The African airline industry is starting to benefit from liberalisation, but there are still many challenges ahead, says Elijah Chingosho, technical director of the African Airlines Association
African countries need a strong and vibrant air transport industry to achieve the goal of social, economic and political integration. The good news is that Africa’s operating environment is becoming more conducive to the growth of the industry arising from the reduction of conflicts and a commitment to Africa’s renaissance by politicians. Government focus on good political and corporate governance and liberalisation programmes auger well for the future.
However, there are many challenges ahead. The number of African airlines with intercontinental flights has been dwindling and some of those retaining their overseas services may become unviable and cease to exist during the next two to three years.
The yields on the African continent are generally high, as the demand for air services on the continent tends to be inelastic. However, these advantages are counteracted by relatively low load factors. The small size of most African airlines and the tendency to fly to too many destinations results in low frequency of services. There is a need to focus on a limited number of markets with high frequencies. In addition, ageing fleets result in low aircraft utilisation and generally unreliable services. Staff productivity is below world average – there is over-manning, but not enough trained personnel.
Against this background, the airline industry on the African continent is undergoing profound changes as a result of liberalisation and globalisation. The so-called Yamoussoukro Decision, signed by African civil aviation ministers in 1999, set the framework for the intra-African liberalisation of the airline industry. Liberalisation and deregulation have resulted in the emergence of new private airlines operating largely in the domestic and regional markets.
There is a growing trend towards privatising national airlines on the continent. This is a positive development as privatisation should improve the performance of the airline industry. Low-cost airlines have also emerged on the continent, and these could promote affordable air transport within Africa.
Meanwhile, consolidation in the African airline industry is progressing, with the number of airlines joining the major worldwide alliance groups continuing to grow. There are many advantages of consolidation and this trend is likely to continue for the foreseeable future. A growing number of major African airlines are acquiring equity in smaller airlines and, as a result, the larger operating units have a greater chance of survival in the fiercely competitive operating environment.
Growth constraints
However, African airlines are facing many regulatory challenges that constrain industry growth. The Yamoussoukro Decision is yet to be fully implemented. Africans cannot speak with one voice when negotiating with the much stronger regional entities like the European Union. The Cape Town Convention, which is meant to establish an international legal framework for financing aircraft, is yet to come into force because insufficient numbers of countries have ratified the agreement. Visa requirements in Africa are a man-made obstacle to the achievement of the African Union and the New Economic Partnership for Africa’s Development (NEPAD) goals of the free movement of people and goods.
Many African carriers are undercapitalised, with airlines facing tight liquidity. In short, most airlines have too much debt and very little equity. Equity financing may be the best option for airlines, but in its absence, the availability of debt funding at affordable interest rates is a key factor inhibiting expansion.
African carriers need capital to finance their operations and acquire aircraft with the challenge faced in obtaining debt or equity meaning that leasing is an attractive option. In the future, NEPAD and direct foreign investment or capital from global money and capital markets may provide sources of finance. The various stakeholders of the African airline industry have important roles they can play to help. The time for expansion is ripe.
Liberalisation of the continent’s airline industry is progressing too, albeit slowly. However, consolidation of the African airline industry is expected to accelerate, especially with the full implementation of the Yamoussoukro Decision. Increased opening up of African skies should see the growth of the low-cost carriers. Competition from these new players should be a strong incentive for legacy carriers to simplify their business models and to become more efficient operating entities.
Internet use in Africa is increasing at a rapid rate and increased use of IT tools should enable airlines to reduce costs and exploit opportunities for e-commerce. The growth of the African airline industry also depends on the current levels of safety and security being significantly improved. Various stakeholders, however, are already joining hands to achieve this.
This article is based on the book African airlines in the era of liberalisation written by Elijah Chingosho. For more information visit www.afraa.org
Source: Airline Business
