By Courtney Trenwith
On the surface, Africa’s aviation industry presents one of the most compelling investment opportunities, yet the continent’s national carriers have been unable to pick up speed under the force of government protectionist policies and outdated regulations. Other airlines are flying in but will they be able to break through the clouds?
With economic growth taking off and a burgeoning middle class, it would seem the African aviation market is a sure fire bid for long range prosperity. But the reality is keeping the industry grounded.
According to the International Monetary Fund, Sub-Saharan Africa will record 4.5 percent economic growth this year, rising to 5.4 percent next year. The improving fortunes are boosting business and millions of citizens are moving into middle income brackets — the typical commercial aviation customers.
“The aviation business moves with economic growth and as markets grow, aviation opportunities grow too, and that’s true in Africa,” Andrew Charlton, founder of Geneva-based Aviation Advocacy, says.
Yet more statistics paint a positive picture: Africa is home to 12 percent of the world’s people, but it accounts for less than 1 percent of the global air service market, according to the World Bank.
But, shockingly, the International Air Transport Association (IATA), the industry trade association, forecasts African air traffic to grow by only 10 percent between 2015 and 2020, compared to 40-50 percent in all other emerging markets, including the Middle East.
How can an industry with so much potential be flying so low? The answer is a Pandora’s box of problems, from protectionist policies to a lack of infrastructure and poor safety records that dissuade passengers from local airlines.
“As a generalisation, the African market is struggling at the moment,” CAPA Middle East and Africa senior analyst Simon Elsegood says. “This is due to a combination of protectionist policies favouring state-owned carriers, a lack of market liberalisation and competition, generally poor airport and air traffic management infrastructure and some stagnating major economies, such as Nigeria and South Africa.
“There is also the issue of charges and fees. Many African airports have expensive fees for aeronautical services - forcing fares up - and/or have state-appointed monopolies on ground handling and other areas. More competition in this area would not only lower costs, but it would drive service standards up for airlines and passengers.
“In addition, questions about safety, security and the strength of regulatory oversight linger in the region. Profitability is also poor. Most African airlines are expected to record losses this year.”
That is a long list of hurdles. Many African states have acknowledged the myriad problems and showed a willingness to address some of them as far back as 1988 when they supported the Yamoussoukro Declaration, in which they agreed to liberalise air services. That was followed up in 1999 with 44 African ministers responsible for civil aviation committing to deregulation and promotion of regional air markets open to transnational competition. It became fully binding in 2002 but progress has been barely measurable.
A 2010 study by Schlumberger found that abandoning national airlines would place countries in a better position to redirect state resources towards investments that have a greater positive impact on economic development.
Enhanced competition also would help lower transport costs, reducing a significant trade barrier and improving tourism. Twenty percent of Africa’s tourism-related jobs are supported by visitors arriving by air, compared with only 4 percent in North America, the Schlumberger report notes, highlighting the importance of a strong aviation network to support the broader economy. The greater economic development would in turn fuel further growth in the aviation industry.
Despite the protectionist policies, few African-based carriers have been capable of expanding their wings. Not only do their financial books look dire — Ethiopian Airways is the only national airline making a profit — but so too are many of their safety records.
According to IATA, African-registered airlines have had an atrocious accident rate compared to the rest of the world. In 2014, Africa recorded 11.18 accidents per million sectors, significantly higher than the world average of 1.92 and still three times the second worst region, the Middle East and North Africa (3.27). The 2014 rate also was worse than 2013 (7.12) but was a marginal improvement on the 2009-2013 average of 12.45.
Schlumberger’s 2010 report says safety will likely improve if African states apply bilateral sanctions against airlines that fail to meet safety standards established by the International Civil Aviation Organization (ICAO). In fact, Schlumberger said, this is what African air regulators agreed to do when they signed the Yamoussoukro Decision in 1999, but in many cases have failed to apply it.
Non-African airlines have been helping to fill the void. European countries, many of which have colonial ties, have been the most active but Gulf-based carriers are increasingly nosing in.
“The Gulf carriers are particularly well-suited to pursue these opportunities. They have the brands, the geography, the service, and the route networks,” Richard Aboulafia, vice president of analysis at Teal Group Corporation, says. “What they may not have is the fleets and experience needed to pursue smaller markets and to serve thinner routes. Emirates, for example, only goes after markets big enough to justify a twin aisle jet.”
Dubai-based Emirates has the most comprehensive African network of the Middle East airlines, flying to 19 countries. UAE national carrier Etihad Airways plans to launch its ninth African destination, Dar es Salaam, on 1 December, while Qatar Airways flies to 15 countries, including multiple destinations in South Africa and Tanzania.
In a statement announcing the launch of a four-times-per-week service between Entebbe, Uganda, and Abu Dhabi in May, Etihad Airways CEO James Hogan said it was in line with the airline’s strategy of targeting emerging markets, including connecting African cities with key business hubs in China and India.
Privately-owned carrier Air Arabia has begun to take advantage of the untapped potential in North Africa by establishing hubs in Mohamed V International Airport in Casablanca, Morocco, and Borg Al Arab International Airport in Alexandria, Egypt, although the number of direct flights offered so far is minimal.
Charlton says Gulf airlines are well placed, geographically, to grasp the African market; their routes already follow the same direction of African trade and people — east-west — compared to legacy European and North American airlines that focus on north-south travel.
“African airlines have something in the order of 45 percent of capacity between Africa and Europe — north-south — but only 20 percent of all seats that go east-west. The big winners with east-west traffic have historically been Gulf carriers, which are beautifully positioned for the China market,” Charlton says.
