Africa – Is it a major untapped market for the airline industry?

Publication | December 2015

Introduction

The African continent is made up of 54 countries, 1500 to 2000 languages and approximately 1.1 billion individuals. We certainly cannot treat it as a homogeneous grouping. It’s characterised by countries at different stages of economic development and variable degrees of political stability. In comparing countries like Eritrea, Nigeria and South Africa, that diversity is apparent.

What we can say is that Africa has been experiencing a high population growth since the second half of the 20th century. In 2010, its population reached one billion and if current demographic trends continue the population will be 1.4 billion by 2025 and 1.9 billion by 2050. The Continent is characterised by vast distances and it has neither good road nor rail systems. Transportation by air would seem to be the strong option for freight, business, leisure and tourism.

Expectedly, there is a large variation across countries in the propensity to fly and the GDP of each is an important factor. Despite representing 15% of the world’s population, the 230 airlines present in African airspace operate just 5.5% of the world’s commercial passenger and freighter aircraft. Additionally, the average age of the African airlines fleet is the oldest of any world region – 17 years versus 13 years for the global average.

The forecast and significant population growth will deliver more demand for air travel. A study prepared for the International Air Transport Association (IATA), the trade body for airlines, points to current demand being lower than it could be because of barriers restricting intra-African air markets. The Continent has been slow to liberalise their intra-African air markets. It has been shown, most starkly across the European Union, that liberalisation stimulates demand for air travel, both intra and intercontinental. It creates competition and, along with it, service improvements and lower costs that engage business and leisure flyers.

Statement of intent - the Yamoussoukro Decision

The problems caused by a lack of liberalisation is understood widely by Governments across Africa and have been so for several years. Many African countries adopted the Yamoussoukro Decision in 1999 to address this. This agreement committed 44 signatory countries to deregulate air services and promote regional air markets opening to transnational competition. The agreement was a follow-up to the similar Yamoussoukro Declaration of 1988.

The key points of the Yamoussoukro Decision of 1999 (YD) included:

  • Full liberalisation of intra-African air transport services in terms of access, capacity, frequency and tariffs;
  • Free exercise of first through to fifth freedom rights of passenger and freight air services by eligible airlines, i.e. the ability of a carrier from country “A” to carry traffic from country “B” to a third country as an extension of the service between countries “A” and “B”;
  • Fair competition on a non-discriminatory basis;
  • Compliance with international safety standards; and
  • A requirement that each nation state develop policies to implement the above.

The explicit intent to promote co-operation to support the growth of regional air travel is mirrored in other regions of the world.

In Europe, the aviation market was liberalised through three successive packages of measures adopted at a European Union (EU) level. The measures covered air carrier licensing, market access and fares. Air transport had been highly regulated and dominated by national flag carriers and state-owned airports. The packages removed commercial restrictions for airlines flying within the EU, such as restrictions on the routes, the number of flights or the setting of fares. All EU airlines may operate air services on any route within the EU. According to the EU, ‘Linking people and regions, air transport plays a vital role in the integration and the competitiveness of Europe, as well as its interaction with the world.’

To date, the implementation of YD has been slow and limited. According to a recent study commissioned by IATA, this is because of:

  • Protectionist policies favouring “national” airlines
  • Discriminatory practices in favour of other continents’ carriers
  • Severe restrictions on African carriers provided by, among others, EU safety regulators
  • Non-physical barriers – visa and other documentary requirements, shortage of foreign exchange etc.

IATA is bringing their influence to bear to push for implementation of YD. In July 2014, it published a study that used statistical modelling to demonstrate the economic benefits of implementation.

The model forecasts traffic between 2 African countries based on the 2 countries’ economic characteristic, levels of trade, geographic relationship and the characteristics of the air service bilateral agreements between them. By pinpointing changes to the terms of the bilateral, the model can be utilised to estimate the traffic impact resulting from liberalisation.

The traffic flows between the 12 African countries included in the study are projected to increase from 6 million passenger movements in 2013 to 11 million after liberalisation.

Passenger traffic impact of liberalisation

Source: ‘Transforming Intra-African Air Connectivity: The Economic Benefits of Implementing the Yamoussoukro Decision’ by InterVISTAS Consulting Limited

Liberalisation the organic way

South Africa is not one of the 44 signatories to YD. The Government has, however, written into their national plans objectives to address barriers related to intra-African air markets as well as those outside. The drivers relate to their national interest to grow the South African economy. They are engaging with the necessary stakeholders to address impediments that will restrict the country’s development.

The most recent iteration in mid-2015 of the South African Department of Transport’s Airlift Strategy, makes every effort to align itself with numerous strategies arising out of the BRICS alliance and the National Development Plan. ‘Airlift’ refers to the moving of freight and people by air and some of the objectives of the strategy are to:

  • Create and maintain an enabling framework within which both suppliers and consumers of air transport services can exercise reasonable flexibility and choice;
  • Critically assess weaknesses in the current regulatory framework;
  • Synchronise the basis for bilateral air services negotiations with other national priorities;
  • Develop specific guidelines for various unique markets with emphasis on the needs of intra-African air services;
  • Encourage a common sense of purpose amongst stakeholders; and
  • Improve the regulation of particularly the supply-side of air transport services.

Evidence of this is the opening of new routes in September into Durban for Qatar Airways and Turkish Airlines.

Airline success

During 2012 Rubicon Diversified Investments sought to acquire “Fly 540” - an aviation business operating in Africa with a view to creating an intra-African airline to be subsequently re-styled as Fastjet.

At the time its owner, Lonrho Aviation [“BVI”] Limited, had interests in Kenya, Ghana, Tanzania and Angola.

Rubicon recognised that the aviation sector in Africa was significantly underserved. It noted that the then regional offerings in Africa were viewed as being “sub-standard relative to what [Rubicon] consider to be international norms in relation to safety, pricing, punctuality, service and route access”. Source: Press release Rubicon Diversified Investment 13 June 2012.

Rubicon’s strategy was to capitalise on the increasing demand for business and leisure air travel in Sub-Saharan Africa. It also intended to provide regional distribution options for intercontinental carriers flying into Africa.

The acquisition was regarded as having a high risk factor. Some of the risks that Rubicon identified included:

  • The extent to which economies of target countries would improve. Rubicon were concerned that “many countries in Africa are facing socio-economic difficulties, including foreign currency shortages, disease, civil unrest, unemployment and shortages of food, manufactured goods and fuel.” Source: fastjet Plc Prospectus for new ordinary shares, 16 April 2014
  • Clearance and approvals from regulatory authorities being delayed or hindered by the administrative and regulatory frameworks in target countries.
  • To what extent would a country approve the foreign ownership of airlines? The potential for target countries to introduce legislation that prefers the position of local shareholder interests is a serious concern. There is a worry that if such legislation was implemented, Rubicon would be unable to obtain or retain the majority control of their businesses and may be forced to sell or, worse, have its assets confiscated.
  • Foreign currency controls and shortages of skills, machinery and equipment making it difficult for Rubicon to repatriate dividends and import the necessary equipment and skills to maintain their fleet of aircraft.
  • Relevant infrastructure including power and communication sectors being of a sufficient standard to support an aviation business.

Despite these concerns, the airline was purchased and has become, in due course, as Fastjet, a successful, regional low cost carrier.

In conclusion

Governments and businesses can form the necessary relationships to drive through their African aviation objectives without YD. It is a lot easier, however, for decision makers to embrace African aviation projects if the points of YD have been implemented. YD covers government trade and investment policy generally and this is important to the business community outside of Africa.

The risks identified by Rubicon to the Fastjet investment largely fell outside of the ambitions of YD.


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