Aviation’s future in Africa’s fast-growing economies
What does the long-term future of aviation in Africa’s emerging markets (EM’s) look like? The answer to this question has been skewed further considering Covid-19’s devastating impact. EM’s on the continent will face a considerable challenge in reigniting and protecting the sector amidst a threat of a continent-wide recession, the first in over 25 years. Before the pandemic, the International Air Transport Association (IATA) estimated that within the next 20 years, Africa will account for 7 of the fastest-growing aviation markets due to fast-growing economies such as Ethiopia and Rwanda. The IATA further estimated that passenger numbers would grow from 107m in 2015 to 294m in 2034. Naturally, it is impossible to accurately predict the effects of the pandemic on these future growth prospects but recent estimates from the IATA do not paint a pretty picture.
PRESENT OUTLOOK
Prolonged restrictions mean that passenger numbers are expected to halve leading to IATA estimates predicting that African airlines will lose $6bn in revenue this year due to the pandemic. With aviation being a significant contributor to GDP, it is expected that its contribution could fall by $28billion compared to previous estimates of $17.8bn. Furthermore, job losses will accrue as a result of declining growth and these could amount to over half of the regions 6.2million aviation-related jobs. The IATA has stressed that these predictions are based on the inevitability that lockdown restriction persists for 3 months with a ‘gradual lifting of restrictions in domestic markets, followed by regional and intercontinental’.
Many EM’s in the region will be affected, the paucity of aviation-related revenues will affect countries capacity to service debts, finance infrastructure and public services. The most affected markets include:
South Africa – 14.5million fewer passengers and a loss of $5.1bn contribution to its economy;
Nigeria – 4.7 million fewer passengers and a loss of $0.89bn in contribution to its economy; and
Ethiopia – 2.5 million fewer passengers, 500,500 jobs at risk and a loss of $1.9bn in contribution
These figures are indicative of aviation’s importance to the market, recovery is crucial to fully maximise growth opportunities. There is a solid foundation for growth in these regions due to the underlying demographic and economic factors. As a whole, Africa’s median age is only 19.4 and its share of the population of working age (25-64) is growing faster than any other region. Such conditions have yielded opportunities to accelerate economic growth, this is commonly termed as the demographic dividend.
DEMOGRAPHIC AND ECONOMIC FACTORS
The prevalence of a large economically active labour force and growing economy has driven some markets into middle-income status, as the middle class grows so does personal disposable incomes and this helps drive the necessity for connectivity and improved transport networks. China is evidence of this where a growing middle class has driven the development of regional air networks, Tianjin airlines have been instrumental in the development of these networks due to the middle-class demographic driving tourism. Household spending on the African continent recently crossed $1trillion and it is expected to total $2.5 trillion by 2025 according to McKinsey. Kenya Airways is one of the airlines that has taken advantage of this by investing in its regional networks by opening new routes and introducing small-sized aircraft fleet ideal for short-medium haul flights.
Tourism has been and will continue to be a key driver for many of the airlines in this region who have experienced exponential growth in recent years. Ethiopian Airlines announced half-year financial profits amounting to $260million for 2019-2020. The airline also announced the construction of a new $5bn airport which is set to be larger than Heathrow and Paris’s Charles de Gaulle making it the largest aviation hub in Africa. Meanwhile, Rwanda Airlines has also been experiencing success as of late which caught the eye of Qatar Airways, the Gulf airline was reported to be in talks to buy a 49% stake in the East African airline. Separately, Qatar has agreed to buy a stake in Rwanda’s new Bugesera International Airport due to be constructed in its capital Kigali.
To realise these infrastructure projects and their benefits, governments will have to find solutions to navigate the current pandemic.
An artist’s impression of Bugesera international Airport
POSSIBLE SOLUTIONS
Firstly, a shift towards Cargo is a short term option. Currently, there is a 70% shortfall in capacity within the cargo sector in Africa which can present governments and stakeholders with an opportunity to play a critical role during the pandemic and transition out of restrictions. Governments and regulators could allow passenger airlines to be categorised as cargo planes delivering medicinal, industrial and other goods in short supply during the pandemic. This ensures that supply chains continue to operate and stops planes being grounded when they could be playing a critical role. By keeping planes flying, this has the added advantage of limiting the requirement of widespread maintenance checks which aircraft have to endure after being grounded for a significant amount of time, these can include major internal checks to the internal components of the aircraft.
With over 40% of inter-regional trade travelling by air, airlines could be transporting goods during this time. Kenya Airways has taken this stance by adapting it's Boeing 787 Dreamliner’s towards cargo specialism, these aircraft have now been transporting essential products including medical supplies and manufacturing equipment. Ethiopian Airlines has doubled its cargo numbers during the pandemic by becoming a key transit hub for medical supplies destined for Latin America. The creation of the Africa Medical Supplies Platform, an eBay like marketplace for medical supplies and PPE on the African continent has also created an opportunity for airliners such as Ethiopian to be involved in the transportation of supplies around the continent.
Secondly, airlines will have to draw on diverse financing options or amend existing legislation. Many economic stimulus packages have involved government bailouts to stranded airlines. However, many EM’s in Africa do not yet have the economic clout to make widespread interventions to commodity-driven companies let alone to airline carriers especially with an impending debt crisis. This problem is further exacerbated by high financing costs and many airlines being state-owned monopolies. South Africa’s national state carrier is currently undergoing a business rescue plan but foreign investment makes recovery incredibly difficult due to foreign ownership in airlines being limited to 25%. South African law requires that airlines be 75% owned by natural persons resident in the republic.
Thirdly, in the absence of governments lessening regulatory and investment restrictions, a solution is for governments to expedite a Pan-African regional initiative such as the development of the Single African Air Transport Market (SAATM). The SAATM is the African Union’s project to create a single market in regards to air transport, this means all members will agree to lift market access restrictions, remove ownership restrictions and advance freedom of air transport. The AU could develop the SAATM further by enticing countries to enter into a mechanism that would be able to support airlines to vitiate the next global pandemic. This could include a collaboration with the African Development Bank to create a financial safety net that would be willing to support airlines in need, this could be funded from duties placed on air transport within the continent or voluntary contributions from airline companies who would pledge a percentage of profits towards this safety net.
Finally, the journey towards pre-covid-19 levels of growth will be a difficult one. EM’s in the region will have to encourage investment and an inclusive growth environment that is not reliant on commodities, particularly if the slump in commodity prices continues thereby threatening public coffers. Intra-Africa trade is a meagre 15% compared to 80% intra-Europe trade, governments should continue developing the Continental Free Trade Africa Agreement as this has the potential to improve trade inflows/outflows consequently stimulating economic growth. It’s clear that a growing affluent population is correlated to increased air travel but intra-air travel is also ideal for a continent which currently exhibits low population densities and challenging road infrastructure. Prudent fiscal measures will need to continue being taken to ensure that economic growth continues and household spending returns to pre-covid levels.
FINAL THOUGHTS
Governments will also need to undertake measures to encourage tourists that their environments are safe to visit. Many countries have taken steps to reinvigorate tourism such as Ivory Coast who have waived their tourism tax. Seychelles has also waived all landing and parking fees for April to December 2020. However, development in tourism cannot be siloed, improvements to airport infrastructure, increased flight connections, visa-free routes, public-private partnerships, and investment in other sectors of the economy will play a part in improving the aviation sector. Other countries may have to consider similar measures but it is incredibly important that any measures take into account public health concerns as prevention will always be better than cure.
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