Turbulence ahead for African Airlines

By Ronak Gopaldas

Africa’s airline industry has weathered turbulent times over the past three years, with Covid related lockdowns, sharp falls in passenger volumes and more recently, a sustained spike in the oil price. The headwinds have not been without their casualties, with several of the continent’s carriers requiring state-funded bailouts to remain in the air and some having closed their doors for good.

The sector is crucial to the continent’s growth ambitions, contributing 2.7% to Africa’s GDP, supporting 6.2 million jobs and ferrying nearly 100 million passengers annually. With roughly 230 airlines operating in Africa, it is a highly contested space and one with little margin for error. That said, demand in the post-Covid recovery is robust, particularly as African business and leisure tourism recovers and there are pockets of opportunity for foreign investors to both add value and derive returns.

In this piece, we examine the impact of Covid-19 and the recent oil price spike on the continent’s airline sector, assess the industry’s medium-term prospects and unpack which countries and carriers have the highest probability of growth. Finally, we will look at ways in which the continent’s airline industry can learn from Ethiopian Airlines which is a dominant player on the continent and a strong global operator.

The state of the African aviation sector

The sheer size of Africa, distances between cities, and the poor state of road and rail infrastructure should, in theory, make aviation an ideal mode of transport for the movement of goods and people alike.^[1] Air transportation, however, has failed to fill this gap and the market remains small by the standard of any other developing market. Despite being one of the most populous continents on the planet, Africa accounts for just 2% of global air traffic. By contrast, South-East Asia, with a population half the size of Africa’s, accounts for 15% of the world’s air traffic.^[2] Indeed, Africa is the smallest continental player in the aviation world.^[3] It has the fewest annual seats, the smallest and oldest fleet, lowest number of aircraft on order and the weakest passenger load factors.^[4] It also averages just 5% of the world’s international passenger travel and less than 2% of domestic passengers by route. There are only three full-service carriers with continent-wide networks in Africa – Ethiopian Airlines, Kenya Airways and South African Airways (SAA). These three have done a fine job connecting their respective hubs with the rest of world. Ethiopian flies to 47 destinations outside Africa and Kenya Airways flies to 31. Both fly direct to Singapore. SAA, however, serves limited international routes – mostly within Africa. Over the years the three airlines have embarked on a substantial fleet modernisation and expansion programme. In August 2022, Ethiopian Airlines became the first African customer of the Airbus A350-1000 when signed an agreement the European aircraft maker to upsize four of its existing Airbus A350-900 variants. The Star Alliance member will soon take delivery of two more A350-900 adding to its fleet size to of 121 passenger aircrafts making it one of the biggest airlines in the world – let alone Africa. The other critical aspect of air transport infrastructure and aerial networking for Africa is the availability of a sufficient number of fully functional international airports with adequate capacity to handle the biggest passenger and cargo carriers in the world. In this regard SSA has not fared well. Some, however, have tried to make up for this deficit by investing in fleet modernisation and airport capacity expansion. For instance, Ethiopia constructed a second runway at Bole International to handle any size of aircraft and established a new terminal building capable of processing up to 3000 passengers an hour. The airport can handle up to 6m passengers a year. Nairobi’s Jomo Kenyatta International has added a second runway and the swanky Nnamdi Azikwe International in Abuja boasts two new terminal buildings and a state-of-the-art radar navigation system.

As demand soars several international carriers are grabbing significant market share. The CAPA Centre for Aviation estimates that non-African airlines have 40% of all seats within Africa and as much as 70% of seats on inter-continental routes. Emirates, Air France, Saudi and British Airways are among the top 10 carriers in Africa and account for 30% of regional seats in 2019 (figure 5). Emirates connects Dubai with more African capitals than any other international airline. In comparison its nearest Asian rival – Singapore Airlines – keeps a light footprint, connecting only two African cities, both of which are in South Africa (Johannesburg and Cape Town).

Pandemic

Covid-19 was the single-greatest shock to the airline sector in aviation history and no airline escaped the impact of lockdowns and travel restrictions.^[5] Some US$372bn was lost in gross passenger operating revenues globally, with African airlines losing an estimated US$8.6bn.^[6] International Revenue Passenger Kilometres (RPK) fell more than 60% that year. Just as a sector recovery was getting underway, the war in Ukraine saw a spike in operating costs squeezing already thin airline margins and surging inflation threatens to delay a full recovery. So adversely has the aviation sector been hit that the International Air Transportation Association (IATA) predicts that passenger flight numbers will only return to pre-pandemic levels in 2024 (figure 2).

