African Air Transport Management: Strategic Analysis of African Aviation Market 3031293231, 9783031293238

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Advances in African Economic, Social and Political Development

Eyden Samunderu

African Air Transport Management Strategic Analysis of African Aviation Market

Advances in African Economic, Social and Political Development Series Editors Diery Seck, CREPOL - Center for Research on Political Economy, Dakar, Senegal Juliet U. Elu, Morehouse College, Atlanta, GA, USA Yaw Nyarko, New York University, New York, NY, USA

Africa is emerging as a rapidly growing region, still facing major challenges, but with a potential for significant progress – a transformation that necessitates vigorous efforts in research and policy thinking. This book series focuses on three intricately related key aspects of modern-day Africa: economic, social and political development. Making use of recent theoretical and empirical advances, the series aims to provide fresh answers to Africa’s development challenges. All the socio-political dimensions of today’s Africa are incorporated as they unfold and new policy options are presented. The series aims to provide a broad and interactive forum of science at work for policymaking and to bring together African and international researchers and experts. The series welcomes monographs and contributed volumes for an academic and professional audience, as well as tightly edited conference proceedings. Relevant topics include, but are not limited to, economic policy and trade, regional integration, labor market policies, demographic development, social issues, political economy and political systems, and environmental and energy issues. All titles in the series are peer-reviewed. The book series is indexed in SCOPUS.

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Eyden Samunderu

African Air Transport Management Strategic Analysis of African Aviation Market

Eyden Samunderu International School of Management Dortmund, Germany

ISSN 2198-7262 ISSN 2198-7270 (electronic) Advances in African Economic, Social and Political Development ISBN 978-3-031-29323-8 ISBN 978-3-031-29324-5 (eBook) https://doi.org/10.1007/978-3-031-29324-5 © The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 This work is subject to copyright. All rights are solely and exclusively licensed by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors, and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, expressed or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. This Springer imprint is published by the registered company Springer Nature Switzerland AG The registered company address is: Gewerbestrasse 11, 6330 Cham, Switzerland

Acknowledgements

As the author for this book, I wish to thank the following people who shared with me some valuable contribution material: Charlotte Posada Kandel (Digital Product at Qatar Tourism) and Tolulope Oluwimi na Fulani (Aviation analyst—Nigeria).

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Contents

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The Context of the Airline Industry: An African Market Perspective Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Situation of Air Transport Market (i.e. Demand and Airlines) and Recent Trends (i.e. Capacity and Demand) . . . . . . . . . . . . . . . . . . . . . . . . . . . Case Study: Ethiopian Airlines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Brief Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ethiopian Airline Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Strategic Partnerships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Potentials and Challenges of the Air Transport Market in Africa . . . . . . African Aviation Connectivity and Infrastructure Development Challenges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Obstacles and Dilemmas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Intra-Africa Connectivity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Measuring Airline Performance: African Markets . . . . . . . . . . . . . . . . . Conceptualizing Airline Performance Framework . . . . . . . . . . . . . . . . . Effects of COVID-19 on African Airlines Performance . . . . . . . . . . . . . Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Air Transport Regulation: A Perspective on Africa’s Regulatory Framework . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . North American and European Union Air Transport Liberalization: Historical Perspective . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Yamoussoukro Decision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Regulatory Framework . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . African Aviation: Internal Versus External Pressures . . . . . . . . . . . . . . . Effects of Liberalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . South Africa . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Kenya . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ethiopia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 1 4 6 6 7 7 9 12 13 13 16 19 19 28 28 33 33 34 37 38 42 43 43 45 47 vii

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Nigeria . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . East African Community . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Demand and Supply Patterns of Air Travel . . . . . . . . . . . . . . . . . . . . . . African Aviation Cost Structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fuel Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financing, Insurance and Leasing . . . . . . . . . . . . . . . . . . . . . . . . . . Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Maintenance and Ground Handling Services . . . . . . . . . . . . . . . . . . Labour . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Safety . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Single African Air Transport Market (SAATM) . . . . . . . . . . . . . . . . . . Alignments in Regional Economic Groups in Africa . . . . . . . . . . . . . . . Northern and Western Africa . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . AMU: The Arab Maghreb Union . . . . . . . . . . . . . . . . . . . . . . . . . . . The League of Arab States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Arab League open Skies’ agreement . . . . . . . . . . . . . . . . . . . . . . . . ECOWAS: Economic Community of West African States . . . . . . . . . West African Economic and Monetary Union . . . . . . . . . . . . . . . . . . The Banjul Accord Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . CEMAC: Central African Economic and Monetary Community . . . . The Air Transport program of the CEMAC states . . . . . . . . . . . . . . . . . Southern and East Africa . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . COMESA: The Common Market for Eastern and Southern Africa . . . SADC: The Southern African Development Community . . . . . . . . . . . . The East African Community . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Regional Economic Community: The Path Ahead . . . . . . . . . . . . . . . . . Measures to be Explored for the Aviation Sector . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

48 49 51 54 54 55 55 56 56 57 57 61 62 62 62 63 64 65 66 67 67 68 68 70 71 72 73 74

Emergence of the Low-Cost Carrier Model in Africa . . . . . . . . . . . . Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Low-Cost Carrier Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Global Market Leaders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Low-Cost Carriers in Africa and the Middle East . . . . . . . . . . . . . . . . . LCC Growth in Africa . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Low-Cost Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Structural Challenges to the Low-Cost Carrier Model in Africa . . . . . . . East African Air Transport Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . GDP Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign Trade and Investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Demand and Supply Patterns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Infrastructure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financing and Aircraft Leasing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Low-Cost Carrier Aircraft Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

77 77 82 85 86 87 88 91 95 95 97 99 101 102 102 103

Contents

Maintenance and Ground Handling Services . . . . . . . . . . . . . . . . . . . . . Labour . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Concept of Sustainability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Economic Sustainability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Low-Cost Carrier Capacity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Demand Patterns in Air Passenger Transportation: Application of Gravity Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Econometric Modelling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Spatial Econometrics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Spatial Econometric Approach to Estimating Panel Data Model from the Airline Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gravity Model for Forecasting Air Transport Market Potential . . . . . . . . Estimating Potential Market Demand Using Gravity Model . . . . . . . . . . Dependent Variable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Explanatory Variables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Population . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Airfare . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Demand Study Survey . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Demand Analysis: Gravity Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . Application of Fare Cut to Demand Forecast . . . . . . . . . . . . . . . . . . . . The Potential for Low-Cost Operations from a Theoretical Perspective . . Demand Analysis: Survey Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . Analysis of Travel Characteristics . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mode of Transportation and Importance of Certain Trip Factors . . . . . . . Air Transportation Usage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Trip Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interim Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Research Study Example . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consumer Surplus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gravity Model: Detailed Description of the Model . . . . . . . . . . . . . . . . Intervening (InterveningAB) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Variables Pertaining to the Bilateral Agreements: Bilateral Factors (0, 1) AB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Using the Model to Estimate the Traffic Impacts of Liberalization . . . . . Economic Impact Parameters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Indicative Findings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Frequency Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Results from the Econometric Analysis . . . . . . . . . . . . . . . . . . . . . . Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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104 104 105 105 107 108 109 113 113 113 114 115 116 117 118 118 118 119 119 123 124 124 129 129 130 131 133 133 135 135 136 137 138 138 141 143 144 144 145 147 148

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Africa’s Air Transport Infrastructure: Challenges, Complexities and Opportunities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Airport Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . African Civil Aviation Commission . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment and Growth in Air Transport . . . . . . . . . . . . . . . . . . . . . . . . Changing African Aviation: What Lays Ahead of Africa’s Skies? . . . . . African Airport Infrastructure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Challenges and Complexities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Private Sector Engagement in Airport Infrastructure . . . . . . . . . . . . . . . Regulatory Environmental Factors . . . . . . . . . . . . . . . . . . . . . . . . . . Project Parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Theories of Resources and Capabilities: Strategic Management Perspective . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Resource-Based View . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Core Competencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dynamic Capabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Impact of Tourism on Promoting Public–Private Partnerships . . . . . Case Study: Ollombo Sassou N’Guesso International Airport . . . . . . . . . Air Traffic Control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Role of the African Development Bank in Airport Infrastructure Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . COMESA Airspace Integration Project . . . . . . . . . . . . . . . . . . . . . . Location . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Financing Gap . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Leveraging Private Sector Engagement to Foster Airport Infrastructure Improvement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Airport Privatization Models . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Impact of COVID-19 on Airports . . . . . . . . . . . . . . . . . . . . . . . . . Herfindahl Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

179 181 181 185 186 186

Tourism Development in Sub-Sahara Africa and Impact on Regional Airline Business Models . . . . . . . . . . . . . . . . . . . . . . . . . Definitions of Tourism . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Types of Tourism . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign Tourism . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Domestic Tourism . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Value of Tourism . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Kenya Tourism . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Engine for Sustainable Economic Development . . . . . . . . . . . . . . . . . . Tourism as a Generator of Employment . . . . . . . . . . . . . . . . . . . . . . . . The Impact of Tourism on Infrastructure Development . . . . . . . . . . . . . Tourism Stimulates Socio-Cultural Heritage Conservation . . . . . . . . . . . Empowering Women, Young People and Marginalized Populations . . . .

189 191 193 194 194 195 195 196 196 197 198 198

151 152 152 154 158 159 160 162 164 164 164 164 166 166 167 172 173 173 175 176 177

Contents

Tourism in the Southern African Development Community . . . . . . . . . . Key Characteristics of the Tourism Sector in Africa . . . . . . . . . . . . . . . The Role of Aviation in Tourism Development . . . . . . . . . . . . . . . . . . . Challenges in Aviation Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Air Transport and Tourist Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Growth and Change in the Global Airline Industry . . . . . . . . . . . . . . . . International Framework for Aviation Regulation . . . . . . . . . . . . . . . . . Paris Convention . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Convention on International Civil Aviation (Chicago Convention) . . . . . Bermuda Type Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Regional Tourism Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tourism’s Contribution to Local and Regional Development . . . . . . . . . Regional Tourism Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Importance of Aviation Sector and Tourism Industry . . . . . . . . . . . . . . . Economic Benefits of Aviation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Social Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Strategic and Operational Measures to Be Taken by Airline Carriers to Foster Development of Tourism in Africa . . . . . . . . . . . . . . . . . . . . . . . Strategic Controlling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operational Controlling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Airline and Regional Tourism Policies . . . . . . . . . . . . . . . . . . . . . . . . . Impact of COVID-19 on International Tourism and Air Transport . . . . . COVID-19 Impact on Air Cargo Capacity . . . . . . . . . . . . . . . . . . . . . . Global Perspective: Impact of COVID-19 . . . . . . . . . . . . . . . . . . . . . . . Case Study: South African Airways (SAA) . . . . . . . . . . . . . . . . . . . . . . Brief History . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fleet Structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Prime Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Outlook for the Aviation Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . Overview Environmental Policies in Aviation . . . . . . . . . . . . . . . . . . . . Aviation Industry Adaption to Climate Change . . . . . . . . . . . . . . . . . . . Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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199 200 201 202 203 204 206 206 206 207 208 209 210 211 212 213 214 214 214 216 217 219 221 224 224 225 225 229 229 231 233 234

About the Author

Eyden Samunderu Managing Partner—AMENA Africa Program Director—International School of Management (ISM), Dortmund, Germany Professor Dr. Eyden Samunderu (PhD) is a leading seasoned international senior strategy expert and welltrusted advisor with a strong history in aviation management consulting and international project management, capsuled by a strong business analytical acumen and commercial awareness of airline alliance networks and airport operations. He has a client-centric mindset supported by a commitment to unparalleled customer service solutions. He has self-confidence and solid presentation skills at both stakeholder and senior management level (C-suite) and a strong deep understanding of the African air transport landscape. He is also the author of Air Transport Management: Strategic Management in the Airline Industry and has published several articles on air transport. His research interests include air transport economics, competition and regulations, spatial econometrics, and financial risk management.

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Abbreviations

ACI ACSA AFCAC AfDB AFRAA AOC ASK ATM AU AVIC BAG BASA CAAZ CASSOA CEMAC CNS CRS COMESA CO2 COMAC DRC ECA EAC ECCAS ECOWAS EU FFP Ft FX FSNC IATA

Airport Council International Airports Company of South Africa African Civil Aviation Commission African Development Bank African Airlines Association Air Operating Certificate Available seat kilometres Air traffic management African Union Aviation Industry of China Banjul Accord Group Bilateral Air Service Agreements Civil Aviation Authority of Zimbabwe Civil Aviation Safety and Security Agency Central African Economic and Monetary Community Communication Navigation Surveillance Computer reservation system Common Market of Eastern and Southern Africa Carbon dioxide Commercial Aircraft Corporation of China Democratic Republic of Congo Export Credit Agency East African Community Economic Community of Central African States Economic Community of Western African States European Union Frequent-flyer program Feet Foreign exchange Full-service network carrier International Air Transport Association xv

xvi

IAG ICAO IO IOSA KAA KCAA LCC LHR MC MIA MTP NA O/D OECD PDP REC RBV RPK SAA SAATM SADC STN SDG UN UNWTO UAE USA WAEMU WHO WTTC WWF YD

Abbreviations

International Airlines Group International Civil Aviation Organization Industrial organization IATA Operational Safety Audit Kenya Airports Authority Kenya Civil Aviation Authority Low-cost carrier London Heathrow Marginal cost Mombasa International Airport Medium-term plan North America Origin and destination Organisation for Economic Co-operation and Development Pre-delivery payment Regional Economic Cooperation Resource-based view Revenue passenger kilometre South African Airways Single African Air Transport Market Southern African Development Community London Stanstead Sustainable Development Goals United Nations United Nations World Tourism Organization United Arab Emirates United States of America West African Economic and Monetary Union World Health Organization World Travel and Tourism Council World Wide Fund for Nature Yamoussoukro Declaration

Chapter 1

The Context of the Airline Industry: An African Market Perspective

Keywords Growth · African aviation · Intra-Africa connectivity · Seat capacity · Open skies · Airline performance

Introduction The growth trajectory within the African aviation market has been earmarked to reach a compounded growth average of 5% per year according to the International Air Transport Association (IATA, 2018). This means that passenger demand for air travel in the continent will become one of the fastest aviation development markets in world, paving way for airlines both regional and international carriers to exploit this opportunity. The catalyst drivers pushing this pattern of growth surge have been defined by an increase in middle class earning, harnessing the propensity to travel, globalization and increasing connectivity to name a few. Despite this expected growth projection, it is rightful to say that the global pandemic as a result of COVID-19 outbreak has dampened the global aviation growth expectations and Africa is no exception. Prior to early 2020, African aviation growth was on track to become one of the fastest-growing markets in the world. However, it is paramount to acknowledge that despite the growth momentum being slowed down by this pandemic, historically, aviation industry has always been considered as an enabler driving economic and social progress within the African continent and the global markets at large. Gheorghe and Sebea (2010) reiterated that in developing economies, air transport growth has facilitated a myriad of opportunities ranging from market access, increased international trade and tourism. Aviation in Africa supports almost 6.8 million jobs and contributes $80 billion to gross domestic product (GDP) (IATA, 2018). Overall, the development of African aviation sector has had a significant impact in terms of driving inbound investments for African economies, job market opportunities, as well as giving national governments the opportunity to generate revenue streams through taxes. Against such a backdrop, African aviation still faces headwind challenges, such as poorly developed intra-African connectivity within the continent and lack of airport infrastructure due to limited capital access, and above all a very protective market due to bilateral air service agreements (BASAs), despite © The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 E. Samunderu, African Air Transport Management, Advances in African Economic, Social and Political Development, https://doi.org/10.1007/978-3-031-29324-5_1

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1 The Context of the Airline Industry: An African Market Perspective

the national governments pushing for a Single African Air Transport Market (SAATM). This SAATM has been signed by African countries who are willing to promote intra-regional connectivity between African city pair capitals by creating a single unified air transport market. Such impetus will foster both the continent’s economic integration and growth agenda. This will be facilitated through the African Continent Free Trade Area (ACFTA), which is designed to boost and accelerate intra-African trade whilst strengthening Africa’s trade footprint on the global markets. For this reason, a functional air transport system will be a precursor to economic progress in the region. However, the original initiative proposal was mapped under the Yammuoskro Declaration (YD) in 1988 which envisaged the vision of developing the African aviation region by embracing airline cooperation and sector integration and pushing Africa toward a liberalized air transport market. Critics have continuously questioned the significance of the YD because of its “failure” to completely liberalize the African air transport market. This has had largely to do with the continuous attitude of African governments to protect their own state-run national carriers, delimiting the progress of an “open skies” landscape. Further obstacles also meant that there was a broad scope by national government not to fully exploit its implementation and shifting the focus more on intra-African air service market (Heinz, 2011). The reality also indicates that Africa’s airport infrastructure is poorly developed and outdated and hence not designed to serve the increasing volume of passenger flow and cargo (Samunderu, 2018). Therefore, Africa needs to modernize its air transport infrastructure ideally through public–private partnership (PPP) engagement. This means, the continent needs to open its doors fully to private capital investment flow designed to support infrastructural improvements and countries like Rwanda and Ivory Coast have already heeded the call by making significant progress in airport infrastructure investments (OECD, 2018). In Rwanda, the new Bugusera international airport will be positioned as an East African hub, capable of accommodating six million passengers annually and will certainly enhance business integration in East Africa. However, due to African government restrictions on public infrastructure participation more hurdles are paramount. For example, repatriation of foreign currency earnings through blocked funds by airline carriers poses another hurdle in Africa. This is a situation whereby countries like Angola, Ethiopia, Libya, Sudan, Zimbabwe, Mozambique and Eritrea put restrictions on foreign currency repatriation and has only dampened any progress toward liberalizing air transport allowing freedom of movement of capital within the region. The analysis of air transport liberalization will be discussed in detail in Chap. 2. The strategic significance of intra-African connectivity cannot be underestimated because of its propensity to drive both economic growth prosperity and development. Demand for intra-African travel will enable the regional carriers to benefit in order to support increased passenger volume and propensity to travel. In comparison to the rest of the world, Africa has the smallest number of air passengers annually and accounts for only 2% of global traffic which includes both commercial passenger and freight. Tourism flow has been the principal driver behind demand patterns for air travel, with South Africa accounting for almost 25 million annual passenger

Introduction

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Fig. 1.1 Airfares on intra-African routes. Source: IATA, 2018

capacity in 2019, followed by Egypt with 24 million and Morocco with 19 million (Simpleflying.com, 2020). Despite, this seemingly reflecting an attractive market developed, air travel in Africa still has extremely high airfares charged on travelling passengers due to a low competitive market structure dominated by national flag carriers. Figure 1.1 illustrates the pattern of high airfares in Africa. However, the new emerging low-cost carriers (LCCs) like Fastjet, Kulula.com and Flysafair have now gained a foothold in the market, but they still do not raise enough competitive challenges to the existing incumbent regional carriers. These LCCs accounted for only 12% of seat capacity within Africa in 2018 according to the Centre for Asia Aviation Pacific (CAPA) and Official Aviation Guide (OAG, 2018). This indicates a low penetration of LCC in a region that consists of 47 countries having only 3 countries formidably experiencing the impact of LCC between 2001 and 2017 (Samunderu, 2018). Drawing a parallel from the European LCC market, Africa is far much behind in exploiting the LCC business model fully. The pioneer carrier that championed the LCC model was Southwest Airlines after the United States (US) transitioned towards a liberalized air transport market. This became popularly known as the “Southwest Effect”, which refers to the decline in fares once a low-fare airline begins serving an airport that initially had no serving low-fare carriers and has become a terminology of the airline industry. Schlumberger and Weisskopf (2014) summed up the elements of the “Southwest Effect” in the aviation industry as: (a) The direct competitive effect in terms of passenger growth and fare reduction on a given route where Southwest airlines had entered. (b) Reduction of fares at surrounding airports through Southwest’s entry.

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The Context of the Airline Industry: An African Market Perspective

(c) Role model effect of Southwest Airlines on the business models of new entrants in other markets. This effect has been successfully “copied” and modified by carriers in other continents to maintain competitiveness and cost advantage over full-service network carriers (FSNCs). For example, most LLCs such as Ryanair and EasyJet used the generalized principles of the “Southwest Effect” which may have fitted to the economic situation of the USA or European market due to Open Skies, but the African market with its complex and rather diversified environment will require more than just the implementation of the Yamoussoukro declaration for LCCs to strive successfully. “Southwest Effect” as a model was adopted by new carriers across the globe (Button, 2012). In Africa, the LCC model has still to make a significant impact in terms of generating strong revenues. In addition, the global revenue passenger kilometres (RPKs) grew by 9.5% in 2018, and Africa’s international RPKs flown by carriers based in Africa grew by 11.2% yearly (IATA, 2018). This is consequently due to the ongoing signs of improvement in Africa’s largest economies within the sub-Saharan region namely, Nigeria and South Africa (IATA, 2018). Notwithstanding, high fixed costs with low utilization within the airline industry in Africa have made it difficult to achieve profitability. The growth drivers that have pushed intra-African travel have been noticeable in the last decade, mainly increased frequency and seat capacity and growing increase in private investments (Njoya, 2015). The dominant carriers within African skies include: Ethiopian Airlines, South African Airways (SAA), Air Mauritius, Air Seychelles, Kenya Airways, Egypt Air, Royal Air Maroc, Rwandair, Taag Angola Airlines, Fastjet (a British-based holding company for a group of low-cost carriers), Kulula.com and Mango Airlines. As Africa braced itself for a surge in growth (pre-COVID-19), well-established carriers like Ethiopian Airlines were driving strong revenues from their commercial operations and also cargo operations, setting a new level of competitive equilibrium. Despite the African continent experiencing air traffic growth, it is imperative to note that key impediments still undermine the full thrust of substantial profit gains (Samunderu, 2019). With the changing air transport landscape, especially with the gradual market liberalization of the open skies agenda, the continent may indeed put itself on the global air transport map. Thereby, Ethiopian Airlines stands out as the fastest growing, most profitable and largest airline in Africa.

Situation of Air Transport Market (i.e. Demand and Airlines) and Recent Trends (i.e. Capacity and Demand) The African air transport market is forecasted to see strong traffic growth in-line with high economic growth over the next 20 years. The Boeing Forecast 2019–2038 predicts high future growths in Africa of 5.9% in airline traffic RPKs and 4.0% in fleet (Boeing, 2019). Also, Airbus predicts in their latest forecast a growth of 4.9%

Situation of Air Transport Market (i.e. Demand and Airlines) and. . .

