Special Report: Unlocking Africa's Potential
Robust African economies are turning the continent into a success story. Can African airlines take advantage?
The World Bank lists the resource-rich countries of Mozambique, Ghana, and Rwanda among the fastest growing economies of 2013. Many other countries in sub-Saharan Africa are not far behind. Overall economic growth for the region in 2013 is forecast at 5.6% with a third of countries achieving 6% growth or more.
Regional vibrancy has attracted attention. Foreign direct investment continent-wide is expected to reach $56 billion in 2015 from $38 billion in 2012.
Africa seems on the cusp of a boom. Comparisons with 1980 China highlight both the potential and the challenges if African airlines are to reap the rewards of this inviting situation.
In the late 1970s, it was hard to see how China would transform into the economic powerhouse it is today, contributing over 15% of global GDP. Connectivity with the world was limited, airline safety was an issue, infrastructure was poor, and airline fleets were in desperate need of renewal. Economic reforms unleashed entrepreneurial innovation. And aviation was a strategic enabler of growth—supported by infrastructure development and global standards, particularly for safety.
Africa’s population today is similar to the China of 1980 and contributes only slightly more to global GDP (Africa contributes 3% of global GDP today, China contributed 2% to global GDP in 1980). And like 1980 China, there are changes taking place. For Africa, these center on demilitarization, political reform, and economic liberalization.
But while the opportunity for development is there, Africa will need to resolve many of the same issues that China handled so successfully. Bringing 54 countries together will be extremely challenging given the divergent strategies of many of these countries. Nevertheless, the rewards on offer make the effort worthwhile. And it is clear that aviation connectivity will play a role.
The biggest issue is safety. In 2012, the Africa safety record worsened to 3.71 Western-built jet hull losses per million flights, up from 3.27 in 2011. The region continues to have the weakest safety performance in the world by a considerable margin.
Figures from the African Airlines Association (AFRAA) show a different side to the story, however. “Statistics show that most accidents on the continent take place in two countries, namely the Democratic Republic of Congo (DRC) and Sudan,” explains Dr Elijah Chingosho, Secretary General, AFRAA. “For example, in 2011, there were three fatal airline accidents in DRC out of a total of five on the continent. Similarly, in 2012, there were two fatal airline accidents in DRC and one in Sudan out of six in Africa. These two countries have been involved in conflict for over a decade, making it difficult for the authorities to oversee safety adequately. In the case of Sudan, sanctions have made it difficult to obtain critical spare parts and other support services.”
Meanwhile, African-based carriers on the IATA Operational Safety Audit (IOSA) registry did not have a single accident in 2012. “Africa is a continent divided on performance,” says Tony Tyler, IATA Director General and CEO. “Airlines on the IOSA registry are performing at or above industry average rates. But the continent’s overall performance is far from satisfactory. It should be as safe to travel by air in Africa as it is in any other part of the world.”
To achieve that aim, IATA, together with ICAO and other stakeholder organizations and companies, has committed to an Africa Strategic Improvement Action Plan that will address safety deficiencies and strengthen regulatory oversight in the region. The goal is world-class safety performance by the end of 2015. The plan was endorsed as part of the Abuja Declaration by the Ministerial meeting on Aviation Safety and Security of the African Union in July 2012, and endorsed at the Assembly of the African Union in January 2013. Tyler notes that this is a clear sign of “recognition of the importance of aviation safety at the very highest levels of government in the continent.”
The Africa Strategic Improvement Action Plan calls for the establishment of independent civil aviation authorities, as well as the implementation of effective and transparent safety oversight systems by all African states. Importantly, it aims to cut in half the number of accidents and serious incidents related to runway excursions, controlled flight into terrain or loss of control.
New, state-of-the-art aircraft would assist safety efforts. The Cape Town Convention on Moveable Assets was created to improve the risk profiles of African airlines wanting to lease or finance aircraft. It guarantees lessees’ ownership and repossession rights in the event of a lessor defaulting either to them or to a third party. In return, carriers domiciled in states that have ratified and passed the Cape Town Convention into law are able to take advantage of much lower finance costs. Some countries, such as South Africa, have yet to adopt the convention.
“The Cape Town Convention establishes a hugely important, forward-thinking regime,” says Jeff Shane, IATA General Counsel. “It not only improves African carriers’ finance options but also drives safety through better access to modern aircraft.”
A pragmatic approach
New aircraft and the successful conclusion of the Action Plan would help ease growing tension surrounding the European Union (EU) list of carriers banned from operating in Europe. The so-called blacklist is now in its seventh year and no African country has ever been removed from it. It includes more than a quarter of African countries and affects the entire region by association.
