African carriers operate in a challenging market with a highly constrained demand. Air transport is currently unaffordable for the African population, as there is a massive gap between the average income of the population and the average intra-African flight ticket price, which is higher than other regions, such as Europe or Latin America. These high airfares are a result of the combination of low passenger load factors and higher operating costs that African carriers need to face due to specific market characteristics. In addition, Air transport market is highly regulated in some African countries, which entails relevant limitations regarding intra-African air connectivity. Ground infrastructural limitations at airport terminals, coupled with an imbalanced and low traffic demand, are additional relevant obstacles to intra-African air trade development. And with regards to air cargo, it is currently a marginal and unbalanced activity within the African aviation sector.
As a result, the African airline industry is, in general terms, a risky and unstable business, presenting overall low profitability results. This is perceived by the financing market and makes difficult for African airlines to get access to external finance. African carriers face worse financing conditions compared to airlines from other regions, what even worsens their options to turnaround negative financial states or take a chance, in a very competitive sector, by developing and enlarging their fleets.
However, there is a clear potential for change, as the industry trends and forecast are promising regarding economy and air traffic development in Africa. Additionally, recent regional market liberalization initiatives are being launched, such as the Single African Air Transport Market (SAATM), which will act as catalyst to multiply the foreseen enhancements. Commitment from States is required for a successful implementation of such air transport liberalization initiatives. Similarly to the SAATM, air transport regional initiatives have been developed in other continent leading to outstanding benefits and increases in air traffic, as well as to a substantial decline in intra-regional airfares as a consequence of enhanced connectivity and competition.
As stated, one of the main challenges in the way of developing the airlines’ industry is lowering the intra-regional airfares without hindering African carriers’ financial states. Africa is the region that accounts the worst profitability indicators in the airlines sector, mainly due to the fact that African airlines are currently facing higher operating costs that carriers from other regions. After conducting an assessment on six cost elements (fuel, crew, maintenance, airport and ANS charges, rentals and leases and others) over a sample of twenty-three (23) airlines, it is concluded that African airlines CASK (cost per offered seat and kilometer) is 25-35% higher than the world average and 100-120% higher than those of low cost carriers. However, the main airline profitability and demand indicators infer a positive tendency for African airlines when assessing the period 2015-2017 and the forecasts for 2018.
African carriers and other aviation partners shall put in place tailored actions towards the activation of existent enablers to overcome the existent exogenous and endogenous constraints to the African airlines’ development, in view of increasing their profitability indicators.
Among the exogenous constraints, the current low levels of air traffic demand need to be addressed, trying to stimulate the propensity of the African population to fly by reducing airfares while guaranteeing airline financial sustainability. Moreover, market access barriers will need to be revised, with the implementation of SAATM, in order to ease competition and to promote air connectivity. In addition, it will be highly relevant that the State of origin of the airline (where the airline is based) is committed to the signature of international regulations on asset-based financing for mobile equipment, most commonly known as the Cape Town Convention and its associated Aircraft Protocol. Thanks to this Convention and Protocol, it is guaranteed that the airline fleet is well conserved through its lifecycle. Hence, the asset (aircraft) can be repossessed in case of bankruptcy of the lender. The signature and ratification of the Cape Town Convention and Protocol entails a significant risk reduction for the borrower, which can have a highly beneficial impact on African airlines.
As aforementioned, African airlines operating costs are among the highest all over the world, highly influenced by the high-taxes and charges levels imposed by national aviation institutional frameworks and/or operators (airports and ANSPs), commonly unjustified given the benefits provided for the airlines. Moreover, as the aeronautical industry is at an incipient status, the services provided by the national ground handlers, training organizations and other kind of service providers are in some regions insufficient and expensive. For instance, the African aviation has long been hampered by high airport fees and taxes on jet fuel. In light of this, all aviation partners must cooperate in terms of reducing the high operating expenses for the African carriers, by means of an overall improvement of the aeronautical sector and a commitment to impose adjusted levels of taxation and charges, balanced to enable the recovery of the infrastructure development while enabling the sustainability of the air carriers. In addition, States should consider the implementation of cost-effective regulations on the crew certification and training requirements, as well as on the crew labor expenses, together with an adequate taxation for registration, certification and operation of aircrafts. Finally, other exogenous costs such as insurance premiums and maintenance expenses should be reduced, which in more mature markets might be considered as endogenous constraints.
Furthermore, African airlines must tackle their endogenous constraints, with the ultimate purpose of building a sustainable business and foster their access to finance. In this regard, African Airlines need to undertake operating cost control actions pursuing higher performance levels, mainly focused on five key criteria: fuel cost reduction policy, employee’ productivity improvement, flight operations, aircraft maintenance cost reduction and operation procedure simplification. Additionally, African airlines must develop solid, robust and bankable business plans, supported by reliable market data and with a profitable and attractive airline business strategy. This strategy must comprehensively define the positioning of the airline within the market, in accordance with its strengths and capabilities, together with a route network strategy and fleet planning to meet its requirements. On the top of that, African airlines must put in place adequate measures to adopt tailored performance management systems and capacity-building programs, in order to build solid business foundations to effectively implement their strategies and overcome their negative financial states.
