Liberalisation seeps into African aviation policy – when what is needed is a flood of new services
Africa has huge growth potential, particularly if liberalisation accelerates. But challenges remain in some of the region's major markets. The continent's largest airline, Ethiopian Airlines, continues to pursue rapid expansion in 2015 while SAA and EgyptAir restructure, and LCCs are starting to make inroads as cracks appear in the protectionist barriers to entry.
2015 could prove to be a landmark year for the African market. Liberalisation may finally be in the cards with the possible implementation of the Yamoussoukro Declaration nearly 15 years after African states initially agreed to open their skies. Africa's new wave of LCCs are finally starting to make inroads in the world's least penetrated market.
Meanwhile South African Airways (SAA) is at last close to implementing major strategic changes and a long overdue restructuring following several years of costly delays. Other major African flag carriers which have struggled in recent years are hoping to resume or accelerate expansion.
Africa's airline standout of the current decade, Ethiopian Airlines, is planning further rapid expansion which should enable it to widen the gap with competitors. Ethiopian has had an amazing run since the turn of the century, doubling in size while most other major African carriers have grown only slightly or not at all.
Ethiopian carried 6 million passengers in the fiscal year ending 30-Jun-2014, more than doubling the 2.82 million it carried in the fiscal year ending Jun-2009. SAA in roughly the same period has grown passenger traffic by about 3% to slightly more than 7 million.
Ethiopian's biggest competitor, Kenya Airways, has grown passenger traffic by 30% this decade from 2.8 million in the fiscal year ending Mar-2009 to 3.7 million in the fiscal year ending Mar-2014. But passenger numbers have been flat, or up very marginally, over the last two and a half years.
Ethiopian also has been a standout financially, posting profits every year this decade. Kenya Airways was in the red in FY2013, FY2014 and 1HFY2015 while SAA has been in the red since FY2012. EgyptAir has also been highly unprofitable since FY2011. RAM has been back in the black since FY2012 but was unprofitable previously, prompting a restructuring.
Kenya and Ethiopia have a favourable geographic position as they are based in East Africa, enabling both flag carriers to tap into the rapid growth between Asia and Africa. But Kenya Airways has been set back by instability in its home market. The carrier plans to resume growth in 2015 as it takes the last three 787-8s from its nine-aircraft order. These are all growth aircraft while its first six 787s, which were all delivered in 2014, were used to replace its fleet of six 767s. The airline is hoping the completion of its fleet renewal programme and improved market conditions enables it to return to the black.
Ethiopian is also completing its fleet modernisation programme this year as it takes the last three of 13 787-8s, along with two additional 777-300ERs and three additional 737-800s, in 1H2015. Asia will once again be the main focus of expansion, with service to Tokyo launching in Apr-2015. Ethiopian is also launching services to its second US gateway, Los Angeles, which will be served via Dublin from Jun-2015.
Ethiopian also continues to expand its cargo fleet with two additional 777Fs slated to be delivered by the end of 2015. Ethiopian already has the largest fleet in Africa - 69 aircraft including nine freighters. Ethiopian's joint venture in Togo, ASKY Airlines, also operates eight aircraft, while its new joint venture in Malawi operates two aircraft.
There are only nine airline groups in Africa with more than 20 aircraft. The rest of the market is extremely fragmented with more than 100 smaller carriers. It is very difficult for most of these carriers, particularly the international operators, to be profitable as they lack the scale to compete effectively against much larger foreign carriers. In West Africa, where market conditions remain extremely challenging due to the Ebola outbreak, there is only one airline of considerable size - Nigeria's Arik Air.
Attempts to build up scale through mergers or acquiring stakes in airlines in other African markets have generally not been successful. Again Ethiopian is a standout in this regard with ASKY and Malawian Airlines, which it launched in 2010 and early 2014 respectively. Ethiopian is now looking at acquiring a strategic stake in Rwandair and establishing a new joint venture flag carrier in South Sudan. Such moves would enable it further to build up its leading position in Eastern Africa while ASKY and Malawian have enabled it to expand in Western and Southern Africa.
SAA also plans to focus on further building up its regional presence in Africa in 2015, potentially through acquisitions or joint ventures in other Africa countries. This was a key component of a new business plan that was initially drafted in early 2013 but has not yet been implemented. SAA is now finally planning to implement this plan - or a slightly revised version.
Under the turnaround plan SAA is seeking to reduce costs, renegotiate supplier contracts, cut its long-haul network, forge new partnerships and acquire new widebody aircraft. A restructuring at bloated SAA is long overdue as prior attempts have failed to go deep enough or been hampered by government intervention. SAA is now at a critical juncture as it faces increasing competition regionally from LCCs, while all its long-haul routes are unprofitable due to several factors, including inefficient aircraft and increasing competition from Gulf carriers.