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Fig. 1.2 Africa’s top airlines by seats. Source: CAPA, 2019

(RPKs) (Airbus, 2018). The growth is driven by a growing population of 4.4bn in 2021 (UN, 2015; Worldometers, 2019), the highest urbanization rate in the world with 51.5% of the population living in urban cities by 2040 (UNECOSOC, 2014; Saghir, & Santoro, 2018), a growing young workforce to 1.6 billion in 2060 (UNECOSOC, 2014) and having the fastest growing middle class in the world to 42% by 2060 (1.1 billion of the predicted population) (AfDB, 2018). However, despite the fact that there is a natural need and high potential for air transport in Africa, the global passenger traffic share is only 2% (ATAG, 2014). Boeing predicts that African carriers require up to 1160 new jet aircraft deliveries over the next 20 years driven by single aisle (71%) and wide body (25%) (Boeing, 2019). Airbus predicts similar numbers that African carriers require up to 1131 new jet aircraft deliveries over the next 20 years (Airbus, 2018). In high-level numbers, Africa has 161 airlines, 349 commercial airports with 98 million passengers operating within or from/to Africa in 2017 (ATAG, 2014). It has become visible that five carriers now dominate the African air transport market, notably, the five largest carriers measured in available seat kilometres (ASKs) in 2017, are Ethiopian Airlines ($48.9bn), South African Airways ($25.9bn), Egyptair ($26.8bn), Royal Air Maroc ($21.5bn) and Kenya Airways ($14.5bn). Overall the African airline landscape by seat capacity is dominated by the following carriers exhibited in Fig. 1.2. According to the Centre for Asia Pacific Aviation (CAPA) (2019), the total seat capacity of full-service network carriers (FSNCs) in Africa was up by 4.3% in 2019 with the LCC capacity up by 13.3%. However, despite such impressive growth, non-African carriers had 40% of all total seats, which means there is an increasing interest by other global carriers to take advantage of the growth in the region. The international airlines that have continued to expand their routes in Africa include the gulf carriers such as Emirates and Saudi Arabian airlines. Air France and British Airways have also continued to increase their seat capacity (See Fig. 1.2). From an international perspective, seat capacity accounted for 73.6% of the total in the year

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The Context of the Airline Industry: An African Market Perspective

Table 1.1 Comparison of the five largest airvlines in Africa (in terms of ASKs) Parameters IATA Airline Code Country of Origin ASKs in 2017 Passenger in 2017 Destination in 2019 Aircraft in 2019 Employees in 2017 Load factor (Passenger) in 2017 Aircraft average age in 2019 Total revenue in 2017 Operating margin in % in 2017

Ethiopian Airlines ET Ethiopia 48.9bn 9.6m 137 101 11,299 71.4%

South African Airways SA South Africa 25.9bn 6m 66 42 5,752 73.2%

Egyptair MS Egypt 26.8bn 8.5bn 73 53 28,940 69.0%

Royal Air Maroc AT Morocco 23.7bn 7.3m 102 55 2,271 71.2%

Kenya Airways KQ Kenya 10.5bn 4.6m 58 33 3,548 72.4%

6.4 Y/O

10.8 Y/O

9.6 Y/O

11.2 Y/O

7.8 Y/O

3.2bn 8.6%

2.2bn 12.2%

1.3bn -23.4%

1.6bn (in 2016) 4%

782m 1.3%

Source: Flightglobal, 2019

2019 and domestic capacity grew by 3.3% (CAPA, 2016). Table 1.1 shows Africa’s top leading carriers by ASKs. Let us now examine Africa’s leading commercial carrier Ethiopian Airlines.

Case Study: Ethiopian Airlines Brief Background Ethiopian Airlines is based in Addis Ababa and the flag carrier of Ethiopia and the largest, most profitable and fastest-growing airline in Africa. It serves 137 destinations with a fleet size of 100 aircrafts in 2019 and transporting 11.5 m passengers in 2018. South African Airways (SAA) is based in Johannesburg and the flat carrier of South Africa, the second largest airline in Africa. It operates 66 destinations with 42 aircrafts in 2019 and transporting over 6 m passengers in 2017. However, SAA struggles with a negative operating margin since 2011. Egyptair is based in Cairo and the flag carrier of Egypt, operating to 73 destinations with a fleet of 53 aircrafts in 2019 and transporting 8.46 m passengers in 2017. It has a negative operating margin since 2011. Royal Air Maroc (RAM) is based in Casablanca and is the flag carrier of Morocco. It operates to 102 destinations with 55 aircrafts in 2019 and transported 7.3 m passenger in 2017. RAM has a successful business model in place connecting Europe, North America and the Middle East with Africa. Kenya Airways is the flag carrier of Kenya with its base in Nairobi operating to 58 destinations with 33 aircraft in 2019 and transporting 4.8 bn passengers in 2018. Kenya Airways has a joint business with KLM on Europe to Africa (Flightglobal, 2019).

Case Study: Ethiopian Airlines

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Ethiopian Airline Operations Ethiopian Airline connects the continent to the rest of the world under the slogan “The New Spirit of Africa”. Ethiopia can be geographically considered as the middle of the world as it is located in Eastern Africa (Ethiopian, 2019a; Flightglobal, 2019). Ethiopian Airlines is 100% owned by the Government of the Federal Democratic Republic of Ethiopia (Flightglobal, 2019). However, the management operates independently and without the influence of the government. According to GebreMariam, “ownership by itself and on its own is not a determinant factor for success or failure. As long as ownership and management is separated in the corporate governance of the enterprise, I do not think government ownership is a problem as long as it is properly managed” (Bekele, 2016, p. 27). Ethiopian Airlines has adopted the model of a FSNC and follows the strategy of multi-pan-African hubs through strategic partnerships with ASKY Airlines, Malawian Airlines, TChadia Airlines and Ethiopian Mozambique Airlines. The three main hubs for Ethiopian Airlines are Addis Ababa (Ethiopia), Lomé (Togo) and Lilongwe (Malawian). The hub and spoke network allows Ethiopian Airlines to feed the traffic from the different regions within Africa via its hubs and is supported by its strategic partnerships (Meichsner, 2016). The goal of the network carriers has been to provide global air transport networks with complete service chains, seamless customer care with a comprehensive network and lounges all around the world. Integrated loyalty program systems are important parts of these concepts as well. Hub and spoke networks have been studied extensively in the air transport literature (see, e.g. Brueckner & Spiller, 1992; Zhange & Wie, 1993; Nero, 1996 and Brueckner, 1997). In a hub and spoke system, flights are concentrated to and from a limited number of airports that are used as collection distribution centres for passengers. There are two basic types of hub and spoke networks, differing in how non-hub cities are connected to the hubs. In the single assignment model each city is connected to a single hub. There is no sorting at the origin because all flow must travel to the same hub. The multiple assignment model will allow each city to be connected to more than one hub.

Strategic Partnerships Ethiopian Airline has been pushing for a strong market position by forging strategic partnerships with other African carriers. Strategic collaborative arrangements have enabled the airline to expand its regional network and gain market access. Joining the Star Alliance has also facilitated the carrier’s ambition to expand its international route network. These alliances usually combine code-share agreements with other arrangements, such as schedule coordination and the merger of frequent-flier programs (FFPs). Furthermore, it can also be argued that strategic alliances are an essential mechanism to hedge against risk, taking into account some of the

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The Context of the Airline Industry: An African Market Perspective

Europe North America Asia

Middle East Ghana's new JV national carrier South America

Ethiopian Airlines Mozambique

Fig. 1.3 Strategic partnerships Ethiopian Airlines: Example of a Hub and Spoke network structure. Source: Modified Flightglobal, 2019; Meichsner, 2016

commercial complexities facing most African carriers. Figure 1.3 illustrates Ethiopian Airlines strategic partnerships (Meichsner et al., 2018). Ethiopian Airlines developed a 15-year road map “Vision 2025” with the plan to transform into the leading aviation group in Africa with seven profit units: Domestic Passenger Service, International Passenger Service, Cargo, MRO, Ground Handling, Catering, Aviation Academy (Ethiopian, 2019b; Flightglobal, 2019). Ethiopian Airlines serves 137 destinations in 75 countries, from which it serves 90 destinations in Africa (in June 2019). In 2018, Ethiopian Airlines carried 11.5 million passengers with an average load factor of 73.7%. Ethiopian has 100 planes in service with an average age of 6.4 years and 47 aircrafts on order. The fleet is composed of 12xA350, 22xB787, 19xB777, 18xDHC-8 and 21xB737 (Ethiopian, 2019b; Flightglobal, 2019). Furthermore, Ethiopian Airlines Cargo is the largest cargo network operator in Africa, covering 46 destinations worldwide (Ethiopian, 2019b). Ethiopian Airlines made a revenue of 3.35 million in 2018 (+4.5% versus 2017) with a net profit margin of 7.6% (Flightglobal, 2019). The underlying weakness of the business model of Ethiopian Airlines is the low revenue from the domestic market due to a small domestic market, the high maintenance and operational cost driven by the variety of aircraft types, the dependency on government as it is 100% state owned, a price conscious African market (inelastic) and a higher fuel costs in Africa compared to the rest of the world (Meichsner, 2016).

Potentials and Challenges of the Air Transport Market in Africa

9

120

9,0

100 7,0 80

6,0 5,0

60 4,0 40

3,0 2,0

20

number for fleet size and destinations

passenger and revenue results (in USD) in millions

8,0

1,0 0

0,0 2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

Passengers (left axis)

Destinations (left axis)

Operating result (thousands) in USD (right axis)

Fleet Size (right axis)

2014

2015

2016

Total Revenue (thousands) in USD (left axis)

Fig. 1.4 Parameters measuring performance for Ethiopian Airlines. Source: Modified Flightglobal, 2019

Ethiopian Airlines has a strong output performance with a total revenue of $3.3 bn, which is split into $2.6 bn passenger revenue, $595 m cargo revenue and $129 m other revenues and resulting in an operating margin of 6.8% in 2018. It is an outstanding performance considering that the operating margin has been positive over the last 10 years and is consistently improving. Ethiopian Airlines transported 11.5 m passengers with a load factor of 73.7% in 2018. It has 13,215 employees. In terms of input measurements, Ethiopian Airlines had offered $57.8bn (18.2% versus 2017) ASK available and 2.2 m FTK (2.5% versus 2017) in 2018. Ethiopian Airlines owns 40% of ASKY, 49% of Malawian Airlines, 49% of Ghana’s new JV national carrier, 45% of Zambia Airways, 49% of TChadia Airways and 100% of Ethiopian Mozambique Airways (Flightglobal, 2019). Figure 1.4 demonstrates the commercial performance of Ethiopian Airlines.

Potentials and Challenges of the Air Transport Market in Africa The African air transport market differs from any other air transport market in the world, as there is a natural need and high growth potential for air transport in Africa. However, the African aviation market underperforms, especially in terms of profitability, growth and sustainability of airlines compared to any other market (Boeing, 2019). The natural need for air transport in Africa is driven by an underdeveloped infrastructure between cities and countries, the geography of Africa with the

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environment and landscape in form of dessert, jungles and a high proportion of landlocked countries, the transportation of perishable goods, relief support and urgently required items. Furthermore, intra-regional trade within Africa and tourism drives the need for air transport (Chingosho, 2009; Heinz, 2011; Meichsner, 2016). Also, there is a high potential for growth in the African air transport market with a growing population from 1.3bn in 2019 to 4.4bn in 2100 (UN, 2015; Worldometers, 2019), the highest urbanization rate in the world with 3.5% annually (UNECOSOC, 2014; Saghir & Santoro, 2018) and a growing workforce of young people from 617 m in 2014 to 1.6bn in 2060 (UNECOSOC, 2014), the fastest-growing middle class in the world, comprising 13% of the population in 2015 and 42% by 2060 (1.1 billion of the predicted population) (AfDB, 2016). However, the impediments undermining a fully functional air transport market in Africa have slowed down the full propensity of driving growth in the region. Governmental restrictions have further dampened increased foreign investment flows. Challenges in the airline industry impacting tourism growth have resulted in declining yields, rising costs, lack of profitability, restrictive bilateral agreements and an extremely slow liberalization process and a lack of stimulation of new markets (Samunderu, 2018). Therefore, air transport in Africa is characterized by unreliability and lack of efficiency: • • • • • • • • •

Service is less frequent and erratic More frequent stops resulting longer flight time Extremely high prices Airfares are among the highest in the world because markets are typically small and dispersed Highest landing fees, fuel costs, airport taxes etc. Unsuccessful and heavily subsidized national flag carriers Ineffective competition in service and quality Rigid regulatory framework—governments limit access to their market Liberalization in piecemeal rather than comprehensive

Other internal pressures that have continued to undermine full air transport progress include the following: • • • • • •

Low load factors Mainly small domestic airline markets High operating costs than other regions Government regulated airfares Political interference in airline decision-making Management instability and lack of continuity

Most intra-African aviation markets are largely restricted due to restricted bilateral agreements and the slow implementation of the Yamoussoukro Decision, the liberalization of the air transport market (IATA, 2019a; Bekele, 2016). Furthermore, governmental protectionism also impacts travel. According to the African Visa Openness Report 2018, Africa remains largely barred, requiring visas in advance to travel to over half of the continent (51%), for 24% of the African countries,

Potentials and Challenges of the Air Transport Market in Africa

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Africans can get it on arrival and for 25% they do not need a visa (VPO, 2018). Another constraint is the infrastructure in Africa. The African Development Bank estimates “that the financial requirement to close Africa’s infrastructure deficit amounts to USD 93 billion annually until 2020” (Infrastructure Africa, 2015, p. 1). In particular, airports in Africa do not have the capacity for an increase in transportation of passengers and cargo (i.e. landside access and warehouses) (Chingosho, 2009). Also, high cost makes it difficult to operate profitably, resulting from high aircraft costs and insurance (23% of total costs), fuel costs (19% of total costs) and ground handling costs (12% of total costs) (Chingosho, 2009; Heinz, 2015). The average aircraft age in Africa is high, with 80% of the aircraft being over 10 years old. This makes long and costly maintenance periods (C/D checks), decreased efficiency (i.e. fuel consumption) and higher costs (i.e. charges and fuel costs) inevitable (Chingosho, 2009). Furthermore, unskilled labour force is another contributor to the underperforming of the African air transport market. Only one in six of nearly 420 million youth aged 15–35 years are in wage employment (AfDB, 2016). However, the capability to handle a higher passenger volume is determined by the productivity of staff, which depends on the training and education of labour force as well as counteracting with the brain-drain of skilled labour force to non-African countries (i.e. Middle East paying a higher salary). Furthermore, attention needs to be drawn to work in aviation (Chingosho, 2009). The African air transport market is characterized by sparse demand in the intra-African air transport market driven by expensive fares due to high cost and limited competition (Heinz, 2011; Chingosho, 2009). As a result, few city pairs exist and the load factor is the world’s lowest (72.4%) in 2018 (IATA, 2019b). “Safety is the most pressing challenge facing the aviation industry in Africa”, points out AFRAA (2014, p.11). Despite the fact that there is a significant improvement in safety, only 26 African States fulfil at least 60% of the SARPS implementation by end of 2017 (IATA, 2019c). The main reasons for this include lack of training and financing, old aircraft, non-compliance with international standards and poor infrastructure (Heinz, 2011). The airline sector in Africa has consistently achieved break-even results over the last decade due to many factors beyond the business models of airlines such as structural changes and liberalization, regional conflicts and the impact of low commodity prices (CAPA, 2016). Conversely, the wider economic situation in Africa is improving slowly but its airlines are yet to perform financially. Nevertheless, with increasing traffic growth, passenger load factors for African airlines are over 70%, which is over 10% lower than the industry average (IATA, 2018). In addition, the global revenue passenger kilometres (RPKs) grew by 9.5% in 2018, whereas Africa’s international RPKs flown by carriers based in Africa grew by 11.2% yearly (IATA, 2018). This is consequently due to the ongoing signs of improvement in Africa’s largest economies within the sub-Saharan region namely, Nigeria and South Africa (IATA, 2018). Notwithstanding, high fixed costs with low utilization within the airline industry in Africa have made profitability difficult to achieve.

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The Context of the Airline Industry: An African Market Perspective

African Aviation Connectivity and Infrastructure Development Challenges The African region makes up at least 12% of the world’s total population and constitutes only 2.5% of the global passenger air traffic (OECD, 2018). The African region is supported by 731 airports and only 430 operating airlines catering to such a large population. However, taking into account that air travel in Africa is still characterized by high fares, lack-lustre service performance and poor connectivity within intra-route networks and further exacerbated by a weak airport infrastructure. This, however, will soon become historical evidence as the equation of economic progress starts to tilt signaling positive compounded annual growth rate of at least 5%. According to the International Air Transport Association IATA (2018), Africa is set to become the world’s fastest aviation growing market in the next 20 years. But what lies underneath this growth trajectory are some complexities that may impede even faster growth. Although these growth projections are optimistic, challenges and complexities may impede faster progress. Let us examine these impediments: • Airport infrastructure is significantly underdeveloped and not prepared to absorb the growing volume of passengers and cargo within the continent. This means that necessary facilities and infrastructure need to be in place to match the potential growth in air traffic. • The pressing issue has been associated with securing the much-needed capital to finance airport infrastructure development. This is a coherent joint effort that requires a high degree of expertise and collaboration in public–private equity investments. • The majority of airlines and airports are run as state entities and operational efficiency is relatively poor with only a few carriers like Ethiopian Airlines, Kenya Airways and South African Airways that have made somehow headway progress. The struggling national carriers are characterized by a lack of efficient operations and a rather unreliable erratic and infrequent service. According to IATA (2018), African carriers have been haemorrhaging cash and continue to operate as loss-making entities after a collective net loss of $100 million in 2017 with a $1 loss to each passenger flown. Also, ineffective competition in service and quality is an issue. • Ownership and control is still a major hurdle for most investors. For instance, Air Malawi has restrictions on more than 49% of ownership structure. With so many carriers bleeding cash, reconfiguring the ownership structure will pave way to access private capital that could enhance the airline’s performance effort. • Lack of market access has also been problematic and continues to put a challenge on African carriers. However, liberalization of air transport in Africa could open a myriad of opportunities for airline carriers, allowing them to increase their network reach with no restrictions. Of course, the Single African Air Transport Market (SAATM) which has been dubbed a seismic event in terms of opening up

Intra-Africa Connectivity

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Africa’s air transport market will have a fundamental impact on the continent such as: – Stimulation of economic growth – Boost air transport connectivity However, groundwork is required for effective policy integration and creation of an open-wide air transport market. This calls for harmonizing civil aviation regulations. But obstacles are still visible.

Obstacles and Dilemmas • Some African governments are reluctant to cede control to truly autonomous National Civil Aviation Authorities. • Who will benefit from a liberalized air transport market? African airlines or foreign carriers? • Can a developing country promote an “Open Skies” policy and still protects its own airline industry?

Intra-Africa Connectivity Africa’s failure to integrate and liberalize its intra-regional air transport market has been cited as a significant reason why growth in the air transport market has not reached its huge potential. Most countries rely on restrictive bilateral service agreements. This is a paramount reason why insufficient integration and lack of non-restrictive open skies policy present a major barrier to air transport growth in Africa. Open skies agreements not only enable better competition, but they also allow carriers of two or more countries to operate any route between the countries without interference in decisions about routes, capacity and pricing. The results are better service provision, affordable airfares and efficient service for the consumers. Since the air transport markets in Africa are small and dispersed, airfares are exorbitantly high. As a result, landing fees, fuel costs and airport taxes are also very high. The significance of correlating airport development and improving air connectivity is paramount to the prosperity of the region and the welfare gains to the African passenger (UNCTAD, 2018). Let us look at the fundamental benefits intraconnectivity will bring to the continent and the following gains in facilitating economic activity: – New routes and increased frequency – Shorter travel times for passengers – A significant drop in airfares

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Fig. 1.5 Illustration of Africa’s network. Source: IATA (2018)

Table 1.2 Ethiopian Airlines’ top 10 international destinations by weekly seats from Addis Ababa

International destination Dubai Nairobi Entebbe Mumbai Johannesburg Mombasa Jeddah Delhi Khartoum Kinshasa (DRC)

Number of weekly seats 11, 926 10,328 9710 9604 8190 7340 6924 6652 6.324 5962

Source: (2020)

– Inward investment flows – Foster an increase in intra-regional trade African carriers have been attempting to increase their route network coverage by tapping into international markets (See Fig. 1.5). Within the continent itself, Africa has seen a CAGR of 4% for two-way seats between 2010 and 2015. Since 2015, seat capacity has also significantly increased due to the number of key carriers such as Ethiopian Airlines and Kenya Airways opening up new routes (www.anna.aero, 2020). See Table 1.2. Ethiopian Airlines, top 10 weekly seats by destination in January 2020. In the last 5 years, prior to COVID-19 pandemic, Africa’s total seat capacity has been on a positive growth path with domestic volume driving the growth. See Fig. 1.6. Historically, since 2015, Africa’s international capacity increased by over eight million seats (www.anna.aero) but if one has to draw a comparison with

Intra-Africa Connectivity

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Fig. 1.6 Africa’s seat development within the continent. Source: www.anna.aero (2020)

Fig. 1.7 Airline seat capacity in Africa. Source, CAPA, 2016

carriers like Ryanair, which added 46 million seats in the same period, the African capacity is still very low. Traditionally, FSNCs have dominated the African skies until early 2000 when LCCs started to emerge as competing business models (Francis et al., 2006). The LCC seat capacity has continued to gain traction as some traditional carriers are

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facing headwinds in terms of low passenger load factors (Fig. 1.7). This has forced South African Airways (SAA) and Kenya Airways to embark on an aggressive restructuring effort in order to reduce massive losses and cash burn, but so far a turnaround for SAA has proved to be extremely difficult. This has raised further concern about state-run carriers in Africa and continuous efforts by government to salvage failed national carriers. A strategic collaboration through code sharing agreements within Africa’s continental carriers could also provide a vehicle for better intra-connectivity. This means African policymakers have to foster a more liberalized and integrated intra-African air transport sector. From an airline perspective, African carriers have to forge their own collaborative arrangements in order to strengthen regional as well as international route networks. However, this may present some challenges because some small carriers operating in Africa may now exhibit the same level of operational efficiency that is able to deliver reciprocity among collaborating carriers. In a way the choice is limited for establishing these partnerships. As already mentioned in the early parts of this chapter, the drivers for growth are visible and a coherent action plan is now required to facilitate intra-connectivity within the region through airline network cooperation. Chap. 2 presents a comprehensive analysis of the significance and the potential impact of the SAATM within the African region.

Measuring Airline Performance: African Markets The African continent has always been a laggard when it comes to airline performance in comparison with rest of the world aviation. The main constraint has been a combination of both access to capital financing and an extremely restrictive air transport market. It has the fewest annual seats, the smallest fleet of narrow- and wide-body jets, the lowest number of aircraft on order, and the weakest passenger load factor of all world regions (CAPA, 2018). It also has the second smallest ratio of intra-regional to intercontinental seats (after the Middle East, where transfer traffic boosts intercontinental capacity). Despite an annual growth of over 5%, Africa is still lagging behind the other regions in terms of key performance indicators. Figure 1.8 tells the story in terms of traffic and revenues. The small scale of Africa’s internal market is a function of many factors, not least, infrastructure and aero-political restrictions. This gives its airlines only a small base on which to build intercontinental operations in competition with other airlines. Non-African airlines have 40% of all seats within Africa and more than 70% of seats on intercontinental routes (CAPA, 2019). Performance measurement has always been a subtopic within the strategy that raises debate; as a result, the airline has its own set of peculiarities, when it comes to defining measurement approaches (Samunderu, 2019). Below we examine some of the most common approaches used to measure performance in airline industry. The airline industry is defined by its unique set of measurement criteria because it enables

Fig. 1.8 Regional comparison of airline traffic and revenues. Source: Airline Business, 2019

Measuring Airline Performance: African Markets 17

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us to measure productivity without controlling for production technology, which is often difficult for outsiders to observe, since the production process is more similar across firms in the airline industry than it is in most other industries (Caves & Christensen, 1988). Challenges also arise for most industries comparing the financial statements of firms from different nations, because it is generally difficult due to the differences in accounting practices. However, firm-specific data in the airline industry are comparable across companies from different nations because the International Civil Aviation Authority (ICAO) requires airlines to report various data in a standardized format. Operational performance of an airline is often referred to as productivity (Doganis, 2006). The two main categories of productivity concept are: gross (on parametric) measures of productivity and shift [parametric] measures of technical change. Operational performance focuses on those key operational success factors that might lead to financial performance (Ariño, 2003). According to Youssef and Hanson (1994), when analyzing an airline’s operational performance, one has to observe the rate of change in revenue passenger RPKs, which is generally used as a yardstick to determine whether a carrier is gaining or losing market share. Thus, the airline industry’s general performance is measured by the total number of RPKs flown in a given year and by effectively increasing the RPKs every year an airline can experience healthy growth. However, in most studies on organizational behaviour, the adoption of market share has long been identified as one of the important variables that might affect a firm’s strategy and performance (Park & Cho, 1997). It is also argued that market share is largely free of aggregation biases and definition problems (Venkatraman & Ramanujam, 1985). Support for market share as a determinant of profitability has been used by researchers to elucidate its significance when evaluating firm-level performance. For this reason, the use of market share as an indicator is an extremely relevant variable in determining whether an airline is gaining ground across its route networks. The formation of market share change is given as follows: SMSkt = MSikt þ MSjkt - MSiktðÞ þ MSjktðÞ SMSkt= change in the sum of market shares of two airlines in the market k at year t MSikt = market share of airline i in market k at year [t] MSjkt= market share of airline j in market k at year [t] MSik()= market share of airline i in market k at year [t] MSjk()= market share of airline j in market k at year [t] Measuring airline performance is essential to determine the company’s performance on a global scale. The main challenge for the measurement of international airline performance is the difference in the profit and balance sheet, which is impacted by different reporting standards, accounting and taxation rules (Schefczyk, 1993; Draft and Albers, 2013). For this reason, performance measurements need to be developed regardless of the origin of the airline, defining the achievements of specific objectives. An airline operation can be split into output and input. Input

Effects of COVID-19 on African Airlines Performance

19

related measures can be split into asset and cost related measurements and output are revenue related measurements. Typical asset measurements can be ASKs, facilities, affiliated companies and current assets. Cost-related measurements can be labour cost, aircraft fuel and other costs (Schefczyk, 1993). Table 1.3 presents a synopsis of studies that have been carried out to highlight the parameters used to measure airline performance and there has been have been a shift of focus on measurement criteria. For example, in the 1980s Caves et al. (1988) focused on the internal operations of an airline to measure performance outcomes. Tracing the timeline, measurement criteria have included other economic variables (Ramathan, 2001; Bachis & Piga, 2006 & Jenatbadi & Ismail, 2007; Hashem Salazader & Noor Azina, 2014).

