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Liberalisation seen as key to catalysing Africa’s air transport sector

LIBERALISATION WOULD BOOST TRAFFIC A runway at Johannesburg’s OR Tambo International Airport

Photo by Duane Daws

AFRICA HAS 245 AIRLINES One of the biggest is Egyptair. Illustrated is one of the airline’s Airbus A330-300s

Photo by Airbus

KENYA HAS THE BEST AIR CONNECTIVITY A Boeing 777-200ER of Kenya Airways takes off from London’s Heathrow Airport

BOOMING CONTINENT An Airbus A340-500 of Nigeria’s Arik Air

Photo by Airbus

BOOSTING SA-ZAMBIA TRAFFIC A Boeing 737-400 of low-cost carrier Kulula

Photo by Duane Daws

5th September 2014

By: Keith Campbell

Creamer Media Senior Deputy Editor

  

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Worldwide, aviation safely transports more than three-billion people a year. It is, as the International Air Transport Association (Iata) points out, the safest form of transport there is. Everywhere, aviation has become a key factor in economic growth. Africa is no exception. Across the continent, Iata VP for Africa Raphael Kuuchi pointed out at the recent Iata Aviation Days Africa conference in Sandton, northern Johannesburg, aviation directly and indirectly “supports nearly seven-million jobs and $80-billion in GDP [gross domestic product]”. South Africa is no exception. At the same conference, Transport Minister Dipuo Peters noted that aviation contributed R74-billion to the country’s GDP and supported 230 000 jobs.

Of course, the industry is not without its challenges. Worldwide, 2014 has been a painful year for the industry, with the disappearance of Flight MH370 and the shooting down of Flight MH17 (both, coincidently, belonging to Malaysia Airlines). However, in Africa specifically, the news on the safety front has been encouraging. Last year, Western-built jet airliner hull loss in Africa came to 2.03, down significantly from a figure of 4.55 in 2012. This represented an improvement of 55.4%. The accident rate for all aircraft improved by almost 50%. One of the key factors in this improvement has been the increasing implementation of the Iata Operational Safety Audit (IOSA) across the continent. “Airlines on the IOSA registry are performing almost seven times better than non-IOSA operators in Africa,” he stressed.

“But we cannot take the recent improvement trend for granted,” cautioned Kuuchi. “To make these gains a sustainable foundation on which to achieve world-class safety levels is going to require the continued determination and commitment of all stakeholders, including governments . . . African Transport Ministers have committed to driving up safety standards with the Abuja Declaration. To support that effort, aviation stakeholders have united behind the Africa Strategic Improvement Action Plan.” Making the IOSA mandatory for all airlines is one of the elements of this plan.


Constraints and Challenges

Aviation is already benefiting Africa. But there are constraints. Continental Africa’s air connectivity with the rest of the world is relatively poor, Iata senior economist James Wiltshire pointed out. In terms of destination-weighted air transport connectivity per billion dollars of GDP (in purchasing power parity terms), in 2012, the best connected continental African country was Kenya, with a figure of about 0.3. The country was located between the Philippines (slightly more) and Canada (slightly less). Kenya was the only continental African country in the upper half of the air connectivity ranking, composed of 66 countries from all continents. (Kenya was placed 26th.)

Morocco was the second ranking continental African country, at 0.2 and placed 35th. Egypt was next, at about 0.19 and in 51st position. South Africa came fourth at about 0.18 and 54th. The fifth and final continental African country on the list was Nigeria, at about 0.09 and in 64th position.

Of course, there is not a direct correlation between levels of development and the degree of air connectivity, as many developed countries, especially in Europe, benefit from excellent road, rail, riverine and maritime communications networks. But these, usually, do not exist in Africa. Of the Asian and Middle Eastern countries and territories on the list, the United Arab Emirates, Hong Kong, Jordan, Qatar, Lebanon, Malaysia, Thailand, Vietnam, Indonesia and the Philippines were ranked ahead of Kenya; Taiwan between Kenya and Morocco; Japan, Saudi Arabia, China and South Korea between Morocco and South Africa; and India and Kazakhstan between South Africa and Nigeria. There were no Asian or Middle Eastern countries ranked below Nigeria.

Overall, Africa lags in terms of air trips per head of population. Countries like India, whose GDP per capita is in the same league as that of many African countries, record more air trips per capita. In continental Africa, only South Africa sees more air trips per capita than India.

