide open with Fokker, British Aerospace, de Havilland, Aerospatiale/Aeritalia, Dornier, Embraer and Saab-Fairchild all eager for a slice of the market. An Aerospatiale/Aeritalia projection puts the potential 20-70 seat turboprop market in Africa between 1983 and the year 2000 at 354 units.
Finance
Total operating revenues for the region’s airlines increased at an average annual rate of 19% from 1972-82, amounting to US$4,080m in 1982. On the other hand, total operating expenses also increased at an average annual rate of 19% during the same period, amounting to US$4,220m in 1982. The delicate fluctuation between profit and loss meant an overall operating result for the decade being close to zero. To compound matters, non-operating expenses consistently dwarfed revenues and, thus, the region’s total net results were negative. Both on routes to Europe and within Africa the revenue/cost ratio for African airlines was just 0.90.
Stringent exchange controls imposed by some African countries have led to severe currency remittance difficulties and cash flow problems for airlines resulting in temporary or permanent withdrawal of some services. Of the total US$850m remittances outstanding at July 31, 1984, IATA says African countries were the predominant source of transfer problems, accounting for US$450m.
In Zaire, however, all airlines have now transferred, without any exchange losses, funds going back to 1977 and current sales are fully protected from currency exposure. IATA also mentions Tanzania as another African country in which positive results have been achieved. An estimated 25% of blocked revenues in Africa is actually owed to African airlines which, because of their fragile financial situation, have been worse hit by exposure to non-transferrable currencies than their foreign counterparts.
Insurance liability premiums for African airlines also increased by 65% in 1978-83 compared to a world average of 24%. African officials complain that their airlines are not getting a fair deal from foreign insurance companies. For their part, insurers attribute these higher-than-usual hull and liability premiums to what they term as the ‘peculiar risks’ of the African air transport environment. They also cite the “inadequate track records” and “poor safety records” of African operators, claims which are vigorously disputed by airline executives in Africa. The total hull value of world airline jet losses in 1983 was US$305.6m of which African losses amounted to US$35.2m.
The impact of high interest rates, volatile exchange rates and currency devaluations on the balance sheets of African airlines should not be under-estimated either as they now constitute a major expense item. Africa’s total external debt in 1983 was about US$150bn and the average debt service ratio (debt repayments as a percentage of export earnings) for the continent’s 50-odd nations was between 30% and 40%. But it is feared that the most impoverished countries could face debt-service ratios of up to 80%-90% for the rest of the decade. With most of Nigeria’s US$15bn-plus external debt denominated in US dollars and annual interest estimated at US$1bn, a one-point rise in rates adds US$100m to its bill.
While state-owned African airlines, as international “flag-carriers”, are often a source of national pride and prestige, they have in many cases proved extremely expensive status symbols existing primarily on state subsidies. This has led to calls for such airlines to be privatised.
Last year the Government of Zaire was forced to intervene to save its heavily-indebted national airline, Air Zaire, from bankruptcy. As part of a “rescue programme” the Government is now prepared to sell 35% of Air Zaire’s equity to outside investors. In 1982, Alia, the Royal Jordanian airline, obtained 20% of the share capital of Sierra Leone’s national airline, with the Sierra Leone Government subscribing to 60% of the capital and Sierra Leone citizens 20%.
In Sudan, the national airline was disbanded by decree in 1983 and converted into a private company. The Government took over the assets and liabilities of the old airline and said shares of the new one could be held by both national and foreign private investors. Even in Nigeria there have been moves to partially privatise the national carrier, Nigeria Airways.
In March, 1983, President Shehu Shagari’s civilian Government proposed the sale of 40% of Nigeria Airways’ capital to the public, with 9% reserved for the staff and a 51% interest retained by the Government. However, the civilian administration was overthrown in a coup d’état on December 31, 1983, and the new military regime has not yet taken any firm decision on the share flotation scheme.
The supportive role played by foreign export credit guarantee agencies has been crucial in assisting African airlines to purchase new aircraft. America’s ExIm Bank, the Netherland’s NCM, Britain’s ECGD, France’s COFACE and West Germany’s HERMES have all provided air finance and risk management services to African countries. Prominent among the commercial banks engaged in air finance in Africa include Citicorp, Chemical Bank, Bankers Trust, National Westminster, Chase Manhattan and the European American Bank.
Most African airlines would prefer to purchase outright new aircraft as a means of building up valuable equity to be used as collateral to help finance further development but, for obvious economic reasons, this has often not been possible. Consequently, leasing has become a common air finance technique in Africa, permitting under-capitalised airlines to acquire fuel-efficient, new technology equipment at a lower cost than that at which they could borrow funds for an outright purchase.
Some recent aircraft acquisitions by African airlines, such as Zambia Airways’ new DC-10-30, have resembled operating leases but are actually long-term lease purchases with the airlines entitled to a fixed price purchase option on the aircraft upon contract expiration. Wet-leasing is a common practice in Africa but is increasingly becoming a hot-potato due to the high costs involved.
One proposal by the African Civil Aviation Commission (AFCAC) is to set up a financing agency for African airlines under the aegis of the African Development Bank, in Abidjan, to offer long-term loans at low interest rates for fleet modernisation. The idea of establishing African aircraft lease agencies offering lower lease rates and eliminating positioning costs has also been floated. Whether such African agencies will go it alone or decide to team up with established international air-finance bodies remains to be seen.