ROUTES AFRICA: Hub and LCC Models Provide African Promise

Africa’s aviation landscape is being transformed by the ambitious growth plans of Kenya Airways, Ethiopian and Fastjet.

Of all the world’s major air transport markets, the continent of Africa is perhaps the one which has presented most challenges to stable, safe and consistent development of air services. These barriers are a combination of natural factors, including geography and natural disasters, but perhaps more importantly man-made, ranging from lack of infrastructure to corruption and safety oversight. Yet to make such one-sided observations would be to underestimate the enormous potential which Africa offers and which an increasing number of home-grown quality airlines are beginning to exploit ever more successfully.

According to preliminary data from ACI, Africa registered an 11 per cent increase in passenger traffic in 2012, the second-highest in the world after the Middle East, while IATA figures reveal African carriers carried 7.5% more passengers in 2012 than 2011. But as new south–south trading flows have grown between Africa and China and other parts of Asia, it has been the dynamic and powerful Gulf carriers that have moved in with sizeable capacity to exploit the growth opportunities.

Ethiopian Airlines CEO, Tewolde GebreMariam, expresses concern that the African Civil Aviation Commission (an institution designed to represent the interests of African carriers) has achieved “mixed effectiveness” with 82 per cent of the market being non-African. “This has to change. African air space is more open to non-African than African carriers. As long as there is a level playing field, this is not a major concern, but if not then it becomes unfair,” he adds.

He highlights the complexities of national, regional and inter-regional regulatory frameworks and believes that African countries should work together to negotiate more effectively, citing the EU’s broad remit as an example, with the EU and US being “balanced partners”. Gebremariam also points out that a poor safety record in a small number of African countries should not be used as an excuse to tar others with the same brush when in fact the vast majority adhere to international standards.

With a population of over one billion people, the opportunity for route development in Africa is vast. Income levels are growing, fed by economic growth. The massive take-up of mobile phones for communication and banking is a barometer indicating a willingness to embrace new technology, rising prosperity and latent untapped demand for accessible air travel.

Projected absolute traffic growth is, in isolation, impressive: around 60 million people flew in Africa in 2010 and this is expected to rise to 150 million people by 2030. However, the statistics should be put in context. Boeing’s 2012 market forecast predicts African annual GDP growth to 2031 at 4.4 per cent per annum, ahead of the global average of 3.3 per cent. Yet in terms of aircraft, Boeing expects to deliver just 900 new aircraft over this period to African carriers, less than 3% of forecast total global demand for 34,000 aircraft. Looked at from a different perspective, Airbus puts African RPK growth at 5 per cent for the same period, but accounting for just 3 per cent of global RPKs and for 4 per cent of global demand for new aircraft.

The African market still struggles under the weight of government bureaucracy and high taxation levels on the sector. In 1999, African carriers signed up to the Yamoussoukro Decision, which was designed to bring air service liberalisation and Open Skies to intra-African air markets. However, the reality has not lived up to expectation and the market remains fragmented and poorly regulated.

Despite the hurdles, there are a number of companies native to the continent that are leading the way in successful route and network development. These airlines are proving that it is possible to follow different but disciplined business models and to deliver both service and financial results to world-class standards.

So who are these leaders? South African Airlines, long regarded as one of the best on the continent, has recently been going through tough times with instability of management and financial problems. But elsewhere, Ethiopian Airlines and Kenya Airways, two airlines with lengthy pedigrees, are flourishing.

Ethiopian Airlines has been in business for 67 years. It is government owned but has to stand on its own two feet, internally funded and self-financing its activities. Fast, profitable and sustainable growth has been delivered over the last eight years. The airline recorded 25 per cent passenger traffic growth in 2012 to 4.6 million passengers, while freight grew by 16 per cent. Twelve-month growth to June 2013 is expected to be 20 per cent.

“African economic development will be the biggest opportunity as it will allow us to grow. Africa will be one of the fastest-growing regions,” says Gebremariam. Ethiopian has developed a very effective hub at its home base of Addis Ababa. An early morning wave operates to points across Africa, followed by early evening departures to Europe, the Middle East and Asia. China is the largest single market with 26 flights per week.

