African airlines: The state of the industry
Severe civil unrest sweeping across North Africa and the Middle East and the prolonged political crisis in Côte d’Ivoire, West Africa, have major implications for the African airline industry just when it seemed to be on the verge of an upswing.
The sudden collapse of the long-standing Governments of Tunisia and Egypt, the outbreak of virtual civil war in Libya and the political tension palpable from Casablanca to Cairo have resulted in a sharp downturn in the region’s economically vital tourism and travel business.
Consequently, North African carriers, such as EgyptAir, Libyan Airlines, Afriqiyah Airways, Tunisair, Air Algérie and Royal Air Maroc, are now battling with a myriad of new problems including a sharp fall in air traffic, load factors, fare yields and revenues, increased operational and security costs and excess aircraft capacity.
Ironically, in recent years, these carriers placed a significant portion of Africa’s total new Airbus, Boeing, Embraer and ATR aircraft orders and options. Talks are already underway between some airlines and manufacturers, and leasing companies, about aircraft delivery deferrals and even cancellations. In addition, aircraft lessors and financiers are on standby to repossess their assets in cases of serious default.
In response to the crisis, EgyptAir, for example, has postponed the launch of new long-haul services, deferred delivery of some new aircraft and sought to place aircraft out on wet-lease in order to cut costs. Meanwhile, Air Ivoire and other African and international carriers serving politically unstable Côte d’Ivoire, have experienced a fall in air traffic and revenues.
Citing strong economic and air transport growth on the back of more foreign direct investment and rapidly growing trade links with Asia, the International Air Transport Association (IATA) predicted in March this year that African airlines would break even in 2011 with profits slightly less than the US$100 million the region posted in 2010. IATA pointed out that African airlines face increased competition for lucrative business traffic from Middle East and other carriers.
On the plus side, airlines such as Kenya Airways, Ethiopian, South African Airways, British Airways/Comair, South Africa, as well as regional carriers such as Precision Air, Tanzania, and Fly540, Kenya, and South Africa’s low-cost airlines, Kulula, Mango and 1Time, all appear to be growing from strength to strength. It is hoped that the confidence exhibited by start-up carriers Senegal Airlines and Camair-Co, Cameroon, will be matched by prudent management and an avoidance of the factors which lead to the downfall of Air Senegal and Cameroon Airlines.
In Nigeria, Arik Air has established itself within a short space of time as the country’s leading airline, with the largest fleet, route network and revenues. It is now putting in place practices and procedures, including membership of the IATA Clearing House, which should enable it to interline with other carriers, rather than operate long-haul routes on a point-to-point basis, and ensure its aircraft are optimally utilised. Air Nigeria has shaken off its legacy as Virgin Nigeria and is steadily building its aircraft fleet and route network.
Generally, apart perhaps from Dana Air, most carriers in Nigeria are struggling with high debts and low morale, while foreign airlines diligently exploit this lucrative market. A financial bail-out plan for domestic airlines, backed by the Federal Government of Nigeria and Central Bank of Nigeria (CBN), is well intended – but needs to be well implemented.
With African economies currently growing faster than the global average, spurring a concomitant growth in air traffic, Airbus and Boeing, the world’s leading commercial aircraft manufacturers, remain optimistic about the African airline industry. Airbus forecasts that Africa will require 929 new aircraft worth US$107 billion between 2009 and 2028. Boeing predicts a demand for 710 new aircraft valued at US$80 billion from 2010 to 2029. Embraer, the regional aircraft manufacturer from Brazil, believes Africa will require 220 new aircraft in the 30 to 120-seat segment and 130 turboprop aircraft by 2029.
Funding Africa’s future aircraft fleet requirements constitutes a huge challenge for the continent’s carriers. In the best of times, many African airlines have struggled to obtain optimally-priced fleet financing, as well as aviation insurance. This is due to a combination of both real and perceived risks associated with African airlines in the international aircraft financing community.
Over the years, new aircraft purchases by African airlines have relied predominantly on financing facilities backed by international Export Credit Agencies (ECAs), rather than on traditional sources of debt. Operating leases, entailing the separation of aircraft ownership and operation, have also become increasingly popular in Africa due to financial necessity and the increased flexibility they provide to airlines.
The international Cape Town Convention provided African airlines from signatory states with a valuable discount on ECA funding terms. However, this concession is set to disappear with the new Aircraft Sector Understanding (ASU) signed early this year which supersedes the 2007 ASU. Essentially, the 2011 ASU sets out revised pricing terms and conditions for ECA funding which are far more onerous, with more costly lending, higher fees and a maximum 12-year repayment term, except in exceptional cases. Some aircraft deliveries previously notified to the Organisation for Economic Co-operation and Development (OECD) Secretariat in Europe may be ‘grandfathered’ (that is, financed under the earlier rules) but not many.
The importance of belonging to one of the global airline alliances is increasingly being recognised in Africa, but only a handful of carriers qualify. Kenya Airways has benefitted immensely from global network connectivity and enhanced revenues since it joined SkyTeam. Similarly, South African Airways and EgyptAir have sought to expand their market presence by joining the Star Alliance, with Ethiopian about to follow suit. Oneworld is yet to gain an airline member in Africa, although Comair, South Africa, is closely associated with it.
It is an African paradox that in spite of all the unrelenting talk of co-operation the continent’s carriers have in reality not yet achieved the desired level of collaboration. If they are to attain a critical mass and benefit from economies of scale it is essential that they work much more closely together.
– By Nick Fadugba
© Copyright 2012 Aviation Business Publications Limited