Conceptualizing Airline Performance Framework Measuring airline performance can be examined through multiple lenses such as internal operations and key performance measurements which can reflect how effective the carrier is. Figure 1.9 highlights a conceptual model that provides a framework for measuring airline performance. This framework allows us to examine how internal operations such as number of departures or average stage lengths have a significant impact on selected airline performance indicators under observation. For empirical analysis, Ordinary Least Squares (OLS) can be adopted to allow us to investigate the effect of internal operations on airline performance (Jenatabadi & Ismail, 2014). Regression analysis for cross-sectional data can also be constructed using Ordinary Least Squares (OLS) through the use of SPSS. According to Demydyuk 2011, the selection of performance indicators involves the evaluation of cost and revenue-driven assessment measures with the dominance of cost-driven distribution over revenue management. However, the most significant variable is to examine airline profitability operating profit per passenger (Demydyuk 2012) as against the dependency on variables such as unit cost, unit revenue and load factors in the airline industry (Doganis 2006). Conversely, Doganis (2006) based his argument on marginal cost, which involves the conveyance of passengers without leaving seats unsold (tangible), reduction of ground handling cost, fuel expended due to aircraft overweight, airport passenger charge and no in-flight entertainment.

Effects of COVID-19 on African Airlines Performance The devastating impact of COVID-19 pandemic crippled the aviation industry. Since 2020 global carriers as well as African airlines have continued to experience the effects of the crisis. Notably, African carriers have also lost a significant level of revenue due to the general slowdown in passenger traffic. In 2021, the situation showed marginal improvement due to the ongoing campaign for rolling out

Data collection through CRS using multinomial logit modelling

Duliba et al. (2001)

Internal variables

Consideration of performance Internal and external variables

Regression

Jenatabaldi and Ismail (2007)

Inflation rate, subsidy, load factor (dependent)

Structural Equation Modelling GDP, Inflation rate HDI, load factors, using cross-sectional data operating profit, market share, RPK, departure, average stage length and advertising expenses

Hashem Salazader and Noor Azina (2014)

Economic variable

Internal and external variables

Airline size, ATK, Operating cost, Internal non-flight asset (facilities, CRS) RPK and variables non-passenger revenue

Number of agencies, number of systems for ticket sales and reservations, travel agent commissions

Performance variables RPMs, RTMs, ground equipment, flight equipment, fuel, ground property and labour

Key findings Strong positive relationship between total costs and output when all other factors are fixed. Substantial economies of density for air carriers of all sizes. The lagged CRS variable was significant at 0.01 and had a positive coefficient, hence indicating a positive relationship to market share of RPMs. Airline CRS placed in a travel agent’s office in a prior period leads to higher levels of RPMs, greater load factor and high profitability. Many of the non-flight assets do not directly contribute to the airline’s revenue generation. They are meant to support the operational activities of the airline. High PLFs and high percentage of passenger revenue predict high profitability. Impact of operational efficiency on PLF and profitability are obvious. Economic situation has significant effect on internal operations. The impact is stronger than the effect of the economic situation on performance. Thus, economic variables have a positive effect on the enhancement of performance. The findings indicate that airlines should invest in CRS and improve on operational planning in order to deliver better PLFs.

1

Schefczyk (1993) Data Envelopment Analysis

Methodology Total factor productivity

Study Caves et al. (1988)

Table 1.3 Synopsis of selected studies measuring airline performance

20 The Context of the Airline Industry: An African Market Perspective

Case study analysis using before and after approach

Intervention analysis with aggregate industry data

Hierarchical clustering and exploratory factor analysis, MANOVA

Cross-sectional analysis

Panel data analysis

Panel data analysis

Youssef and Hansen (1994)

Guzvha (2004)

Dai et al. (2005)

Davila and Venkatachalam (2004)

Ceha and Ohta (2000)

Adrangi et al. (1991)

Market share and operating profits

Market share

Load factor

Load factor, size and efficiency

RPM, ASM

Internal variables

Internal variables

Internal variables

Internal variables

Internal and external variables

RPK, market concentration (HHI), market Internal and share, fare levels external variables

(continued)

Positive correlation was detected between changes in market share of the SAS-Swiss alliance. The study concluded that alliances had impact on technical efficiency and market performance. The intervention analysis of industry data showed a statistically and economically significant effect of the attack on the performance of the US carriers. Airlines were grouped using cluster analysis. Small carrier operators were much more vulnerable to the external shocks of 2001 and this subsequently impacted their load factors. Passenger load factor is positively associated with CEO compensation. Thus, the weight on PLF increases with CEO power. The findings of the study revealed difficulty tradeoff is needed in matching passenger demand with aircraft size levels of frequency of service offered. Results indicated that as carriers gain market share, their operating cost per revenue mile increases (perhaps due to diseconomies of scale). Thus, higher market power allows for more oligopoly power and ability to pass on higher costs in the form of higher prices.

Effects of COVID-19 on African Airlines Performance 21

Regression

Panel data using regression analysis

Regression using MARKOV model

Sample analysis using regressions

Duval and Schiff (2011)

Clougherty (2002)

Chin and Tay (2001)

Antoniou (1992)

Kim and Kuilman Longitudinal analysis (2013)

Methodology Regression

Study Aderamo (2010)

Table 1.3 (continued)

Fleet size

Operating profit margin

Transformed monthly airline stock prices

Market share

GDP, international visitor arrival (dependent)

Performance variables GDP, inflation rate aircraft kilometer, cargo ton kilometer (dependent)

Consideration of performance Key findings Economic The results of the research findings indivariable cated that in order to foster demand for air services, the Nigerian government must improve transport systems. Economic Regional hubs are a catalyst driver for the variable provision of airlift for many visitors that do have non-stop and direct air services. Internal An airline s domestic network size variables strongly impacts competitive position. In the study, US airlines improved their international competitive position when they match extensive domestic networks with international routes and they complete domestic airline mergers. Economic The research findings concluded that an variable airline s growth and profitability are positively related. Hence, the probability for an airline s survival is determined by an increase in assets and profitability. Internal variThe findings indicated that market ables and exter- contestability, the multiple output nature nal variables of costs, the structure of networks and airport presence play a key role in profitability of unregulated airlines. Internal The likelihood of divestiture for any parvariables ticular aircraft was found to depend strongly on its age and size.

22 1 The Context of the Airline Industry: An African Market Perspective

Regression analysis

Network size, market size, income, tourism potential

(continued)

Internal variable Results showed strong evidence linking and external airfares to the structure of hub and spoke variable networks. There was also evidence of the importance of networks in reducing airline costs. Fares leading to higher traffic densities on the spokes of network reduce fares in various markets a carrier serves. Hansen et al. Principal component analysis Network size Internal Cost function estimation results con(2001) using statistical cost modelling variables firmed the link between the US National techniques Airspace System performance and airline cost. In the cost models with two and three performance factors, the irregularity and disruption factors are found to have the strongest cost impact. Long-run income in price elasticity of Ramathan (2001) Cointegration analysis using GDP, PKM, TKM Internal and PKM was found to be 1.147 and - 0.209 time series data external which is statistically significant. Elasticity variables with respect to the ratio of urban to total population was significantly large. Lepak (1997) Time Series Transformed monthly market stock prices, Economic Analysis findings concluded that the inflation rate variable stock price changes in the airline industry are less sensitive to price changes in the market after the 1978 deregulation. Bachis and Piga Primary and secondary data Inflation rate Economic Third-degree price discrimination did not (2006) analysis using SEM variable exert any strong impact on annual changes of the online fares in Europe. Detzen et al. Regression GDP, RPM (dependent) Economic Findings revealed some spillover effects (2012) variable on network expansion due to positive stock returns. Therefore, the results indicated that increased passenger traffic contributed significantly to improved connectivity and revenue increase of FSNCs.

Brueckner et al. (1992)

Effects of COVID-19 on African Airlines Performance 23

Panel data analysis

Rey et al. (2011)

Source: Author

Methodology Regression

Study Dobruszke and Van Hamme (2011)

Table 1.3 (continued) Consideration of performance Key findings Economic The investigation concluded that at variable country level, the change in seat supply is largely dependent on economic growth. Also, no positive effects of the share of LCCs on supply during a crisis. GDP per capita, Number of tourists inter- Economic The expansion of the low-cost carriers national visitor arrivals (dependent) variable had both direct and indirect effects on the Spanish tourism sector. The findings concluded that a 10% rise in the number of visitors travelling by LCCs would also increase per capita number of tourists from EU 15 countries.

Performance variables GDP, Number of seats (dependent)

24 1 The Context of the Airline Industry: An African Market Perspective

Effects of COVID-19 on African Airlines Performance

25

FFi

Internal Operations

Airline Performance

Passenger Load Factors

Operating Profit

ASK

Operating Fleet Size

Employee

Ordinary Least Squares (OLS)

Performance Findings Notes - FFi : Focal Firmi

Fig. 1.9 Conceptual model structure for airline performance. Source: Author. Notes: FFi: Focal Firm i

vaccinations across the globe. In 2021, the African region saw a slight increase in revenue performance during the first quarter of 2021 which reached US$8.2 which showed a 25% increase compared to 2020 revenues (AFRAA, 2021). Despite the African market experiencing a slight slowdown in capacity and traffic growth, during the first quarter of 2021, the region remained the best-performing in terms of growth compared to 2019 due to the less restrictive travel regulations. On a domestic level, the first quarter of 2020 represented almost 40% of the traffic carried by African airlines. This later increased to 52% during the first quarter of 2021 at the expense of inter-continental traffic, which saw a drop in market share from 40% to only 29%. Intra-African flights saw a slight decrease which represented only 19% of African airlines’ traffic compared to 20% in 2019 (See Fig. 1.10). At regional level, North Africa remains the leading region in Africa for passengers and represents 33.6% of the total continental traffic. Its domestic traffic represents 49% of the total. Its international traffic is directed in majority to Europe

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African airlines international passenger destination 1st Quarter 2021 4% 3% 21%

39%

Intra-Africa Europe Middle East

33%

Asia America

Fig. 1.10 African Airlines international passenger destination first Quarter 2021. Source: AFRAA, 2021 Passenger traffic distribution

19% 52% 29%

Intercontinetal Intra-Africa Domestic

Fig. 1.11 African Airlines passenger distribution 2021. Source: AFRAA, 2021

(46%). Morocco has emerged as the leading traffic contributor to Europe, followed by Egypt and Tunisia. The key preferred destinations are France, Turkey, Ukraine, Spain and Italy (See Fig. 1.10). The member airlines of the AFRAA that reported their 2021 data ca by African airlines. Fifty-two percent of this traffic was intercontinental. Domestic and IntraAfrican traffic represented 19% and 29%, respectively, carried 14.2 million passengers, representing 41% of the total number of passengers transported. See Fig. 1.11. East Africa represents the second most popular destination in terms of continental traffic and boasted 25.5% in 2021. Overall, domestic traffic represents 65.5% in this region, mainly in key markets like Kenya, Ethiopia and Tanzania which are very attractive tourist destinations. The busiest route city pair within the East African region is Nairobi-Entebbe.

Effects of COVID-19 on African Airlines Performance

27

Southern African regions represented 19.7% of the continental traffic during the first quarter of 2021. The COVID-19 Pandemic also severely affected this region which witnessed a sharp drop of 61.6% in traffic in comparison to the first quarter of 2020. Domestic traffic represents 78.1% of the total air traffic and South Africa is a popular destination market. The Central and West African regions represent 21.2% of the traffic in Africa. The total market share of domestic traffic was 66.3% in the first quarter of 2021. Intra-Africa has the highest share of non-domestic traffic, with 67.8%. The popular international destinations include France and the Middle East with a 10.1% market share. Exogenous economic shocks on the industry Exogenous economic shocks are “events that impact the economy which originate from outside it. They are unexpected and unpredictable”. Even though economic shocks affect a certain company, industry or market from outside, the impact advances until the interior core structures. Throughout the time, economies and governments were influenced by national or even global crises, which had a drastic impact on the overall development and health of the markets and the respective industries. Exogenous shocks like the financial meltdown in 2008, were the cause of a global financial crisis with long-lasting consequences. It took many years for the world economy to recover with a loss of many existences. Especially the aviation industry was significantly affected, due to a high dependency on customer demand. Exogenous shocks can be divided into two main types: Supply and demand shocks. Assessing the historical development of shocks, it appears that supply shocks are more common to occur. With regards to economic consequences, the supply of certain goods and services decreases due to external influences. Taking the theory of market equilibrium into account, it exemplifies that the price significantly increases whereas the availability of goods and services diminish with a decrease in supply. “This combination of economic stagnation and inflation is commonly referred to as stagflation” (Liden, 2021). On the other hand, considering a demand economic shock, the impact is comparable to those of the supply shock. If demands increase, prices will increase whereas the availability of goods and services will rather decrease. In contrast if demand diminishes, the prices will also decrease. The availability remains at its high level (Liden, 2021). Economic shocks are characterized by a temporal appearance. In the reconstruction and resolving phase of the industry or company, supply and demand will strive back to an equilibrium (Liden, 2021). The operative impact diminishes as fast as the shock appears to affect the industry. The strategic impact must be considered in the long-term orientation. The impact of COVID-19 also resulted in a global economic slowdown with a contraction of almost 3.5% of the global GDP which represented the worst recession since 1930. However, the advanced market economies were the hardest hit and experienced a decline of 4.70% due to the rapid increase of the virus. On a

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comparable level, in emerging markets and developing economies, the decline amounted to 1.7% (AFRAA, 2021). According to the World Bank, both the demand and supply of commodity markets were hugely affected by the pandemic crisis because of all containment measures. Crude oil prices fell sharply during the first quarter of 2020 and the barrel price was reduced from US$70 to US$20 which forced OPEC to reduce output production in order to stimulate demand for crude oil. Overall, the average crude oil price was reduced to US$41 compared to US$64 in 2019. In Africa, the GDP of the continent contracted by 2.1% in 2020, which signalled the first recession on the continent over the last 50 years. The continent’s economy was mainly affected by the near-complete stop in tourism, sharp plummeting of crude oil prices and Africa regressed in 2020 in terms of economic fundamentals.

Conclusion As it has been demonstrated in this chapter, the African continent has indeed shown the essential elements required to drive the growth of air transport in the region. Even though the growth statistics are promising, there is still a lot that needs to be done in order to ensure that the continent can benefit from a fully functional air transport system. Both national government and private sector engagement will need to play a pivotal role in paving way for infrastructure improvements and also pushing the agenda for an open skies policy. It is also paramount that there should be capital access to support projects such as improving existing airport structures. Given the aviation industry’s strategic importance for modern economies and the need to improve and expand infrastructure to respond to the expected increase in air traffic, airport privatization presents itself as a viable solution. As discussed earlier in this chapter, Africa still has some inherent risks which will require the government to push for economic and political reforms designed to attract foreign investment flow. The investment climate has to be attractive enough for private sectors to engage in massive projects and proper managerial precision is required to navigate through such complexities. Airlines also will need to focus on improving better intraconnectivity and better operational efficiency with effective cost optimization methods. Despite such challenges, Africa is indeed a viable and promising aviation market.

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IATA. (2019b). Healthy passenger demand continues in 2018 with another record load factor. Accessed July 16, 2019, from https://www.iata.org/pressroom/pr/Pages/2019-02-07-01.aspx IATA. (2019c). IATA releases 2018 airline safety performance. Accessed July 16, 2019, from https://www.iata.org/pressroom/pr/Pages/2019-02-21-01.aspx. Infrastructure Africa. (2015). Available at https://www.icafrica.org/fileadmin/documents/Annual_ Reports/ICA_2015_annual_report.pdf Jenatabadi, H. S., & Ismail, N. A. (2007). The determination of load factors in the airline industry. International. Review of Business Research Papers., 3, 125–133. Jenatabadi, H. S., & Ismail, N. A. (2014). Application of structural equation modelling for estimating airline performance. Journal of Air Transport Management, 40, 25–33. Kim, T. Y., & Kuilman, J. G. (2013). The demography of resources. Journal of Management Studies, 50(7), 1155–1184. Lepak, G. M. (1997). Airline deregulation and the impact on stock prices of major surviving carriers. Transportation Research Part E. Logistics and Transportation Review, 33, 107–115. Liden, D. (2021). What is economic shock? https://www.wise-geek.com/what-is-economicshock.htm Meichsner, N. A. (2016). Evaluating the success of Ethiopian airlines: A strategic analysis of the African air transport market. Master’s Thesis,. Cranfield University. Meichsner, N., O’Connell, J. F., & Warnock-Smith, D. (2018). The future for African air transport: Learning from Ethiopian Airlines. Journal of Transport Geography, 71, 182–197. Nero, G. (1996). A structural model of Intra European Union duopoly airline competition. Journal of Transport Economics and Policy, 30(2), 137–155. http://www.jstor.org/stable/20053106 Njoya, E. T. (2015). Africa’s single aviation market: The progress so far. Journal of Transport Geography. Accessed Oct 15, 2020, from. https://doi.org/10.1016/j.jtrangeo Rey, B., Myro, R. L., & Galera, A. (2011). Effect of low-cost airlines on tourism in Spain. A dynamic panel data model. Journal of Air Transport Management, 17, 163–167. Official Aviation Guide (OAG). (2018). www.oag.com Organization for Economic Cooperation and Development (OECD). (2018). Unlocking Africa’s aviation potential. Accessed Nov 26, from https://oecd-development-matters.org/2018/10/29/ unlocking-africas-aviation-potential/#:~:text=According%20to%20the%20International%20 Air%20Transport%20Association%20%28IATA%29%2C,potential%20to%20fuel%20eco nomic%20growth%2C%20several%20barriers%20exist. Park, N. K., & Cho, D. S. (1997). The effect of strategic alliance on performance: A study of international airline alliances. Journal of Air Transport Management, 3(3), 155–164. Ramathan, R. (2001). The long run behaviour of transport performance in India. A cointegration approach. Transportation Research Part A: Policy and Practice, 35 4, 309–320. Saghir, J. and Santoro, J. (2018). Urbanization in Sub-Saharan Africa: Meeting challenges by bridging stakeholders. Accessed June 27, 2019, from https://www.csis.org/analysis/ urbanization-sub-saharan-africa Samunderu, E. (2018). Challenges and complexities underlining Africa’s airport infrastructure financing: A multiple lenses perspective. Aviators Africa. Issue, 11(2019), 50–51. Samunderu, E. (2019). Air transport management–A strategic management in the airline industry (1st ed.). Kogan Publishing UK. Schefczyk, M. (1993). Operational performance of airlines: An extension of traditional measurement paradigms. Strategic Management Journal, 14(4), 301–317. Schlumberger, C. and Weisskopf, N. (2014). Ready for take-off? The potential for low-cost carriers in developing countries. World Bank Group. Accessed Nov 26, 2020, from http://documents1. worldbank.org/curated/en/420911468331785786/pdf/Ready-for-takeoff-potential-for-lowcost-carriers-in-developing-countries.pdf Simpleflying. (2020). The African aviation market: An overview. Accessed Nov 25, 2020, from https://simpleflying.com/the-african-aviation-market-an-overview/ United Nations (UN). (2015). World population prospects. Accessed June 18, 2019, from http:// www.un.org/en/development/desa/population/events/other/10/index.shtml

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United Nations Conference on Trade and Development (UNCTAD) (2018). Air connectivity in Africa: Challenges and opportunities. Accessed Dec 8, 2020, from https://unctad.org/system/ files/non-official-document/Item6_Brian_Pearce_IATA_13sept.pdf UNECOSOC. (2014). Sustainable urbanization in Africa. Accessed June 14, 2019, from http:// www.un.org/en/ecosoc/integration/pdf/economiccommissionforafrica.pdf Venkatraman, N., & Ramanujam, V. (1985). Measurement of business performance in strategy research. A Comparison of Approaches, Academy of Management Review, 11(4), 801–814. VPO. (2018). Africa Visa openness report 2018. Accessed June 14, 2019, from https://www. visaopenness.org/ Worldometers. (2019). Africa population. Accessed June 13, 2019, from https://www. worldometers.info/world-population/africa-population/ Youssef, W., & Hansen, M. (1994). Consequences of strategic alliances between international airlines: the case of Swissair and SAS. Transportation Research, 28A(5), 415–431. Zhang, A., & Wei, X. (1993). Competition in airline networks, the case of constant elasticity demands. Economics Letters, 42, 253–259.

Chapter 2

Air Transport Regulation: A Perspective on Africa’s Regulatory Framework

Keywords Regulations · Yamoussoukro Decision · Freedom rights · Air service agreements · Bilateral air service agreements · Air transport liberalization · Open skies

Introduction The African airline market has been traditionally sheltered from international competition due to excessive bilateral restrictive measures, which have hampered any progress towards a viable and efficient air transport market (Samunderu, 2019). As a result, most African governments have continued to inject cash support to their national flag carriers even though a large number of these carriers have been poor performers (e.g. Air Zimbabwe). In comparison to the North American and European Union market, the pace of opening up African skies has been “painfully” slow despite the governments setting the agenda for open skies under the Yamoussoukro Decision (YD) in 1999 when 44 signatory members of the African Union (AU) formalized the road map transition to open up African airspace. The benefits still need to yield any economic gains. The YD preemptively was designed to prompt the move of liberalization and also foster growth, strengthen supply chain networks as well as encourage investment flow and innovation. However, due to the disconnection between the policies and legal framework in various African regional markets, remain visibly fragmented. There is also a severe lack of direct flights to the major cities on the continent in particular within the Southern African Development Community (SADC). This is exacerbated by tight regulations, limited competition, restriction on flight frequency and seat capacity resulting in very high-ticket prices and an extremely inefficient air services market. However, the regional aviation market between many African countries remains highly regulated, with limited competition, restrictions on flight frequency and/or seat capacity, and resulting high-ticket prices. Preceding any moves towards liberalization on the continent, Africa’s aviation environment was characterized by government protectionism over weak, stateowned airlines (African Union, 2008; ICAO, 2006). Up to today, the regulatory environment remains one of complex, protectionist bilateral air service agreements © The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 E. Samunderu, African Air Transport Management, Advances in African Economic, Social and Political Development, https://doi.org/10.1007/978-3-031-29324-5_2

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which embody third and fourth freedom rights, non-existent fifth freedom rights, restrictions on frequencies and capacity, double approval tariffs, limited designated carriers per route, and demands for royalty payments with varying rules and regulations (African Union, 2008).

