Strengthening African Airlines Financial Position for Sustainable Life Post-COVID-19

Roland Ohaeri Covers, Features 2 Comments

Overland Airways

The aviation landscape globally is changing as a result of COVID-19, with African airlines likely to be the hardest hit. According to IATA’s COVID-19 financial impact assessment of March 2020, Africa will experience one of the starkest declines in traffic. The majority of African airlines are currently grounded, with notably bankruptcies of South African Airlines and Air Mauritius, with a lot of smaller airlines likely to follow suit.

 

This might be a unique opportunity for the African aviation sector to reset, given that pre-pandemic, most African airlines were not profitable. African Governments and other stakeholders in the industry could truly use this asan opportunity to create a master plan for a sustainable and profitable aviation model for the region.

This will involve radical thinking from the African Governments and aviation stakeholders and a thorough examination of the current state of play will be required. In addition alliances will need to be established between countries in the region.

 

My thoughts and ideas on how African airlines could strengthen their financial position post Covid-19 are as follows:

 

Economies of Scale

Aviation is a scale business; most carries in Africa don’t have scale to achieve economies of scale in their business model. Ethiopian Airlines is one of the airlines which have scale as well as a totally integrated value-chain, which includes its own MRO and a training centre.

Given that the pandemic has exposed a lot of African airlines, this is a great opportunity for them to seek partnerships and alliances among themselves to create a more financially sustainable business model.

 

It does not make sense in the long-run to have several airlines with few aircraft trying to compete with each other. What would be better for the region is to have a few larger airlines, with the scale to be financially strong in the long-term and profitable.

The post-COVID-19 era is an era of mergers and acquisitions; the African airlines require some consolidation. “Time to forget about competition and think about a very robust aviation industry” – according to Captain Ado Sanusi, Managing Director, Aero Contractors.

 

Strategy/Business Model

The current business model pursued by several African airlines also raises a number of fundamental questions about what is required to run a successful airline in Africa. In a recent article by Sylvain Bose, he argues that there are three potential profitable and viable strategies/business models for airlines in Africa:

 

The intercontinental mega-hub strategy/business model, pursued by Ethiopian Airlines and other ultra-rich countries like Emirates and Qatar. This model requires the Government to provide a huge amount of financial backing to a crafted “whole of state aviation strategy” that is essentially the cornerstone of the nation’s development journey.

 

The domestic low-cost strategy, pursued by the Kulula in South Africa with the aim to stimulate traffic flows through low prices like the low-cost carriers successful in other parts of the world (Easyjet and Ryanair in Europe).

 

The regional premium strategy, pursued by ASKY or Air Cote d’Ivoire which aims to harness business traffic out of regional economic capitals/hubs.

Unfortunately, a larger proportion of airlines currently in Africa are attempting these three “incompatible” strategies. These airlines lack a clear strategy in an industry where the strategy/business model drives all decisions, and is critical for running and operating a successful airline.

 

Professional Aviation Managers

Running and operating an airline is not rocket science, it can be simplified to just ferrying passengers from one location to another. But in reality, running a successful airline is far more complicated and requires seasoned aviation professionals at the helm of operations to ensure long-term financial sustainability and success.

 

A number of airlines in Africa are not run by professional airline managers. To ensure future success of airlines operations in the post-COVID-19 era, airlines will need the appointment of seasoned professional airline managers to run the operation of the airlines.

 

Aviation Development Finance

Financing and funding still remain a big challenge for African airlines, given the capital intensity of an airline operation. The African Development Bank (AfDB) for the last couple years has been looking at how to bridge the aviation financing gap in the region and to support the sector to achieve its full potential.

In 2017 the African Development Bank signed an MOU with IATA to establish a framework for collaboration to boost the aviation sector in Africa. In the last decade the AfDB has invested close to $1 billion in the construction and expansion of airport terminals, as well as aviation safety and aircraft financing. The AfDB was particularly keen to find a solution for aircraft financing and leasing in the region.

 

Given the economic impact of the pandemic on the economies of Africa, the President of AfDB, Dr. Akinwumi Adesina, of the AfDB in a recent interview with the FT (Covid-19 and Locust-19 threaten perfect storm for Africa) admitted that the bank will have to do a detour from their main priorities, which include aviation infrastructure development and aircraft financing.

But he emphasised that the bank’s main priorities are also still very critical for the growth of African economies. Bearing this in mind, it will be critical for the AfDB to continue its effort in the aircraft financing and leasing space, to ensure African airlines get competitive rates when they are either purchasing or leasing aircrafts thereby strengthen their financial position for a sustainable life post Covid-19.

 

Single African Air Transport Market (SAATM) / Open Skies

Open skies in African still remains a bottleneck for the growth and success of airlines in the region. The Single African Air Transport Market (SAATM) would need to be implemented to ensure African aviation achieves its full potential or stops “punching below its weight” according to Raphael Kuuchi – IATA’s Special Envoy on Aeropolitical Affairs for Africa.  This is a great opportunity for countries in Africa to implement the open skies program for the greater good of aviation post COVID-19.

 

Individual African Governments

To ensure airlines remain financially viable post Covid-19, individual African governments also have to create an environment for airlines to thrive. This will involve looking at reducing or suspending airport levies, fuel charges and government imposed taxes.

 

Conclusion

If governments and other aviation stakeholders can come together to implement the measures highlighted above, I believe the airlines in Africa have a great chance of thriving post COVID-19.

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Let us not forget there are other potential upsides to the airlines in Africa as a result of COVID-19, with oil prices at historically low levels and the potential that aircraft valuation and lease rates are likely to fall due to oversupply in the industry as a result of bankruptcies and fall in capacity.

 

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Comments 2

  1. Africa should also consider the franchise model wherein the National carrier identity can still be maintained, but where the operations are managed by private companies.

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