Will the Gulf answer African aviation's SOS?

Africa’s aviation sector is buckling under the strain of economic and political pressures. Gulf carriers will have a major say in the future of the industry
Passenger traffic in Africa rose 9.8 percent during May — the second highest rate for any region, according to IATA.
By Daniel Shane
Sat 13 Jul 2013 11:14 AM

Africa is home to more than 1 billion people across 54 countries and is for the next two years forecast to see record levels of foreign direct investment and an average rate of GDP growth double that of the rest of the world.

With foreign trade and disposable incomes also on the up, one could expect the continent’s aviation sector to be a main benefactor of this boom.

Nothing could be farther from the truth.

High costs have been the crux of the problem, caused by a combination of punitive airport fees charged by national governments keen to protect their own carriers, and sky-high insurance premiums due to poor safety records and soaring fuel costs.

Demand for air travel in the continent is clearly there though. According to figures from the International Air Transport Association, passenger traffic in Africa rose 9.8 percent during May — the second highest rate for any region.

With carriers from outside the continent, including those in the Gulf, willing to step in and fulfil long-haul demand, Africa’s operators are increasingly re-tooling their strategies in order to survive. But while Gulf airlines are one of the biggest threats facing the industry, they are also one of its greatest opportunities.

Kenya Airways is sub-Saharan Africa’s third largest airline, following South African Airways and Ethiopian Airlines. It boasts a relatively modern fleet — including orders for nine Boeing 787 Dreamliners — and a network of more than 50 destinations across Africa, Europe, India and the Far East.

In its most recent financial year, the carrier posted a worse-than-anticipated loss of 7.9 billion Kenyan shillings (KES) ($92m), following a net profit of KES1.6bn the previous year. The shock deficit was partly caused by travel warnings issued by European Union countries during recent presidential elections, as well as the fallout of military operations against Islamic terrorists in neighbouring Somalia.

As a result of dwindling traffic through Europe, Kenya Airways has cut its capacity on these routes by more than a fifth. To counter the effect of this, the airline is increasingly looking to new markets as it seeks to develop Nairobi as a hub through which to channel traffic to underserved destinations in eastern and southern Africa.

The Gulf is a big part of this strategy. The airline flies to both Dubai and Abu Dhabi, both cities with large African expat populations, and also has in place a codeshare deal with Etihad Airways, the UAE’s cash-rich flag carrier.

“[The Gulf is] a great area to focus on for a number of reasons. Whether we like it or not, the Middle East has changed the whole movement of traffic between the East, the West, the South and the North,” Dr Titus Naikuni, group CEO and managing director at Kenya Airways, tells Arabian Business. “If you look at our location [in Narobi], we’re in a very attractive location in terms of captive traffic, but we may not have the infrastructure.”

Jomo Kenyatta International Airport, which can handle about 5 million passengers per year, is currently undergoing about $100m worth of work to almost double its passenger capacity and will also build a second runway.

Naikuni says that Kenya Airways is looking to refocus away from Europe onto markets that better reflect the strengths of East African economies. For one, the airline has increased capacity on its routes into China — now the biggest foreign investor in Africa — and is also seeking to capitalise on East Africa’s emerging status as a leading exporter of food and labour to the Gulf. “East Africa is also endowed with good education in terms of English, but high unemployment, but that works out well to be a supplier of labour — like India is doing,” he adds.

Kenya Airways is also attempting to reposition itself to better serve traffic that terminates within the African continent and is seeking to set up a low-cost carrier later this year. To this end though, the airline has found political opposition among protectionist national governments to be a bugbear. “This is a very political business. If you go in to some countries for instance, you won’t be allowed to operate due to licensing issues and all that,” Naikuni says.

While in some aspects Gulf airlines are complementing the networks of African carriers, in others they are pure competitors — most ostensibly in long-haul traffic.

