Structural and policy issues have constrained growth in the African aviation sector.
Africa’s aviation sector is one of the many casualties of the COVID-19 pandemic sweeping the continent, with at least $6bn in revenue losses predicted for airlines this year by the International Air Transport Association (IATA) in mid-2020.
This is $2bn more than what was expected at the end of March, when many lockdowns were implemented to stop the spread of infection. IATA says full-year traffic is expected to plummet by 51%, with attendant job losses. The African Union has added to the bad news. It estimates that African countries have lost about $55m in travel and tourism revenues in three months of lockdowns and border closures and it predicts that some airlines will not survive the pandemic.
These estimates were based on a scenario of severe travel restrictions lasting for three months, with a gradual lifting of restrictions in domestic markets, followed by regional and intercontinental flights. Lockdowns in many places began to ease in July, but the road ahead is still uncertain, with a big unknown being the willingness of travellers to fly again anytime soon. South Africa has been the hardest-hit, with IATA stating that the lockdown resulted in 14.5 million fewer passengers flying into the country, with a $5.1bn impact on the economy. With its national carrier and the biggest private airline both in business rescue and a third in provisional liquidation, the capacity for recovery is severely diminished. Nigeria, Ethiopia and Kenya were also hard-hit, with Nigeria receiving 4.7 million fewer passengers, Ethiopia 2.5 million and Kenya 3.5 million.
A rescue operation
Ethiopian Airlines, Africa’s biggest and most profitable carrier, is ready to step into the breach to rescue struggling carriers as part of its strategy to claim Africa’s skies and claw back business for the continent from international airlines.
The airline has managed to keep in the black despite losing almost $1bn in ticket sales. It had a strong start to the year and has kept revenue flowing after grounding its passenger business by turning to its lucrative cargo division, marketing its services to other African countries and the international community. This paid off. Addis Ababa became the African hub for COVID-19 supplies donated by Chinese billionaire Jack Ma to the continent and for the UN World Food Programme’s distribution of humanitarian support.
The airline has been able to charge premium rates for its services as most of its competitors are struggling or grounded. Ethiopian Airlines is well positioned to benefit from further consolidation in the sector in the post-COVID-19 era. It is already in talks with Air Mauritius, which recently went into administration, on a possible recovery strategy. It is also waiting for the dust to settle on South African Airways, hoping that there might be an opportunity to bring what was once Africa’s most successful airline into the African stable. The airline already has an extensive African footprint after taking up equity stakes and management partnerships with about 10 carriers and governments over the past decade. It has established a subsidiary airline in Mozambique and has helped Chad, Malawi and Zambia to relaunch their national carriers. It also had deals with or is negotiating with Congo Republic, Guinea, Equatorial Guinea and Eritrea, among others, as part of its strategy to build feeder hubs across Africa to direct traffic through its Addis Ababa hub for onward long-haul travel.
This strategy could now be costly for Ethiopian Airlines, with the continent facing a severe economic downturn in the wake of the pandemic. The World Bank predicts that sub-Saharan Africa’s growth will decline from 2.4% in 2019 to between -2.1% and -5.1% in 2020, pushing the region into recession for the first time in 25 years. This will affect countries differently, but some of those the airline has bet on have their own structural issues already. Zambia, for example, is set to go into recession on the back of its unsustainable debt load and contraction of its vital mining sector, while Chad and Equatorial Guinea are reeling from the record drop in oil prices in 2020. Whether they can afford to support a national airline, even with Ethiopian Airline’s help, is yet to be seen. And while the carrier maintains its objectives are altruistic – to boost regional integration and to keep out international predators – its growing monopoly in Africa’s skies may limit the space for other smaller African carriers to operate. But recovery of the aviation sector in the post-COVID-19 era is not simply about re-igniting travel. The sector in Africa as a whole is structurally unsound. This malaise is reflected by the statistics.
A structural adjustment is needed
Africa has about 12% of the global population, but accounts for less than 4% of the air services market. This is not because of COVID-19, but because it is an uncompetitive, high-cost sector, constrained by protectionist policies and governments’ short-term revenue priorities. Policymakers tend to view aviation as a luxury business rather than a catalyst for economic development and growth. They have compromised its success with punitive taxes, expensive landing rights, uncompetitive fuel charges, visa requirements and other costs that make African air travel expensive.
Local markets tend to be highly regulated with policy support directed to national carriers, despite the fact that many are loss-making enterprises. This deters new investment in the sector. There are few privately owned airlines of any size outside of South Africa and Nigeria, where local airlines survive in the absence of a national carrier. These factors make it difficult for stakeholders to formulate an agile response to the challenges emanating from the pandemic.