Covid-19 aviation briefing. African Aviation Industry

COVID-19 Outbreak. A global aviation recession

45% Global cut off on seat offers (Week 30-03)

The COVID-19 outbreak is having a major impact on national and international aviation, and air traffic is expected to further decline in the coming weeks. No region of the globe will escape the depression.

img_001
Seats evolution by region (Week 30/12/2019 – Week 30/03/2020). Source: OAG, flightradar24, ALG analysis

98% of the global air market is under severe confinement and flight restrictions

According to IATA COVID Financial Impact Assessment, dated March 24, in 2020 Africa will experience one of the starkest declines in traffic. At present, many airlines in the region have completely ceased operations as most African countries have closed their borders in order to combat the spread of COVID-19.

img 002
Date: 10 April 2020. Source: IATA, ALG Analysis

Unprecedented crisis for the air transport sector

Health crisis + global economic sudden stop

For the first time since 2008, the global GDP growth for 2020 is expected to be negative. Research from the World Travel & Tourism Council shows that, globally, up to 75 million jobs are at immediate risk.

img 003

Global outbreak and uneven timing

While some parts of the world will be able to control and minimize the outbreak in a few months, in other countries it could take longer. As a result, air services from/to some regions will resume sooner than others in which restrictions may still apply.

img 004

The recovery scheme works as plates sliding at different speeds. The slowest plate (country), due to friction (trade, trade relationship) slows down the system as a whole. As a result, the recovery rate is defined by the country with the worst strategy against COVID-19 (longer duration of the pandemic stages).

It is expected that domestic/enclosed markets with proper policies against COVID-19 (i.e. US domestic or Intra-EU traffics), will recover faster than international segments. The international traffic rebound will be harder as it will also depend on each country pair. The agreement in the measures applied between regions will define the future of Africa-Europe/Intra-African connectivity.

Dramatic drop in demand will impact all sectors of the aviation industry

Commercial air transport has direct and indirect impacts in many business activities; including manufacturers, lessors, infrastructure providers, regulators, service providers, airlines, distribution channels based on the demand foundation, etc.

The COVID-19 outbreak has triggered a cascade effect. The fall in demand has had a direct impact in airlines, which are simultaneously spreading their financial crisis to the whole industry. This includes aircraft returns and requests of lease relief to lessors, cancellations of aircraft orders to manufacturers, airports deprived of flights, passengers, and retail, generating lack of revenues, with supporting services (handling, maintenance, cleaning) costs still to be covered.

The sustainability of the aviation sector in Africa will depend, to a large extent, on the adequacy of the stimulation packages implemented by each of the regional governments.

  • In the short term, the liquidity of airlines should be guaranteed, as they conform the weakest link in the chain. Several countries in Africa are announcing support for the aviation sector in order to reduce the impact of the COVID-19.
  • Subsequently, measures should be implemented to reactivate the demand so that the sector’s liquidity problems do not result in solvency problems and bankruptcies.
  • Airports will also require relief measures. Governments will have to consider additional measures to rebalance the concession contracts of many airport operators.

img 006

Africa has been hit as hard as other affected regions

Airports capacity cut-off by market (updated 06/04)

img 007
Airports capacity cut-off by market (updated 06/04)

Airports are currently operating some domestic traffic and other minor international flights under strict disinfection measures. Specific measures have already been adopted, such as temporary slot waiver in EU airports, recalibration of cargo operations and charter flights for evacuations.

img 008
Airlines capacity cut-off by market (updated 06/04). Source: Airlines websites, OAG schedule analyzer

The vast majority of airlines’ fleet are on the ground, keeping operations to a minimum. Airlines plan to resume their services and achieve relative normality at the beginning of July.

African air market is highly exposed to international resolutions and decisions

img 009
Air transport market supply’s segmentation by region (Jan 2019-Feb 2020)

Unlike the European and US markets, where internal flights represent more than 85% of the seats, the African market is more exposed to the international segment, where the recovery of passengers’ willingness to flight is expected to be slower.

Within the African market, domestic flights represent 28% of the seats and, as previously discussed, recovery paths will mainly depend on each country’s responses against COVID-19.

On the other hand, the regional market represents 17% of the commercial seats. The Single African Air Transport Market (SAATM) is implemented differently depending on the region and, although there have been improvements, it still is at an early stage. At present, the inter-regional traffic accounts only for 6% of commercial seats.

