Another setback for aviation in Africa

A tour of the less-well covered regions of the aviation industry

Much has been written about the aviation industry in the USA, Europe and Asia and how it has been coping with the pandemic.

We hear less about Africa, the Middle East or Latin America and I have been asked by the aviation practice of boutique executive search firm Venari Partners to help to redress the balance.

In a series of posts over the next few weeks, I’ll take a look at each of these regions and I’ve decided to start with the land of all our ancestors, Africa.

Untapped potential

Home to 1.4 billion people and with a land area three times the size of either China or the United States, Africa has always been a continent with huge potential for aviation.

But even before the pandemic struck, Africa was a continent with an underdeveloped aviation industry. That is despite the fact that air travel is often the only real option for getting around, given the large distances involved and poor, or in many cases non-existent, rail and road networks.

Propensity to travel by air is strongly linked to income levels of course, and it is Africa’s low GDP per capita that is the main reason why the industry is so underdeveloped. But that is not the only factor. Africa’s GDP per capita is almost identical to India’s, but intra-African airline capacity in 2019 was only 60% of intra-India capacity.

Source: Wikipedia, 2019 capacity from OAG, GridPoint analysis

India’s slightly bigger population is crammed into a land area about a tenth the size of Africa. That works both ways in terms of aviation demand. People tend to stay close to home when they travel, but it also makes road and rail more of an alternative for travel, with Indian Railways carrying over 8 billion passengers a year. Rail is a much smaller competitor in Africa. In South Africa, the continent’s second largest economy by GDP, rail carries only 270m passengers a year. It is even worse in Nigeria, the biggest country in Africa both by both GDP and population. Years of neglect have left the rail system in disrepair and carrying only 2m passengers a year.

Of course, India is a single country, whereas Africa comprises 54 separate countries. But the intra-European air travel market is not so different in size from the US domestic market. Europe generally seeks to facilitate movement of people between its countries and has deregulated its aviation market, creating something close to a “domestic” air travel market across the continent. Deregulation in Europe led to enormous growth in intra-European flights and the emergence of large and successful pan-European carriers.

The development of aviation in Africa is still hobbled by national restrictions and progress on liberalisation has been slow. Infrastructure constraints, visa restrictions and a lack of aviation support services also hold back the region’s potential. Back in 2012, a team of ex-easyJet executives founded FastJet, a low-cost airline with big ambitions to replicate easyJet’s success in Europe across Africa. It has been a dismal failure, defeated by problems getting route rights and the UK-based management team completely underestimating the difficulties of doing business in Africa.

But despite the challenges, prior to the pandemic, the African aviation market had continued to grow slowly but steadily. Airlines based in Africa were the fastest growing regional group in 2019, according to statistics from IATA.

Source: IATA

Before getting into the problems created by COVID-19, let us take a look at the makeup of the African aviation market in 2019.

African air capacity

As is the case for most parts of the world, intra-regional capacity is the largest individual regional market segment. However, in terms of ASKs flown, the Africa to Europe and the Middle East are each not far behind and are bigger in aggregate. Most traffic to and from Africa goes via the Middle East or Europe, with few direct flights to other parts of the world.

Source: OAG, GridPoint analysis

In terms of carriers, Ethiopian Airlines is the clear leader for intra-African flying. The financially troubled South African Airways and its low-cost subsidiary Mango came in second place. There are two other low-cost carriers of note. The largest is FlySafair, a South African based carrier which started operations in 2014 and now has 18 aircraft. Also based in South Africa is Kulula, owned by Comair who operate the low-cost airline alongside a British Airways franchise operation targeting more affluent customers.

Low-cost capacity is coloured in red. Source: OAG, GridPoint analysis

When it comes to capacity to and from Europe and the Middle East, the market is dominated by non-African airlines. Ethiopian and Royal Air Maroc are the only two African airlines which make it into the top 10. Overall, Emirates is the clear leader, with Air France - KLM in second position and the largest operator to Europe.

Source: OAG, GridPoint analysis

Pre-crisis financial position of the African carriers

Going into the crisis, only Ethiopian Airlines could be said to have been in decent financial shape. They made a 7% pre-tax profit margin in the year to June 2019 and had cash reserves equal to 15% of revenues.

Egyptair was also profitable, although only just so with a profit margin of 2% and much lower cash reserves of only 8% of revenue.

South African Airways hasn’t published results for three years but was already bankrupt before the pandemic hit, with reported losses of over $3 billion in the last three years.

Kenya Airways has also been loss-making in recent years, reporting losses of around 10% of revenues in the year ending December 2019. With cash reserves equal to only 2.4% of revenues and massive debts equal to 98% of its assets, it was in no position to withstand any kind of downturn. Certainly nothing of the scale of COVID-19.

Source: company reports, press reports for latest available annual reporting period: Kenya (December 2019), Ethiopian and Egyptair (June 2019), RAM (estimated 2019), SAA (March 2017).

COVID-19: an existential threat, or a path back to state ownership?

African airlines have been hit every bit as hard by the pandemic as elsewhere. In fact, the 86% hit to traffic in September compared to last year made African based airlines the worst hit region, after the Middle East.

In the case of South African Airlines, which was already in bankruptcy before the crisis, the threat of liquidation is a very real one. At most, a much diminished airline may emerge from the wreckage. To be honest, the South African government would do better to allow the carrier to disappear and stop throwing billions of dollars into the SAA money-pit. When demand returns, other airlines will undoubtedly be ready to step in to operate any viable routes.

There has been talk about Ethiopian Airlines being interested in participating in a rescue of South African Airlines. It seems more likely to me that they are only interested in picking up a few assets such as slots, which would make it easier for them to jump into the gap if SAA doesn’t resume operations. For all that Ethiopian were the most financially solid of all the African carriers, they will undoubtedly have enough problems of their own to deal with at the moment. Their sole shareholder, the Ethiopian government, had been planning to part-privatise the company this year but has had to put that plan on hold. Using Ethiopian tax-payer money to save jobs in another country seems unlikely to get their support.

For now at least, the other airlines also seem to have the support of their governments. Both Egyptair and Royal Air Maroc are wholly government owned and the Kenyan government has tabled proposals to move Kenya Airways back into full national ownership too.

State ownership has not generally been associated with well run and financially successful airlines. Africa had been moving in the direction of privatisation and slowly towards liberalisation too.

Both of those trends have been thrown into reverse by the pandemic. There will be even less money available for investment in infrastructure. The long awaited “day in the sun” for African aviation seems further away than ever.