RAM has also shrunk in recent years as LCC competition in Morocco intensified. But the airline has completed a restructuring, is again profitable and has embarked on a growth phase which will result in the fleet roughly doubling in size over the next 10 years. The 10-year fleet plan includes eight additional widebodies for a total of 13 aircraft.
RAM completed a major milestone in early Jan-2015 with the delivery of its first of at least four 787s. RAM plans to take two 787s in 2015 followed by two more in 2016. It also plans to take four additional E190s in 2015 and add capacity on existing medium/long-haul routes, while focusing network expansion on regional routes within Africa, which only accounts for about 30% of its international seat capacity. RAM is also reviewing global alliance options, which could result in it becoming only the fifth airline in Africa to join a global alliance.
Morocco has traditionally been more like a European rather than African market given its proximity and connections to Europe, which account for about three-quarters of total capacity, and high LCC penetration rate. LCCs make up nearly 40% of seat capacity in Morocco - more than any other African country. LCCs account for only 13% of total capacity in Africa, or about half the global average of 26%.
Almost all of Africa's LCC capacity is concentrated on international routes to Europe and the Middle East or in the domestic South African market. South Africa's domestic LCCs account for about one-third of total LCC capacity in Africa. European LCCs account for another 40% of Africa's total LCC capacity, with 90% of this capacity on routes to Northern Africa.
Middle Eastern LCCs comprise about 14% of a rapidly growing share of African LCC capacity. A majority of this capacity is again on routes to Northern Africa, which has an overall LCC penetration rate of about 18%.
There are currently only eight LCCs based in Africa, operating a combined fleet of about 34 aircraft. This represents less than 3% of the approximately 1300 commercial aircraft operated by African carriers.
LCC growth has been extremely slow in Africa, greatly inhibited by conservative government policies. LCC capacity in Africa was up by only about 4% in 2014 compared with 2013, according to OAG data.
The continent's LCC fleet expanded in 2014 by about 10 aircraft as three new carriers launched - flyafrica.com in Zimbabwe, FlySafair in South Africa and JamboJet - in Kenya. About two thirds of the current African LCC fleet only operates in the domestic South African market, which has an LCC penetration rate of almost 50%.
2015 should see more rapid LCC capacity growth - albeit on a very small base - driven primarily by the new entrants. Skywise is aiming to launch services in Mar-2015, becoming the fourth LCC in South Africa's domestic market.
flyafrica.com plans to launch up to four new affiliates in 2015, starting with the Mar-2015 launch in Namibia, a market which is not served by any LCCs. Rival pan-African LCC group fastjet also plans to launch up to three new affiliates or bases in 2015, starting with Zambia.
flyafrica.com and fastjet are focused primarily on stimulating demand on regional international routes. The intra-Africa international market has some of the highest average air fares in the world and is drastically underserved with an LCC penetration rate of about only 1%. Change in this market is inevitable but will come at a much faster rate if Yamoussoukro is successfully implemented.
The anticipated expansion of LCCs in the short-haul international market will drive accelerated growth but also impact flag carriers which have traditionally been protected. SAA, in particular, will face increased pressure as LCCs start to penetrate South Africa's short-haul international market. Regional services within Africa have been SAA's only profitable portion of its business in recent years.
From Mar-2015 SAA will be competing with LCCs on eight of its regional international routes, compared to only one in Mar-2014 and none in Mar-2013. This is just the tip of the iceberg and should finally prompt a strategic response from the SAA Group in 2015, including the potential expansion of SAA LCC subsidiary Mango in other African markets (organically and potentially through new joint ventures). Mango has only one international route, Johannesburg-Zanzibar, a small market with no FSC or LCC competition that it serves with three weekly flights.
Another of the region's struggling flag carriers, Kenya Airways, also faces the prospect of increasing LCC competition on its profitable regional routes. So far Kenyan authorities have stymied fastjet, which is seeking to operate several routes into Kenya and establish a local affiliate. Kenya should eventually recognise the value of LCCs to the overall economy and liberalise its market. Kenya Airways will likely respond by expanding budget subsidiary Jambojet, which has been focusing only on Kenya's limited domestic market.
The building blocks are in place for rapid change and faster growth throughout Africa. The growth - and success - does not have to be limited to Ethiopia. But liberalisation is absolutely critical. Yamoussoukro is one potentially important part of that, but the underlying factor is the attitudes of governments to the concept of aviation expansion as a goal. In too many cases the objective of national policies continues to revolve around protection of the national, government owned, airline.