29 Mar 2018 / Article

The African aviation industry: on the verge of a take-off ?

By Pierre Guislain, vice-president Private Sector, Infrastructure and Industrialization at the African Development Bank. Prior to joining the AfDB Group in december 2016, Mr. Guislain was Senior Director of Global Practice on Transport and Information and Communications at the World Bank Group. He also worked as Director of the Joint World Bank-IFC-MIGA Investment Climate Department and as Co-Director at IFC for Fragile States and Conflict Affected Countries.

When Ethiopian Airlines took delivery of its first Boeing 787 Dreamliner in 2012, it was the second carrier in the world to operate this airliner. Today, the company has 21 in service. If you’ve travelled recently from Addis Ababa to Toronto, there is a chance you have been on board one of the latest state-of-the-art aircraft. Ethiopian airlines is a reference point in Africa’s aviation industry. The company is Africa’s largest carrier, by fleet and by the number of international destinations served (100 across five continents).

Unfortunately, Ethiopian Airlines is more the exception than the rule in African aviation. While all other regions of the world have seen the industry returning to profitability, with net profits increasing from $34.5 billion in 2016 to $38.4 billion globally in 2017, African aviation remains in the red.

Highly fragmented

There are multiple reasons for this weak overall performance. First, the continent remains highly fragmented with 54 national markets that have not yet evolved into an open regional market. Second, most large airlines in Africa are state-owned or controlled and this has affected the level playing field and the ability of new entrants to break into the market. Third, taxes, fees and charges are much higher in most parts of Africa than elsewhere in the world, accounting in some markets for about half of total ticket cost. In a number of cases, these high charges have been driven by over-dimensioned airport expansion project. Finally, the financing costs are significantly higher than in other parts of the world, and especially so for aircraft acquisition which have been affected by a significant drop in the availability of export credit financing.

Fares are on average about twice as high as in Europe and three times higher than in India

All this leads to fares that are on average about twice as high as in Europe and three times higher than in India for equivalent distances, and these high fares in turn are a damper on demand. Despite the low levels of air connectivity, Africa has the lowest load factors (below 60%) of any region of the world. And low cost carriers have yet to make major inroads on the continent.

An encouraging growth

On the positive side, air safety in Africa has improved significantly over the past decade with a sharp reduction in accidents. Also, we have seen the emergence of a number of new regional operators, including Asky and Air Cote d’Ivoire in West Africa, that are filling an important gap in regional connectivity with particular significance for fragile and landlocked countries and for competition on key routes. Currently, there are five African airlines competing on the Abidjan – Dakar route, for example, offering about 25 flights a week; thanks to increased competition, fares have dropped by about a third since 2012.

The aviation industry today supports seven million jobs

Despite the challenges, the opportunities are large. While African air traffic represents only about 3% of the world’s traffic and all African airlines combined generate only about half the revenues of Emirates alone, the continent’s recent growth performance is encouraging – annual growth in Africa’s international air traffic increased from 5.5% in 2013 to 7.5% in 2017. Africa’s average passenger increases is estimated at 5% annually over the next 20 years, outpacing global growth rates.

The aviation industry today supports seven million jobs and USD 72 billion in GDP. A 2014 IATA study estimated that if the 12 African countries included in the study lifted air traffic restrictions this would lead to a 35% drop in fares, 155,000 new jobs and an additional USD1.3 billion in GDP.

Implementation of open skies

The continent is indeed the next frontier for airline growth, provided governments decide to act and create the enabling environment needed for investment in the industry to take place.

The top priority is the effective implementation of open skies. In 1999, forty-four African countries signed the Yamoussoukro Decision paving the way for the African open skies. Almost twenty-years later, progress in implementation remains limited. But there is reason to be hopeful. A strong signal came from African heads of states, who in January this year launched the Single African Air Transport Market (SAATM), a significant political step towards implementing the much delayed air transport liberalization. Benefits would translate into increased intra-African traffic and trade volumes, better connectivity, a fall in passenger air fares, and a significant contribution to regional integration. African governments should also adhere to the Cape Town Convention on International Interests in Mobile Equipment, which provides security to lenders by enabling them to seize aircraft that serve as collateral for their loans; less than half of the African countries have done so to date, yet this would help lower financing costs for airlines at no real cost.

In short, growth prospects are strong, and much remains to be done to give investors confidence in the sector. Policymakers should remove policy, regulatory and fiscal bottlenecks and create the enabling environment that is required to attract private sector investment and operators.
Meanwhile, the African Development Bank will continue to play its part in supporting the sector. In the past decade, the Bank has invested over USD 1 billion in the construction and expansion of airport terminals, as well as aviation safety and aircraft financing. Recent investments include a USD 92 million senior loan for the construction of Senegal’s International Airport Blaise Diagne commissioned in December 2017, and a USD 160 million loan for the expansion of Jomo Kenyatta Airport.

Additional Bank interventions in the aviation industry have included a USD 115 million loan to Air Côte d’Ivoire to modernize and expand its fleet. The Bank has also supported capacity building and navigation systems in 25 countries and 69 airports. We are currently consulting stakeholders to refine our strategic approach to the sector, which we see as a critical driver of regional integration. We stand ready to help governments that are ready to implement the needed reforms and to catalyze private investment in the sector infrastructure needed to support this growth.

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