North American and European Union Air Transport Liberalization: Historical Perspective In order to reflect the policy of “open skies” one has to look at the historical developments that preceded the liberalization of air transport markets in North American and the European Union (EU). Air transport liberalization, generally improves quality and accelerates the growth of air transport service by liberalizing supply and freight for air transport service, thus increasing new entrants to the industry. Growth of air transport industry promotes growth of related industries, such as tourism, consumption, and investment, thus finally helping with overall economic growth and job creation (Brueckner & Spiller, 1994). In North America, the liberalization of air transport markets was initiated as far back as 1973 and this exposed carriers to a new entrant model of low-cost carriers (Southwest Airlines). As a result, markets became more competitive, airfares shifted and passengers had a choice. The deregulation of civil aviation in the USA since the 1970s has provided valuable evidence about the nature of the airline industry and its response to the liberalization of conditions of entry by new carriers. Since the 1990s, Europe’s airline industry entered a critical phase of reorganization (Captain & Sickles, 1998). Since then, regions have aspired to push towards deregulation of the industry and the African continent is no exception. Policy makers have pushed the economic gains derived from opening up air transport markets. In their report, the Economic Benefits of Liberalizing Regional Air Transport, Richman and Lyle (2005) sum up the economic benefits of air transport liberalization as follows: First, air transport liberalization has been successful in a range of socio-economic and geographical environments as a channel and catalyst for increased economic growth and employment, especially related to tourism. Second, any decline in market share and traffic of the national carrier is likely to be much more than that compensated by the benefits to the economy at large from increased air traffic to and from the country. Third, the alternative to liberalization is likely to prove much more costly to both a national carrier and the economy in the medium-term, with a probably increasing need for public subsidy to the carrier and an increasing opportunity cost for development of the national economy.

Introduction

35

Table 2.1 Liberalization and air service growth of selected markets Event U.S. deregulation, 1973

UK Liberalization of Secondary Airports Open Skies Agreements for United Arab Emirates Domestic deregulation in India UK–India Bilateral and creation of new frequencies Domestic deregulation in Brazil Single European Market

Yamoussoukro Decision (YD) Single African Air Transport Market (SAATM)

Results Emergence of hub and spoke systems, low-cost carriers with nationwide route networks, new entrants and integrated cargo carriers. Growth of international services to Manchester, Birmingham, Glasgow etc. Growth of Dubai as a major international hub Development of low-cost carriers and aggressive, expansionoriented airlines. Growth of capacity, new gateways, and additional carriers operating UK–India service. Growth of low-cost carrier Gol and others. Growth of low-cost carriers. Ryanair, Easyjet etc. New services, traffic growth, and new gateways throughout European Union. Paved way for facilitating African air transport connectivity, but restrictions still impeded full air travel. A flagship agenda for the African continent is to establish full open skies by 2063. Its aim is to promote social, economic, and political integration into the region.

Table 2.1 shows an illustration of the liberalization effects on selected regions and their impact. Bilateral agreements used to govern international aviation policies within the EU before the mid-1980s and the bilateral treaties caused the market to be tightly regulated behind high entry barriers, showing a very fragmented market. To improve the efficiency of the airline industry, deregulation was introduced in three phases, termed as three policy packages. The first package became applicable in January 1988. The second package was approved in June 1990, and the third package was approved in June 1991, but went into effect on January 1, 1993 (Graham, 1997). The implementation of the three packages was completely finished in 1997 (Graham, 1997). The first package allowed the airlines to increase their capacity shares on the routes between countries, allowed access to the markets, and set the airfares. The second package removed airport deregulation in the position of the fourth freedom services and loosened capacity-sharing contracts (see Table 2.2). It provided protection against discrimination of the airlines by their nationality in the cases of getting licenses in different member states. In the phase of implementation of the third package, the EU carriers were allowed to freely set fares (but have been limited by safeguards against predatory pricing) since 1993. From April 1997, the airlines have been allowed to fill a maximum 50% of seats in a stopover in another member state. The seventh freedom has also been permitted (see Table 2.2). The third package, therefore, has removed most of the remaining regulatory constraints on intra-EU transport (ICAO, 2010).

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Table 2.2 The nine freedom rights of air Item number 1 2 3 4 5 6 7 8

9

Items The right to fly over another country without landing. The right to make a landing for technical reasons (e.g. refuelling) in another country without disembarking or picking up revenue traffic. The right to carry revenue traffic from your own country to another country with which you have an air services agreement. The right to carry revenue back to your own country from a country with which you have an air services agreement. The right of an airline from country A to carry revenue between country B and other countries, C. D. etc. The right of country to exercise two sets of third and fourth freedom rights (A-B and A-C) but use its base at A as a transit point. The right of an airline formation country to carry revenue traffic between two points with another country. The right of an airline to carry traffic between two domestic points in a foreign country that either originated in or is destined for the carrier’s home country. Also referred to as “cabotage” privileges. The right of an airline to carry traffic between two domestic points in a foreign country. Also referred to as “full cabotage” or “open skies” privileges.

Source: Manual on the Regulation of International Transport, ICAO, 2010

Evidently, the process of deregulation was initiated in 1992. Many of the fundamental attributes that now characterize the European domestic airline industry such as hub-and spoke method of delivery, complex pricing schemes, the dominance of many airports by single carriers (e.g. Madrid Barajas—Iberia; London Heathrow— British Airways, Charles De Gaulle—Air France; Royal Dutch KLM—Schiphol etc.). However, before the liberalization of the EU air transport market, the configuration of flag carriers’ international networks had been restricted to linking home airports to the point of distribution stipulated in the bilateral air service agreements negotiated by the airline’s country of registration. These contained both administrative and economic provisions channelled with the number of designated airlines allowed to operate specific routes as well as regulating tariffs, capacities, frequencies, and traffic rights. The objective was an attempt to re-organize national networks into a competitive and flexible Single European Market (SEM). The implementation of the liberalization process within the former 15 member states of the EU was launched in 1987 with the most important Third Package introduced in 1993. This meant completely abolishing capacity frequency, price and ownership restrictions and granted full cabotage to all EU airlines, conferring them the right to operate domestic services within the Union regardless of their home state (Button, 1989). In this new regulatory environment, incumbent airlines saw their monopolies eroded by both the entry of new market players and operational expansion of existing airlines into domestic and intra-EU markets.

Yamoussoukro Decision

37

The restrictive Air Service Agreements (ASAs) that typified the institutional structure of international airline markets before the advent of open skies manifestly had a number of adverse effects on the efficiency of supply and specifically on the benefits consumers could reap from air travel. The removal of both this capacity constraint and of negotiated pricing, as happens under the open skies arrangements, results in competition for air services, and a move towards cost-recovery pricing strategies by the carriers. This is particularly fundamental because air transport markets will become more competitive resulting in airlines deploying dynamic pricing strategies based on demand factors. Thus, the potential gains of open skies means removal of capacity constraints, paving way for airline strategic alliances.

Yamoussoukro Decision The decision to push for open skies agenda was triggered by Africa’s limited growth trajectory due to restrictive policies that undermined economic progress. Doganis (2006) echoed this objective by saying that: “The agreement aimed to liberalize market access by the year 2002 in order to create a single African aviation market”. However, the result has been mediocre to date. In support of regional economic communities, a number of African states have led the way in the implementation of Yamoussoukro Decision (YD). This is especially so in West Africa through the West African Economic and Monetary Union (WAEMU) and the Banjul Accord Group (BAG) which have facilitated the development of the most liberalized air transport market in Africa (Schlumberger, 2010). Historically, the African continent has remained “slow” in terms of economic growth due to a number of multiple factors. These mainly include civil conflicts, unstable political climate, lack of investment drive and general poverty among the millions of Africans. However, despite the continent’s large population size air travel continues to be only for the few who can afford the high airfares. Intra-governmental restrictive policies have also played a part in suppressing any positive form of progress. Against such a backdrop, government leaders and policy makers in the continent saw the need to foster growth and open up markets to initiate the key principle agenda for regional cooperation and prosperity. However, due to a lack of multi-consensus support for integration of policies, the YD was seen as the first step towards air transport reform. Adopting such a reform policy meant the African governments recognized that restrictive and protectionist intra-African regulatory regime was only hampering the speed of economic progress, private capital flow and the expansion of air transport network. Such traditional policy of protectionism is based on Bilateral Air Service Agreements (BASAs) which are used as an instrument to restrict air spaces. However, it is important to note that African governments have also initiated number of proceedings to accelerate air transport integration within the region such as the African Economic Community, which went into force in 1994, and the Banjul Accord, which facilitated the primary objectives of the YD. Other initiatives

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Air Transport Regulation: A Perspective on Africa’s Regulatory Framework

Table 2.3 Benefits and impediments of YD Impediments Lack of political commitment and unification

Infrastructure, aircraft safety and security concerns Lack of effective enforcement mechanism Uneven geographical distribution of IntraAfrican air passenger traffic predominantly linking large and medium hubs in Ethiopia, Kenya, Morocco and South Africa YD not fully accepted in Africa—11 countries including South Africa, Djibouti, Equatorial Guinea, Eritrea, Gabon, Madagascar, Mauritania, Morocco, Somalia and Swaziland did not ratify YD Collapse of numerous airlines including Air Afrique, Nigerian Airways, Ghana Airways and Cameroon Airlines attributed to liberalization and years of mismanagement

Benefits of deregulation New and expanded airlines including Starbow, Africa World Airlines (Ghana) JamboJet (Kenya) Increasing consolidation of the aviation market in the intra-African air transport market Accelerated new market entry Advancement of the Low-Cost Carrier (LCC) sector

Increasing private sector participation in the African air transport sector. Private carriers operating in domestic and regional markets

Private participation in the airport sector including privatization of airports in Cote d’ Ivoire, South Africa, Ghana, Nigeria and Botswana

Source: Author

included the African Civil Aviation Commission (AFCAC), a specialized agency of the African Union and other arms like the Regional Trade Organization (RTO) and the Association of African Airlines (AFRAA): Significantly, a study by INTERVISTAS (2014) has shown that full implementation of YD 1999 through cross-border liberalization of only 12 African countries’ airspace is envisioned to create at least 5 million new passengers, 1.3 billion US dollars in annual GDP and 155,000 new jobs, a 75% increase in direct services, fare savings of 25–35% (Rivers, 2016). Amankwah-Amoah (2018) and Doganis (2006) succinctly describe the situation as the protection of flag carriers that are viewed as engines of growth and national and African sovereignty serving as detriments to the entry of new airlines; a situation that harkens back to the conflicting interests of colonial powers. Table 2.3 summarizes some of the benefits and impediments to the full acceptance and execution of YD.

The Regulatory Framework Up to today, the regulatory environment remains one of complex, protectionist bilateral air service agreements which embody third and fourth freedom rights, non-existent fifth freedom rights, restrictions on frequencies and capacity, double

The Regulatory Framework

39

approval tariffs, limited designated carriers per route and demands for royalty payments with varying rules and regulations. This situation leads to a very poor overall connectivity on the African continent, a reduced competitiveness and quality of service on intra-African routes and an insignificant impact on socio-economic development of the majority of African populations (Heinz, 2011). The decision to open up Africa had the following defined objectives: 1. To ensure that there was full-scale liberalization of air services in terms of capacity, tariffs, allow market access for new entrants as well existing incumbents. 2. Increase intra-African connectivity through the introduction of more scheduled flights. 3. Allow the first, second, third fourth and fifth freedom rights of commercial passengers as well as freight services within the region’s air transport market. 4. To ensure that Africa’s air safety standards were in compliance with international standards as stipulated by world governing bodies like ICAO. 5. Promote and facilitate an even playing field by reducing entry barriers and enhancing airline competition. 6. Remove obstacles that facilitated protectionist policies by national governments, especially for the national flag carriers. The YD was to be implemented in a 3-tiered stage system (See Fig. 2.1). Since the YD was designed to foster a more competitive market, evidently from other advanced air transport markets like North America and the EU, liberalization has proved to be a catalyst for increased economic growth and employment. To ensure safety standards the YD also paved way for market forces to determine the number of carriers competing on certain routes, flight frequency, seat capacities and airfare prices. In an ideal market world, this would have given the African market an impetus to allow its population access to air services at competitive airfare market prices. But, this has not been exactly what the outcome has been. The principles of the YD were mapped on the following liberalization factors and action dimensions as shown in Table 2.4. The major push for opening up African skies has been seen as welcome news by countries that have strong national airline carriers. These countries include Algeria, South Africa, Kenya, Tunisia, South Africa, Ethiopia and the rising Rwanda. These countries view the benefits liberalization will bring to their countries because of increased air traffic. However, countries like Tanzania, Cameroon, Uganda and Ghana have also backed the initiative because they have seen an increased volume of traffic at national level. However, the YD has also pushed number of countries such as Kenya, to review their bilateral agreements so they can align new policy changes according to the YD recommendations. However many countries with weak, state-owned airlines feel the need to protect their airlines from losing money by restricting competition. They focus on the potential impact on the national airline rather than evidence from around the world that the broader economic benefits of cheaper, convenient air travel far exceeds the

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Air Transport Regulation: A Perspective on Africa’s Regulatory Framework

PHASE 1: 1988-1989 Maximizing capacity usage between carriers 

Exchanging technical and capacity data



Preparing for designation and gateway airport



Promoting cooperation among national carriers in order to facilitate eventual consolidation

PHASE 2: 1990-1992 Encourage joint operations to achieve better economies of scale and deeper integration x

Instituting common insurance mechanism

x

Establishing common Computer Reservation Systems (CRSs)

x

Common purchase of spare parts

x

Joint promotion and marketing

x

Joint training and maintenance mechanism

PHASE 3: 1994-1996 x

Complete integration of airlines

x

Integration of African airlines into a consortium of competitive commercial entities that would bring sustained progress in air transport in Africa, that would be capable of withstanding rapidly evolving world trends in aviation

Fig. 2.1 Implementation steps of the Yamoussoukro Declaration (Heinz, 2011). Source Heinz (2011)

direct revenue and employment generated by a country’s airline. This is all the more so when the operation of the national airline is contingent on direct financial subsidies. A large proportion of African countries have weak, state-controlled airlines and they do see the urgency of air transport liberalization because they need to protect their own national flag carriers and restrict competition. This level of competition will emanate from the leading carriers like Ethiopian Airlines and Kenya Airways as well as the increased number of Gulf carriers such as the Doha, Qatar-based carrier, which is operating Airbus A320s in African markets. However, a fierce competition

The Regulatory Framework

41

Table 2.4 Liberalization factors and dimensions of the Yamoussoukro Decision Liberalization factors Market access Tariffs

Designation of airlines

Frequency and capacity

Granting of traffic rights Licensing and ownership

Dimension African states mutually grant themselves the right to exercise traffic rights, but retain the power to designate the airlines Tariff freedom is limited to eligible airlines. States can reject excessive increases and low tariffs that adversely affect the economic viability of airlines Designation by states. Conditions for eligibility of airlines are: • The designated airline must be legally constituted in accordance with the laws of a member state. • The headquarters and main operating activities of the designated airlines should be in the countries concerned. Freedom of capacity on intra-African routes. The expected conditions are: • None of the signatory states may unilaterally restrict capacity, number of flight types of aircraft or traffic rights except on a non-discriminatory basis for certain environmental or technical reasons with respect to air safety or security. Free granting of traffic rights for the first, second, third, fourth and fifth freedoms. The Decision does not oblige the signatory state to grant cabotage rights. Must be majority controlled, owned by national governments of the contracting states or state parties to the YD

Source: Adapted from Njoya (2016) Table 2.5 Top 10 airlines serving Uganda by seats August 2018 Airline Kenya Airways Ethiopian Airlines Emirates Rwandair Flydubai Jambojet KLM Brussels Airlines Qatar Airways South African Airways

Flights 382 276 62 327 98 124 31 31 31 54

Available seat kilometres (ASKs) 20, 708,297 41, 174,690 92, 315,835 9, 010836 63, 474,581 5,043,246 55, 369,368 27, 295,434 27,295,434 19, 4,230,527

Seats 37, 790 36, 298 24, 800 22, 210 17, 052 9672 8730 8424 7874 6624

Source: (Flightgobal.com, 2020)

is coming from the Emirates, which is operating Boeing 777,300-ER aircraft in the continent. Countries, like Uganda have seen an increase in competition with respect to number of seats offered and scheduled flights in the month of August 2018 (See Table 2.5). It is evident that the Yamoussoukro declaration put objectives of uniting and integrating the African aviation environment above those of creating a more competitive pan-African operating environment. Furthermore, the declaration itself was

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Air Transport Regulation: A Perspective on Africa’s Regulatory Framework

Table 2.6 Implementation of the Yamoussoukro Decision 1994 Mauritius Meeting: Review of Declaration • Facilitate granting of the fourth, fifth and sixth freedom rights. • Understanding that fifth freedom rights should be granted on routes where third and fourth freedom rights did not exist. • Enforced notion that air transport sector needed to be liberalized. 1999 Yamoussoukro Decision • Formalized implementation of Yamoussoukro Declaration applicable to international air service alone. • Granting of all state parties to the decision the free exercise of first, second, third fourth and fifth freedom rights on scheduled and non-scheduled air services. • Liberalization of tariffs: free increasing and lowering of tariffs without approval. • Frequency and capacity are not restricted. Source: Heinz (2011)

generally “understood to be a general, nonbinding expression of strategy” and the integrity and scope of its application across the continent was limited (African Union, 2008). Nevertheless, a number of measures were taken to further prompt its implementation during and beyond the initial 8 years of its execution. Table 2.6 shows the implementation of the YD (Heinz, 2011).

African Aviation: Internal Versus External Pressures Traditionally, the African air transport has been lagging behind the rest of the world despite its growth trajectory being above 5%. Currently, in Africa, 19 states have no international airlines raising the challenge of a lack of Air Operating Certificates (AOC) limiting some carriers to access international air space. Below is a selected list of carriers that have air space restrictions in the EU (See Table 2.7). However, it is important to note that the following internal and external pressures that impeded faster growth of the industry have hindered the African market. Below provides a summary of these challenges. Internal Pressure: • • • • •

Low load factors. Mainly small domestic airline markets. High-operating costs than other regions. Political interference in airline decision-making. Management instability and lack of continuity. External Pressure:

• Air transport liberalization and globalization. • Increased competition from large foreign carriers and the new low-cost carriers.

Effects of Liberalization

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Table 2.7 European Union Blacklist of African Airlines. Source: Kandel, 2016 Airline All air carriers certified by the authorities with responsibility for regulatory oversight of Angola, with the exception of TAAG Angola Airlines All air carriers certified by the authorities with responsibility for regulatory oversight of Benin All air carriers certified by the authorities with responsibility for regulatory oversight of the Republic of Congo All air carriers certified by the authorities with responsibility for regulatory oversight of the Democratic Republic of Congo All air carriers certified by the authorities with responsibility for regulatory oversight of Djibouti All air carriers certified by the authorities with responsibility for regulatory oversight of Equatorial Guinea All air carriers certified by the authorities with responsibility for regulatory oversight of Eritrea All air carriers certified by the authorities with responsibility for regulatory oversight of Liberia All air carriers certified by the authorities with responsibility for regulatory oversight of the Republic of Gabon, with the exception of Gabon Airlines, Afrijet and SN2AG All air carriers certified by the authorities with responsibility for regulatory oversight of the Republic of Mozambique All air carriers certified by the authorities with responsibility for regulatory oversight of Sao Tome and Principe All air carriers certified by the authorities with responsibility for regulatory oversight of Sierra Leone All air carriers certified by the authorities with responsibility for regulatory oversight of Sudan All air carriers certified by the authorities with responsibility for regulatory oversight of Swaziland All air carriers certified by the authorities with responsibility for regulatory oversight of Zambia

Country Angola

Benin Republic of Congo Democratic Republic of Congo Djibouti Equatorial Guinea Eritrea Liberia Republic of Gabon

Republic of Mozambique Sao Tome and Principe Sierra Leona Republic of Sudan Swaziland Zambia

• World Bank and the International Monetary Fund (IMF) structure on government subsidies to national flag carriers.

Effects of Liberalization South Africa Travel and tourism contribute significantly to the South African economy (Matshediso, 2014). Just like other parts of the continent, the share of the country’s intra-African air traffic is about 80% and is controlled by non-African airlines

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(Smyth & Pearce, 2015). This situation is attributable to the lack of viability and economic challenges faced by local airlines and the strategic failure to identify critical success factors to help airlines manoeuvre out of these challenges (Kamath & Tornquist, 2014). In order to remedy the situation Steyn and Mhlanga (2016) examined bilateral air service agreements (BASA) between South Africa under the context of liberalization. Liberalization involves free entry and exit, with the freedom to set fares and select the routes to fly. Liberalization is envisioned to act as a catalyst for the promotion of competition among airline carriers and by doing so improve the quality of services to customers (Uzodima, 2012). It is imperative, that there are still many marketing and route development opportunities available to South African and international carriers. This will, however, call for a harmonized civil aviation of regulations even though some African governments are reluctant to cede control to truly autonomous National Civil Aviation Authorities. Nevertheless, key questions remain: • Who will benefit from a liberalized air transport market? Foreign carriers or African carriers? • Can a developing country promote an open skies policy and still protects its own national carrier? The liberalization of air services in the African continent has had mixed results. Below we can examine the key markets in Africa that have experienced dramatic impact because of air service liberalization. Firstly, South Africa, which is the continent’s leading economic powerhouse, has witnessed consumer welfare gains because of decreased airfares and its domestic market has grown by more than 50%. The introduction of low-cost carriers like Kulula.com has also shifted the balance of competition on both regional and domestic routes. Liberalization in South Africa encouraged new airlines to enter the market. However, few of them survived due to deficient management (Campbell, 2014), route restrictions, slot restrictions, and competition with the national carrier. Over time, the national carrier has accumulated huge debts due to inefficient management and has had to be bailed out repeatedly (Steyn & Mhlanga, 2016; Adegoke, 2019). South Africa is not a signatory to YD and some scholars among them Schlumberger (2010) contend that apart from the benefits to airlines and passengers, being a signatory would have made a significant contribution to the national economies of Southern Africa. It is notable that instead the nation pursued a bilateralism approach with other countries namely Kenya, Tanzania and Botswana (Ndhlovu & Ricover, 2009) with some level of success. In spite of these developments, the current study opines that the development of air transport in South Africa is expected to grow. Figure 2.1 shows the progression of international and domestic passengers in the period 1996–2030. According to Fig. 2.2, the total number of air passengers in South Africa is expected to reach 50 million in the year 2030. The regression line for international passengers from 1996 to 2030 shows that it can explain 68.08% of the variation within the regression has a fitted line, which is a significant finding. As such the model indicates that fair level of certainty of the growth of international passengers

Effects of Liberalization

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South Africa Air Traffic 1996 - 2030 60000000

y = 890790x - 2E+09 R² = 0.4231

50000000 40000000 30000000

y = 330915x - 7E+08 R² = 0.6808

20000000 10000000 0 1985

1990

1995

2000

2005

2010

2015

2020

2025

Passenger Internaonal

TOTAL Passengers

Linear (Passenger Internaonal)

Linear (TOTAL Passengers)

2030

2035

Fig. 2.2 South Africa Air Traffic 1996–2030. Source: Author

leaving and entering South Africa. On the other hand, the regression line for total passengers explains 42.31% of the variance, meaning that there could be other factors that would explain or hinder the growth of the air transport market in the nation. Steyn and Mhlanga (2016) conclude that government control of implementation processes and continued protection and support for national airlines means that private airlines will struggle to survive.