“Unfortunately, some African airlines, which are IATA members and on the IOSA registry, are on the banned list as a result of oversight concerns in their home states,” says Chris Zweigenthal, Chief Executive, Airlines Association of Southern Africa. “This not only discourages customers from flying on these airlines, but I believe it also has the consequence of some customers choosing non-African airlines over African airlines even if they operate the same route and that airline is not on the banned list.
“The irony is that EU airlines are permitted to operate to states whose airlines have been banned,” he adds. “I believe a more proactive approach with the direct involvement of ICAO and the EU assisting African states to address issues of concern without the negative approach of banning the airline would be more constructive.”
IATA has noted that trying to get Europe to revise the banned list has not worked. The overall safety improvements that can be expected from a commitment to mandate IOSA registration for all carriers would be a very strong argument for Europe to rethink its position, however.
IATA is collaborating with ICAO and AFRAA with a focus on building skills and preparing Africa for IOSA. Last year, regulators from 40 African states attended IOSA awareness workshops. IATA has also announced sponsored in-house IOSA training for 10 African airlines.
Competition home and away
The significance of the EU banned list can be seen through another major challenge in African aviation; competition from airlines based in other regions.
Many African carriers cannot market as aggressively as better capitalized foreign competitors with more market clout and so shy away from intercontinental operations. There are only a handful of intercontinental carriers in Africa. Non-African airlines account for around 80% of the intercontinental market share to and from Africa according to AFRAA. With safety issues perceived to be continent-wide, this trend will continue.
The problem is exacerbated by the lack of liberalization within Africa, which is keeping African carriers isolated and unable to develop networks in support of the continent’s economies. The Yamoussoukro Decision—the intended liberalization project for Africa—remains largely a theoretical construct. Some countries, such as Ethiopia, have ratified Yamoussoukro and Ethiopian Airlines is working with African partners. But this is the exception and not the rule.
Many governments, fearing dominance from other African carriers, deny these carriers market access, while granting limited rights to non-African airlines. It is easier to give rights to an airline that won’t compete on heavy intra-Africa routes. AFRAA estimates around 17 non-African airlines have Fifth Freedom Rights within Africa compared with 11 African carriers.
“The Yamoussoukro Decision of 1999 was designed to lead to a more measured and structured liberalization within Africa, prior to international liberalization,” explains Zweigenthal. “However, its implementation has been held up by the long time taken to draw up continental-wide competition regulations, a competition authority, dispute resolution mechanisms, implementing provisions, and the incorporation of the Yamoussoukro Decision into the domestic legislation of many states. Due to these delays, I believe Africa has lost an opportunity to grow and develop its own aviation industry to the extent that it should have.”
Chingosho explains what a fully implemented Yamoussoukro Decision would mean. “Airlines will more freely consolidate through joint ventures, mergers, cross-invest in each other, and adopt other marketing arrangements that will spur their growth and competitiveness,” he says. This will provide consumers and economies with the benefits of greater connectivity.
“It will also help deal with inadequate capital in several African airlines resulting in small fleets of ageing aircraft that are less reliable and incur high operating costs while causing more emissions, which is detrimental to the environment,” Chingosho adds.
The possible strengthening of African airlines may ultimately see more African airlines in global alliances, further enhancing the airlines’ position. International liberalization can follow once a strong African-based industry has developed.
Cooperation is possible
Protectionist thinking seems certain only to dampen growth to the detriment of all parties. And even though it may be hard to find consensus among the 54 African states, it is not impossible. The Agency for Aerial Navigation Safety in Africa and Madagascar (ASECNA) provides air navigation services across a vast section of the African continent and proves cooperation is achievable.
A viable air transport industry would improve connectivity between African countries, boosting intra-African business, trade, and tourism. It would surely be a boon to the 16 landlocked African countries.
It is estimated that more than half of African city-pairs are served by fewer than five flights per week. Less than 5% of the city-pairs are served by 50 or more flights a week. This limited market access and forced domesticity has consequences. Load factors for African carriers are below the industry average and addressing this wasted capacity could make a huge difference to profitability.
The development of fastjet may prove a pointer to the future. It has ambitions to be a pan-continental airline and is developing a franchise shape, as seen with LAN and elsewhere. The model provides economies of scale and a coherent network without the need for a regulatory overhaul. And it is not only smaller carriers that are adapting to the business conditions. Ethiopian Airlines will also provide customers with more choice, with plans for a multi-hub strategy.
