Dubai Air Show

African Airlines Struggle As Governments, Airports Welcome World’s Airlines

 - November 15, 2013, 1:30 PM
Experts say African airlines such as Ethiopian Airlines (below), currently the most profitable among the four best-performing national carriers–the other three being Kenya Airways (above), Egyptair and South African Airlines–need to cooperate more on business strategy if they are stop losing market share to European, Middle Eastern and even U.S. carriers.

Africa’s airlines need to wake up to competition from outside the continent, form alliances that allow players both big and small to interact for the greater good, and realize that governments are often no longer interested in protecting domestic carriers (as they see economy-boosting tourist arrivals as a more important priority), according to Nick Fadugba, CEO of African Aviation Services. “Africa’s aviation industry is now at a critical juncture,” he said. “The ability of African airlines to bring in large volumes of tourism and business traffic is not meeting the expectations of some governments in terms of their economic requirements; that’s why foreign airlines are playing an important role in helping to grow Africa’s economy.”

Fadugba cited a recent example to underline the newly competitive winds of change. “The Kenyan government recently welcomed the introduction of services to Nairobi by Qatar Airways, even though it partly owns Kenya Airways. [It] recognizes that Kenya Airways alone cannot bring in all the tourists, traders and business people required to drive the Kenyan economy. Most African governments now want to drive economic growth rather than simply protect their national airlines.”

Fadugba said African airlines need to cooperate more on MRO, training and safety, as well as business strategy. Although market size is growing, the share of air traffic carried by African airlines is diminishing, he said. “If African airlines don’t change their business strategy they will continue to lose business and market share, especially to European and Middle East carriers–and even to U.S. carriers, which are once again making in-roads into Africa.”

Fadugba singled out the national airlines of Ethiopia, Kenya, Egypt and South Africa as the continent’s best-performing national airlines. “It depends how you grade them. In terms of profitability, Ethiopian Airlines is definitely ahead of everybody else. It made a net profit of around $140 million in its last financial year and is more profitable than any other airline in Africa.”

Kenya Airways, though not profitable in the past two years, has made progress with fleet and route development, and has dovetailed its network with partner KLM. Fadugba praised EgyptAir for the quality of its fleet, “first-class” aviation training and MRO facilities in Cairo. “Fundamentally, it is a very strong airline and plays a crucial role in supporting the country’s vital tourism industry.”

South African Airlines (SAA) for decades had the highest turnover, but now faces growing competition on long-haul routes from European and Middle East airlines. “The airline is 100 percent owned by the government of South Africa which has shown it is committed to the airline through significant financial support. This is due to the critical role SAA plays in supporting South Africa’s economic development. The airline is implementing a new turnaround plan and hopefully this will work,” Fadugba said.

He pointed to the implications for Royal Air Maroc of the government’s decision to attract more tourists to the country. Their arrival was benefiting Morocco, but had outgrown RAM’s ability to serve them. “[The airline] now faces much more competition. Low-cost carriers such as Ryanair, easyJet and Air Arabia have all grown their market share in Morocco. The fact is that liberalizing your economy puts your national airline at a disadvantage. It’s a conundrum,” he said.

Nigeria’s strong economy makes it one of the largest airline markets in Africa. “Today, all the airlines [there] are private-sector driven,” said Fadugba. “Many of them are small and underfunded. The largest airline to emerge is Arik Air, which has by far the biggest aircraft fleet, route network and turnover. It has more than 25 modern aircraft, including Boeing 737-800s and Airbus A330s. It is doing reasonably well and has a few international routes such as London, New York and Johannesburg. That notwithstanding, it’s a hard slog for Arik to compete with the major international carriers.”

The government of Nigeria could launch a new national carrier, but no details have yet been disclosed publicly. “The fact is that non-Nigerian airlines currently carry about 98 percent of all air traffic to and from Nigeria. This [causes] huge capital flight and financial drain on the economy,” Fadugba said.

Turning to low-cost carriers, he said Fastjet’s emergence was a “positive development. An airline in Africa using a neutral, common brand not associated with a particular country is a brilliant concept. Every nationality in Africa can buy into the brand and not feel threatened by it.” However, he added that the airline needs to gain access to markets beyond its base in Tanzania and find sufficient funds to support its airline operations during its early years.

Continent-wide success was not assured. “Don’t forget, launching a pan-African airline requires substantial funds and it will be difficult to implement a low-cost strategy in a high-cost environment such as Africa. Fastjet will experience a high cash burn before it turns cash positive. It has to be careful in selecting partners and should expand gradually rather than bite off more than it can chew.”

Fadugba said global airline alliances could be replicated in Africa, where the concept is not new. He cited the example of Air Afrique, the erstwhile pan-African airline owned by around 10 African countries, with Air France as a shareholder, but which was liquidated around 10 years ago. “It was based in Cote d’Ivoire, but eventually went out of business because the owners couldn’t agree on a successful strategy. Each member country wanted their capital city to be a hub airport, but this was not practical from an airline economics perspective. Everybody wanted [it] to fly from their capital direct to Paris [which didn’t make sense]. This…led to [its] downfall.”

Open Skies

Fadugba cited weak implementation of pan-African interregional “Open Skies,” called for in the 1999 Yamoussoukro Decision, which built on the similarly named declaration of a decade earlier. “The fact is that African airlines cannot expect to be protected forever. The way of the world today is air transport liberalization and open skies. Indeed, Africa has itself been trying to achieve this objective through its Yamoussoukro Decision, which has yet to be implemented fully. In essence, this is a legally binding decision to liberalize the skies in Africa, but very few governments are complying with it. There’s nobody enforcing the agreement and this needs to be addressed.”

Uganda’s open skies policy has shown that liberalization can succeed and that it has numerous economic benefits. “Uganda is one of the few African countries that is [truly] implementing the Yamoussoukro Decision on air transport liberalization,” said Fadugba. “Any airline can fly there. That’s because they don’t have a government-owned national airline to protect. In contrast, some countries in other parts of Africa strictly regulate access by foreign and African carriers to their markets.”

He said African airports had a completely different perspective to African airlines. “African airports are pleased to welcome as many airlines as possible, no matter where they come from. Hence, African airports have warmly welcomed Emirates, Qatar Airways and Etihad [and others]. They are gaining additional revenue from airport charges and landing fees. It’s a bonanza for African airports.”

Fadugba said the Chinese were investing heavily in aviation infrastructure, calling the new airport built by China’s Anhui Foreign Economic Construction Co. in Maputo, Mozambique, a “world-class facility. The Chinese are newcomers in terms of investing in African aviation. Of course, they may be doing so to gain access to mineral resources. But, from an African perspective, China represents a new source of investment, which can be harnessed for economic development. By comparison, very few companies from the U.S. are building and funding airports. So funding from China is helping to achieve airport modernization in many African countries.”