Abu Dhabi-based Etihad Airways at present operates seven continental destinations — including Johannesburg, Nairobi and Lagos — and recently signed a major code-sharing deal with cash-strapped South African Airways, which itself has been forced to cut back on long-haul services.

“Next to the BRIC countries, it is a main growth market, with fast-growing economies, wealth and foreign investments from China and other countries,” Etihad’s CEO James Hogan was quoted as saying in June this year.

Dubai’s Emirates Airline, one of the world’s biggest international carriers, has similarly sharpened its gaze on Africa. Emirates has a huge network across the continent, including destinations such as Addis Ababa, Accra, Dakar, Lagos, Harare, Nairobi and Dar Es Salaam.

Saj Ahmad, chief analyst at StrategicAero Research, says that the African market provides a huge opportunity for Gulf carriers, although their success in the continent will likely come at the expense of indigenous providers. “African carriers will definitely be negatively impacted by Arabian airlines. But on the flip side, passengers will gain access to a wider global network and with better competitive fares versus what African airlines might charge,” he says. “It is an untapped market, but it is restricted by poor infrastructure and chronic capacity constraints.”

This final point is one that Emirates appears to agree with. “Intra-African demand is huge but [African carriers] restrict themselves,” the airline’s President Tim Clark was quoted as saying. “Africa is a powerhouse. We are moving African business that has demand for the points that we serve. I am not unsympathetic but they need to improve infrastructure and market access.”

StrategicAero’s Ahmad says that the Arab world’s ‘big three’ airlines — Emirates, Etihad and Qatar Airways — are increasingly seeking to serve long-haul passenger traffic that begins in Africa and terminates outside the continent, via one of their Gulf hubs. This strategy also has the effect of cutting African airlines out of the loop. “They will certainly be looking to poach high-fare, high-yield passengers and connect them via their Dubai, Doha and Abu Dhabi hubs to anywhere in the world, bypassing Africa altogether — and also bypassing the likes of Kenya Airways and Ethiopian Airlines,” Ahmad adds.

He believes that African airlines should seek to align themselves with one of the Gulf carriers, much like Kenya Airways has done with Etihad, and complement their long-haul networks with shorter-haul services in underserved parts of Africa. Ahmad says that Etihad in particular will seek out more codeshare deals in the continent, but does not expect that airline to actively seek out equity stakes in African carriers, which has been a key strategy for it elsewhere in the world.

“African airlines do not represent good value for money. Just because they are cheap doesn’t mean the chequebook needs to come out,” Ahmad believes.

One airline that is currently seeking partnership with a Gulf carrier is Tanzania’s FastJet. Set up by easyJet founder Stelios Haji-Ioannou, FastJet began operations this year and is the continent’s first budget airline. It currently serves only domestic locations, but has successfully applied for flying licences in Kenya, Angola and Ghana, and is also partnering for a new regional airline in Nigeria.

“[Emirates] are keen to establish relationships with third-party airlines that can either feed into, or move on passengers that they bring into that country. We certainly see these sorts of relationship growing in the short term,” says Richard Bodin, chief commercial officer, FastJet.

Bodin agrees that protectionism has historically been a burden on Africa’s aviation market, but argues that this has started to change in recent years with the continent’s newfound wealth. He says that there is an impetus in the region to move towards an open-skies policy.

“The wealth that has been generated by governments in the last ten years — particularly mineral and oil finds — that’s beginning to cascade to the population,” he believes. “So we have to try and make sure the governments and the industry realise the benefits of a free and open trade environment.”

Bodin, who was formerly an executive at the UK’s easyJet, says that the influx of carriers from the Gulf into the continent has created a pivotal juncture for African aviation, one which not everyone will survive.

“The strong ones will survive and grow. We can collectively list two or three airlines in Africa that we have a lot of respect for. The ones that are still stuck in the 1980s in terms of how they treat their passengers and how they treat their fleet growth, they will struggle,” believes Bodin.

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