Whatever the model, African airlines have to deal with a high-cost environment. Cost containment is particularly difficult in many African countries for a number of reasons.
“To begin with, currencies in countries such as South Africa, Namibia, Malawi, and Zambia are weak compared with the US dollar or the euro,” says Mike Higgins, IATA Regional Vice President for Africa. “So while the bulk of revenue is generated in soft home currencies the majority of the overheads—capital, financing, lease rentals, fuel uplift at foreign airports, and infrastructure in foreign markets, for example—are incurred in the stronger currencies.”
Other problems are self-inflicted. In Africa, fuel prices on average are 21% higher than the world average and the pricing system can be opaque. At some stations in Africa, for example, fuel prices can be twice as high as Dubai, which obviously has consequences for competition. Higher costs translate into higher prices, which in turn stifle demand. IATA is working with African airlines to better understand the issue and to provide lobbying assistance with governments.
Infrastructure, much of which is below international standards, also contributes to the high-cost environment. Several airports have monopoly suppliers in one or more areas of operations. And many have high charges. Senegal increased international landing charges 13% in 2012. On top of this the Airport Development Fee in Senegal stands at about $68 per passenger—the highest in Africa. There is little transparency in how the money is being used as the new airport has been designed without airline input. The regulations covering infrastructure development should be in line with the ICAO principles of user consultation and transparency.
Benin, Cameroon, the Democratic Republic of the Congo, Gambia, Guinea-Bissau, Mali, Niger, Sierra Leone, and Togo all have development charges ranging from $9 per passenger to over $50.
This is not to say that infrastructure improvements aren’t welcome. Since 2010, there have been infrastructure developments well suited to their markets at Johannesburg’s O.R. Tambo International Airport, Cape Town International Airport, Maputo, Addis Ababa, Luanda, Nairobi, and Windhoek.
But the timing of the construction of the new infrastructure must be correct to ensure that the burden of payment on the consumer is not imposed prematurely. King Shaka International Airport at Durban, Botswana’s Gabarone Airport, and Swaziland’s new international airport are widely perceived as vanity projects due to their scale and opulence compared with the size and nature of the markets they serve.
A sustainable air transport industry in Africa will also need skilled personnel. Africa has long suffered a brain drain, as pilots and technicians head to better-paid posts elsewhere in the world. Boeing estimates Africa will need 14,500 new pilots through 2031 and 16,200 technicians.
But poor education in the right subjects and perceived poor remuneration packages is thinning out the talent pipeline. At the same time, rampant demand in the Gulf region and in Asia is draining the existing pool of highly skilled air transport professionals across all disciplines.
The International Airline Training Fund (IATF) will provide some relief. IATF is a non-profit foundation funded by contributions from IATA members and other air transport organizations and provides training for developing nations across a range of aviation disciplines and levels.
“African airlines have to raise their game and their remuneration packages to retain pilots, engineers, cabin crew, and airline managers,” suggests Higgins. “But this is difficult when they are looking for every opportunity to contain costs.”
Aviation already plays an essential role in Africa, supporting some 6.7 million jobs and $67.8 billion in economic activity.
And the upside could be even greater. African airlines are expected to post a small profit in 2013, a definite improvement on the small loss experienced in 2012. African carriers are also expected to see a healthy increase in demand during 2013 that will outstrip the expansion in capacity. Load factors will increase as a result.
And the middle classes are growing too. By 2030, around 50% of Africans will live in cities, giving rise to greater spending power and an emerging middle class. The African Development Bank projects that Africa’s middle class will grow by more than 700 million people in the coming decades.
To realize its full potential, African aviation needs a joined-up, continent-wide aviation policy. In 2012, African governments adopted a Common African Civil Aviation Policy (AFCAP). It was endorsed by the Heads of States of the African Union. The objective of AFCAP is for member states to have a well-integrated transport system that would link air transportation to other modes of transport for the seamless movement of passengers and cargo.
“The AFCAP provides a framework and the platform for the formulation, collaboration, and integration of national and multinational civil aviation initiatives,” says AFRAA’s Chingosho. “The AFCAP should help the promotion of a harmonized approach to merge the various aspects of civil aviation, including safety, security, efficiency, and environmental protection, among others.”
IATA’s Higgins also insists on the removal of artificial barriers and investment in the appropriate areas. “Without all of these things, connectivity will be stunted and the rapidly expanding cities across the continent will never realize their true full potential to trade and experience meaningful socio-economic growth,” he says.