Kenya Kenya is seen as a regional business and commercial hub of Africa, boasting the most dynamic economy in the East African region with an advanced private sector and the least aid-dependent economy. Nevertheless, Kenya’s economic performance has been rocky over the past decade, underlined by a lingering vulnerability to weather conditions. Economic problems within Kenya are mostly attributable to longstanding problems relating to infrastructure investment, slow structural reforms, and corruption, which limit stronger growth. Whilst the signs of an increasingly dynamic private sector are encouraging, political developments have been less positive. One of the main causes for below-potential growth and a stark decrease in GDP growth rates from 7% to below 2% in 2008 and 2009 was the outbreak of violence after the December 2007 election, which compounded the divisive, ethnically based nature of Kenyan politics. The economy did not fully recover from the weather- and politics-related shocks of 2008–09 until 2010 when it saw an estimated 5.8% GDP expansion (IHS Global Insight, 2013). Although tourism has been and continues to be an important source of revenue (foreign exchange earnings) for the Kenyan economy, as well as employment opportunities and livelihood for many. In 2017, the total contribution of travel and

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Kenya Air Traffic 1996 - 2030 14000000 12000000 10000000

y = 310409x - 6E+08 R² = 0.9751

8000000 6000000

y = 140183x - 3E+08 R² = 0.9379

4000000 2000000 0 1985

1990

1995

2000

2005

2010

2015

2020

2025

Passenger Internaonal

TOTAL Passengers

Linear (Passenger Internaonal)

Linear (TOTAL Passengers)

2030

2035

Fig. 2.3 Kenya Air Traffic 1996–2030. Source: Author

tourism to the Kenyan economy was about 9.7% of the country’s Gross Domestic Product (GDP). Travel and tourism accounted for about 9% of total employment in the same year (the conversation.com, 2019). Its dynamics have changed in the wake of terror attacks in 1998 with the bombing of the US embassy in Nairobi the Israeli-owned Paradise Hotel also experienced a violent attack. In 2013, the militant group Al-Shabaab also carried a deadly attack at Nairobi’s Westgate Shopping Mall. Between 2011 and 2017, there were on average 60 attacks each year carried out by different groups and this had a severe impact on the tourism industry. Kenya is a long-haul tourism destination and air transport is key for tourism, contribution to GDP and employment (Lucy, 2014). The country boasts an attractive tourism of wildlife and culture and attracts millions of visitors every year. Tourism, in particular, has suffered the negative effects of insecurity that have seen dips and troughs over the last 20 years. In addition, the national carrier is plagued with challenges most notable of which include lack of capital, limited flight frequencies, low application of information technology, management instability and aggressive competition from Europe and the Middle East. The country was a signatory of YD and embarked on the liberalization of air transport since 1990. As such key developments include the privatization of the national carrier in 1996 and the signing of more than 57 BASAs by 2017 (Eric, Semeyutin & Hubbard, 2020). According to Fig. 2.3, the total number of air passengers in Kenya is expected to reach 12 million in the year 2030. The regression line for international passengers from 1996 to 2030 shows that it can explain 93.79% of the variation within the regression has a fitted line, which is a significant finding. As such, the model indicates a good level of certainty of the growth of international passengers leaving and entering the country. On the other hand, the regression line for total passengers explains 97.51% of the variance. This means the model is a good estimate of the growth of the air transport market in the nation. It is envisioned that the regulatory

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framework for air transport will remain a key pillar in the enhancement of the benefits of the air transport sector in the country.

Ethiopia As already discussed in Chap. 1, Ethiopian Airlines has emerged as the leading African carrier in the region in both commercial and cargo activities. Ethiopia has grown into a successful national carrier over the years. Success has emerged from a large intra-Africa network, a strong hub with multiple-wave permutations for onward connecting traffic, and by forging deep strategic partnerships with regional-based African carriers (Meichsner, O’Connell & Warnock-Smith, 2018). Figure 2.3 shows the progression of air transport growth for the country up to the year 2030. According to Fig. 2.4, the total number of air passengers in Ethiopia is expected to reach 15 million in the year 2030. The regression line for international passengers from 1991 to 2030 shows that it can explain 88.91% of the variation within the regression has a fitted line, which is a significant finding. As such the model indicates that a fair level of certainty of the growth of international passengers leaving and entering Ethiopia. On the other hand, the regression line for total passengers explains an 85.71% of the variance. Meaning that there could be other factors that would explain or hinder the growth of the air transport market in the nation. This data does not cover transit passengers. The success of the national carrier in Ethiopia could be attributed to several factors. Firstly, an understanding of the operating environment. Secondly, having the right business model and finally executing the right strategy.

Ethiopia Air Traffic 1991 - 2030 20000000 y = 448561x - 9E+08 R² = 0.8571

15000000 10000000

y = 370762x - 7E+08 R² = 0.8891

5000000 0 1985 -5000000

1990

1995

2000

2005

2010

2015

2020

2025

Passenger Internaonal

TOTAL Passengers

Linear (Passenger Internaonal)

Linear (TOTAL Passengers)

Fig. 2.4 Ethiopia Air Traffic 1991–2030. Source: Author

2030

2035

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Nigeria In 1998, Nigeria adopted a reform with full deregulation of its domestic air transport market, paving way for new start-up carriers. However, Nigeria has also experienced a huge failure start-up rate due to these start-ups running out of cash. Overall, the rate of Nigerian startup failure is at 61.07% (businesseliteafrica.com, 2021). Ismaila, Warnock-Smith and Hubbard (2014) opine that deregulation of the air transport sector in Nigeria to the level of open skies would stimulate traffic growth by at least 65%. Other studies by Daramola and Jaja (2011) found on the domestic air connectivity in the country suggest that the deregulation would have significant positive impacts. However, Nigerian aviation sector has experienced some obstacles that have hindered full growth propensity. In comparison with some of its regional counterparts like South Africa, Kenya and Morocco, the aviation sector in Nigeria has experienced a low volume of traffic and resulting in under-utilization of its airport infrastructure. Nigeria has also been able to sign BASAS with over 50 countries facilitating international air traffic among the signatories. As already discussed earlier in this chapter, BASAs hamper any progress to create an even playing field in terms of competition due to national government’s desire to shelter indigenous carriers from the onslaught of competition. As a result, Nigeria’s local carriers continue to struggle against international carriers due to poor management and a lack of financial acumen to operate efficient services. New carriers have been introduced, for example, Green Africa Airways, which was founded by Babawande Afolabi in 2015 and up to today, the carrier has not been operational, but is expected to start operations in late 2021 once, the Air Operating Certificate (AOC) has been issued. Due to weak local competition, international carriers have been able to control a significant volume of international air traffic. The liberalization of air transport market in Nigeria has been based on the YD initiative and backed by the law. This has resulted in the following moves such as the privatization of public entities such as Nigerian Airways (now defunct) as well as terminal buildings. The liberalization process has certainly had an impact on the increase in passenger volume. Figure 2.5 suggests that the total number of air passengers in Nigeria is expected to reach 25 million in the year 2030. The regression line for international passengers from 1996 to 2030 shows that it can explain 86% of the variation within the regression has a fitted line, which is a significant finding. As such the model indicates that a fair level of certainty of the growth of international passengers leaving and entering Nigeria. On the other hand, the regression line for total passengers explains an 82.72% of the variance. This means that there could be other factors that would explain or hinder the growth of the air transport market in the nation.

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Nigeria Air Traffic 2001 - 2030 30000000 y = 801046x - 2E+09 R² = 0.8272

25000000 20000000 15000000

y = 297425x - 6E+08 R² = 0.86

10000000 5000000 0 1990 -5000000

1995

2000

2005

2010

2015

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Passenger Internaonal

TOTAL Passengers

Linear (Passenger Internaonal)

Linear (TOTAL Passengers)

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Fig. 2.5 Nigeria Air Traffic 2001–2030. Source: Author

East African Community The picture of market liberalization of air transport looks increasingly promising within the East African Community. In 2005, the aviation bodies of Uganda, Kenya and Tanzania agreed on structural changes to harmonize aviation policies and regulations as well as extend full privileges to airlines licensed and registered in the EAC (Schlumberger, 2010). The implementation of the Yamoussoukro Decision and harmonization of regulation has already led to an increase in frequencies in the East African states, giving consumers more choice. There has been an increase in city pairs connections among the EAC partner states and countries have adopted multiple designations of airlines and are progressively removing limitations on frequencies, capacity between the city pairs in the region and traffic rights Nonetheless; the efforts do not remain without challenges. Some partner states with small and weaker airlines are concerned that full liberalization may lead to the disappearance of their airlines as a result of anti-competitive behaviour such as abuse of dominant position by the bigger airlines. Other issues are related to the current low EAC regional and international airport capacities, safety oversight and security concerns. However, political and economic instabilities have kept East Africa long behind other emerging regions throughout the world in developing the necessary infrastructure and services needed to facilitate healthy economic growth (UNECA, 2010). The air transport sector has had major obstacles related to lack of investment to support fully functional air services. The airports are outdated and air traffic is very low. Despite, such a rather gloomy economic picture, countries like Uganda, Tanzania and Rwanda, have realized that air transport is an economic enabler of its development and a sector asset to position itself as East African hub catering to its tourism passenger volumes. Uganda has also consistently been one of the fastest-growing economies in Africa. However, GDP growth rates slowed down from nearly 10% in 2006 to 4%

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in 2012 but have accelerated again over the last months, especially due to improved fiscal policies and trade investments. Tanzania’s economy has shown a resilient growth over the last decade also during the global economic turmoil with an average GDP growth rate of 7%. After coming to independence in the 1960s and adopting far-reaching economic reforms aimed at increasing the importance of market outcomes in close cooperation with international lenders and development agencies, Tanzania’s economic performance over the past decades moved from strength to strength. Prudent macroeconomic management, alongside substantial donor assistance, has helped build comfortable reserve levels, strengthen budgetary spending and fuel strong investment in the country. Rwanda’s economy, now being widely recognized as one of the rising economies in sub-Saharan Africa as well as one of the leading reformers in the continent, has rebounded impressively following the 1990–1993 civil war and the 1994 genocide, which destroyed much of its already fragile economic infrastructure and productive capacity. The Kigali International Airport has seen a growth jump of 13% in annual passenger volume paving the way for another infrastructure development, Bugusera International Airport that is under construction. The US818 dollar airport is located 25 kilometres southeast of Kigali and is expected to have a capacity of 1.8 million passengers per year. Qatar Airways signed an agreement to have a 60% stake in the airport and the final cost is projected to be USD 1.3 billion (CAPA, 2019). Rwandair, the national carrier is based at Kigali International Airport. The carrier operates both domestic and international services to Central, Eastern and Southern Africa; with interline services to Europe, the Middle East and China. The carrier currently has 12 aircrafts in service. The heterogeneous fleet includes the following models: Airbus A-330 s; Boeing 737; Boeing 737 NG/Max; Canadian Regional Jets (CRJ), Dash 8; McDonnell MD-80/90. East Africa is experiencing a strong annual passenger growth (pre-COVID-19). Kenyan passenger numbers grew by 7.3% in 2019, whilst Tanzania can look back to a record growth of 16.6% (CAPA, 2020). Nonetheless, this growth is driven by intercontinental traffic. Kenya has also seen strong increases in seat supply as home hub carrier Kenya Airways has expanded and several foreign airlines have increased capacity due to tourism growth. In Kenya, there has also been a trend to develop secondary international hubs at Mombasa and Malindi, which now receive consistently scheduled links to inbound tourism markets from Europe. Demand from Nairobi is focused towards Tanzania and Uganda as well as South Africa. In this region, 43% of all passenger demand is within intra-Eastern Africa with a further 35% between Eastern and Southern Africa. The lack of sufficient air transportation supply hinders not only the economic development of the region but also cannot cater adequately to the strong demand growth. Again, having the world’s lowest annual available seat kilometres (ASKs), the continent lacks satisfactory air transport networks and availability of flight connections, which are far behind other developing regions.

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Demand and Supply Patterns of Air Travel As African economies continue to develop, the propensity to travel is growing, which gives increasing opportunities for new and existing carriers to grow their traffic. Thus, it is not surprising that all leading aviation forecasters project African aviation to grow at annual rates of five or more percent. Although still relatively immature by global standards, with only 10% of Africans travelling by air, African aviation has seen impressive growth rates over the last decade facilitated by the rapid economic growth of especially the East African sub-region and an emerging middle class in many countries. The growth in air transportation in Africa is expected to come from demand for intra-African connectivity, as the region’s economies are more intertwined with each other, which shows potential for intra-African carrier operations. The strongest growth in seats supplied to Africa has actually come from intercontinental markets, which connect Africa to other world regions. Even more importantly, growth in seat capacity on intercontinental markets has been over 7.5%, versus around 5% for intra-Africa. Even more importantly, growth in seat capacity on intercontinental markets has been over 7.5%, versus around 5% for intra-Africa (ICF SH&E, 2018). Figure 2.6, puts this stark lack of air services in perspective by benchmarking the availability of air transport for Africa versus other parts of the world. Fifteen per cent of the world’s population that are African are catered to by only around four per cent of all scheduled air service seats in the world. The immense potential to provide air traffic to the region is significant, as a comparison with the advanced economies of North America and Europe demonstrate. The population of these two regions combined is roughly equal to that of Africa. However, compared to around 4% of worldwide

Fig. 2.6 World population share vs. scheduled air service, 2018. Source (ICF SH&E, 2018)

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Fig. 2.7 Distribution of nonstop daily seats within Africa. Source: Author

scheduled seats available to African countries, their North American and European counterparts have access to around 55% of global seat capacity. Figure 2.6 demonstrates this contrast showing very limited capacity between the various regions. Less than 15% of total intra-African seat capacity is devoted to flights that connect the various African regions. This again highlights the impediments that have affected intra-African connectivity. Due to connectivity challenges, the region still has a limited number of nonstop flights. Lack of high connectivity of nonstop flights is key in terms of cutting down total travelling time and could affect fares charged between connecting routes. See Fig. 2.7. It is not surprising that, given stronger passenger growth and a comparative lack of growth in air transport supply, fares have risen in Africa at a time where they have fallen elsewhere in the world. Higher than average airfares in Africa compared to the rest of the world are a consequence of the general lack of competition from strong airlines on intercontinental routes as well as the income inequalities across African populations, thus, resulting in very low natural demand levels (Schlumberger, 2010). Travelling on routes within the continent is considerably more expensive per mile flown than intercontinental flights. This is especially prevalent on routes of less than 4000 kilometres and is a reflection of the larger intercontinental markets at higher competitiveness (Chingosho, 2009). Domestic pricing within African countries is most likely skewed by subsidized or fixed pricing on routes, which keeps fares artificially high (See Fig. 2.8). It is evident that RPKs on the African continent are relatively high compared to non-African counterparts. This is a reflection of the fact that those few people who

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Fig. 2.8 One-way average fares in Africa per stage length as compared to other world regions, 2009 (adapted from ICF SH&E, 2018)

travel by air are relatively wealthy, and other travel options are lacking in some cases. Low-cost carriers, who are expected to play an increasingly important role in the coming years, could cause a significant reduction in yield in the market. An African consumer still pays almost 50% more on a ticket than his counterpart in Latin America for a flight of around 3000 km (Chingosho, 2009). Both the lack of available alternatives in terms of substitutes or competing airlines and the wealth of those travelling is reflected in the continent’s lower-than-average price elasticity of demand. Elasticity of demand is for both business and leisure travellers the lowest in the world. This means that demand for either is not affected by a rise in prices, which is mostly due to limited capacity in most markets on the continent. A further reflection of the lower-than-average demand on intra-continental routes can be found in the continent’s overall low load factors. Chingosho (2009) argues, “because of the low marginal costs of carrying additional traffic, load factors are a critical determinant of profitability. However, load factors for African airlines are generally low compared with the rest of the world”. The world’s average load factors are around 75%, whilst African airlines can only look—even though up by 0.8% from the previous year—at average load factors of 67.8% (See Fig. 2.9). In the case of East Africa, several key infrastructure constraints make it difficult for airlines, especially those trying to adopt the low-cost model to the market, to run with operational ease. Poor infrastructure of most East African airports is seen as a principal reason why the region continues to struggle to fulfil its undoubtedly economic potential. These infrastructure problems can be difficult to solve due to limited financial resources and will therefore consequently lead to retaining infrastructure problems. In East Africa, service providers in this sector are—with the exception of Kenya and Tanzania – government-owned monopolies. Despite poor service, this implies charges significantly higher than the world average. Moreover, Africa also shows a substantial lack of secondary airports, putting an additional burden on low-cost airlines due to higher costs at main gateways.

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82.00% 80.00%

79.52% %

7 9.40% 79.40%

78.00%

76.90% 7 6.9 90%

76.80% 76.00%

76.00%

Load Factor

74.00% 72.00% 70.00% 67.80%

68.00% 66.00% 64.00% 62.00% 60.00% North America

Europe

Asia-Pacific Middle East

Latin America

Africa

Fig. 2.9 Comparison of world load factors. Source: IATA, 2018

African Aviation Cost Structure African airlines face fixed and variable costs that are much higher than those of similar-sized airlines in other world regions. Higher operating costs, with aeronautical charges and fuel costs among the most expensive in the world make it especially for low-cost airlines a difficult task to hold on to their lean business strategy. The small size of African carriers translates furthermore into a distinct lack of bargaining power with large fuel companies (Chingosho, 2009). Most African airlines also do not employ fuel price risk management and hedging techniques, which exposes them to unpredictable volatilities in the fuel price. Additionally, high taxes on jet fuel make it an average of 21% more expensive for African airlines to buy jet fuel than for airlines elsewhere in the world.

Fuel Costs Generally, in air transport fuel costs represent a huge proportion of an airline’s operational expense structure. Whilst, some carriers in Europe like Ryanair have

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resorted to fuel hedging strategies. Hedging strategy varies from airline to airline, but most of them hedge for a one-year term (short-term contract). Fuel costs that are significantly higher in Africa than in the rest of the world arise from constraints in supply and a lack of scale as well as high fuel taxes in most African countries. Due to the geographic location of most African countries, fuel needs to be transported by road over long distances, which in turn pushes up prices considerably. This is especially the case for landlocked countries such as Uganda and Rwanda. Additionally, the small market sizes do not allow fuel companies to benefit from economies of scale, which is why they have to spread costs over relatively low fuel sales volumes and fewer customers, which in turn drives up costs. The small size of African carriers translates furthermore into a distinct lack of bargaining power with large fuel companies (Chingosho, 2009). Most African airlines also do not employ fuel price risk management and hedging techniques, which exposes them to unpredictable volatilities in the fuel price. Additionally, high taxes on jet fuel make it on an average of 21% more expensive for African airlines to buy jet fuel than for airlines elsewhere in the world.

Financing, Insurance and Leasing Besides higher fuel costs, African airlines have to pay more to lease planes than carriers in other regions. A 5-year-old Boeing 737 might cost a Nigerian carrier up to USD 400,000 a month to lease, compared to USD 180,000 in Europe, because of local carriers’ poor safety record and the courts’ sluggishness in dealing with previous bankruptcies. Insurance costs for African carriers can also be stratospheric due to the poor safety record of most airlines. Aircraft and insurance costs make up nearly a quarter of the total costs incurred as shown by Heinz (2011). This is also verified by Fig. 2.10, which shows the cost structure of African airlines.

Distribution The lack of technological development and Internet penetration means that African airlines make about 75% of their sales through Global Distribution Systems (GDSs). Chingosho (2009) details, “African airlines tend to pay higher commissions to travel agents and other middlemen than the world average. The commission payable to travel agents for domestic operations is typically about 7% of the ticket price”. “While Africa does have large populations and growing middle classes, the continent does not have the depth of Internet penetration to drive online sales, which are key to the European LCC model”, says Roeland van den Bergh, senior analyst at the Centre for Asia-Pacific Aviation.

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Fig. 2.10 Cost distribution of AEA and African Airlines. Source: Compiled by author

Fuel 19%

Ground handling 12% Crew cost 9%

Maintenance 9% Aircraft cost & insurance 23% Airport & navigation charges 8% Others 4% Inflight & catering 5%

Sales & marketing 5%

Administration & overheards 6%

Maintenance and Ground Handling Services Since Africa represent only 2.5% of the world air transport market, and a number of ground handing service providers see a huge market opportunity to exploit. However, there is again a point in this business opportunity, and that is because the handling charges and fees from African airport operators are among the highest in the world. According to AFRAA, “the standards of ground handling at airports in Africa vary widely due partly to the lack of or inadequate oversight by the responsible authorities. Similarly, infrastructure and facilities for handling passengers/cargo in many airports are inadequate”. The old age of the African fleet with an average age of 21 years is an additional cost burden on the airlines due to considerably higher maintenance needs and spare parts not being covered under manufacturers’ warranties anymore.

Labour Overhead employee costs constitute about 30% of total airline costs in Africa, whereas a maximum of 20% is the norm in other world regions. The small size of most airlines, inadequate information systems and government employment policies result in a large number of overhead staff employed in African airlines. Some governments even control the wages and salaries paid to airline employees, which in turn results in an overall low productivity. The lack of a skilled workforce poses additional training costs on the airlines’ already high-cost structure. Not only the

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fixed costs are higher but also variable crew costs due to the small number of weekly flights carried out in the region, which requires longer layovers at outstations.

Safety Old aircraft, lack of training, poor infrastructure, lack of financing and non-compliance with international standards are some of the key factors contributing to a poor safety record on the African continent. As of June 2013, Africa remains at the top of the EU’s list of blacklisted carriers with 75% of banned states being on the African continent and 25% of the entire African fleet being banned from flying into the European Union. For example, the beleaguered Air Zimbabwe state-owned carrier has suffered massive debts mounting to USD 300 million was de-registered in 2016 from the global aviation safety registry after its failure to comply with minimum acceptable standards of safety, efficiency and quality. This means the state carrier is now officially considered an unsafe operator after violating IATA Operational Safety Audits (Iosa). Despite safety concerns, Ethiopian Airlines had to deal with air crash of its Boeing 737 Max bound for Nairobi from Addis Ababa. Major African carriers and civil aviation entities have made significant strides in improving their safety records in recent years. IATA and AFRAA have joined forces with the African Civil Aviation Commission (AFCAC) on a 3-year safety project. The objective is to provide technical support to the African air operators of states party to SAATM to ensure that they achieve and maintain global aviation safety standards.

Single African Air Transport Market (SAATM) Advocates for air transport liberalization view that the growth potential of Africa’s civil aviation will be a positive impetus towards economic empowerment and regional development. The SAATM, open sky agreement was originally signed by 23 out of 55 member states of the African Union paving way for creating a unified air transport. To date, 34 nations have signed up to the SAATM (See Fig. 2.11). Benin, Botswana, Burkina Faso, Cabo Verde, Cameroon, Central African Republic, Congo Brazzaville, Cote d’Ivoire, Egypt, Ethiopia, Equatorial Guinea, Gabon, Gambia, Ghana, Guinea (Bissau), Guinea, Kenya, Lesotho, Liberia, Mali, Morocco, Mozambique, Namibia, Niger, Nigeria, Democratic Republic of Congo, Rwanda, Sénégal, Sierra Leone, South Africa, Swaziland, Tchad, Togo, Zimbabwe. These countries represent over 80% of the existing aviation market in Africa. Figure 2.11 illustrates the map of SAATM participant states.