Air connectivity within Africa is particularly poor. Fares on intra-African routes, Wiltshire reported, are high – noticeably higher than fares for flights within South America, significantly higher than for those within Asia and considerably higher than for those within Europe. They are also double the fares of international flights linking Africa to the rest of the world. But African passenger load factors are low. In the last few years, African airlines’ load factors have varied between 69% and 72%, as against 79% to 81% (79.5% during last year) for the global industry average and around 83% for North American airlines. A tendency to deploy high-capacity aircraft on low- and medium-density routes was one of the factors driving down capacity, noted the Board of Airline Representatives of South Africa CEO June Crawford. African airlines had made losses of $100-million last year and were forecast to make profits, also of $100-million, this year. No less than 82% of African air traffic to the other continents was by non-African carriers.

These constraints exist in a continent that is otherwise booming, she highlighted. With a popu- lation of one-billion, Africa is the second fastest growing continent. GDP growth over the next decade will average at 6% (the forecast average for this year alone is 5.2%, with a third of African countries reaching 6% or more). By 2020, the continent will have a total GDP of $2.6-trillion. It has enormous potential, with 60% of the world’s uncultivated arable land, 12% of the world’s oil, 42% of the gold and 90% of the diamond resources, among other assets.


Slow Progress

Aviation could benefit the continent much more, if it was allowed to. Back in 1988, many African countries agreed to the Yamoussoukro Declara- tion (named after the administrative capital of Côte d’Ivoire [the Ivory Coast]), which affirmed a commitment, in principle, to the liberalisation of African air services. In 1999, this was followed by the Yamoussoukro Decision, in which 44 countries agreed to deregulate air services and encourage regional air markets by allowing transnational competition. But implementation has been limited and slow.

This tardiness has been despite the good results obtained in the limited liberalisation programmes that have been implemented. A study by consultancy InterVISTAS on behalf of Iata showed that the creation of a more liberal bilateral air market between South Africa and Kenya in the early 2000s had resulted in a 69% increase in passenger traffic. Authorisation of low-cost carrier services between Johannesburg and Lusaka (Zambia) had seen a 38% rise in passenger traffic and a cut in discount air fares that also came to 38%. (A low-cost carrier is a budget airline that offers lower fares for a service with lower service levels than on traditional airlines.)

Ethiopia has a policy of negotiating more liberal bilateral air service agreements in Africa. This has resulted in Ethiopians benefiting from 35% to 38% more frequencies and 10% to 21% lower fares. Furthermore, Ethiopian Airlines is now one of Africa’s biggest and most profitable operations. A final example, although not an intra-African one: the 2006 open skies agreement between Morocco and the European Union (EU) was followed by a 160% increase in air traffic and an increase in the number of direct routes between the north-west African country and the EU from 83 in 2005 to 309 in 2013.


Another Example

“There are a million excuses not to liberalise, but can you afford not to?” queried Latin American and Caribbean Air Transport Association Executive Board adviser (and business develop- ment officer for the Flight Support group of the HEICO Corporation) Alex de Gunten. He referred to Latin America’s experience with liberalisation – the region has made greater progress than Africa but is “not were we want” to be. “Change takes time!”

The two regions, he pointed out, had many similarities: extremely fragmented markets, poor rail and road networks and multiple air navigation service providers (29 in Latin America, 38 in Africa, as against just two in North America). He pointed out that Africa had 245 airlines, Latin America had 177 but the US – a market five times bigger than Latin America and ten times bigger than Africa – had 167.

The four main obstacles to liberalisation in Latin America, he reported, were, first and biggest, short-sighted airlines that were worried about their own short-term survival and not about what was best for the industry, their countries and their own long-term survival. Second, were over-mighty and myopic unions, some so short-sighted that they preferred to see the extinction of their airlines rather than accept changes in how things were done. (He cited the case of the pilot’s union for now defunct Mexican carrier Mexicana, which had the best paid pilots in the whole of the Americas – not just Latin America – and which refused to make comprises to save the company.) The third obstacle was “politicians using airlines as private playgrounds”. The fourth was inconsistent and/or unclear government policies.

Yet some years ago, it became clear to most (but not all) governments and airlines in the region that things had to change. The governments concerned realised that their focus should be on safety and infrastructure and not on running airlines. “Today, in Latin America only three major airlines are State-owned,” he noted. The airlines realised that if they did not change, many of them would not survive.

