The current situation in, and the short-term outlook for, the aviation industry in Africa is challenging, as it is elsewhere in the world. The International Air Transport Association (IATA), predicts that African airlines will lose $6 billion in revenue this year due to the Covid-19 pandemic, with passenger numbers more than halving. In the highly fragmented sector, operators are succumbing to the effects of travel restrictions and border closures: Air Mauritius recently filed for voluntary administration and South Africa’s stalwart of profitability, Comair, has placed itself in the country’s business rescue process. Others may follow suit in an effort to restructure their underlying businesses. In the short term, dealing with the immediate cash flow crisis has become the priority.
The ability of the aviation industry in most African nations to weather the viral storm and remain sustainable in the long term is hindered by existing structural factors. Local markets are highly regulated, often with protectionist policies limiting private or foreign ownership of operators and hindering competition. Most of Africa’s airlines are state-owned and it is often these state carriers that are the primary ground handler where they are located. These operators therefore have considerable sway when it comes to slot allocation and to policing the already high barriers to entry. These pre-existing barriers prevent an agile response to the rapidly evolving challenges of the pandemic.
What the African aviation sector will look like once lockdown measures are lifted is very much dependent on the form exit strategies take, how they are implemented and how economies are re-activated. Governments are unlikely to have the fiscal space to fund significant rescue packages for airlines when the deployment of fiscal policy should be concentrated on supporting health services. In the short-term however, African airlines will need government support to remain viable and to keep important trade routes open, as noted by the African Airlines Association. Some governments have already responded to financial assistance requests from their national carriers with Air Senegal and Rwandair reportedly benefiting from government stimulus packages aimed at the transportation sector.
Whilst the reliefs of rent deferrals and government support may ease immediate cash-flow issues, if the African aviation industry is to be sustainable in the long-term, creative and bespoke strategies need to be devised and implemented that cater to its unique challenges. Not being a homogenous entity, solutions and strategies may need to differ from country to country, and it will also not be a case of replicating what has been successful elsewhere.
Corporate Structures and Innovative Financing
There is little doubt that the effects of the pandemic will accelerate consolidation trends. Smaller companies may be absorbed into new, larger operations that function across the continent, creating scale and new markets. There are also opportunities for the expansion of existing partnership arrangements and so the continental reach of operators which have already taken advantage of such arrangements. Overcoming existing barriers to entry and moving away from the mind-set of airlines as public utilities will be key to this process. A modified version of the Scandinavian Airlines model may also be a viable alternative; political challenges will need to be overcome for such a model to be successful, but pooling resources and technical expertise to create a more efficient multi-national operator may be an option for some carriers.
More broadly, there is significant scope for new investment in the industry, particularly from private equity, if this is permitted and protected. The challenge African operators will face is attracting investment at a time when so many other industries and more established operators will be looking to do the same. Whilst country specific recovery strategies will be more effective in the short term, a radical rethink amongst industry players and the international financing community is needed to develop innovative financing solutions to overcome the liquidity challenges African airlines will continue to face. Given the industry’s ability to create such innovative financing products (e.g. aircraft non-payment insurance), a pan-African financing solution which caters for the market’s particularities should be able to be devised and supported.
Cooperation and Open Skies
Considering the enormous challenge that operators now face, cooperation and collaboration with competitors, which would have been unthinkable previously, may now be critical to their long term survival and the overall economic recovery of the continent. Governments could harness the recent momentum within the African Union and across regional economic communities to enhance the effectiveness of this coordination. The ongoing crisis may just force a united response.
Operators may need to take a flexible approach to their ongoing business models, allowing for private charter arrangements for the smaller aircraft in a fleet. More traditional approaches such as code sharing and interlining agreements may also see an increase but greater cooperation outside of the usual frameworks will be needed, particularly in the sharing of know how. With projected consolidation and a downturn in demand for air travel, there may be a surplus of skilled personnel in the short term and accessing this pool of talent could accelerate this sharing process.
There is an argument that the implementation of the Single African Air Transport Market (SAATM) would accelerate collaboration and deregulation but, as we have noted previously, the implementation framework for the SAATM has yet to be devised. Concerns of potential regional dominance or the unequal allocation of profits under the open skies regime may continue to hold back further liberalisation. However, consolidation and rationalisation must come with harmonisation of regulations and extensions of existing freedoms of the air.
Since the outbreak of the pandemic, cargo carriers have performed a vital role in ensuring supply chains remain serviced and that essential medical equipment is delivered to those areas in need. In particular, Ethiopian Airlines has become the main distributor of Chinese medical aid to Africa and Bole International Airport has been designed a UN aid transport hub. Other operators, such as Kenya Airways, have also continued to be a vital conduit for perishable goods to European markets.
IATA has urged governments to cut the red tape associated with special charter flights to allow vital products to continue to be shipped, despite the predicted downturn in cargo volumes. Lessors and financiers may also find themselves fielding more requests for passenger aircraft to be converted into cargo carriers temporarily. They may be more inclined to accept such requests where OEMs are involved in the conversions; several service bulletins in this regard have already been issued.
Redirecting efforts and the focus of operations towards cargo may be enough in the short term to assure some cash flow for those carriers that can take advantage of the changing landscape and deploy their aircraft accordingly. As countries begin to open up and lift travel restrictions, operators may find ways to maximise load factors by mirroring passenger routes with those kept open by cargo activity.
Fleets and Networks
The presumption is that domestic air travel will rebound sooner than international routes. As airlines rationalise their fleets as part of their survival strategies, narrow body and regional aircraft may become more important to their immediate recoveries. Networks will need to be revisited with careful monitoring of those that may open up faster than others. Smaller aircraft operators may also be presented with opportunities to enter into ACMI arrangements with larger carriers that don’t have access to smaller aircraft more suited to domestic and regional demand.
As an alternative to rescue packages, or to complement existing government financial support, African nations could look to adopt a support system for air transport based on the European public service obligations framework (Regulation (EC) No 1008/2008) and modified to local needs. Whilst more commonly used on domestic routes, such a model, or equivalent subsidies that support vital economic routes, may ensure the connectivity needed for a carrier’s economic purposes and may allow wider operations to resume before passenger demand returns to more viable levels. This would also keep open links between nations that would otherwise find themselves cut off.
For those that can adapt and be flexible, including governments, there are glimmers of hope in all the doom and gloom. Support from the international financial community together with enhanced protection and opportunities for private investors, greater cross-continental cooperation and fleet rationalisation could all lead to a radically different looking market.
Promoting intra-Africa trade and supporting supply chains, particularly of agricultural goods at a time when food security concerns abound, is critical to cushioning the economic blow this pandemic will bring. A functioning cross-continental aviation network is central to those efforts.