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Fig. 2.11 SAATM participants. Source: wwwsimpleflying.com (2019)

Africa’s failure to integrate and liberalize its intra-regional air transport market has been cited as a significant reason why growth in the air transport market has not reached its huge potential. Most countries rely on restrictive bilateral service agreements. This is a paramount reason why insufficient integration and lack of non-restrictive open skies policy present a major barrier to air transport growth in Africa. Open skies agreements not only enable better competition, but it also allows carriers of two or more countries to operate any route between the countries without interference in decisions about routes, capacity and pricing. The result is better service provision, affordable airfares an efficient service for the consumers. As part of the remedy for African aviation, a new initiative was inaugurated on January 28th, 2018, with the African Union (AU) heads of state launch of the Single African Air Transport Market (SAATM). In support of SAATM, the African Continental Free Trade Area (AfCFTA) and the visa facilitation initiative form the three AU Agenda 2063-flagship initiatives. These initiatives form the foundation upon which aviation in Africa is to grow and provide larger than forecast economic growth. SAATM is aimed at creating a single, unified and transport market in Africa. Twenty-six countries representing 80% of the existing aviation market in African have subscribed to the initiative. The goal of SAATM is to strengthen safety and security oversight on the continent and promote a climate of cooperation among African countries through partnerships, mergers and acquisitions. The primary assumption of the initiative is that improved brands will compete favourably with stronger states or blocks of states from outside the continent. An added benefit of full implementation of SAATM is the guarantee of a larger market for African carriers and improved access to capital. The surprise of the AU 2063 flagship project Single African Air Transport Market (SAATM) is that it is translating into the emergence of new State-owned national

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carriers such as Uganda Airways, Air Tanzania and Nigeria Air and the expansion of others, instead of the entry of new private sector airlines. The success of the SAATM requires regulatory and institutional steps that are essential so that the benefits of economic liberalization of air services emerge over the next few years. This includes a slackening of historically rigid market access, establishment and ownership and control provisions in bilateral air services agreements (BASAs). Which is the role of Governments. State ownership of airlines may, however, result in an uneven level playing field from a competitiveness perspective if the state’s role as regulator is conflicted by its ownership interest in a state-owned airline, much as a referee would have a player in a game. New air services route development is somewhat speculative, but start-up losses emerge until sufficient demand can support the operational cost of capacity in much the same way as all new businesses normally incur start-up losses, except at higher relative values. The critical airline function is the right sizing of aircraft. If the seating capacity of aircraft is too large, the cost of production of such seats is not paid by anyone, resulting in wasteful losses. Excessive capacity by State-owned airlines in sparse markets has the risk of effectively foreclosing private sector competitor airlines as market forces are distorted. Moreover, where capacity exceeds true market demand, airlines incur losses, which have to be funded by subsidies or State-guaranteed loans, which ultimately cannot be repaid. Capacity and pricing wars between State-owned airlines may then result in a subsidy race between States, which in turn could decimate national treasuries. This situation is avoided in the European Union through strict State Aid rules and judgements to maintain competitive markets. The SAATM framework does not yet have the institutional and enforcement capability to fine airlines and signature States for over-border (part of an internal market) anti-competitive behaviour transgressions of State-owned airlines and State aid not based market investor principles. Whether competition authorities will be given mandates to intervene in State aid to fund capacity and price wars between state-owned airlines remain to be seen. For the African continent to fully reap the benefits of air transport liberalization, key aspects require consideration according to a report by Deloitte (2018). The following aspects are key: (a) (b) (c) (d) (e)

Ownership and control Eligibility Infrastructure Capacity Frequency of flights

Thus, the Africa Union can learn from the EU deregulation experience as a guiding framework even though the conditions of liberalization are not particularly the same. What is important here is that the new open skies policies should create a fair playing field for all the signatories in particular along the dimensions of

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Table 2.8 The benefits of open skies Country Algeria Angola Egypt Ethiopia Ghana Kenya Namibia Nigeria South Africa Tunisia Uganda Senegal

Passenger volume (PAX) +419,000 +531,000 +318,000 +202,000 +335,000 +406,000 +529,000 +426,000 +800,000 +343,000 +426,000 +214,000

Gross domestic product (GDP) $124 M $137 M $114 M $60 M $47 M $77 M $94 M $77.6 M $283,9 M $114 M $77.6 M $41 M

Jobs 11,100 15,300 11,300 14,800 9500 15,900 10,600 18,600 14,500 8100 18,600 8000

Notes: All 12 countries total passenger volume = 4,9 M, GDP = +1297 M and jobs = +155,100 Source: Adapted from IATA (www.iata.org/africa-openskies)

competition rules, consumer rights tax regimes etc. The implementation of concrete measures will be overseen by the African Civil Aviation Commission (AFCAC), which assumes the watchdog role to ensure that the following regulations are adhered to: SAATM Regulations 1. 2. 3. 4.

Regulations on the powers, functions and operations of the executing agency. Regulations on competition in air transport services within the African continue. Regulations on the protection of consumers of air transport services. AFCAC is charged with the responsibility of managing air transport liberalization in Africa. 5. This responsibility includes the SAATM, which ensures that aviation assumes its rightful place, role and contributes to intra-African connections. 6. The SAATM underscores Africa’s social, economic, political integration and boosts intra-African trade and tourism as per AU-Agenda 2063. Source: AFCAC (2019). The Air Benefits Report (2017) commissioned by IATA revealed that air transport on the African continent supports at least 6.8 million jobs and generated USD 72.5 billion to Africa’s GDP. Despite expected economic gains predicted because of implementing the SAATM, critics are skeptical of its implementation. The following factors have been commonly identified as bottlenecks that would impede full implementation according to the Deloitte report (2018). Table 2.8 highlights some of the key benefits of the open skies agreement selected group of countries. Overall, skeptics view that SAATM looks very good on paper, therefore, there are still some factors that require concrete implementation in order to realize the full benefits of an open skies policy (ICAO, 2017). This means that there has to be a

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proper functional mechanism in place designed to ensure proper governance. The legal mechanism needs to be rigorous whereby all the member parties must adhere to, and issues related to fair competition, taxes and general aviation safety standards also need better implementation. Unfair competition is still a major obstacle. For example, in countries like Nigeria, start-up carriers supported by the government get percent interest rate on loans and no value-added tax (VAT), in comparison to the private entities that have 28% interest rates on loans. Another complexity challenge is that there are still no reciprocal gains across the continent because of the open skies arrangement, in particular to visas and cargo movement. The absence of well-developed technology also hinders any successful implementation. This is so because there is no technology in place to facilitate smooth and efficient air traffic management across all the countries that have signed up for the open skies agreement.

Alignments in Regional Economic Groups in Africa The African continent with its five zones namely North, South, East, West and Central have all been formed into Regional Economic Committee (REC) groups for the common objective of achieving a socio-economic integration. A review of their alliances provides an insight into the policy convergence or lack of it that they represented in the Pan-African context. The progress of liberalization in Africa has a correlation to the consensus achieved by these RECs both individually and collectively towards the implementation of the Yamoussoukro declaration of 1988. Post-independence, the African Continent was characterized by fragile borders and limited resources (Tolcha, Bråthen, & JohanHolmgren, 2020). The marginalization of the African economy in the global context can be attributed to factors such as endemic conflicts, corruption, economic stagnation and the like. In this context, promotion of a continental unity was only possible if the member states could set aside their differences and work towards accomplishing an integrated economic structure in tune with the globalization efforts. In the 1960s, regional integration was limited to safeguarding the political freedoms. There was a need to bring about economic integration in the aftermath of the economic crisis of the 1980s where a thrust was needed for intra-African trade in order to reduce the overall vulnerability of prices. This led to the formation of the Regional Economic communities of Africa that would enable an economic integration besides offering an opportunity to negotiate more effectively with the economies of the rest of the world. The process of integration envisaged by the RECs was meant to foster a climate of free trade and cooperation amongst the member countries that would in turn be a win-win for all the stakeholders. Although states are the primary actors, there are political parties and other stakeholders that provide impetus to the process of integration that would improve both the economic and social scenario.

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Territorially contiguous states formed economic blocks as a strategy to jointly address the developmental challenges. This would be possible by addressing the structural weaknesses that were inherent to the states. The African union endorsed eight RECs as the building blocks of the continent’s economic integration namely the Arab Maghreb Union, The Common market for Eastern and Southern Africa (COMESA), Community of Sahel—Saharan States (CEN-SAD), East African Community (EAC), Economic Community of Central African States (ECCAS), the Economic Community of West African States (ECOWAS), the inter-governmental authority on development (IGAD) and the southern Africa development Community (SADC).

Northern and Western Africa AMU: The Arab Maghreb Union This was founded in 1989, by a treaty signed in Morocco as a pan-Arab trade agreement to achieve economic unity in North Africa. Although Morocco was not a party to the Yamoussoukro Decision (YD), the body recognized the need for liberalization of aviation in the continent. Although there were more than 30 multilateral agreements by AMU, only five were ratified by all members. This is a touchstone of the challenges faced by this congregation. The status of the Western Sahara was a major zone of contention. However, members of AMU realized the importance of the Transport sector in order to achieve the greater objectives of development. Air Maghreb was a jointly owned airline that got the nod; however, it did not last as it was abandoned after the Bankruptcy of Air Afrique. All the AMU states except Morocco were signatories to the YD. A fair share of liberalization of this region came with the collaboration with European counterparts. The open skies agreement came up in two phases with the first phase granting unrestricted third and fourth freedom rights to EU carriers. The second phase granted fifth freedom rights. Royal Air Morac had acquired a 51% stake in Air Senegal international, 51% stake in Air Gabon International and a 51% stake in Air Mauritanie which enabled it to expand into sub-Saharan Africa. As most AMU countries were bound by the YD, there was a consistent push for liberalization among the member states. The reasonable level of success achieved by these initiatives contributed to the success of liberalization at AMU. It was envisaged that other North African states would soon follow this path.

The League of Arab States This league was founded in Cairo in 1945 and consisted of seven Arab nations namely Egypt, Iraq, Jordan, Lebanon, Saudi Arabia, Syria and the Republic of

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Yemen. Subsequently, the Arab League added 22 members. Over the years, political issues such as offering recognition to PLO have weakened the league. Egypt’s membership was suspended in 1979 and readmitted 9 years later in 1988. The Kuwait crisis in 1990 contributed to a buildup of foreign military in the region that created a deep divide among the Arab league and its members till the Gulf crisis in 1990. However, the conflict between Israel and Lebanon brought up a renewed unity amongst the Arab world. In 1967, the civil aviation council of Arab States was created to critically evaluate the economics of Air Transport and recommend adoption of the agreements in the interest of Arab States. The agenda was to harmonize air transport and create an Arab aviation market. However, this objective was too far from being achieved. After three decades in 1995, the Arab Organization for Civil Aviation was launched under which a joint framework was drafted for development of Air Transport services. The aim was to promote and develop cooperation and integration of Air Transport activities. However, this organization had to comply with the rules of three councils namely the economic and social council, the Arab League Council and the Arab transportation ministers council. Due to these restrictions, the objectives of the congregation made little progress just as the civil aviation council.

Arab League open Skies’ agreement The air service liberalization was meant to reduce restrictions for carriers of member states. Egypt, Sudan and Somalia were part of a multilateral agreement of 12 countries known as the Arab League Open Skies’ Agreement. This was to facilitate all means of transport and communication on a preferential basis with an aim to eliminate obstacles to the development of Arab Air transport. The agreement provided concrete traffic rights with specific rights to transit through any of the territories, land in any of the territories of the other state parties besides embarking and disembarking passengers and cargo from any territories of the State Parties. These constituted the first two freedoms of international air service transit agreement of 1944, which was signed by 125 countries including the Arab States. Under the Yamoussoukro Decision, it is defined to grant the first, second, third, fourth and fifth freedoms. However, the Arab league Open Skies’ Agreement is not clear beyond the second freedom. The provisions of the Arab League Agreement, that find consonance in Yamoussoukro Decision include one where each party can designate one or more transport companies that can benefit from the provisions of agreement. Similarly, yet another provision provides freedom of capacity for each designated air transport company in terms of adequate number of flights. In terms of Tariff, the Arab league agreement provides a better framework than the YD. It explicitly states that the designated transport company should determine its tariffs based on commercial considerations. It further states, that tariffs must factor in all relevant factors such as operating costs, types of services, profit and competition. However, the civil aviation authority could intervene to prevent discriminatory practices.

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The Arab League Open Skies’ agreement goes farther in many domains than the Yamoussoukro Decision. Among the six Arab states of Algeria, Egypt, Libya, Mauritania, Morocco and Tunisia, only four are bound by the decision YD. Morocco and Mauritania are not parties. However, Morocco pursued liberalization through AMU. Unfortunately, none of the Arab States has ratified the Arab League Open Skies’ Agreement. However, the new dynamics prevalent could form the basis for better liberalization from the Arab States where they can offer priority to Market potential rather than worry about competition. As a final step towards implementation of the Yamoussoukro Decision YD, the Arab league could begin negotiations among the groupings through COMESA for the implementation of the liberalization processes.

ECOWAS: Economic Community of West African States This consisted of a group of 15 West African countries as an entity founded in 1975. With regard to the implementation of YD, this entity split into two groups namely WAEMU—West African Economic and Monetary Union and the Banjul Accord Group (BAG). ECOWAS did not adopt legally binding legislation for YD. However, they could accomplish progress in lifting frequency constraints. BAG, on the other hand, has complied with the YD in terms of multilateral air service rights agreements. This community founded in 1975, was intended to achieve integration of the Region irrespective of the language barrier. Besides working to promote economic integration and cooperation through Trade liberalization. However, their unity ran into trouble when they could not find consensus on revenue losses due to liberalization. This shifted their focus to peacekeeping operations where they gained some reputation. For years, they failed in ratifying protocols that led to their review of treaty of Lagos for a revised version that was signed in 1993 (ECOWAS, 1993). Whilst the revised version reiterated the objectives, it also called for harmonization of national policies and promotion of integration. The most significant modification was that the regulations of ECOWAS would be binding on all member states. Specifically, the member states were mandated to encourage flight scheduling, aircraft leasing, granting fifth freedom rights and developing regional air transport services to promote profitability. This found consonance in the Yamoussoukro Declaration of 1988. Given this ECOWAS was expected to achieve a great deal in regional integration. However, the French speaking WAEMU and the English speaking BAG went their different ways towards liberalization. The Yamoussoukro decision emphasized on pursuit of implementation of decisions by west and central African states represented by ECOWAS and CEMAC and drafted the Bamako action plan that was aimed to strengthen the capacity of Civil aviation, harmonize institutional framework and explore options to provide oversight to industry. However, these efforts also did not bear fruit which prompted ECOWAS to draft a new action plan known as the Lome action plan to ensure economic regulation, safety and

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security improvements. ECOWAS and CEMAC continued to work together and recommended creation of autonomous civil aviation authority. In spite of the extensive work that it had put in, ECOWAS could not make much headway towards implementation of the Yamoussoukro Decision.

West African Economic and Monetary Union The WAEMU also known as Union economique et Monetaire, consists of some ECOWAS members it was established in 1962 to manage the common currencies in all the French colonies. The erstwhile WAMU was dissolved in 1994 and WAEMU was founded with seven member states. The objectives of WAEMU were to establish a common market to achieve greater economic competitiveness through Harmonization of legal environment, converging macroeconomic policies of member countries, ensure free movement of Goods and services, coordinating policies of Transport and development and harmonizing fiscal policies. WAEMU and its guiding principles constitute a favourable legal framework for the timely implementation of decisions and obviates possible abuse by member countries who seek to stall the rules. The WAEMU set its objectives of coordination of national policies of transport and communication by adopting a common air Transport program in order to achieve this WAEMU sought to establish competitiveness of Air transport in order to stimulate growth and integration of member states. These objectives were addressed by ensuring compliance with infrastructure and equipment, harmonizing air transport regulations, enhancing air transport systems and liberalizing air transport services. Of these, the liberalization of air transport as part of the Yamoussoukro Declaration was sought to be achieved by disengaging member states from industrial and commercial air transport and full liberalization by providing eighth freedom rights to WAEMU carriers. The plan was to prepare an air Transport legal framework in three phases. The first phase included regulation of Market access, regulation on Air carrier certification, regulation on passengers and regulation of accident investigations. The second phase included competition regulation and consumer protection regulation. The third phase consisted of regulation of regional and national facilitation committees bringing in a union aviation code to ensure clear deliverables. The legislation brought in dealt with aviation safety, organization of civil aviation, personnel licensing and training, aircraft operations, transport of hazardous goods and aviation safety. WAEMU made successful progress in adopting several such legislations to implement liberalization process to comply with requirements of Yamoussoukro Decision. The significant regulations include: (a) Traffic rights for providing market access within WAEMU granting freedom and entitlement to member states. This exceeds the requirement of Yamoussoukro Decision (YD).

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(b) Tariff regulation on service for passengers and freight within WAEMU allows carriers to fix tariffs 24 h in advance. The YD requires filing 30 days in advance. (c) Competition regulation making exercise of traffic rights subject to competition legislation. The YD notes that parties shall ensure competition, which is accomplished here. (d) Safety and security regulations to address regions’ safety and security challenges. An assessment showed that safety was poor in six WAEMU states and fair in two. Thus, WAEMU has successfully addressed the provisions of YD besides consumer protection and Carrier liability. Thus, WAEMU has been able to accomplish the regulatory framework as prescribed by YD but integration of WAEMU’s air services into the continental African region could not be dealt with indicating that WAEMU could not achieve a continent-wide implementation of the Yamoussoukro Decision.

The Banjul Accord Group Banjul Accord Group (BAG) comprising seven Western African states aimed at ensuring implementation of the Yamoussoukro Decision states that its main objective was to safeguard international air transport in the region and promote cooperation among national carriers. It intended to create larger entities by integrating airlines. The Accord sought cooperation among airlines at three levels namely: 1. Provision and management of air traffic services. 2. Establishment of safety oversight procedures. 3. Establishment of multinational approach to negotiate agreements. The Accord became an integral part of an MOU between four western African states and nine airlines. It was an attempt to establish cooperation among carriers as envisaged by the Yamoussoukro decision YD. These two could not be achieved, as the fallacy was that BAG aimed to implement both the Yamoussoukro Declaration and the Yamoussoukro Decision thus creating confusion about its focus. BAG produced two documents namely a) the multilateral air service agreement (MASA) and b) the memorandum of understanding for implementation of technical cooperation project (COSCAP). MASA includes: • Traffic rights providing first and second, third, fourth and fifth freedom rights to states in accordance with Yamoussoukro Decision. • Designation of carrier where each state can designate one or more airlines on a route under MASA. • Tariffs can be freely established based on commercial considerations. However, if the tariffs are discriminatory the contracting parties can intervene. • Capacity and Frequency—no restrictions are to be imposed on frequency, capacity and type of aircraft under MASA.

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In compliance with Yamoussoukro Decision, MASA stressed on safety and security whilst granting traffic rights. Each contracting party may withhold or revoke the authorization if the designated airline does not take appropriate corrective action. This was a strong rule to ground the operations and revoke the operating permit of the BAG airline. The BAG states recognized that this regulatory oversight was not required which lead to BAG signing an MOU to implement technical cooperation that focused on preparing only the required regulation and build capacity for regulatory supervision. MASA also went far beyond provisions of Yamoussoukro Decision with regard to security. It demanded conformity from contracting passengers to provisions of convention of Offenses committed on board aircrafts listed in the Hague protocol. MASA also makes contracting parties obligated to provide assistance in preventing unlawful acts related to safety of Aircraft, passenger crew, airports etc. MASA also stipulated on settlements of disputes primarily by negotiation or by arbitration mechanism through due arbitration procedures. Through MASA, BAG could establish a liberalized regime that was compatible with the provisions of Yamoussoukro Decision.

CEMAC: Central African Economic and Monetary Community This was created in 1994 with six states on two main institutions. The provisions of CEMAC member states were identical to YD and therefore contributed to the good progress in implementation of YD by CEMAC. This region is the most liberalized in Africa. CEMAC consists of six central African states meant for economic integration to ensure same monetary value against other currencies. The CEMAC treaty was signed in 1994 by Cameroon, Central African Republic, Chad, Republic of Congo, Equatorial Guinea and Gabon. The main objectives of CEMAC were similar to WAEMU in trying to establish a harmonized development among member states. The specific objectives included strengthening economic and financial competitiveness, converging overall macroeconomic policy, and creating a common market-free movement of Goods and services and coordinating national policies of member states in relation to all sectors including tourism and transport.

The Air Transport program of the CEMAC states Three distinct measures namely agreement of an Air transport, civil aviation code and joint competition regulation were part of the CEMAC region program. The agreement on air transport was intended to develop CEMAC’s inter-community air transport to promote economic and commercial relations between member states.

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The provisions included were creation of an entity for flight safety and fostering cooperation. Several provisions were similar to the Yamoussoukro Decision in relation to a) designation of carrier where each member state designates two carriers to participate in the service market b) traffic rights—first, second, third and fourth freedom rights to be granted to flights. Fifth freedom rights are restricted to 40% of previous Annual capacity. Sixth and seventh freedoms not mentioned, eighth possible if member states grant rights to a designated carrier. C) Tariffs are freely determined based on commercial considerations. D) Capacity and frequency are granted to designated carriers. Whilst no restriction of capacity or type of aircraft shall be imposed, carriers can enter into commercial arrangements themselves. CEMAC included additional provisions for implementation of Liberalization where the agency would supervise the policy. Member states have the right to terminate the obligations by opting out. The CEMAC civil aviation code was adopted by the council of ministers replacing the earlier civil aviation legislation. The code has most of the provisions, decided by the CEMAC agreement with 10 main sections that included general provisions, supervision of the sector regulation of aircraft, airports, personnel licensing, aviation security, environmental protection and criminal enforcement. All the provisions of Yamoussoukro Decision were incorporated in the Code. The code covered Market access, Tariffs, Frequency and capacity, designation and establishment and competition regulation. Thus, like the WAEMU, CEMAC was also implemented most of the main provisions of the Yamoussoukro Decision.

Southern and East Africa COMESA: The Common Market for Eastern and Southern Africa This is an East African entity consisting of two regional economic communities namely COMESA and EAC (East African Community) (Schlumberger, 2010). It is made up of 20 countries that came together for economic integration. COMESA is based on YD and the liberalization was to happen in two phases: Where Phase 1 was aimed at free movement of intra-regional passenger service that has been implemented. Phase 2 is yet to be implemented which seeks to remove restrictions on daily frequency between city pairs (Njoya & Knowles, Introduction to the special issue: Air transport in the Global South, 2020). The regions of South and East Africa have three regional and economic councils. The largest being COMESA, covering 20 countries from Egypt in the North to Zimbabwe in the South. This is followed by SADC, comprising 15 member states in South Africa. The smallest being REC, comprising five east African states.

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The Common Market for Southern and Eastern Africa: COMESA (Common Market for Eastern and Southern Africa) was established in 1981 with the objective of increasing economic and commercial cooperation among states, harmonizing tariffs and reducing trade barriers based on the Lagos Plan of Action. There was a preferential trade area established comprising 18 southern and east African states. This was the precursor to COMESA with 11 signatory states. The member states of COMESA include Angola, Burundi, Comoros, Democratic Republic of Congo, Djibouti, Egypt, Eritrea, Ethiopia, Kenya, Libya, Madagascar, Malawi, Mauritius, Rwanda, Seychelles, Sudan, Swaziland, Uganda, Zambia and Zimbabwe. The COMESA treaty was aimed at promoting sustainable growth and development, adopting macroeconomic policies, creating an enabling environment for foreign and domestic investment, promoting peace and security, strengthening relationships between common markets and helping the realization of the objectives of EAC. For these objectives, COMESA drafted a specific undertaking to (a) establish a customs union; (b) adopt a bond guarantee; (c) trade documents and procedures; (d) establish regulations for origin of products; (e) establishing rules for origin of products; (f) grant exemptions for certain provisions. Thus, trade liberalization was sought to be achieved through the liberalization of Air transport services that would facilitate trade. The COMESA air transport liberalization program was to develop complimentary transport and communication policies. This would help the movement of goods and services. The policy framework was in consonance with the Yamoussoukro Decision. Air transportation within COMESA was to be liberalized in two phases where in the first phase free movement of Air cargo and passenger service was introduced along with the introduction. Along with free movement of intra-COMESA passenger service with a frequency of two flights between any city pairs. It also eliminated capacity restrictions and provided fifth freedom rights as prescribed by the Yamoussoukro Decision. The liberalization of air transportation within COMESA was achieved within 1 year of Phase 1 whilst Phase 2 introduced movement of Air transport services within COMESA far beyond the scope of Yamoussoukro Decision. This featured implementation of market access, traffic rights, tariffs and lifting of capacity besides increase in frequency. The implementation of Phase 2 was differed as the COMESA was awaiting competition regulations. Later, the implementation of Phase 2 remained pending for several years where only 12 member states had implemented Phase 1. It was found that besides competition regulations, many other elements were required for the completion of regional air transport liberalization program. These included: • • • • • • •

Adoption of COMESA air transport policy. Implementation of provisions for competition. Creation of joint mechanisms for liberalization. The drafting of memorandum for the legal enforcement of decisions. The drafting of standard mechanism for entry into market. The sensitization of airlines to implement the Yamoussoukro Decision. Drafting of consumer protection regulation.