The subsequent reforms included the standardi- sation of procedures, training and of homologation by the various national civil aviation authorities in the region. Air services were liberalised. Some countries, such as Chile and Peru, even abolished laws which forbade foreign ownership of airlines operating within their territories.

“Another realisation is that less airlines is not necessarily a bad thing,” he averred. “There has been a very significant consolidation of the industry. This has happened.”

Smaller airlines proved highly adaptable, while some of the big names (for example, Brazil’s Varig) went under. But the regional industry has been strengthened. “We now have six very successful airline groups, by world standards” he pointed out. “They have become much more efficient. They have also been able to modernise their fleets. We’ve been able to invest over $60-billion in new aircraft over the last five years.” Most of the region’s airlines have joined global alliances. The passengers and national economies have benefited.

Safety has also improved. Assisted by the implementation of IOSA, Latin America’s accident rate is now below the world average. “It’s amazing the difference it makes in the accident rate,” he affirmed. “Please give IOSA a lot of support. It has a hell of an impact on safety.”

“[It is said:] ‘Everyone is a winner’ from liberali- sation: alas that is not 100% true. If it was, it would have been done a long time ago. In general, we can say that governments, airlines and the people will benefit. But some airlines will fail. There will be consolidation,” affirmed De Gunten. “Political will is essential.”


Benefits for Africa

If the Yamoussoukro Decision is properly implemented, what benefits can Africa expect? InterVISTAS, in its study Transforming Intra-African Air Connectivity: The Economic Benefits of Implementing the Yamoussoukro Decision, summarises them. “Liberalisation can lead to increased air service levels and lower fares, which, in turn, stimulates additional traffic volumes, facilitates tourism, trade, investment and other sectors of the economy and brings about enhanced productivity, economic growth and increased employment . . .”

More precisely, the study looked at 12 countries from four subregions. These were Algeria, Egypt and Tunisia in North Africa; Ethiopia, Kenya and Uganda in East Africa; Angola, Namibia and South Africa in Southern Africa; and Ghana, Nigeria and Senegal in West Africa. The forecasts were made using a model focused on bilateral air traffic (whether between two countries or two subregions) which incorporated the economic characteristics, trade levels and geographic relationship of both sides, as well as the nature of the bilateral air service agreement between them.

The results were that, with liberalisation, passenger volumes would increase by 141% for Algeria, 153% for Angola, 89% for Egypt, 56% for Ethiopia, 73% for Ghana, 60% for Kenya, 92% for Namibia, 51% for Nigeria, 131% for Senegal, 54% for South Africa, 134% for Tunisia and 115% for Uganda. Connectivity would also increase. These 12 countries create 66 country pair combinations of which 34 (or 52%) had some kind of direct service last year. Liberalisation is expected to add another 17 direct links between country pairs, taking the proportion to 75%. Passenger fares are predicted to fall by 25% to 35%.

Liberalisation should also boost national GDPs – in the case of Algeria, by $124-million, Angola by $113-million, Egypt by $114-million, Ethiopia by $60-million, Ghana by $47-million, Kenya by $77-million, Namibia by $94-million, Nigeria by $128-million, Senegal by $41-million, South Africa by $283.9-million, Tunisia by $114-million and Uganda by $77.6-million. Jobs would also be created; 11 100 in Algeria, 15 300 in Angola, 11 300 in Egypt, 14 800 in Ethiopia, 9 500 in Ghana, 15 900 in Kenya, 10 600 in Namibia, 17 400 in Nigeria, 8 000 in Senegal, 14 500 in South Africa, 8 100 in Tunisia and 18 600 in Uganda.

For all 12 countries combined, air traffic libe- ralisation would increase passenger flow by 4.9-million, create 155 100 jobs, bring in consumer benefits of $1.023-billion and increase GDP by $1.297-billion. (All the financial figures in the InterVISTAS report are in 2013 prices.) The report also noted that the example of Ethiopian Airlines showed that African airlines “can thrive in a more liberalised environment”.

“I believe increased intra-African air connectivity is essential if Africa is to seize the opportunities for growth promised by its demographic and resources advantage,” concluded Kuuchi. “Only through industry and governments working hand-in-hand can these challenges be overcome, to the benefit of everyone across Africa.”

Edited by Martin Zhuwakinyu
Creamer Media Senior Deputy Editor

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