The intercontinental segment represents 55% of market share, even having a higher economical impact in airports. This market is severely threatened in the short/mid term. From an airline perspective, this market is mainly dominated by international carriers and therefore, its opening will be determined by European/Middle-East countries. If these countries were under lockdown, their recovery could be delayed.

img 010
International market supply in Africa by carrier flag (% Feb 2020 seats). Source: OAG schedule analyzer, ALG analysis

The African market is more exposed to the international segment, and therefore the international carriers’ strategy will affect its development.

Main African airlines will face viability risks due to liquidity issues

img 011
African airlines: Operating Margin. Source: Airlines’ financial statements; (*) ALG estimation from a sample of  12 airlines. Note: Operating margin calculated as the operating profit divided by total revenues
img 012
African airlines: coverage of fixed-charges’ obligations. Source: Airlines’ financial statements; (*) ALG estimation from a sample of  12 airlines. Note: The coverage of fixed-charges’ obligations represents the monthly average fixed costs that can be covered with assets (cash and other liquidities) and short-term financial debts, according to airlines’ financial statements

Some airlines will not have enough cash reserves to manage their financials and they will be driven to technical bankruptcy states or breached debt covenants. Governments should consider providing financial support/aid to guarantee the survival of their local airlines.

African airlines can only guarantee their survival under a commercial lockdown for a period of 1 to 5 months, if no additional aviation business support measures are implemented.

Looking forward: different recovery scenarios

Aviation has never faced a similar global crisis. The COVID-19 outbreak will deeply change the air transport demand’s scheme and patterns. The depths of the change will depend on how long it takes to overcome the pandemic. Even when the health crisis ends, the recovery of the economic downturn and passengers’ willingness to flight will continue to impact the aviation sector.

img 013
Demand timeline

Different recovery shapes depending on Markets & Travel Purposes

  • Domestic/enclosed markets. They are expected to recover first if governments implement effective social distancing initiatives.
  • International markets. Different recovery rates depending on each country pair, and affected by many unmanageable factors: policies against COVID-19, duration of the quarantine period, availability of treatments, macroeconomic impacts, etc. We expect some countries to be effected for longer than others.
  • Travel purposes
    • Business: A fast recovery is expected for businesses where mobility is a must. However, passengers who can carry their activities via teleworking may no longer need aviation services.
    • Visiting friends and relatives: The recovery will take longer, especially for population  that have low-income and is exposed to massive layoffs.
    • Tourism: The sector has been heavily hit and its recovery is expected to be delayed. The change in passengers’ leisure trends and the effect of the economic recovery is likely to penalize this passenger segment.

Africa’s capacity expected to decrease ~32% in 2020 (base case scenario)

img 014
Africa’s capacity cut-off estimation – “U” recovery scenario  (seats 2020 v. 2019). Source: ALG Analysis

Airlines may have to implement social distancing policies. In this sense, non-African carriers operating long-haul flights will be the most affected, whereas African carriers with lower load factors, will be less impacted.

img 015
COVID-19 impact’s estimation by scenarios: Africa (Mseats, 2020 v. 2019)

Seat capacity is expected to decrease between -22% and -53% in 2020 in African aviation market.

The base scenario (“U” recovery) considers that the African market will require more than 1 year to recover the pre-crisis demand levels.

Expected recovery rate segmented by African regions

img 016
OAG schedule analyzer, ALG analysis

Expected recovery rate in selected Aviation Nations

img 017
Source: OAG schedule analyzer, ALG analysis

Expected recovery rate in selected African markets

img 018
Source: OAG schedule analyzer, ALG analysis

Different airport recovery profiles; will the investment plans be impacted?

img 019
Airport recovery profile (dependent on each country’s policies against the pandemic). Top African Airports

Will investment plans remain necessary for major African airports/cities?

img 020

Airports require public support to make the recovery process viable

Revised IATA revenue forecast (31 March 2020) estimates that impact of the pandemic now stands at -41% fall in RPKs and minus USD15B versus the 2019’s levels for the region.

It is pivotal for Governments to start the implementation of several initiatives needed to ensure the sustainability of the African air transport sector.

img 024

The multilateral development banks are key in the recovery of this sector in Africa:

They need to reinforce their presence in the region with a triple objective:

1.Mobilize finance

2.Support public procurement

3.Increase technical assistance and advisory services for knowledge creation and knowledge transfer

Airport Operator responsiveness

img 023


About the authors
Joan Miquel Vilardell holds a PhD and MSc in Civil Engineering, and holds an MBA. He is the ALG Partner responsible for the development of the African market.
For more insights, please check www.alg-global.com or contact:
jmvilardell@alg-global.com