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• Harmonization of regulatory framework. • Incorporation of all regulations into administrative procedures. Liberalization in Africa is still regulated on a bilateral basis, between members of Yamoussoukro Decision. Therefore, a bilateral solution among COMESA member states provides a solution to the principles of liberalization as agreed in the Yamoussoukro decision. COMESA prepared a specialized competition regulation draft and soon realized that a common regulation was needed for the entire south and east African regions, where the member states belong to a number of RECs. Therefore, COMESA, EAC and SADC adopted a common draft. This included three main provisions under which anti-competitive agreements, limiting markets, providing excessive capacity dividing sources of supply or entering of agreements that put partners at disadvantage. Yet another provision prevents abuse of dominant positions that creates unfair trading conditions. There are provisions to ensure no discrimination takes place among the member states against carriers. Additional provisions are aimed at enforcing joint competition regulations. Finally, it was agreed that COMESA, EAC and SADC would form a joint body for the implementation of the Yamoussoukro Decision. However, over the years the implementation of joint competition regulations remains pending amongst these three bodies. Even after 8 years, the Phase 2 implementation remains a hurdle for the liberalization of air services.

SADC: The Southern African Development Community SADC membership consisted of a group of 15 states of South Africa founded in 1992. Though they never formally agreed for inter-regional liberalization, they worked towards implementation of the YD. They worked to achieve efficient and sustainable growth. Bwire (2018) assesses the status of implementation of the YD in the various RECs (regional economic communities of Africa) and concludes that CEMAC and WAEMU carry the highest implementation score of 5, followed by BAG (4), COMESA and EAC (3) and SADC (2). AMU was rated as having an overall implementation score of only 1 out of 5. The SADC was an initiative to end the colonial white minority rule and the establishment of black majority rule in South Africa. The member states included Angola, Botswana, Lesotho, Mozambique, Tanzania, Zambia and Zimbabwe. Later, Malawi and Swaziland joined the Lusaka declaration to establish the South African Development Coordination Conference. This was aimed to reduce dependency on South Africa. This was later transformed to SADC through the Windhoek declaration. The objectives of SADC were economic growth and overall development. Although the objectives were not well defined, it paved the way for free movement of Capital and goods in the region. Currently, SADC comprises 15 states with headquarters in Botswana. The SADC commits to maintaining human rights democracy and rule of law to ensure equality of member states. The SADC drafted a

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protocol known as the protocol on transport, communication and meteorology. It deals with transport in general along with civil aviation. It sets out the objectives of civil aviation, to provide safe reliable and efficient transportation within member states. The civil aviation policy also aimed at developing regionally owned airlines by restructuring SADC airlines, airports and service providers. The SADC has driven continuously to implement the Yamoussoukro Decision by teaming up with COMESA and EAC. However, the hurdle remains the task of establishing a joint competition authority. Thus, the SADC member states cannot be considered to liberalize air transport in the spirit of the Yamoussoukro Decision.

The East African Community Kenya, Tanzania and Uganda formed the EAC in order to maintain a cooperative regional trade framework. The objective of EAC was to set up an East African common market, a goal that could not be realized because these three countries could not harmonize the external tariffs. The collapse of EAC was triggered by the bankruptcy of East African Airways; a promising example of Regional cooperation was thwarted due to a protectionist mindset of safeguarding national carriers. Later, these countries came together for the creation of the permanent Tripartite Commission for East African Cooperation. EAC was enlarged with Burundi and Rwanda joining in, to create a widening cooperation between partner states to derive greater economic and legal benefits. A common market, a monetary union was set up for the realization of set objectives. The institutional framework that was established contained all the elements for effective implementation of goals. The east African Community’s air transport program consisted of Concrete programs and policies that covered civil aviation and civil air transport among others (ICAO, 2019). The objectives of civil aviation were to facilitate joint air services by adopting common policies for Civil Air transport, liberalize Air traffic rights, harmonize civil aviation rules and regulations, establish upper area control system, coordinate flight schedules of designated carriers, apply ICAO guidelines to determine User charges for scheduled air services and adopt common aircraft standards. This is in consonance with the Yamoussoukro Decision. The EAC continued its work on several key measures prescribed by Yamoussoukro Decision. Whilst the RECs developed regulations, for liberalized air service, the EAC focused on amendments to bilaterals for member states towards full implementation of Yamoussoukro Decision. The EAC worked towards harmonized civil aviation safety and security regulations. These regulations dealt with personnel licensing, training organizations, and airworthiness, instruments and equipment operation of aircraft, air operator administration, commercial operation, rules of air Traffic control and Parachute operations. Thus, EAC, gave a massive thrust to liberalizing and developing air services in conformity with the principles of Yamoussoukro Decision. A fragmented African continent with its heterogeneous economic and political organizations needed a harmonious application of the mechanism of Yamoussoukro

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Decision, in order to fully liberalize air services. This was far too optimistic an expectation given the diversity of interests that govern the administration at large. The complete continent-wide implementation is always going to be fraught with challenges. Whilst the CEMAC has implemented all the necessary legislations to comply with YD, COMESA has achieved progress by its legal instruments for effective liberalization. The EAC has devised an effective strategy to revise Bilaterals in conformity with Yamoussoukro Decision. Of all SADC has achieved least progress. This has been due to South Africa’s reticence. To date, eight African states namely Djibouti, Eritrea, Madagascar, Mauritania, Morocco, Somalia, South Africa and Swaziland remain non-committal to the Yamoussoukro Decision.

Regional Economic Community: The Path Ahead Although it is an acknowledged fact that the RECs of Africa have not fully accomplished the objectives for which they were formed, it is true that they have had their share of success in bringing about a certain synergy needed for economic integration. These regional bodies have been able to articulate their regional policies and contribute to the development of a common strategy to coordinate the economic policies in the region. The creation of the customs union, to bring about cooperation for a free trade area has promoted intra-regional trade. Regional banks have taken shape to fund developmental projects to build infrastructure and to drive the integration process. Efforts have been put in to ensure convertibility of currencies, reduce tariffs, increase exports and promote investments. It is also a fact that political instability has hampered integration of regions. These RECs have worked towards visa relaxations, issues of common travel documents and creation of monetary zones. Yet another reason for the RECs falling short of expectations is due to the various challenges faced by them. The overlapping memberships of the RECs have made it difficult to arrive at a consensus among the member states with differences clouding the goals of integration due to their contradictory policies. As the number of RECs grow the process of coordination and harmonization also becomes a challenge. Funding also is an issue as the members with lesser resources struggle to pay up the subscriptions to keep them on board. The smaller countries in a community are always skeptical of possible hegemony of their bigger partners in accomplishing the larger goals. The fear of uneven gains and losses brings about mutual suspicion in the interactions. Lack of political will is yet another challenge for successful regional integration. Most countries will find it difficult to let go of their control of monetary issues to the RECs. Internal instability and conflicts pose a threat to the peace and security of a region and hamper integration efforts. The political leadership has failed to galvanize support for the overall integration process and thus certain stakeholders may have been left out from the benefits of macroeconomic policy convergence. A possible solution for the long term could be a progressive integration of the RECs after they have achieved their slated regional objectives. Today on the ground

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there seem to be tensions between the RECs consequent to sharp differences between them. Therefore, rationalizing on these differences could help accelerate the process of the continent’s integration. There needs to be a complete harmonization of programs and policies to promote cross-regional cooperation. The structural weaknesses of all the states have to be resolved and the RECs must take up leadership roles in deepening cooperation integration and unity to achieve the continent’s economic integration.

Measures to be Explored for the Aviation Sector For a pan-African integration of the aviation sector, the complexities of the regions with their diverse nature of stakes have had a dampening effect on the pace of liberalization as envisaged by the Yamoussoukro Decision. Therefore, efforts to liberalize air transport need to be fast tracked to bring about an optimal or coherent regulatory framework that would enable the socio-economic integration required to turn the aviation sector around. There needs to be a creation of conducive atmosphere to attract airlines and regain passenger confidence by offering competitive fare structures that would serve as win for all the stakeholders to see a revival of African aviation. Given that the uncertainty of COVID persists with the onset of second and third waves beside the omicron variant further financial measures that can be explored in the African scenario could be sector specific. In terms of economic stimulus, reduction of operational expenses by each sector in the short term could provide financial sustainability. Loans could be made more accessible to the stakeholders by state guarantees with an impetus on providing them at competitive rates. Tax waivers and payment deferrals could sustain liquidity of the airlines. Loan restructuring and repayment deferrals can be extended to those with cash shortages. Across the board, payment of dividends can be put on hold in public entities until the crisis eases. Government can take over some of the direct costs related to health for all stakeholders in order to mitigate the operational expenses. Governments for the purchase and release of aircrafts to undertake fleet enlargement can offer specific support. To the airports, efforts must be centred on looking into their debt refinancing besides providing help for their requisition of protective testing equipment and other facilities to curb the virus. Measures should be to bring in public–private partnership in the medium and long term to look at increasing their revenues to pre-crisis levels through their expansion plans. Emphasis is to be given to infrastructure enhancement in general. Further support is extended to air navigation service providers through charge reductions or payment deferrals for their financial sustainability. With the global economy having to fight the twin battles of the pandemic and the post-COVID recovery it is imperative that the African states, in particular, realize the significance of implication of SAATM so as to accelerate the process of liberalizing their skies’. Airlines operating on low traffic volume should be granted interim traffic rights on an ad hoc basis in an effort to allow countries to maintain regional

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connectivity. Foreign Airlines must be granted the fifth, seventh, eighth and ninth Air Freedom rights. In an effort to accelerate SAATM implementation, the initiatives must avoid states with protectionist measures and financial and technical support must be given to states willing to liberalize and thereby guarantee implementation of the Yamoussoukro Decision. Restrictive visa policies across African countries should be done away with and allowing free movement of people could provide a major boost to post-COVID recovery. Finally, there is a need to create an optimal and coherent framework for personnel certification, remove slot restrictions at congested airports, harmonize regulations to a pan-African level, allow foreign investment review taxation and promote capacity building. Opening borders in a calibrated manner post-COVID, marketing strategies such as promotional campaigns, frequent flyer programs would help boost passenger volumes can build passenger confidence. In the short term, measures should address sustenance of industry and in the medium and long term, there must be structural changes that function as catalysts to post-COVID recovery.

References Adegoke, Y. (2019). How South African Airways ended up in bankruptcy protection. Accessed Jan 22, 2020, from https://qz.com/africa/1762863/how-south-african-airways-ended-up-in-bank ruptcy-protection African Civil Aviation Commission. (2019). Accessed Mar 23, 2021, from http://afcac.org/en/ images/2019/Meetings/July/kigali/afcac_pptx2.pdf African Union. (2008). Air transport liberalisation in Africa: The Yamoussoukro decision process, African Union business elite Africa.com (2020). Startups. Accessed Mar 12, 2021, from https:// businesselitesafrica.com/2020/03/18/nigerias-startup-failure-rate-tops-african-peers-at-61/ Amankwah-Amoah, J. (2018). Cultivating greater self-confidence in African management research. Thunderbird International Business Review, 60(4), 511–522. Button, K. (1989). Liberalizing the Canadian scheduled aviation markets. Fiscal Studies, 8, 1475–5890. Brueckner, J. K., & Spiller, P. T. (1994). Economies traffic density in the deregulated airline industry. Journal of Law and Economics, 37, 379–415. Bwire, S. N. (2018). Assessing the Yamoussoukro decision: Accounting for determinants of air transport liberalization in Africa. USIU Africa. Accessed Feb, 2022, from http://erepo.usiu.ac. ke/11732/4529 Campbell, K. (2014). African airlines face cost and political changes, need international partnerships. Accessed Jan 22, 2020, from http://www.Engineeringnews.co.za/article/African-airlinesfacecost-and political-challenges-and-need-international-partnerships-2011-0429 CAPA. (2019). Kigali Bugusera international airport report. Accessed Mar 18, 2021, from https:// centreforaviation.com/data/profiles/newairports/kigali-bugesera-international-airport CAPA. (2020). World aviation yearbook 2020. Centre of Asia-Pacific Aviation. Daramola, A., & Chioma Jaja, C. (2011). Liberalization and changing spatial configurations in Nigeria’s domestic air transport network. Journal of Transport Geography, 19(6), 1198–1209. Deloitte. (2018). Single African air transport market. Is Africa ready? Accessed Mar 23, 2021, from https://www2.deloitte.com/content/dam/Deloitte/ke/Documents/consumer-business/eaSAATM-aviation-report-2018.pdf

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Smyth, M., & Pearce, B. (2015). Air travel demand: Measuring the responsiveness of air travel demand to changes in prices and incomes. Embry-Riddle Aeronautical University. Steyn, J. N., & Mhlanga, O. (2016). The impact of international air transport agreements on airline operations in Southern Africa. A historical review. African Journal of Hospitality, Tourism and Leisure, 5(2). The Conversation. (2019). How Kenya’s tourism industry has felt the impact of terrorist attacks. Accessed Mar 11, 2021, from https://theconversation.com/how-kenyas-tourism-industry-hasfelt-the-impact-of-terrorist-attacks-110151 Tolcha, T. D., Bråthen, S., & Holmgren, J. (2020). Air transport demand and economic development in sub-Saharan Africa: Direction of causality. Journal of Transport Geography, 86, 102–114. Accessed Feb, 2022, from https://www.sciencedirect.com/science/article/pii/S0 966692319309421 UNECA. (2010). Assessing Regional Integration in Africa IV: Enhancing Intra-African Trade. United Nations Economic Commission for Africa. Uzodima, H. (2012). How foreign airlines take advantage of our market. PUNCH. Online Accessed Jan 22, 2020, from http://punchng.Com/News/BAVirgininvolvedinunethicalpolicies-senate

Chapter 3

Emergence of the Low-Cost Carrier Model in Africa

Keywords Low-cost carriers · Low-cost strategy · Deregulation · Full-service network carriers · Capacity

Introduction The deregulation effects in North America and Europe paved the way for a new breed of airline business model, the low-cost carrier. This model, 30 years on has been replicated across the globe and upsetting the status quo of air transport markets that were traditionally dominated by national flag carriers. This shift in the dynamic of competition created a “new game” in the industry. At times of regulation, airlines competed mainly through services and after deregulation, it was abandoned, although fares fell, service competition though reduced stayed in place. Because of the impossibility of arbitrage (tickets are personal documents) airlines can easily price discriminate and consumers can self-select themselves choosing between different bundles of services attached to a flight.1 However, deregulation had a rapid effect on the industry overall, particularly on the relaxation of entry and exit controls which gave an impetus to the emergence of new additional scheduled service carriers, alliance networks and the rise of LCCs. These “no frills” carriers such as Southwest Airlines, EasyJet and Ryanair offered a new business perspective on air travel by exploiting their advantage of more efficient operating characteristics, 1 All kind of discounts (tourist, student, family fare etc.) are used by the full-service network carriers to capture passengers with some elastic demand or those who can spend more time searching for better price (value-based price sensitive consumers). Thus, price discrimination is used as an instrument of competition. See Holmes (1989) for an explicit formal model of price discrimination under duopoly and Borenstein & Rose (1994) for a quantitative estimate variation of airline fares. In their study they found expected average difference between two passengers’ fares to be 36% of the average ticket price. Measuring price dispersion with Gini coefficient, they found increasing price dispersion on more competitive routes. Two types of price discrimination are also identified in this study: monopoly-type (pricing according to the consumers’ valuation of basic service) and competition type, price discrimination based on consumer valuation of “brands” (reputation, class of an airline and additional service offered).

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 E. Samunderu, African Air Transport Management, Advances in African Economic, Social and Political Development, https://doi.org/10.1007/978-3-031-29324-5_3

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3 Emergence of the Low-Cost Carrier Model in Africa

both indirect costs (such as simplified ticketing services) and direct costs (their more effective aircraft utilization rates). These LCCs were able to offer limited commuter and feeder services on profitable route networks. In Europe, Ryanair and EasyJet, the dominant LCCs, grew their passenger traffic at an average of over 40% per year between 2000 and 2006 (Airline Business, 2019). Southwest Airlines has a considerable share (26.92%) of the total number of passengers carried by all of the top 25 carriers. The increasing role of the LCCs on global markets has further created competitive dynamics, especially on domestic routes. This is because international routes remain generally more regulated than domestic markets and whilst established carriers continue to dominate the international scene and in deregulated domestic contexts, they seem to be losing ground to their low-cost competitors, which tend to use secondary, less congested airports of the major cities. Whether they are called budget, value-based, low cost or no-frills airlines and the truth is that these new carriers have, if not seriously threatened, certainly challenged the pre-deregulation dominance of established flag (Europe) and legacy (US) carriers. By expanding their geographic reach into the Asia-Pacific region (e.g. Air Asia, Freedom Air, Pacific Blue Airlines and Bangkok Air); LCCs have now penetrated all three of the world’s major air transport markets and now Africa. Even though there has been a significant increase in LCCs domestic market penetration the full-service network carrier model still dominates the long haul markets and continues to use the traditional hub and spoke network structure (Alderighi et al., 2004). Network Planning evaluates each component and works with teams to constantly maximize performance. In addition to route forecasting, airline network planning is a continuous process that evaluates the full horizon of an airline’s open schedule. Figure 3.1 illustrates network planning considerations between hub and spoke and point-to-point structures. The operating model of these network carriers in Africa includes South African Airlines, Kenya Airways and Ethiopian Airlines and these carriers have historically dominated African skies. Figure 3.2 illustrates a “typical” airline operating model which consists of three sub-models: revenue production, flight production and support services. In Africa, the liberalization of air transport market has been very slow and the emergence of the LCC model only started to take effect in early 2000. However, despite a slow response to new competitive dynamics, Africa has been bracing itself with new entrants competing on domestic routes. The African air transport market has entered into a critical phase as the continent’s national flag carriers face a new level of competition from the emerging low-cost carriers (LCCs). On a global scale, key air transport regions like North America and Europe have witnessed a successful LCC model. In North America, the pioneering model of low-cost travel was Southwest Airlines and the business model has now been replicated across the globe. In Europe, Ryanair continues to be the leading carrier offering intra-European flights. In the last 20 years, the LCC model has thrived in Europe and other mature markets. Figure 3.3 shows how the LCCs in Europe have increased their share of the market.

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79

Airline operating model – Network Planning: What is it? The primary task of network planning is to find the network structure that best delivers the airline’s overall strategy. There are several basic structures Hub and spoke: Connectivity focus Non-directional hub

Directional hub

Key insights

Continuous hub

ƒ No “perfect network” ƒ Different structures appropriate to specific traffic situations depending on: Flights connect in nondirectional waves / “banks”

Still banked, but directional

– Geography / location of the hub

Large hubs; “debank” but still have great connectivity

– Volumes of local traffic / size of catchment

Point to point: Productivity focus Focus city

– Size of carrier, markets served (long haul/short haul), competition

Join the dots

Shuttle

B1 B2

…

– Operational constraints at airport

B3

–… Mostly out-and-back from focus city

Back-and-forward between two large markets

“Focus city” often providing some onward “flow”

Fig. 3.1 Hub and spoke vs Point-to-point network structure. Source: Author

Revenue production

Flight production

Strategy

Airport Operations

Network & Fleet

Product Design

Crew Management

Scheduling

Advertising Promo & Marketing

Flight Management

Revenue Management

Product & Service Delivery

Sales & Distribution

Loyalty & CRM

Cargo Operations

Maintenance & Repair Operations (MRO)

HR Support services

Finance & Accounting Supply Chain & Procurement IT Legal, Regulatory, Safety & Security, Other Administration

Fig. 3.2 Airline operating model

Although LCCs’ market share in the European aviation industry increased by almost 20% in the last decade, there has been a fierce competitive response by the traditional full-service carriers during this period to sustain their market position. For instance, full-service carriers started to offer some alternative cheaper flight options called budget-economy class. Nevertheless, LCCs have a well-advanced cost-minimization strategy so that they can operate at a much lower expense. In 2019, the average cost per passenger of Ryanair and Wizz Air were 31 and 39 euros,

80

3 0%

5%

10%

15%

20%

Emergence of the Low-Cost Carrier Model in Africa 25%

30%

35%

40%

2020 33.1%

2018

32.8%

2017

35.5%

2016

33.9%

2015

32.2%

2014

29.9%

2013

2011 2010 2009

50%

44.5%

2019

2012

45%

28.2% 27.4% 25.7% 24.8% 23.9%

Fig. 3.3 Market share of low-cost carriers in Europe from 2009 to 2020. Source: Statista, 2020b

respectively. Usually, LCCs operate on a shorter distance, this requires them to have a dispersed airplane fleet across cities rather than having one main hub for all the flights as it is the case for traditional carriers. An example could be that Ryanair had 274 airplanes in Germany in 2020. African markets have also witnessed the emergence of LCCs, with Fastjet leading the charge offering domestic flights to a rising middle-class group. As the number of potential travellers grows, the new low-cost airlines are slowly convincing governments about the benefits of increased air travel. Despite, the increased demand for air travel on the African continent, there have been numerous failed LCCs, which include Velvet Sky, which collapsed in 2012, Fly540 scrapped its flights to destinations like Luanda and Accra sighting financial problems. However, a number of carriers have so far grown and changed the pattern of air travel on the continent (See Table 3.1). Even though Africa has seen an increase in the launch of LCCs, their presence on the continent is still very low in comparison with other regions. Figure 3.4 illustrates this comparison. As of April 2019, the region with the highest in-service low-cost carrier fleet was Asia-Pacific with 1882 aircrafts. The penetration of LCCs’ market share on the African content is still in its infancy and remains a very expensive place to operate an airline due to amongst other things—poor infrastructure, logistics and maintenance challenges, as well as inadequate skilled human resources. The question is whether LCCs can thrive in Africa unlike other markets such as Asia-Pacific, Europe or North America. The underlining impediments are as follows: (a) Lack of alternative and cheaper uncongested secondary airports meaning high fuel burn during delays and not quick enough turnaround times to effectively utilize aircraft.

Introduction

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Table 3.1 Africa’s top low-cost carriers

Carrier Kulula. com

First year of operations 2001

Fastjet

2011

Flyafrica. com Mango

2019

Fleet type Boeing 737–800 Boeing 737–400

Fleet size 20

Embraer 145

4

2006

Boeing 737–800

14

FlySafair

2014

18

Fly540

2006

Boeing 737–800, Boeing 737–400 ATR 42

JamboJet

2014

Bombardier Dash 8-Q400

7

Dana Air

2008

8

Flydubai. com

2008

Boeing 737–300, McDonnell Douglas MD-82, McDonnell Douglas MD-83 Boeing 737–800, Boeing 737 MAX-8, Boeing 737 MAX-9, Boeing 737 MAX-10

*Skywise

2015

Boeing 737

8

54

Destination markets Johannesburg, Cape Town, Durban, Port Elizabeth, Bloemfontein, East London, Windhoek, Harare, Mauritius, Victoria Falls, Livingstone, Nairobi Dar es Salaam, Johannesburg, Entebbe, Harare, Kilimanjaro, Lusaka, Mbeya, Mwanza Johannesburg, Harare, Victoria Falls, Windhoek Johannesburg, Cape Town, Durban, Port Elizabeth, Bloemfontein, George, Zanzibar Johannesburg, Cape Town, Port Elizabeth, George Nairobi, Eldoret, Mombasa, Kisumu, Lamu, Lodwar, Malindi, Juba, Zanzibar Nairobi, Eldoret, Mombasa, Kisumu Lagos, Abuja, Port Harcourt, Uyo

Addis Ababa, Alexandria, Bujumbura, Dar es Salaam, Djibouti, Entebbe, Juba, Khartoum, Kigali, Kilimanjaro, Port Sudan, Zanzibar Johannesburg, Cape Town.