China is one of the fastest growing segments for African aviation, as the wealthy Asian state increases its investment and influence in the developing continent. China has been Africa’s largest trading partner since 2009, with bilateral trade increasing 5.5 percent year-on-year to $221bn last year. There are more than 2,000 Chinese-invested companies on the continent, employing more than 80,000 people, according to the China Daily.
The number of people flying between China and Africa has been growing by an average of 15 percent each of the past few years to about 1.5 million last year, according to China Southern Airlines. But fewer than 30 percent take direct flights.
Chinese airlines used to operate flights to Egypt, Ethiopia, Nigeria and Angola, but pulled out following the global financial crisis, citing financial and other reasons.
But they are moving back in. Under an order from the government to return to Africa, Chinese airlines are progressively launching direct routes.
China Southern, the largest Chinese carrier in terms of fleet size, became the only Chinese airline offering direct services between China and mainland Africa when it launched a Guangzhou-Nairobi service on 5 August. Air China followed with the first direct flights between Beijing and Johannesburg on 29 October, and between Beijing and Addis Ababa on 2 November.
In May 2014, Premier Li Keqiang proposed a China-Africa regional aviation cooperation plan, which includes encouraging Chinese enterprises to set up aviation joint ventures with African counterparts and jointly develop regional aviation in Africa.
China has reportedly signed official air service agreements with 17 African countries, including Ethiopia, South Africa and Tanzania and initiated other agreements with six African countries, including the Seychelles and Uganda.
There also are a handful of African airlines breaking through the clouds. Ethiopian and Kenya Airways are steadily expanding their fleets, network and revenues, and have earned respectable reputations as world class carriers.
South African Airlines (SAA) was once among them but has been wallowing in the red in recent years. The government has so far failed to approve any significant restructuring of the national carrier, but SAA has announced a plan to return to profit by saving $143m over three years by reducing costs.
Ethiopian remains government owned but it has managed to forge a consistent profit for more than a decade. In the year to June 2015, the airline reported a net profit of $170m, with $2.4bn in revenues. It has grown astronomically since 2009, when it recorded $300m in revenues, and aims to reach $10bn by 2025.
It is the largest carrier in Africa, with nearly 80 planes and a network of more than 100 destinations, and plans to grow to 150 by 2025. In the past four years, it has doubled its fleet of widebody aircraft to 30, and the number of long-haul destinations to 13, with expectations to double again in the next decade.
Ethiopian has focused its new routes on Asia and North America, and is now the sixth most dominant airline carrying passengers between Africa and North America, with 7 percent of capacity, according to CAPA. The airline’s base of Addis Ababa is well positioned to offer connections to Asia and Eastern and Central Africa.
Ethiopian also has the most direct seats of any airline in the increasingly lucrative Africa-China routes, according to CAPA. China is Ethiopian’s largest market by seat capacity, with nearly 10 percent, and the airline has plans to add capacity to key business centres such as Beijing and Guangzhou, as well as expand its code share partnership with China Southern.
Kenya Airways rivals Ethiopian as a fellow East African carrier. Its books have not been as glossy in recent years, however, it moved back into the black in 2014 with a small $4m profit.
It also has launched an ambitious growth plan, issuing additional shares in 2012 to help fund a doubling of its fleet to 107 aircraft by 2021. The carrier’s 10-year strategy is focused on the booming Asia-Africa market. However, it faces more geopolitical concerns, including instability at home, than Ethiopian.
“Kenya and Ethiopian are demonstrating they can be world class carriers,” John Strickland, director of JLS Consulting, says.
While the rest of Africa presents similar opportunities, even the most innovative private airlines are hamstrung.
Another analyst says that despite flourishing entrepreneurial skills in many countries, including Nigeria, Uganda and South Africa, none of them can be successful operating in an environment of inconsistent government approaches to business and commercial practices.
“Nigeria is a very rich entrepreneurial country but airlines come and go because of challenges so they can’t sustain their business long-term," the analyst, who preferred to remain anonymous, says.
Cheick Modibo Diarra, Mali’s acting prime minister in 2012, says poor management is to blame for African national carriers’ failure to achieve commercial success.
“Since the 1960s when most African countries became independent, most of them established national airlines - that was a mode of transportation. At this time, bad management skills, corruption and all of those things led to the failure of most of these airlines,” he tells Arabian Business.
“What is more important to me is not the nationalist way of thinking … [but] to give the possibility of citizens to freely move and to move their goods. It doesn’t make a difference to me if it is going by Dubai [carrier Emirates] or by somebody else.”
Emirates launched direct flights to the Malian capital Bamako last month and Diarra optimistically hopes the airline, one of the most successful in the world, will establish a hub in the West African state to help further connect it to neighbouring countries.
“[If a passenger is] going from Tripoli to Bamaku, sometimes you have to wait three days to get a flight directly and therefore it’s better to go straight to Dubai and then out again,” Diarra laments. “If they could organise those regional hubs on the ground … and decide okay, instead of there being every day a flight from here to Bamaku, here to Dakar, here to Tripoli, what I’m going to do is create a mini hub in Tripoli and have two or three planes carrying people from Algeria, or Morocco, or Egypt to Tripoli and then the big jumbo will take them on to Dubai. That will enable Emirates to create the aircraft infrastructure needed for these countries to hop among themselves, and I believe it will be very beneficial financially for them because it is a continent that is absolutely full of people who want to travel but who can’t.”
It may be fanciful to imagine Emirates — the world’s largest operator of the 500-seat A380 and Boeing’s 777 fleet, with capacity between 350-440 — accepting the viability of an inter-Africa network, but the opportunity stands for a carrier to fulfil.
Diarra, though, becomes pessimistic at the prospect of Africa being left to fly its own flag.
“Yes those countries, of course, should be looking at doing that themselves. But these countries have been independent for 55 years — why haven’t they done it yet?” he says.
The market is clearly ready for take-off but who will get on board?