The outbreak of war in Ukraine in February 2022 and resultant spike in oil and jet fuel prices^[8] came at a time when Covid restrictions were being rolled back and the airline sector was showing signs of a strong upturn^[9](figure 3).

Oil supply constraints due to sanctions imposed on Russia has seen jet fuel prices more than double from pre-pandemic levels amid a resurgence in demand and has delayed a return to profitability for many carriers who have been forced to push these costs on to passengers. For the six months to June 2022, only North American Airlines have returned to profitability (figure 4).

More recently, fears are mounting of a global recession after persistently high (food and energy) inflation forced many major central banks to begin quantitative tightening and raising policy rates. A recession will reduce consumers’ disposable income and lower their propensity for discretionary spending / air travel. To be sure, the release of some pent-up demand following the ease of travel after the pandemic did serve as a boost to the airline industry but it was not enough to reach pre-pandemic levels. For Africa, there are several additional headwinds hampering growth and profitability.^[10]

Africa’s air travel sector is showing signs of growth and recovering from the Covid-19 pandemic. The continent’s passenger load factor (PLF) in May 2022 was up 1.9% at 69.6% from the same month in 2019 (pre-Covid), while the global average was -2.7% lower over the same period. That said, the global market had a PLF of 79.1% in May 2022 suggesting significant capacity underutilisation in Africa. Underutilisation and systemically lower PLFs on the continent have been a concern among airlines and airplane manufacturers for some time. A combination of underdeveloped infrastructure, more efficient competition, high passenger fees and taxes, lower levels of passenger affordability, mismanagement, corruption, and government interference have seen the closure, or at least mothballing, of several carriers.

Taxes

African passengers pay an average of 3.4 different taxes worth an average amount of US$64.^[11] 32 of the continent’s 53 airports charge above US$50 per passenger while 10 airports charge in excess of US$100 (figure 6). Contrast this with Europe and the Middle East, where passengers are charged an average of US$30.23 and US$29.65 respectively. Some countries in Africa that are part of regional economic communities have preferential taxes and fees capped at US$57.6 for flights between member states. The African Airlines Association (AFRAA) calculated travel tax elasticity and concluded that a 10% reduction in ticket price could see continental air travel demand increase by almost 8 million passengers annually.

The African Union (AU) adopted a resolution to deregulate the African skies and reduce the cost of air travel across the continent as far back as in 1999 but two decades on there appears to be little tangible progress. The so-called ‘Yamoussoukro Decision’^[12]which granted mutual transit rights to national flag carriers of 44 African countries has remained largely unenforced. In 2018 the Single African Air Transport Market (SAATM) or Open Skies Treaty was introduced with the backing of the AU^[13] but it lacks teeth as it comes with no repercussions for non-compliance.

Evidence is clear that liberalisation works to stimulate industry growth. The European Common Aviation Area (ECAA) was created in 2006, opening new markets for continental carriers, and expanding the airline industry with several low-cost carriers and thereby increasing passenger demand. Similar agreements already exist between the EU and the US and between the EU and Morocco. In Asia, the Association of Southeast Asian Nations Single Aviation Market (ASEAN-SAM) came into existence in 2009 between 10 ^[14] countries.^[15]The outbreak of the COVID-19 pandemic stalled progress on the development and implementation of SAATM but is again receiving fresh impetus in 2022.^[16]

With the African Continental Free Trade Area (AfCFTA) having commenced in 2021^[17], a liberalised and more efficient aviation sector will be critical to AfCFTA achieving its ambitions of reduced trade costs, and more broadly, to the AU’s 2063 Agenda of free movement of people, businesses, and investments.^[18] Catalysing SAATM is therefore not just about reducing air transportation costs and increasing market access, but is critical to the continent’s growth, development, and integration agenda as a whole.^[19]

Affordability

The affordability of air travel in Africa goes beyond the price of jet fuel and airport taxes. On average, a person in Europe and North America takes at least one return trip per year, while in countries like Nigeria and Ethiopia, the average person takes one return trip every 50 years.^[20] African travellers require nearly 3 weeks’ worth of national income to purchase an intercontinental flight and nearly 7 weeks income to purchase a ticket to beyond the continent (figure 7). This is approximately 10 times as much time as required by EU and US flyers.

