Insight & Analysis

Making African airlines pay

Published: Oct 2021

The long-term sustainability of Africa’s domestic air transport market hangs on improved financial management and acceptance of the need for even more extensive collaboration and consolidation.

Airplane flying over the clouds at sunset

African Airlines were living on borrowed time even before the Covid pandemic. According to the African Airlines Association (AFRAA), four decades of competition from more efficient foreign carriers had left domestic airlines with just a 20% share of the continent’s air transport market by the end of 2019.

In addition, African airlines were loss-making throughout the 2010s, during which time worldwide airlines were generally profitable. In 2019, for instance, African carriers lost US$1.66 per passenger carried, while globally carriers made an average profit of US$9.27 per passenger.

To help airline treasury teams prepare for the post-Covid environment, Kenya Airways, AFRAA and Lufthansa Consulting held a virtual workshop in September to discuss the challenges and benefits of consolidation.

Participants were told that without meaningful action, the continent’s carriers could become completely marginalised.

“The main reason behind this situation is the high cost operating environment as well as other challenges such as limited intra-African connectivity and inadequate infrastructure,” explains Maureen Kahonge, Senior Manager Business Development at AFRAA.

The association is promoting greater efficiency as a means of reducing fares so that the sector can be made accessible and affordable to a wider demographic of travellers. It also hopes that intra-continental traveller numbers will be boosted by the African Continental Free Trade Market and the African Union’s Protocol of Free Movement of People, which remove travel restrictions between African countries.

Better financial management at individual airline level would clearly boost the industry. However, there is also acceptance that the issue of high operational costs across the sector must be addressed, with consolidation set to play a vital role in that process.

Partnerships and joint ventures involving African airlines are not uncommon. Ethiopian Airlines owns 45% of the newly launched Zambia Airways and has a 40% stake in ASKY Airlines (which covers West Africa) as well as owning 49% of Malawi Airlines and Chad’s Tchadia Airlines. In neighbouring Kenya, Kenya Airways has a 41% shareholding in Tanzania’s Precision Air.

But the memorandum of cooperation signed in September between Kenya Airways and South Africa Airways carries extra significance as it has the long-term objective of creating a pan-African airline.

South Africa Airways interim CEO, Thomas Kgokolo, says the collaboration includes joint recovery strategies and other cost containment initiatives, although the agreement does not preclude either airline from pursuing commercial co-operation with other carriers.

“The first element of successful airline consolidation is appropriate corporate governance structures,” says Kahonge. “African governments need to leave airline management decisions to be made in corporate boardrooms rather than at cabinet level.”

AFRAA is also calling for enhancement of efficiency through adoption of new technologies and the removal of political restrictions that hinder intra-Africa connectivity. Effective implementation of the Single African Air Transport Market is identified as a key factor in stimulating traffic growth and developing networks.

“On the regulatory front, there is a need for uniform implementation of harmonised regulations and the establishment of working relationship between regulators and airlines,” adds Kahonge. “Political will and commitment by governments is necessary to support airline consolidation.”

The unique challenges faced when conducting financial due diligence on an African carrier include limited resources and/or expertise to conduct feasibility studies of appropriate models, and lack of adequate data to support the evaluation of potential consolidation or partnerships.

According to Kahonge, Covid is an opportunity for airlines to redefine their business strategy. “Airlines are expected to undertake various levels of collaboration and consolidation with the overall objective of putting in place sustainable, future-ready business models,” she says.

In addition to partnerships and alliances, AFRAA also recommends code sharing – an arrangement whereby an airline places its designator code on a flight operated by another airline, and sells tickets for that flight. This is established practice in many parts of the world.

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