Africa's struggles continue as economies weaken and competition intensifies

Published January 2017 in Airline Leader: Issue 38

Africa remains a region with huge untapped potential – as it has for many years. The long term outlook for growth is always bright, particularly if the Yamoussoukro Decision were to be implemented, bringing long overdue liberalisation.

However, the short term outlook is bleak – both for growth and profitability – and over the long term profitability for Africa’s struggling airline sector will be extremely difficult to achieve.

While 2016 was a standout year for most regions, Africa continued to struggle. The African airline sector remained unprofitable with traffic growth of less than 5%. Demand was weak, impacted by political instability, a sluggish economy and low oil prices (as several African countries have oil based economies).

Sub-Saharan Africa’s economy expanded by less than 2% in 2016, the weakest GDP growth figure in over 20 years. Nigeria’s economy contracted while GDP growth in Angola and South Africa was less than 1%.

The outlook for 2017 is not much better. Africa’s economy will pick up slightly as oil prices stabilise and potentially increase. However, GDP growth in sub-Saharan Africa will remain below the global average at approximately 3%. Currency volatility, political uncertainty and weak consumer sentiment will again impact demand. Against such a challenging economic backdrop it is very difficult for airlines to improve profitability or – given the precarious state of many African airlines – narrow losses.

The 2017 outlook in South Africa, Africa’s largest aviation market, is particularly bleak. GDP growth of only 1% to 2% is projected. Domestic passenger traffic is expected to remain flat for the second consecutive year, pressuring already low yields and thin margins.

South Africa’s market has suffered from overcapacity since late 2014, when two new LCCs commenced operations. One of the new entrants suspended operations at the end of 2015 but there are still three LCC competitors (Kulula, Mango and FlySafair) and too much capacity given the size of the market and current economic environment.

Mango, a subsidiary of South African Airways (SAA), was unprofitable in FY2016 after several consecutive years of profits. Kulula parent Comair, which also operates a full service airline under the British Airways brand, reported a decline in profits. Meanwhile, government owned SAA remains highly unprofitable and is planning yet another restructuring.

SAA was in limbo for virtually all of 2016 after nearly all of its executives, frustrated with constant government meddling and the inability to implement the previous restructuring plan, resigned. SAA expects to appoint a new permanent CEO and unveil its latest restructuring plan in early 2017. The prospects of success are slim given SAA’s track record of multiple failed turnaround attempts and the government’s track record of intervening.

SAA is in dire straits. A full and deep restructuring is required – as well as another cash injection. SAA would also benefit from political stability and a stronger local economy.   

While the situation at SAA is most severe, most African flag carriers face difficult market conditions and long term challenges as they enter 2017. The only major exception is Ethiopian Airlines which has emerged as Africa’s largest and most profitable airline group.

Ethiopian has doubled in size over the last five years while significantly growing profits. Ethiopian is planning further expansion in 2017 including three new destinations in Asia as Singapore is resumed (this time as a nonstop route) and Chengdu and Jakarta are launched. Ethiopian is already by far the largest African airline in Asia with 11 destinations, enabling it to take advantage of booming demand in the Asia-Africa market.

Ethiopia is well positioned geographically for Asia-Africa traffic. Other East African countries have similar geography but do not have the same level of government support or have been impacted by political instability.

For example, Kenya Airways five years ago was the same size as Ethiopian and had a similar Asian network and strategy. However, Kenya Airways has been unprofitable for the last five years, forcing it to shelve expansion plans, and has barely grown. Its outlook for 2017 remains relatively bleak.

RwandAir is pursuing bold expansion in a bid to build Kigali into another hub for East Africa. The airline recently took delivery of two A330s, its first widebody aircraft, and plans to launch long haul services in 2017. Guangzhou, Mumbai, London and New York are all part of RwandAir’s ambitious network plan for 2017.

More regional expansion within Africa, which is needed to feed the new long haul routes, is also planned with additional Boeing 737s. RwandAir has a fleet of only 12 aircraft, making it one of many African flag carriers with less than 20 aircraft. There are currently only 14 African airlines, including four in South Africa, with at least 20 aircraft.

The prospects for new long haul routes at RwandAir or any of the smaller regional African airlines are challenging. Competition against airlines from outside Africa is fierce and Africa’s airlines, with a few exceptions, lack the scale to compete effectively.

TOP 10 African Airlines Ranked By Fleet Size: as of DEC-2016

Rank Airline Widebody Narrowbody Other Total
1 ET Ethiopian Airlines 40 22 16 78
2 AH Air Algerie 11 31 18 60
3 SA South African Airways 25 29 0 54
4 AT Royal Air Maroc 10 37 4 51
5 MS EgyptAir 18 31 0 49
6 SET Solenta Aviation 0 0 37 37
7 4Z SA Airlink 0 0 37 37
8 KQ Kenya Airways 7 13 15 35
9 TU Tunisair 2 28 0 30
10 MN Comair (South Africa) 0 26 0 26

African airlines in recent years have seen their share of passenger traffic to/from Africa drop to only 20%. The sector will struggle to win back market share as the Gulf airlines and Turkish Airlines continue to expand rapidly, including in 2017.

Emirates now has more capacity in Africa’s international market than any other African airline except Ethiopian and EgyptAir. Of the top 15 airlines in Africa’s international market, eight are from outside Africa.

Qatar Airways’ capacity on Doha-Africa routes is up approximately 50% over the last three years to approximately 70,000 weekly seats. Turkish Airlines’ capacity on Istanbul-Africa routes is also up 50% over the last three years to approximately 80,000 weekly seats. Turkish now has 42 destinations in Africa. Ethiopian is the only African airline with more international destinations in Africa than Turkish Airlines, with 48.

