Hilka Birns/CAPE TOWN
Many African carriers find themselves in a no-win situation. On one hand they face soaring fuel bills, rampant finance and insurance costs, depressed home currencies battered by the raging US dollar and increasingly difficult grounds on which to justify the state subsidisation of airlines when basic necessities such as health education and housing are not being delivered. On the other hand, they are staring down the barrel of globalisation, which for some of the traditional flag carriers equates to subservience and a loss of independent status tantamount to re-colonialisation. There is agreement that the status quo must change, but there are differing views on the new role African airlines will have to adopt to survive, let alone grow.
Most of Africa's scheduled carriers remain either wholly or partly state-owned (45 at last count). A handful have embraced globalisation by selling strategic equity stakes to foreign airlines, such as Kenya Airways-KLM; South African Airways (SAA)-SAirGroup; Air Mauritius-Air France and Air India; and Comair-British Airways. Air France also retains its historical minor shareholdings in a host of francophone African airlines.
Most African carriers have formed partnership ventures with other airlines, but Kenya Airways stands out as the only one to have joined a global alliance (Wings). SAA has forged its own "starburst" strategy by entering into code-shares with individual operators in each of the global alliances. It also has a strategy of building a strong intra-African airline network. Comair is the only African carrier to have entered into a franchise agreement that has resulted in an established international brand competing in a regional African market.
Problems facing some African operators include vulnerability to political interference and instability (Air Zimbabwe, TAAG), war (Air Zaire, Rwanda Airlines) and soaring inflation with depressed home currencies and weak economies. Revenues are earned in soft currencies, but costs - particularly fuel, finance, insurance and spares - are largely payable in US dollars. Recent casualties of the economic situation include Zambia Airways, Aero Zambia, Air Lesotho, Ugandan Airlines and Royal Swazi National Airways. It has also resulted in international carriers withdrawing from the market, such as Austrian Airlines from South Africa and Zimbabwe, and Lufthansa from Namibia. Topping these woes is the unaffordability of air tickets for most Africans.
Johannesburg, the southern African hub, presents a unique problem for regional operators. "Fuel at Johannesburg International Airport is 25% more expensive than the average fuel price at 100 similar airports worldwide," says John Morrison, chief executive of the Airlines Association of Southern Africa (AASA). "Aviation in South Africa is a high-cost industry and is seen as a soft target for excessive charges and levies from government owned or partly-owned monopolies," he adds.
South Africa's jet fuel pricing structure is derived from a complicated formula devised over 20 years ago. It provides significant profits for the national oil refinery, which is owned, as is the pipeline, by the parastatals Sasol and Petronet. "These two organisations between them result in an excessive charge of about 40 cents a litre payable directly by the airlines. In 1998 this resulted in an annual excessive charge of over R200 million ($29 million)," Morrison claims.
Negotiations are under way between operator groups and the South African Government to identify the true cost to airlines. The government has commissioned two studies on the fuel issue and is expected to convene a meeting of interested parties soon.
Departure Tax
In South Africa, airworthiness fees, Civil Aviation Authority charges and passenger levies may soon be joined by a R100 air passenger departure tax, which is due to be imposed on airlines from 1 November. "The government is hoping to raise R300 million with the tax of which only R140 million will be ploughed back into tourism, the rest going to central coffers and not benefiting aviation. Airlines are resisting this tax and meetings are being held with government at present," says Morrison.
The AASA also represents regional carriers in ongoing negotiations for a cut in airport and ATS fees in South Africa, which adopted a user-pays approach in the mid-1990s for these types of services.
More widespread problems include low yields from domestic services and poor staff productivity, despite low labour costs. Outsourced service providers, such as ground handling and catering, benchmark their costs against industry leaders operating in hard currency environments.
There are alternatives, but there are differing views on which is the best way to move forward.
"I don't believe there is still a place for state-run airlines in Africa. They are usually subsidised, which means they don't have to make a profit, which in turn distorts the market," says Morrison. This view is echoed by Bill Meaney, SAA's executive vice president alliances and network strategy: "We're seeing a trend away from subsidisation, because African countries are under pressure to deliver more pressing needs. We will in future see corporatisation and rapid privatisation as state carriers have to start financing themselves."
Status Symbols
Another standard-bearer for change is SA Airlink co-owner and AASA president Roger Foster. "In some African states there is still an emotional attachment to airlines as political status symbols. Some African states cannot accept that they cannot afford to have a national airline and in some cases it is clear that they have no notion or understanding of airline economics. There needs to be a decision: is it in the national interest to fuel national pride by owning a flag carrier, or is it in the national interest to provide a viable air transport service? In my opinion, government should not be in the business of running an airline. They should rather be facilitating the running of air transport services".
Foster highlights Kenya as an example where air transport has been a driver for the country's economic recovery. Putting his money where his mouth is, Foster's own carrier has entered into a partnership with the Swaziland government to restructure the bankrupt Royal Swazi National Airways into what has become Airlink Swaziland, a profitable and reliable air service .
