Aviation: Resurrected African Airlines will need a lot of Government finances to Survive

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From Lagos to Lusaka, African governments have in recent weeks announced plans to revive their flag carriers.

During last month’s Farnborough International Air Show — a biennial trade exhibition for the aerospace and defence industries — Uganda and Nigeria placed orders for aircraft to restart their national airlines while in Zambia, the government has teamed up with Ethiopian Airlines to revive a limping Zambia Airways.

Air Tanzania, which has been operating a domestic network for the past three years, recently took delivery of a Boeing 787 Dreamliner, as part of plans to launch long haul flights.

Although most projections paint a positive picture for African aviation and incumbents such as Ethiopian remain upbeat about the prospects for the continent’s air transport market, analysts warn that the comeback carriers are entering a radically altered marketplace that calls for deep pockets and smart business strategies.

“It is instructive that none of the airlines that collapsed in the closing decade of the past century and the early 2000s really failed because of competition as such,” said Fred Ochieng Obbo, a veteran of the regional air transport industry.

“They failed due to a combination of internal and external factors. So while there is a business case for an airline in many of these places today, success is going to call for more than just buying a gleaming fleet of aircraft.”

According to Mr Obbo, African airlines faced the tandem challenges of underfunding and rising costs amid loss of shareholder commitment.

Fuel prices were rising, making their aged fleets economically and operationally inefficient.
In many cases also, they were operating aircraft that were too big for the markets they were serving.
But coming from the depths of World Bank and IMF-sponsored structural adjustment programmes that many had signed up to in the mid 1980s, their principal shareholders — the governments — were not in a position to financially support the needed strategic and technological transition that would have helped them survive.

In some cases, there was no national consensus on options such as divestiture that would have attracted private participation to keep them flying.

As they make a come back today, some variables have changed for the better. The manufacturers have developed new aircraft families that are not only more fuel efficient but offer a diversified product range that give the operator a better fit between the network and aircraft.

On the other hand, economic growth on the continent has held steady above three per cent and the air transport industry is opening up, allowing for the development of new city pairs.

African air transport is projected to grow at six per cent annually well into the next decade. The region that accounts for just three per cent of global air traffic is also seen as an opportunity for growth given the unmet demand gap for air services.

‘Open airspace’
After dragging their feet on the 1999 Yamoussoukro Decision that provided for the full liberalisation of Africa’s airspace, the continent’s leaders in January launched the Single African Aviation Transport Market (SAATM).

Twenty-six countries have so far signed up to the pact. Once implemented, SAATM is expected to open up the market for air services with unrestricted frequencies.
Experts are pinning their hopes on the fact that intra-African air travel remains disjointed leading to a significant degree of blockage and leakage of traffic.

For example Dubai, well outside the African mainland, is the eighth largest hub for connecting African aviation.

It is unlikely that the existing airlines can fully exhaust the opportunity that liberalisation of Africa’s skies presents.

According to OAG, a UK-based global aviation data company, only three of the 10 largest cities in Africa have direct air connections with each other.

That compares with an inter-connectivity level of 97 percent for European cities. Regional aircraft manufacturers argue that there are as many as 250 new routes on the continent that could be profitably opened up using new generation turboprop aircraft.

Mr Obbo agrees but cautions that those opportunities do not automatically translate into success factors for startups for two primary reasons: One is that the industry’s operational model has changed with the market coalescing around a few hubs and networks through alliances such as SkyTeam, One World and the like.

“SAATM will open up markets but growth will be within the existing hub structure. Successfully developing competing new hubs is going to call for patience and the shareholders in these new airlines need to be psychologically and materially prepared,” Mr Obbo argues.

That means the new carriers will go through a longer burn curve before they build up the credentials to join any of these alliances while flying to the same hubs will add capacity and drive prices and yields down.

Giving the example of East Africa where there are already three hubs – Nairobi, Dar es Salaam and Kigali, and a prospective Entebbe.

Mr Obbo argues that having so many hubs close to each other can drive the carriers to a point where they are feeding off each other without generating any new traffic.
The other challenge he sees, revolves around the passenger mix. Because of weak economies, few Africans are flying from within their own markets.

This means that close to 90 per cent of the traffic in some cases is externally generated. As a result, an airline needs a diversified network to aggregate this traffic into economic loads. Attracting external customers who are already attached to existing brands will be a tough job.

“I’m not saying that it cannot work. But it will call for a lot more investment because you are going to need a very diverse network to tap into a passenger base whose bulk is externally generated,” he said.

Mr Obbo’s views buck the optimism of the business plan for Uganda Airlines, which will take delivery of its first aircraft in January 2019. The plan projects a load factor of 60 per cent and a profit of $3 million in the first year.

On the other hand, the same airline will during the first two years of operation need to generate monthly revenues of $8 million to service the loans that have been contracted to finance the purchase the four CRJ900 aircraft.

That figure will rise to $21.8 million monthly when the two Airbus A330 long-haul aircraft join the fleet in 2021.

With all the uncertainties that stalk the air transport industry, the Treasury must be prepared to fork out this money if the plan is to have a chance of success.

Source: theeastafrican.co.uk

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