Business

Justifying Africa’s expensive aviation sector

Over time, there have been talks of African aviation market growing with great potential, but lacking in harnessing the greatness the continent’s aviation possesses, writes
WOLE SHADARE

 

Promise and opportunities

 

The African aviation market has always been promising and filled with opportunities, yet operating in the environment is challenging. It is a fast-growing market in which air connectivity went up by 30 per cent from 2014 to 2019.
Africa has a large and young workforce that can drive economic growth, which brings velocity to digital innovations.

 

The continent has skipped certain stages of digitalisation and jumped right into the mobile world. Coupled with the entrepreneurial spirit seen across the continent, African travelers have adopted smart, digital solutions such as micro money platforms.

 

A report by Lufthansa Consulting on Africa’s aviation survival entitled, “Becoming a master of survival in the African airline industry,” stated that in 2019, Africa made up 12 per cent of the world population, but only two per cent of passenger air traffic.

 

Lufthansa Consulting report

 

Lufthansa Consulting expects that there will be room for all types of business models in Africa in the future: Full Service, Hybrid, Low-Cost and Ultra-Low-Cost carriers. When defining their new business model, airlines need to consider how the new normal will shape up, which segments they can serve best and where they see the greatest potential.

 

It further stated that “Africa is the most expensive environment on earth to operate an airline. This is mainly driven by market access limitations and high operational costs. In some areas, the governments charge high user development fees and the overall fueling costs are expensive.

“For domestic travel, the prices for mandatory COVID-19 tests were unreasonably high and have made travel within Africa even more costly.”

 

COVID-19 impact

African carriers just like every other carrier were badly hit by the devastating COVID-19. This has further added to the excruciating pain of the continent’s airlines.

 

African Airlines were hit hard by the pandemic with capacity dropping to 20 per cent or less of 2019 levels. Most are planning to produce below 80 per cent levels compared to 2019 by the end of 2021.

 

With vaccines being administered in global markets and being identified as one key driver, we are now just entering the phase of recovery.

 

The slow vaccination rate in Africa (just 4.2 doses per 100 people, compared to 77 for North America and 76 in Europe) will be a major challenge going forward.

 

African Airlines are facing the question of how they can use this crisis as an opportunity to transform their business model. In their search for answers, airline managers need to take an investor’s perspective on their own enterprise and evaluate two main dimensions.

 

First, how future-ready is their business model, and was it working before COVID-19 struck? Secondly, will it work in the post COVID environment where so much has changed?

Evaluation

 

Depending on the answer, airline managers need to evaluate whether implementing balance-sheet optimizing and cash-saving measures will be sufficient or whether a transformation of the business model is necessary to become a master of survival.

Addressing the issues

There is no denying the facts as laid down by Lufthansa Consulting. Africa’s air transports woes are well documented and one that may remain so for many years to come because of so many factors such as low capital to run a very sensitive venture like an airline, provision of airports infrastructure, high lease rental of aircraft and equipment, high airport taxes and charges, navigational system, low traffic made up of virtually empty airspaces, low propensity to travel by air, and lack of disposable income occasioned by poverty and poverty of many African nations among other issues.

 

High taxes/charges

 

It is very true that taxes are higher in Africa with the cost of operations. Airport authorities most of the time raise taxes/charges to generate enough funds to run many of the aerodromes which are sometimes run on generators in places where there are no stable electricity supplies.

Poor international air traffic figure

 

For instance, Nigeria’s international passenger traffic oscillates between seven and eight million passengers annually; an abysmal figure which shows that only a few are first time travelers while the majority of that number are frequent travelers.

 

Nigeria recently increased airport taxes for international passengers to $100. The country through the Federal Airports Authority of Nigeria (FAAN) justified the increment which it said was inevitable in view of the high of operations and provision of facilities among others.

 

Volume consideration

 

In the United Kingdom, Heathrow Airport processes over 70 million passengers annually and can as well charge $40 per passenger. Just like every other busy airport, they make it up with the volume of passengers they record every year.

 

Seventy million processed passengers annually give so much money to the airport managers and still leave enormous funds for airports expansion and development. No wonder, airports like Heathrow, Dubai Airports, and other busy airports around the world daily undergo maintenance and provision of other state-of-the-art technology and improving them for passengers’ comfort.

 

Airlines’ rising airfares, poor connectivity

 

The same applies to airlines. There are less than five recognizable Low-Cost Carriers (LLC) in Africa that are offering cheaper fares. Air transport is arguably expensive in Africa, occasioned by poor air connectivity. A trip from one part of the continent is herculean. The poor air connectivity between two African nations could force travelers to first make a trip to Europe from one African state before connecting to the main destination in the region. . It is now easier to travel within Africa than before, but the cost is still far higher than in other places and it is as high as 50 percent.

 

Challenges of aircraft financing in Nigeria

 

There are a number of challenges to aircraft financing in Nigeria including but not limited to multiple charges by the regulator, high operation costs including bank interest rates, multiple taxations, and a lack of understanding of the sector by local financial institutions.

 

These factors have led to the loss of various local airlines including First Nation and IRS airlines and a reduction in operating aircraft in Nigeria from 90 in 2015 to 53 in 2019. To address some of these challenges, the federal government through the NCAA considered granting incentives to operators such as tax waivers and other concessions as a means of attracting investment.

 

Indeed, the current paucity of operating aircraft is because it has become extremely difficult for Nigerian airlines to lease aircraft. They are forced to buy and buying even used aircraft could be very expensive. Consequently, the operators in order to recoup their investments, pass the cost to the travelers and that has continued to see to the astronomical increase in airfares.

 

Experts said that until impediments like government’s protectionist policies, poor connectivity, and infrastructure are addressed head-on, the high fares would continue to stifle the growth of aviation industry on the continent.
Rethinking new business model

 

Some airlines will need to fundamentally change their business model. An example is Airlink in South Africa. The continued difficulties of the national carrier resulted in a vacuum in the market. This allowed Airlink to step away from its franchise partnership with SAA; launch independent operations under its own code, build new interline partnerships, and set itself up for growth.

 

Many of the continent’s carriers are averse to changes as they still apply the outdated and archaic model of the 1980s to run a dynamic and sophisticated airline and aviation industries.

 

Last line

 

A set of key strategic questions should guide airline managers in determining an airline’s future successful business model. Any discussion should start with the questions of what the airline’s purpose is. Is it optimizing profits or may there be a more nuanced purpose? Airlines that are owned by public entities tend to serve purposes beyond optimizing profits, e.g., providing connectivity as a critical part of the country’s infrastructure. Competitive business models are then based on specifically targeted customer groups in specific geographic regions combined with the best fleet to reach them.

 

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