At this point, a particular and differential treatment must be given to the Airlines’ fleet financing issue. Airlines’ fleet financing needs and aircraft acquisition is one, if not the most, of the main needs for the African airlines industry. According to Boeing (commercial outlook – 2017), the active African airlines’ fleet stands at 720 aircrafts, mainly single aisle and regional jets (small aircrafts). The fleet composition is not spread evenly among aircraft classes, with a substantial higher presence of narrow body aircrafts. Single aisle aircrafts (small narrow-bodies) with a seat count ranging from 100 to 180 seats, currently make up 58% of the African fleet. Based on the air traffic statistics and forecast, Boeing estimates a total of 1,220 new aircraft deliveries from now to 2036, with single aisle aircrafts making a 74% of the total deliveries (900) and wide-body aircrafts a 23% (300). The market value for the total deliveries will worth $180 billion USD. The growth of the aviation business globally means that sources of funding will have to grow accordingly, the market value expected to be required for aircraft transaction by 2021 being of approximately $185 billion USD.
A popular option amongst airlines is represented by the mix between owned and leased fleet, allowing air operators to adjust the capacity requirements to demand without overexposing themselves to long-term risks. In 2017, approximately 43% of the global demand for aircraft funding came from lessors. However, as has been pointed out before, African airlines have recently suffered the downturn of one of their main funding sources, the Export Credit Agencies (ECAs). After the reduction of the ECAs financing, leasing financing mechanism could be exploited by African airlines in order to attract other private funding. Nonetheless, leasing options for African carriers are also limited. So far, the first African Aircraft Leasing Company initiative, launched by Boeing and the Nigerian aviation services provider (Springfountain) still is in a planning phase.
The achievement of all these challenges constitutes the perfect baseline for receiving funds for further airline growth and to ultimately contribute to the decline of airfares and to the development of intra-regional air transport in Africa.
As a conclusion, four main high-level recommendations have been defined:
- African States shall implement a robust regulative framework for the airlines, pursuant to international conventions requirements and promoting effective safety levels: The implementation of harmonized aviation standards all over Africa will be the first step towards the establishment of successful airlines models in the continent. Harmonized and rigorously applied safety, security and operational standards will install confidence in the private sector on the sector capabilities, thus attracting the private investment and opening a window to new strategical partnerships with other international airlines. Furthermore, African States would be progressively solving the deficiencies that gave rise to the higher insurance premiums and/or operating bans from the EU (EU Blacklist). In other words, those States pursuant to international standards will be able to remove all restrictions on their national airlines, thus improving their air carriers’ potential connectivity with the European continent. Additionally, African States should sign and ratify the international conventions and protocols, such as the Cape Town convention, as an expression of their commitment to reduce the risk for the borrowers and meet international agreements. This will have a highly beneficial impact on African airlines as they could obtain newer financing sources and/or achieve strategic partnerships with other international carriers.
- Enhance airlines’ access to finance, with the purpose of enabling African carriers to undertake fleet enlargement and renewal projects, promoting both aircraft leasing and direct purchase options. On one hand, it is proposed that African aviation partners support the promotion of aircraft leasing options in Africa, as could be through the creation of an African leasing company (for operating lease purposes) or by arranging favorable partnerships with international leasing companies to provide improved financing conditions for African airlines. And on the other hand, adequate financing opportunities should be implemented to replace the ECAs’ main role, to provide financial support in assisting airlines in their re-fleeting needs. Airlines, for their part, will need to define robust business plans and strategies for their fleet enlargement projects, together with comprehensive prove of their commitment to uphold the international, regional and national standards.
- Strengthen African airlines’ business management: African airlines will need to comprehensively define a robust business plan, with a clear market positioning and an assessment on the air traffic demand for the route network planning. From this, airlines will need to develop a fleet development plan, defining their future needs for aircraft acquisition considering their route network planning. In long term, these business plans should aim to reduce African airlines’ airfares. Another important factor on which African aviation partners’ should work, would be on assisting airlines at fostering the capability of their human resources, in particular, of airline management as implementation agents for the aforementioned plans. In addition, airlines could be assisted at defining sound commercial management and strategies, in coordination with African government strategies, as the basis for their fleet and route network development plans.
- Promote African aviation industry cooperation towards the reduction of African airlines’ exogenous costs: Governments and service providers (airports and ANSPs) need a balanced taxation level, setting a trade-off between infrastructure investment recovery and service providers’ financial sustainability and a reduction on the airlines’ operating expenses. The adoption of competitive taxations’ levels in airport and air navigation taxes and charges will enable airlines to reduce the airfares. In addition, other State’s taxations should be reduced, such as the ones applicable to fuel, crew certification and training requirements, as well as on the crew labor expenses, aircraft registration and certification charges, and others such as income taxes, added-value tax, environmental tax, and custom taxes. Finally, African aviation industry together must work towards the activation and strengthening of the Aeronautical industry (fuel suppliers, MROs…) to increase their competence in view of reducing the airlines’ operating expenses. The industry alignment with international standards and the resolution of existent safety and security concerns are equally important, in view of further reducing the airlines’ insurance premiums. On the top of that, African governments and airport operators should put in place adequate costs to their services, aligned with the quality of service they are providing and removing unjustifiable high charges.