Fundamentally, access to air travel in Africa and by Africans is as much about raising employment and income as it is about reducing the cost of fares. Reducing the cost of fares through lowering taxes and introducing other efficiencies will in itself have a positive knock-on effect on the economy and employment. IATA estimates that if just 12 key markets in Africa liberalised their aviation sector, 115,000 additional direct jobs would be created and an extra US$1.3bn in GDP would be generated^[21]. The impact will be felt throughout the air transport value chain and related services industries and have an extensive multiplier effect – each job in Africa’s aviation sector supports 14.8 jobs elsewhere on the continent. According to the 2019 Air Benefits Report^[22] by The International Civil Aviation Organization (ICAO), air transport in Africa supports more than 6 million jobs and contributes nearly US$60bn to the continent’s GDP. It notes that the African aviation market has the highest potential for growth.

Government interventions

Protectionism, and the delays in liberalising Africa’s aviation sector is a carryover of post-independence ambitions to have state owned flag carriers. Many of these have been poorly run, prone to government interference and corruption, and have not been economically viable. Despite this, several countries have provided extensive government financial assistance to keep their national carriers in the air at the expense of taxpayers, passengers, and a more competitive landscape. Their ambition was to eventually realise the success of Ethiopian Airlines.

Many African airlines were in financial distress even before the pandemic The financial impact of Covid-19 has made many unviable.^[23] The casualty list makes for grim reading. In South Africa, SAA – once a national pride – has all but collapsed. So have the state-owned low-cost carriers - Mango and SA Express. The government’s decision to stop bailing them out after years of bleeding cash was the final nail in their coffin. Privately run airline, Comair^[24] in South Africa was also forced to shut its doors in 2022 after it failed to reach an agreement with creditors. A similar story in Kenya where the national treasury refused to bail out Kenya Airways.^[25] In Namibia, Air Namibia filed for bankruptcy in early 2021.^[26] Air Tanzania, Air Zambia, and Uganda Air^[27] too are struggling to remain viable and Air Mauritius is in administration. There are many more examples on the continent, but as in the case of South Africa^[28] and Rwanda, governments are coming around to the idea that they are not necessarily best suited to own an airline.^[29] The South African government has reached a tentative deal with a private consortium to sell a major stake in SAA which is currently grounded. In 2019, RwandAir signed a deal with Qatar Airways in which the Middle Eastern state purchase 49% of RwandAir, and would invest in and own a 60% stake in a new airport to be built on the outskirts of Kigali with the capacity to process 14 million passengers a year.^[30] It is not that state-owned airlines cannot be sustainably and profitably run.

The Ethiopian secret of success

Ethiopian was one of only three airlines globally to remain profitable through the pandemic. Its resilience is due to its long-implemented strategy of diversification (providing aircraft maintenance to foreign airlines, specialist aviation training, enhancing cargo operations and developing an aerospace manufacturing unit) and nimbleness to adapt to the sector’s fast-changing needs.

Cargo flights were one of the sector’s bright spots during the pandemic. African cargo flights were almost 25% higher in March 2020 than the previous year. In part, it was fuelled by the import of Covid-related Personal Protective Equipment (PPE), but growing Asia-Africa trade is a significant contributor, particularly in light of land and sea logistical constraints.^[31] Ethiopian Airlines, Kenya Airways and smaller players like Astral Aviation were quick to spot the opportunity. Ethiopian Airlines repurposed 25 of their passenger planes to ferry cargo to and from the continent.^[32] Stronger cargo demand is likely to continue as trade volumes begin to normalise and land and sea logistics continue to experience bottlenecks. Importantly for Ethiopian Airlines, its success is in large part is due to the carrier having had stable management with minimal government input and has been allowed to conduct its operations independently. The airline is also consistently ranked as the number one airline on the continent by Skytrax and is the only African airline to feature in the Skytrax top 50 airlines in 2021.^[33]

Similarly, the government of Rwanda, through its reforms and willingness to sell down its stake in RwandAir and enter partnerships with fellow airlines suggests it will emulate Ethiopia’s model and success.

Conclusion

Africa’s airline sector is undergoing enormous change. Many of the once dominant state airlines are floundering and undergoing privatisation. Interested buyers range from competitor airlines (as in the case of Qatar Airways and Ethiopian Airlines) to private equity consortiums who see the significant potential for a recovery in Africa’s airline market. The process of governments finally throwing in the towel is also providing new entrants with opportunities to grab considerable market share and the surviving incumbents to entrench their presence and expand their footprint across routes.

In many ways, the pandemic accelerated a long overdue rationalising and consolidation of the sector.^[34] Despite the tumult, Africa remains an attractive aviation investment destination given its large and growing population and rising standards of living. That said, governments and regional bodies need to expedite their implementation of SAATM to further reduce the cost of air travel in Africa and expand regional cooperation. In doing so, Africa’s airline industry could soon become a catalyst for growth and economic development, rather than a heavily subsidised drain.^[35]