Emirates and Qatar each have just over 20 African destinations with Emirates having significantly more capacity due to its all-widebody fleet. Emirates’ capacity on Dubai-Africa routes is up a more modest 20% over the last three years, but on a much bigger base. It currently has approximately 140,000 weekly seats on Dubai-Africa routes and another 13,000 weekly seats on Fifth Freedom routes within Africa.

Top 15 airlines in Africa’s international market ranked by weekly seat capacity: Dec-2016

Rank Airline Total Seats
1 ET Ethiopian Airlines 221,797
2 MS EgyptAir 177,320
3 AT Royal Air Maroc 168,904
4 EK Emirates Airline 153,326
5 SA South African Airways 125,614
6 AH Air Algerie 116,905
7 AF Air France 108,884
8 KQ Kenya Airways 102,578
9 SV Saudia 87,697
10 TK Turkish Airlines 83,965
11 TU Tunisair 74,504
12 QR Qatar Airways 71,424
13 FR Ryanair 59,724
14 BA British Airways 53,540
15 MK Air Mauritius 41,223

Expansion on regional routes within Africa by Emirates and other foreign airlines has impacted African operators. In many cases African flag carriers cannot secure similar Fifth Freedom rights from the same countries which grant the rights to airlines from the Middle East or Europe. Having to compete on both long haul routes and regionally with giants such as Emirates is starting to take a toll.

Several African airlines have expressed interest in an African alliance with the objective of providing better scale and more effectively competing against “mega competitors” from the Middle East and Europe. However, calls for African alliances have been made repeatedly over the years without progress.

Ethiopian, which has been one of the main proponents of an African alliance, has so far found it easier to build up its own group through investments rather than a portfolio of regional partners. Ethiopian has stakes in Togo-based ASKY Airlines and Malawian Airlines has been looking at potential new airline investments throughout Africa.

ASKY has been particularly successful, opening up new connections within West Africa boosted by feed from Ethiopian. ASKY, a rare regional airline in Africa that is making money, is now preparing to launch services to Europe in 2017.

Possible liberalisation through the Yamoussoukro Decision would also make it easier for Africa’s airlines to compete more effectively in Africa’s regional international market. Sadly the reality is a Yamoussoukro Indecision. The intra-Africa market has always been significantly undersupplied and now suffers from high average fares stifling trade and economic ties. There is now talk of finally implementing the Yamoussoukro Decision in 2017, which would represent a huge breakthrough in liberalising the market and opening up regional international routes to all African airlines regardless of their base. The Yamoussoukro Decision was initially intended to create a single African market in 2002.

If it happens, implementation of the Yamoussoukro Decision would be the watershed event for 2017. However, it is a double-edged sword in that several airlines, which are already struggling, would find it hard to compete in a new more liberal environment. Several African airlines – and their government owners – are already urging a phased or gradual approach to liberalisation. While perhaps a practical approach, the risk is that such lobbying and resistance by some governments could simply derail the entire liberalisation process once again.

LCCs – and hence consumers – would potentially benefit the most from a liberalised market. LCCs in Africa have so far only been able to penetrate the South African domestic market and international routes from North Africa to Europe (flown by European LCCs) and to a lesser extent East Africa to the Middle East (flown by LCCs from the Gulf). There are virtually no LCC options in the regional international market – despite multiple attempts to establish LCC groups with pan-regional strategies similar to AirAsia.

One of the region’s emerging LCC groups,, suspended operations in late 2015. Meanwhile, more established LCC group fastjet is now undergoing a major restructuring initiative in a bid to survive.

Tanzania-based fastjet launched services in late 2012 and its first foreign affiliate, in Zimbabwe, commenced operations in 2015. However, fastjet has encountered multiple setbacks in launching airlines in other African countries and has been highly unprofitable. The group’s load factor was less than 50% in 1H2016, leading to a dismal negative 94% operating margin – it had an operating loss of USD31 million on a revenue base of only USD33 million.

Fastjet recently suspended flights from Dar Es Salaam to Nairobi, a lucrative monopoly route of Kenya Airways which took fastjet years to secure traffic rights for and was only launched in Jan-2016. Fastjet has also dropped flights from Dar Es Salaam to Entebbe in Uganda and from Victoria Falls in Zimbabwe to Johannesburg. Earlier it dropped Lilongwe in Malawi and is now left with only five international routes. These are virtually the only international routes within Africa now served by LCCs.

Africa LCC Capacity Share: 2007 To 2016

The LCC penetration rate in Africa dropped in 2016 from an already low base. LCCs account for less than 10% of capacity within Africa – with almost all of this capacity in the South African domestic market where ironically there is now a surplus of LCC capacity.

LCCs account for a larger share of capacity to/from Africa, approximately 14%, but European LCCs account for almost all of this capacity. Ryanair alone accounts for over 20% of LCC international seat capacity in Africa although it serves just one African country – Morocco.

The challenges fastjet has encountered are yet another indication of how difficult it is to grow and be profitable in the African airline sector. LCCs from outside Africa enjoy a much higher level of profitability on their African routes than LCCs based in Africa – as is the case with Africa’s full service airline sector.

Within the intra-Africa international market, regulatory constraints and high taxes make it difficult to offer low enough fares to stimulate demand. Africa still does not have a large middle class with sufficient income levels to afford regional international air travel. Meanwhile, economic conditions have become even more challenging and competition with airlines from outside the region fiercer.

While there are a few positive exceptions, most notably Ethiopian, the overall outlook for the African airline sector seems to get bleaker by the year. 2017 will be no different. The long term potential remains long term.

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