International Finance - the private sector development arm of the World Bank - has advised some African countries to privatise their airlines. In Nigeria's case it has called for the liquidation of Nigeria Airways unless it can find strategic equity partners willing to inject fresh capital.
The privatisation versus corporatisation debate continues to rage. "Privatisation is not the issue," says Omari Nundu of the Southern African Development Community's (SADC) aviation committee. "I believe that state-owned airlines can operate without government interference, but we need to liberate the managers and empower them to run the business".
International Air Transport Association (IATA) director for Africa and Indian Ocean Islands Sassy N'Diaye believes that consolidation is inevitable. "The only way for African airlines to survive is to pull together now, but optimistically, I don't see more than five intercontinental African airlines surviving in the long run." He lists Air Afrique, EgyptAir, Kenya Airways, Royal Air Maroc and SAA as survivors.
Global Players
However unpalatable globalisation seems for some carriers, it is a reality they cannot afford to ignore. "Some airlines see it [globalisation] as a threat to their independence. They see global players as taking market share away from them within their own markets and perceive the global player as being the main beneficiary in such relationships," says Morrison. A fear often expressed at African airline conferences is that European alliance partners may rob their African counterparts of effective control over their businesses, while there is resentment about mega-carrier's prominence in African markets.
Yet those who have embraced globalisation see the immediate benefits for African carriers. "They provide quality endorsement and enhanced credibility for African airlines," says Foster. "In a globalised industry you need critical mass in terms of infrastructure and global distribution. In comparison with Europe and North America, African airlines on their own have limited capabilities to compete." Other benefits cover skills transfer, provision of state-of-the-art IT and either collective or leveraged purchasing power, which will be passed on from the senior partner if there is a vested interest.
"The industry is changing rapidly. The next step will be global brands with individual operators carrying their own names as sub-brands and virtual airlines operating purely as marketing agents which outsource the operation to specialists. Africa needs to take note of this. Rather than resist it, it should forge alliances with established airlines, which are already viable entities," says Foster.
But it is one thing telling African airlines to jump on the globalisation bus. What if the bus does not stop on your patch? The understanding is that the benefit for the global player is having guaranteed "bums on seats" on specific routes which are fed from a regional carrier. Clearly then the trick is to become an attractive feeder either to a global player or to an African continental carrier. Says Meaney "Africa is one of our highest yield routes. "It's a question of getting enough critical mass by using smaller gauge aircraft more frequently, preferably on daily services. It's also a question of having a feeder network beyond the hub and having the right feeder and de-feeder partner."
N'Diaye amplifies the often-voiced African resistance to this conventional wisdom. "African carriers will tell you they are being led into becoming feeder carriers to intercontinental operators, but this is not an honourable role as it does not serve African participation in the world of commerce."
"Africa has 700 million inhabitants, but represents less than 4% of world commerce. By 2010 it is estimated that Africa will have over one billion inhabitants. The market is there, we just need to find a way of growing the air transport market in Africa. The problems we face are those of pricing and purchasing power," he says. "New thinking needs to be done. Africa is where Europe was 40 years ago. State subsidisation of domestic airlines is needed to make air transport affordable for Africans. Railways and roads are not reliable except in a few countries."
Nundu agrees with this, but says the key to African airline survival and growth lies in liberalisation of intra-African air traffic rights:. "The potential market is there, but it is being restricted". He believes that African airlines should be allowed to fly to wherever, with whatever equipment, they want and whenever they want. This would stimulate competition, bring down fares and grow the market.
Larger Catchment Areas
Meaney disagrees. "No, liberalisation will do just the opposite. I think it will result in fewer carriers, which will have to go into partnerships with other African carriers and will have to operate far more efficiently to survive. We need much larger (passenger) catchment areas in Africa." He says SAA supports moves to liberalise intra-African air traffic regulations, in line with its vision of building a strong African network. Having sewn up Southern Africa, it's looking to build one or two hubs in East and West Africa to create a network of daily flights with partners in both regions.
The most recent addition is a codeshare agreement with Nigeria Airways on the Johannesburg-Lagos-New York route. This makes Lagos another strategic building block in SAA's West African network. In East Africa, SAA's recent failure to acquire 49% of Uganda Airlines means it may focus its efforts on turning SA Alliance, which it co-owns with Uganda and Tanzania, into a regional carrier.
Much hope is pinned on the liberalisation of African air traffic regulations. In 1988, at a meeting at Yamoussoukro, Cote D'Ivoire, African states signed an accord committing their flag carriers to intra-continental collaboration. Eleven years on little has changed. Instead it has brought the realisation - that the air transport market has to be liberalised before airlines can co-operate. This decision has been endorsed by various African regions, notably the SADC and the Common Market for Eastern & Southern Africa (COMESA).
Source: Flight International