Ethiopian was one of the first airlines globally to receive the 787 Dreamliner, with four delivered by June 2013. After the recent worldwide grounding all are now back in service. This aircraft’s long range and operating efficiencies are key to the company’s ‘Vision 2025’ growth strategy. The objective is to become “the leading aviation group in Africa”, expanding the network to 90 international and 26 domestic destinations, increasing the fleet to 120 aircraft and passenger volumes to 18 million.

Kenya Airways was privatised in 1996 and has worked closely in its development with shareholder Air France-KLM. In 2005, it received globally recognised IOSA safety certification. The airline, led by CEO, Titus Naikuni, is recognised as being one of the best managed in the industry but still has to combat barriers in its home country when taking tough commercial decisions necessary to improve efficiency.

There have been strikes and questions in the Kenyan parliament concerning the company’s recent efforts to slim down its workforce: “We see a lot of opportunity for improvements in productivity,” says COO, Mbuvi Ngunzi, an accountant by training, who comes from outside the airline industry having worked at Bamburi Cement. His approach is: “Can we do this more simply?” It is this business mindset and willingness to challenge the status quo that help explain Kenya Airways’ success where others have failed.

The airline is more focused on the African market than Ethiopian, but it still operates extensive transcontinental services to Europe, the Middle East and Asia, using a fleet of B767s and B777s. The airline has just entered a codeshare with Etihad and launches direct services to Abu Dhabi this summer. Boeing 787s are on order and there are plans to widen the long-haul network to North and South America, including services to Brazil.

A sizeable presence will also be built up in the key Chinese market. Currently only Guangzhou is served by Kenya. Highlighting the strong growth in African economies, Ngunzi points out the importance of meeting the requirements of the growing number of African traders who need to travel to an increasing number of markets across the world.

There are numerous arguments stacked against the likely success of low-cost carriers in Africa and yet there is an overwhelming market dynamic in favour: large populations, long distances, difficult surface transport and a desire for affordable, safe and reliable travel.

Newcomer Fastjet, which began services at the end of 2012, looks to have a better chance of succeeding. Stelios Haji-Ioannou, founder of easyJet, is a minority investor and consultant to the airline. CEO, Ed Winter, also ex-easyJet, has extensive operational experience of flying in Africa as a pilot, dating back to British Airways and BOAC.

Noting that “Africa is not an easy place to do business”, Fastjet can draw on easyGroup’s “expertise in running low-cost airlines” says Winter. It also has the advantage that its largest shareholder is Lonrho Plc which has long experience in trading across multiple business sectors in Africa. “It has a huge reputation,” Winter explains.

Winter spent six months working on the project with Stelios and literally “Googled Africa”, recognising that there was huge potential opportunity. Lonrho already held four AOCs with its regional airline Fly540, which have been used to facilitate the start-up of Fastjet. There have been some well-publicised legal spats with the management of Fly540, but it appears that an amicable solution has now been found to these.

The airline’s initial operations started in Tanzania and plans are in hand for a roll-out to Kenya, Ghana and Angola, using the pre-existing AOCs. “Load factors up to March averaged 78 per cent, great for a start-up, and really validated the ability to stimulate the market,” explains Winter, while “approximately 35 per cent of our passengers were first-time flyers”. There have been frustrations along the way. “Getting designated on international routes has been our biggest problem, with protectionism and corruption being a huge issue,” but Winter is optimistic that they will succeed in breaking through these barriers.

One indication of the delicate path to achieving acceptable cost levels for airlines in Africa and the attendant political sensitivities was Fastjet’s success in obtaining the support of the former Ghanaian President to reduce international departure tax. However, when he died, they had to restart the process. Nevertheless, things look to be moving in the right direction. Plans were recently announced to move into the South African domestic market, taking advantage of the failure of local LCC 1time.

There will be more bumps along the road as the African market continues its growth path, but these three airlines are proving that, with persistence and good management, the opportunities certainly outweigh the challenges.

This article was modified from a story that appears in the latest issue of Routes News, the world air service development magazine, and which can be viewed online here.

Richard Maslen

Richard Maslen has travelled across the globe to report on developments in the aviation sector as airlines and airports have continued to evolve and…