Taking Off…

Nairobi – Many African airlines, the majority government-owned, continue to experience problems that have been compounded by indebtedness, mismanagement as well as over regulated and restrictive airspace.
Governments “heavy-handedness” in the aviation industry, coupled with mistrust among African governments, increased operation costs and a shrinking revenue base have reduced African airlines’ competitiveness on the global market.
This ineffectiveness has resuscitated calls among aviation sector players to unite against encroachment of foreign airlines in African airspace while liberalising the sector.
According to the Centre for Aviation (CAPA) – a leading source of aviation market intelligence – the issue recently compelled heads of the three leading airlines in Africa – Kenya Airways, South African Airways and Ethiopia Airlines – to push for greater unity in order to compete against the private sector.
Kenya Airways Chief Executive Officer Titus Naikuni told delegates at the 44th African Airlines Association (AFRAA) annual assembly Johannesburg, South Africa on November 19 that a merger with Ethiopian Airlines and SAA would create a large, Pan-African carrier that can compete globally.
CAPA says, non-African carriers presently cover 80 percent of intercontinental traffic to and from Africa, adding that while the big three airlines are “big” in the context of the African market, globally they are small players when compared to the likes of Emirates, Air France-KLM and British Airways.
“What we need to do is we need to merge our airlines. There is no way that we are going to survive as small airlines,” Naikuni said. “We are the lambs at the gate.”
Ethiopian Airlines CEO Tewolde Gebremariam agrees with the merger proposal “in principle”, saying size matters in the aviation industry as it relies on economies of scale.
He said the idea warranted further discussion “because now we are being challenged by not only big carriers but also governments who treat these carriers as a strategic national asset”.
In November 1999, African ministers in charge of civil aviation met in Yamoussoukro, Côte d’Ivoire, to discuss the liberalisation of air services. But the progress in getting states to sign the Yamoussoukro Decision has been slow.
Even some of the world’s biggest airlines have conceded that they need to consolidate to survive. Europe has consolidated to three major airline groups – Lufthansa, Air France-KLM and British Airways/Iberia parent IAG – in a region of 27 countries.
In the United States, United and Continental have come together, as well as Delta and Northwest. In Latin America there have been mega mergers in recent years with LAN and TAM, and between Avianca and TACA.
If Kenya Airways, Ethiopian Airlines and SAA were to merge, they would account for just 37 percent of Emirates’ revenue and about half the number of passengers annually.
Africa’s big three currently offer about 650 000 weekly seats. This would make it roughly the 30th largest airline group in the world, slightly behind Avianca-TACA.
But for cross-border mergers to become a reality, African governments will need to put aside their mistrust of each other and resolve the issue of national flag carriers.
The desire by all of Africa’s 54 states to have their own flag carrier means competition is rife in a small market, while weak or corrupt management and government interference have been blamed for under-performance.

• Strength in Unity

Alphonse Kioko, MD of Precision Air, the Tanzanian national carrier, notes that political patronage coupled with distrust in Africa have derailed growth of the only post-colonial airline in East Africa.
“But if like-minded airlines unite, we stand a greater chance of healthy growth,” he says.
He adds that West African Airways suf fered the same fate and Ma lawi and Zimbabwe’s governments’ 100 percent-ownership of their respective carriers had not yielded much.
But that can change with forging of synergies.
The viability of Af rican airlines and their abil ity to attract investment to stimulate growth, improve infrastructure, make airspace safe and stimulate profit cannot be achieved when governments continue to monopolise the aviation industry.
According to Melanie Humphries, head of aviation finance for Africa at Investec, the continent’s economic growth is not positively impacting on airlines.
Humphries blames the situation on opera tional costs, which chew over 55 percent of revenue.

• Sovereignty
Some carriers fear that greater liberalisation of intra-African skies will benefit Africa’s big three and Egypt Air as well, which – given its access to finance – can quickly expand its market.
As a result they perceive these big carriers as a threat to their futures rather than as potential partners.
In the short-term, smaller airlines can learn from the big three plus Egypt Air through consultancy services, route development, staff training, fleet acquisition and maintenance and access to funding.
Kenya Airways and Ethiopian already have two regional operators, Precision Air and ASKY respectively, broadening their intra-Africa network reach.
Egypt Air plans to invest in a regional carrier based in Ghana, while SAA has been looking to open a West African hub, according to CAPA.
Precision Air was established in 1991, began operations in 1994, and launched its first commercial service in November 1999.
The carrier was completely owned by businessman Ngaleku Shirima until 2003 when Kenya Airways acquired a 49 percent stake.
Precision CEO Kioko said Kenya Airways’ involvement in the company has allowed the carrier to access financing from banks in a way that was not previously feasible.
It has also benefited from staff exchanges with Kenya Airways.
ASKY gives Ethiopia’s carrier a hub in the huge and fast-growing West African market, which is rich in oil and mineral exports and not easily accessed from Addis Ababa.

 • Broader Co-operation
One of the biggest challenges facing the industry is the lack of open skies.
African states negotiate their own bilateral agreements which have led to highly restricted intra-Africa airspace, but competing foreign airlines offering inbound tourism and trade connections are granted significant capacity rights.
The lack of co-operation within Africa means that in some cases, in order to fly from one part of the continent to another, passengers and goods have to be routed through Europe. For example, to travel from Brazzaville (Congo) to Dakar (Senegal), one has to go via Paris (France).
SAA chairman Vuysile Kona says their smaller counterparts must first believe in Africa and support the continent’s existing world class training capabilities rather than taking their business to Europe, the US or Asia.
“SAA, despite its own financial difficulties, has a mandate from the South African government to engage more with other African airlines to support them,” Vuysile says.
South Africa's Minister of Public Enterprises, Malusi Gigaba, in his keynote address to the AFRAA meeting, encouraged airlines to collaborate more and increase intra-Africa travel to expand the continent’s international links and support economic activity.

December 2012
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