African Airlines ‘Right-Size’ Their Way to Prosperity

 - April 2, 2013, 4:10 AM

The success enjoyed by outside players in providing capacity to Africa has meant regional and domestic business has assumed ever-increasing importance not just for Africa’s indigenous airlines but for the continent’s economic growth as well. The tremendous distances between population centers and the lack of convenient and reliable roads also make Africa a bumper opportunity for suppliers of regional jets with seating capacities of around 100. “Right-sizing,” a term OEMs use to describe the replacement of mainline narrowbodies with regional jets, first in North America and Europe, now applies to Africa as well, as the dream of owning fleets based on 180-seat Airbus and Boeing aircraft proves increasingly unworkable.

Over the past four years regional air traffic in Africa has grown at an average rate of 30 percent. In 2007, domestic and intra-regional services combined accounted for only 46 percent of total traffic, according to the African Airlines Association (AFRAA). By 2011 the figure had grown to 62 percent, while domestic and intercontinental traffic both fell over the same period.

Some 88 percent of flights in Africa depart with fewer than 100 passengers, Embraer data for the first three quarters of 2011 shows, while load factors fell to a nadir of 67.2 percent by last July. Further opportunity lies in the fact that about half of the 30- to 120-seat fleet in Africa is more than 20 years old. Looking ahead, Embraer calculates that over the next 20 years African airlines will take delivery of 210 commercial jets carrying up to 120 seats, and that airplanes in the 91- to 120-seat category will account for two-thirds of the total.

A Ripe Market for Manufacturers

Embraer now counts 30 E-Jets in operation and 19 on order by African carriers, as well as 38 ERJ-series regional jets on order or scheduled for delivery on the continent. Standout customers include Egyptair Express, Kenya Airways and South Africa’s Airlink, all of which own, or will soon own, more than 10 Embraer aircraft each.

Kenya Airways in many ways serves as a poster child for Embraer’s E-Jet line, as it attempts to fulfill a promise to fly to every African capital from Nairobi this year. “In the under-100-seat range, this is purely E-Jets for now and so too for the order book,” said Mbuvi Ngunze, the airline’s COO. Starting with four E190s in service in 2011, it has since expanded its 100-seat-class Embraer fleet to nine and plans to add another seven by next year, while reducing its E170 fleet from five to three over the same period. Plans call for routes flown by the E190 to increase from 14 to 33, while weekly frequencies increase from 55 to 315, daily utilization from 6.9 to 10.1 hours and cycles per day from 4.4 to 6.5.

Bombardier, meanwhile, counts orders for 42 Q400 turboprops and 46 CRJ-series regional jets in the region. RwandAir became the first African airline to own the CRJ900, when it took delivery of two from Bombardier in October. Other important Bombardier customers include South African Express, Libyan Airlines and Ethiopian Airlines, which in December took delivery of its tenth and final Q400. Another three Q400s have gone to Ethiopian’s Togolese affiliate, Asky.

“The majority of flights in Africa carry between 110 and 140 passengers, and more than 60 percent of single-aisle aircraft flights leave the gate with between 80 and 130 passengers,” said Raphael Haddad, Bombardier’s vice president, sales, Africa and Middle East. “The CSeries, with 110 to 145 seats, is the right size for these circumstances and drives optimal load factors and frequencies. The CRJ and the Q400 have been recognized by government and airlines as contributors to economic development by connecting the major centers to secondary destinations as well as secondary markets to each other, hence driving greater economic development.”

In Mozambique, tourism, substantial iron-ore and coal deposits and large-scale offshore gas reserves have drawn an influx of international businesses and passengers for Linhas Aéreas de Moçambique (LAM). After an extensive restructuring from 2007 to 2012 involving replacement of Boeing 737-200s with smaller aircraft, LAM now operates two Embraer E190s and holds a firm order on a third Embraer 100-seater, due in October, as well as three Bombardier Q400s and one 737-500. “Two Embraer 145s [are] to be delivered soon on financial lease to replace [our Embraer Brasilia turboprops],” said LAM chief executive Marlene Manave.

Of course, circumstances differ among Africa’s diverse regions. In South Africa, for example, regional carriers face lower profitability due to high fuel costs and instability caused by the Euro debt crisis, according to Inati Ntshanga, CEO of South African Express (SAX). “Price elasticity is driving demand from mainline and regional carriers to low-cost carriers,” he said. As a result, the industry has experienced turbulent capacity growth over the past four years. Ntshanga expects domestic capacity to fall by 8 percent in 2012-13 and intra-regional available seat miles (ASMs) to drop 4 percent, while domestic passengers carried increases only 1 percent, and regional passenger traffic declines 1 percent.

“So how do we survive?” asked Ntshanga. “By partnering.” South African Airlines, regional carrier SA Express (SAX) and domestic airline SA Airlink designed their partnership to optimize schedules, share services, scale economies and provide value to all parties, said Ntshanga. Regional carriers such as SAX feed mainline carriers at their hubs, operate point-to-point service in less dense markets and sometimes operate independently or as partial spin-offs from the mainline parent.

“Regional carriers can offset the burden of building connectivity with a small operation by entering into cooperative agreements with larger network carriers,” said Stephan Heinz, an analyst at London’s Seabury Group.