Source: Compiled by Author from company websites

(b) Small flying population hence a lack of passenger volumes to sustain a low-cost model. (c) High Costs charged by Governments (taxes, landing, navigation, handling and other regulatory fees) raise ticket prices. (d) Lack of open skies. Alternative cheaper and uncongested airports have to be supported by road and rail networks to make access for travellers convenient. Considering Africa’s poor transport infrastructure, constructing an inaccessible airport is a waste of time and resources. Further, LCCs can only fly where passengers actually want to travel, which is mostly to primary airports close to urban areas/centres in major cities. In East Africa, for example most domestic flights to secondary airports like Eldoret,

82

3 0

200

400

600

Emergence of the Low-Cost Carrier Model in Africa 800

1,000

1,200

1,400

1,600

1,800

Asia-Pacific

1,882

Europe

1,638

North America

1,434

Latin America

Middle East

Africa

2,000

484

133

78

Fig. 3.4 Low-cost carriers worldwide—in-service fleet by region 2019. Sources: Statista (2019a)

Kisumu, Mombasa, Kilimanjaro and Mwanza originate from and return to primary congested airports—Nairobi (JKIA) and Dar es Salaam (JNIA). This guarantees high operational costs and explains why LCCs in Africa are few in number and have only recently commenced operations, yet secondary airports in the region have been in existence for decades. LCCs in Europe and the USA sell tickets online and accept payments by credit/ debit card to eliminate costs associated with agents and handling/storing/ transporting cash. Unfortunately, majority of Africans view card (plastic money) transactions with suspicion. Further, still the African continent as a whole suffers from low Internet connectivity and computer usage which makes online sales unpopular. Ticket purchases are made by cash transactions with travel agents or airline sales offices. This modus operandi raises operational costs making it unattractive for LCCs. Although the middle class in Africa is steadily growing, the culture of holiday or leisure/adventure is alien to most Africans. Travel by air is limited to “essential matters” like work, business, education and medical treatment. The frequently flown routes indicated are between major cities, not to game parks or holiday resorts. With such a backdrop of constraints, the LCC model may take time to compete effectively with the established full-service network carriers. The LCC market share is still very in comparison with other regions (See Fig. 3.5).

The Low-Cost Carrier Model Over recent years, low-cost carriers (LCCs) demonstrated a strong market performance, adding a crucial market value to the aviation industry and satisfying customers’ preferences. LCCs’ business innovation to achieve high efficiency in terms

The Low-Cost Carrier Model 0% Africa

Middle East

Asia Pacific

North America

Europe

Latin America

5%

83 10%

15%

20%

25%

30%

35%

40%

45%

50%

12.8%

23.5%

32.5%

34.9%

44.5%

45%

Fig. 3.5 Market share of low-cost carriers worldwide in 2020, by region. Sources: Statista, 2019b

of the passenger load factor, competitive cost reduction and organizational structure fulfilled the market demand whilst creating distinctly affordable market possibilities for millions of travellers with a constrained budget. The low-cost carrier model or no-frills carriers follow an entirely different network strategy following US deregulation in 1978, where Southwest Airlines pioneered this. Instead of the long haul, high-yield and transfer markets, they concentrated on high-volume routes by using non-hub and secondary airports and offering very low-priced, no-frills tickets. They preferred serving the O&D city pair markets with a point-to-point network structure than to serving the transfer markets with hub and spoke networks. As a result, LCCs fly short-haul routes, no lounges at airports, no in-flight entertainment, no frequent flyer program, and no seat assignments focus only on point-to-point traffic, one cabin, have a large share of their sale via Internet and call centres. These characteristics define the non-differentiated element of an LCC product that is focused on cost leadership and cost reduction. This kind of operation makes it possible for LCCs to keep their costs low, expand by entering new markets and increase their share of profits. For a whilst after the emergence of the low-cost phenomenon in Europe, incumbents did not see any threat in the competition with them. In Africa, the threat has increased with new LCCs entering the lucrative regional market destinations, with South Africa offering the most attractive landscape for new start-up airlines. However, it seems that the approach has changed since British Airways launched GO in 1998, fares were lowered by some incumbent airlines, and they increased the use of frequent flyer programs (FFPs). Table 3.2 highlights the common characteristics of the LCCs. The LCC market in Africa has been driven by economic and operational elements in the macro environment which has determined the success and failure of many airlines. The liberalization of the African air transport market paved way for the emergence of LCCs in the region, which is predominant in Northern and Southern Africa. Moreover, the privatization of state-owned airlines since the mid-1980s has

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Table 3.2 Common characteristics of the low-cost business model • • • • • • • • • • • • • • • •

Offering a la carte services to create opportunities for ancillary revenues. Point-to-Point network structure. Use of secondary airports. High aircraft utilization. Short to medium routes. Single aircraft fleet. No frills service. Minimum cabin crew. Lower wage scales. Minimized reservation costs. High-density, single-class configuration. Simple fare and pricing structure. E-ticketing to eradicate travel agents and Global Distribution Systems (GDS). No freight. Quick turnaround times. Unreserved seating (or reservation for a fee).

globally been a trend in the airline industry due to deregulation and liberalization in various markets (Amankwah-Amoah & Debrah, 2009). This trend, according to Doganis (2006) eliminated inefficient practices of network carriers depending on state resources to gain a competitive edge in the market. However, government ownership of several airlines in Africa is still in practice, with the presence of a few such as South African Airways, Ethiopian Airlines and Kenya Airways hindering the stable penetration of LCCs in sub-Saharan Africa. Conversely, the major changes in the macro environment have forced some African governments to deregulate their market. For example, the end of apartheid in the early 1990s made the international community to lift sanctions against the country, which revived flights to major destinations in the continent (Mhlanga & Steyn, 2016). Demand for intra-air travel in South Africa prompted the rise of Comair to offer scheduled flights on domestic routes. The carrier operates as a British Airways franchisee and an affiliate member of one world alliance. It also operates as a low-cost carrier under its own kulula.com brand. Its main base is OR Tambo International Airport, Johannesburg, and has focus cities at Cape Town International Airport and King Shaka International Airport. Its headquarters are near OR Tambo in the Bonaero Park area of Kempton. As part of its fleet renewal strategy, Comair ordered eight of these aircraft, with the next arriving in March of 2021 and the last one due for delivery in 2022. It is the first airline in Southern Africa to acquire the 737 MAX 8 and the new aircraft will replace its remaining Boeing 737–400 s. The LCC arm of Comair, kulula.com entered the South African market by modelling the low-cost business strategy after the successful European LCC, easyJet and later extended their network regionally to Windhoek in Namibia, Harare in Zimbabwe and Lusaka in Zambia. Kulula.com’s success ushered other “LCCs” such as 1Time, Mango (a subsidiary of South African Airways), Velvet, Fly540 and Fastjet into the market.

Global Market Leaders

85

Global Market Leaders Low-cost sector carriers have continued to show significant growth on a global scale both in terms of influence and scope. As mentioned earlier in the chapter, Southwest Airlines continues to be the leading player and in 2018, the carrier recorded operating profit of US$3.2 billion, which is the highest of any low-cost carrier (Airline Business, 2019). Table 3.3 shows the world’s biggest ten LLCs by passengers in 2018. The world’s largest budget operators have continued to expand till 2020 when growth slowed down due to the crisis. However, in 2019 passenger seat capacity was also very high and Table 3.4. illustrates the ten biggest LCC groups by capacity (year ending 30 June 2019).

Table 3.3 Ten biggest LCCs by passengers Carrier Southwest Airlines Ryanair Easyjet Indigoa Air Asia Jetblue Airways Eurowings Norwegian Lion Air Wizz Air

Pax (passengers) 163.6 million 137.3 million 88 million 61.8 million 44.4 million 42.1 million 38.5 million 37.3 million 35.5 million 33.8 million

Percentage increase from 2017 3.8% 6.6% 7.8% 25.6% 13.7% 5.3% 18.0% 12.7% 0.5% 19.6%

Source: Airline Business, 2019 Indigo had a 25.6% increase in passenger numbers during 2018 to reach 61.8 million in total, the fastest growth amongst the 10 biggest budget airline groups a

Table 3.4 Ten biggest LCC groups by seat capacity (year ending 30 June 2019) Carrier Southwest Airlines Ryanair Easyjet Indigo Air Asia Groupa JetBlue Airways Lion Airb Norwegian Gol Vueling Airlines a

Seat capacity 211 million 148 million 104 million 83 million 66 million 52 million 51 million 47 million 43 million 40 million

Percentage increase from 2018 2.2% 5.6% 12.1% 25.9% 18.8% 3.2% -6.3% 10.2% 3.9% 6.6%

Includes all AirAsia units and affiliate carriers except those affiliated to AirAsia X Lion Air experienced a drop in seat capacity

b

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Table 3.5 Ten biggest LCCs by revenue 2018 Carrier Southwest Airlines Ryanair EasyJet JetBlue Airways Norwegian Eurowings Indigo West Jet Spirit Airlines Gola

Revenues (US$) $22.0 billion $9.3 billion $7.9 billion $7.7 billion $4.9 billion $4.7 billion $4.3 billion $4.7 billion $3.3 billion $3.1 billion

Percentage increase from 2017 3.8% 9.8% 23.5% 9.0% 31.1% 19.0% 14.4% 4.7% 25.7% -3.1%

Source: Airline Business, 2019 Gol posted a 3.1% drop in revenues from previous year 2017

a

Overall, there was a rise of 9.6% in seat capacity amongst the 20 biggest budget airline groups for the year to 30 June 2019. From a revenue perspective, in 2018 Southwest Airlines ranked first again indicating a strong and sustainable business model. This is illustrated in Table 3.5. Overall, in 2018 the ten biggest LCCs had an estimated 10.8% increase in revenue.

Low-Cost Carriers in Africa and the Middle East Interestingly, none of the top ten LCCs are from Africa or even the Middle East. It has been nearly two decades since the LCCs began to penetrate the Middle East and African markets. Comair had the first mover advantage when it launched its budget brand Kulula.com in 2001 and Air Arabia was the pioneer in the Middle East launching operations in 2003. Whilst the LCC sector in the Middle East and Africa has since expanded, the LCC model has hardly proliferated in the way that it has in other regions. There are only 200 aircrafts currently operated by LCCs based in the Middle East and Africa (CAPA, 2019). This indicates that LCC market makes up only a small proportion of the total aviation sector. Most of the LCCs are small and the main players are concentrated in three markets: Saudi Arabia, South Africa and the United Arab Emirates. LCC growth seems inevitable, but overcoming challenges particularly in Africa’s highly protective aviation market will prove to be complex even though African countries are pushing the open skies market liberalization. Another major challenge that has undermined African LCCs market, is the combined fleet size of 69 aircrafts and in the Middle East the LCC has a fleet of 132 aircraft in service (CAPA, 2019). None of the carriers operate widebody and all the LCCs operate narrowbodies (A320s and 737 s). In Africa of the 69 LCC aircrafts, 53 are narrow bodies and 16 are regional aircraft (turboprops and regional jets).

LCC Growth in Africa

87

Table 3.6 Middle East and Africa LCCs ranked by fleet size 2019 Rank 1 2 3 4 5 6 7 8 9 10 11 12 13 14

Carrier flydubai Air Arabia flynas FlySafair flyadeal Air Arabai Maroc Kululaa Mango Fly540 FlyEgypt Jambojet SalamAir Air Arabia Egypt fastjet Zimbabwec

Year launched 2009 2003 2007 2014 2017 2009 2001 2006 2006 2016 2014 2017 2010 2015

Country UAE UAE Saudi Arabia South Africa Morocco South Africa South Africa Kenya Egypt Kenya Kenya Oman Egypt Zimbabwe

Fleet size 47 40 30 13 11 10 10 10 8 7 6 4 3 2

Notes Kulula is a low-cost brand under Comair, which also operates as a British Airways branded fullservice franchise operation; only Comair’s aircraft in the Kulula livery and configuration are included in this table. b fastjet was established as a pan-Africa LCC group an initially launched in Tanzania in 2012, but fastjet Tanzania suspended operations in late 20,218. The group’s affiliate in Zimbabwe, which launched in 2015, is still operating, and fastjet still operates services in Mozambique using a wet-leased aircraft (not included in this table). c FlyEgypt launched in 2015 but initially operated as a charter airline, then began scheduled services under an LCC model in 2016. Source: CAPA (2019) a

The Middle East and Africa combined account for only 3% of the global LCC in-service fleet. Africa and the Middle East are relatively small regions, but they are clearly showing some traction compared to other regions when it comes to LCC development. There is certainly an opportunity for the LCC model in Africa and incumbent carriers will need to increase fleet size to accommodate the projected growth of passenger demand in the future. Below, shows the current ranking of the Middle East and Africa LCCs ranking by fleet size (number of aircraft in service) as of 2019 (Table 3.6).

LCC Growth in Africa The LCC landscape outside South Africa is very limited and South Africa accounts for approximately half of the South African LCC fleet. The South African portion of intra-Africa LCC capacity is much larger (over 80%) because half of the African LCC fleet outside South Africa consists of small regional aircraft and the other half consists of narrowbody aircraft that are used primarily for routes to other regions

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Fig. 3.6 Intra-Africa LCC and FSNC annual seat capacity: 2009–2018. Source: CAPA (2019)

mainly Europe and the Middle East. South Africa accounts for approximately 250,000 weekly LCC seats in its domestic market and the in the rest of intraAfrica market there are less than 50,000 weekly seats (CAPA, 2019). South Africa’s domestic market has a 60% LCC penetration rate and the LCC overall penetration for overall intra-Africa market is approximately 13%. This is a very small figure for the regional market that is generally within the narrowbody range. Figure 3.6 illustrates the growth of the LCC model in Africa, which now accounts for 12% of the total seat capacity. If one has to compare it with Europe, the picture is very different. Europe has the world’s highest short-haul LCC penetration rate, but growth is slower than most of the other regions due to the fact that it is already in its maturity phase. The LCCs accounted for 41% of seats in the same year (2018) as African carriers and the overall capacity has increased by 78% in the last decade. Although the LCC still faces regulatory barriers in Africa, the potential to increase penetration is and a possible cross-border LCC model could be a viable option to challenge the existing FSNCs. Given that most of the individual markets do not have the scale to support individual airlines, forging strategic collaboration to establish a pan-African LCC model could also prove to be a viable market entry option. However, attempts by fastjet and now defunct flyafrica.com to establish a group of LCCs in Africa failed to gain support due to conflicting vested interests and the vagaries of the bilateral regulatory structure. Until there are fundamental changes in the regulatory environment, the LCC model penetration in Africa will continue to face obstacles and may not be able to achieve its full potential.

Low-Cost Strategy Like the full-service carrier model, the low-cost business model creates a network structure that can promote connectivity but in contrast trades off lower levels of service, measured both in capacity and frequency against lower fares. This has

Low-Cost Strategy

89

become widely coined as “no frills” network model. The LCCs have positioned themselves as market builders by creating the point-to-point service in markets where it could not be warranted previously due to lower traffic volumes at higher full carrier service fares. The LCC studies (Franke, 2004) have shown that they have a much larger potential passenger catchment area than the full-service carriers. The catchment area is defined as the geographic region surrounding an airport from which passengers are derived. Whilst full-service carriers rely on hub and spoke networks to create catchments, LCCs create incentives for each customer to create their own spoke to the point of departure. These value-based airlines tend to exhibit common product and process design characteristics that enable them to operate at a much lower cost per unit output. It is important to note that the key to cost analysis is to go beyond mechanistic and purely empirical approaches such as the experience curve and probe into factors that determine a firm’s cost position. Thus, the experience curve combines four sources of cost reduction: economies of scale, economies of learning, improved process technology and process design and improved product design. These are determined as cost drivers. On the demand side, the LCC model has created a unique proposition through product and process design that enables the carrier to eliminate or “unbundle” certain service features in exchange for a lower fare. These service features include: less frequency, no meals, no free or any alcoholic drink beverages, more passenger per flight attendant, no lounge, no interlining or code sharing, electronic tickets, no pre-assignment seating and less leg room. Furthermore, one of the primary forms of process design savings, is the planning on point-to-point city pair flights focusing on the local origin and destination market rather than developing a hub system (connecting nodes). In practice, therefore, flights are scheduled without connections and stops in other cities. This could also be considered as product design because the passenger will travel directly (point-to-point) to their destination rather than through a hub. Therefore, there are substantial consumer welfare benefits in terms of lower prices and less congestion and time input during transfers. Another cost advantage associated with this model, is that rather than having a bank of flights arriving at the same time, the LCC spread out staffing, ground handling, maintenance, food service, bridge and gate requirements at each airport to achieve cost savings. Another cost driver is associated with organization design and culture of the company. Many LCCs start-ups have attempted to replicate the model, as closely as possible. The most difficult part has been to replicate the organization and design and culture. It should be noted that this value-based carrier model is not generic. Different LCCs do different things and like all businesses we see a continual evolution and redefinition, migration of the model. The most noticeable strategy for LCCs focuses on the homogeneous fleet type (mostly Boeing 737, but this is changing, for example Jet Blue with A320). The advantages of a common fleet include: lower maintenance costs, parts, suppliers even safety cards purchased in one model for the entire fleet. Training costs are reduced with only one type of fleet; therefore, economies of density can be achieved in training.

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The choice of airports used by the LCCs can also be viewed as another source of cost savings. These carriers tend to focus on secondary airports that have excess capacity and are willing to forego some airside revenues in exchange for non-airside revenues that are developed as a result of the traffic stimulated by LCC. According to Porter (1996), low fares cannot be sustained unless an airline maximizes its operational efficiency. In other words, the airline has to perform similar activities to that of competitors at a substantially lower cost base than rivals. Therefore, the LCC model revolves around the strict adherence to cost-cutting strategies, facilitated by simplicity of the product and delivery process design in order to become a price leader in the markets the airline serves. To achieve these operational cost reductions, LCCs generally operate a single aircraft type, outsource operations, unbundle fares and use secondary airports. Unlike full-service network carriers, the LCC model is extremely lean and agile. Cost savings in service arise from the operation of a no-frills one-class cabin service. In other words, no additional services such as food and beverages are included in the ticket price, which, combined with extensive use of service outsourcing, leads to significant service cost savings. In this context, ancillary revenues become highly important for low-cost airlines as additional products and services are sold onboard and on the website, which includes in its simplest form check-in baggage and credit card payment fees, and, in a more advanced form, the cross-sell of hotel accommodation, car rental or travel insurances. Operational savings arise from short-haul point-to-point services and the operation of a young and homogenous fleet of medium-sized aircraft, which results in a reduction of fuel, maintenance, repair, labour, overhead and—if buying aircraft in bulk—capital costs. A higher seating density and higher daily aircraft utilization lead to further operational cost advantages. The seat pitch of an LCC is usually 28 inches, compared to a conventional economy class pitch of 32 inches, thus increasing the maximum capacity of each flight. Overall, low-fare airlines should be able to operate at seat costs that are only 40–50% of those of a full-service carrier. Combined with a significant load factor differential and lower distribution costs, an LCC’s cost per passenger can, thus, drop to about one-third of that of a full-service operator. Hence, cost savings arise from lower unit costs in all categories, as fixed costs can be spread over more seats and passengers. Moreover, the effective capacity use of most low-cost airlines is a direct result of efficient airport operations. As LCCs typically do not require the same extent of airport services their full-service competitors need, they have sought out secondary or regional airports as their preferred airfields, which further reduces ground times and delays. Thus, lower operating costs coupled with a higher seating density and higher load factors permit LCCs to offer fares up to 50–70% lower than those of incumbents do. Overhead savings, on the other hand, stem from direct distribution through Internet sales and very limited marketing efforts. On the sales and demand side, LCCs typically implement a very dynamic pricing policy with heavy discounts for

Structural Challenges to the Low-Cost Carrier Model in Africa

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tickets booked long in advance, which leads to the stimulation of latent demand from low-yield passengers who would not have flown otherwise.

Structural Challenges to the Low-Cost Carrier Model in Africa The advent of LCCs in sub-Saharan Africa has contributed to the substantial increase in passenger numbers on yearly basis, and its business strategy is to ease travel, especially for the low-income and middle-class earners. Nonetheless, pre-existing challenges such as intra-African air service restrictions have hindered a free flow of these benefits within the region. According to African Airlines Association (AFRAA, 2016), the operational and infrastructural challenges such as staggering expense of carrier activities, high taxes and charges, infrastructure Constraints, slow pace of liberalization of African skies, and the existence of non-physical hindrances to air travel are massively affecting the stable presence of “LCCs” in the region. Additionally, the acceleration of new market entry in Africa “despite the market consolidation of major airlines” have doubled African airlines operating within the continent (Njoya, 2016). Nonetheless, the rapid of LCCs in Africa, is a result of many of the carriers establishing multiple subsidiaries to avoid the challenges of traffic rights. There are about 10 African LCCs outside South Africa which still accounts for less than 3% of capacity within the regional international market in Africa. Other parts of sub-Saharan Africa such as Kenya, Tanzania and Zimbabwe can only boost at least one LCC. Furthermore, the number of challenges in African aviation has a greater impact on “LCCs” than network carriers due to non-physical barriers such as inadequate infrastructure to accommodate LCCs, low Internet penetration, lack of skillset in the macro environment, high landing and navigation charges, high taxes, visa requirements limiting business travel and restrictive market access. Since LCCs require the use of secondary airports which are less congested and have lower aeronautical costs, in Europe they have benefited from the choice of these airports such as London Stanstead or Frankfurt-Hahn. But, in Africa few low-cost airport alternatives exist, instead all airlines must operate out from the same airports as their legacy carriers. The aviation industry operates like a fiscal regime. According to ICAO regulations, fuel, which represents at least 24.7% of African airlines’ operational costs, should not be taxable. However, many other specific taxes and fees are applied to passengers. These surcharges include the following: (a) Sub-regional departures taxes and fees. A number of African countries have adopted preferential tax and fee rates regimes levied on passengers travelling from member state countries. For example, the

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Economic Community of West African States (ECOWAS) and Economic Community of Central African States (CEMAC) have adopted this tax and fee regime. Various groups of countries in Africa have adopted preferential taxes and fee rates for travel amongst their members. ECOWAS and CEMAC are examples. According to AFRAA (2020), preferential taxation collection generated average taxes in the amount of USD 57.6, which is lower compared to non-regional travel. Some countries have very low regional departure rates and these include: Khartoum $8.2; Lubombo $7.2; Tripoli $4.3; Maseru $3.3 and the ones with high rates of over $100 USD include: Niamey $162.7; Monrovia $145.0, Bissau $137.9; Dakar $116.9; Douala $115.6; Bangui $111.2 and Freetown $109.0. All airlines in Africa face significant government-imposed charges. For comparison, the UK’s Air Passenger Duty (APD) ranges between $16 and $97 for flights less than 2000mi, depending on the class of service. Although the fees aren’t drastically different, one has to note that the UK has a gross domestic product per capita, adjusted for purchasing power parity, ten times that of sub-Saharan Africa. (b) International departures taxes and fees. For non-regional travels, the passenger pay on average 3.4 different taxes and fees at departure, representing an average amount of USD 64. Out of 53 airports, 10 charge passengers above USD 100. Furthermore, 32 which is more than half, charge the passenger above USD 50. According to a 2013 African Airlines Association (AFRAA) and ICAO publication, African airport charges are generally much higher than the global average. Indeed, more than 12 major African airports charged at least US$10 more per passenger than Europe’s second most expensive airport at the time, Frankfurt. Apart from passenger taxes that are levied directly on the ticket, airlines have to face many other charges related to their operations at the airport level. Some of them are listed below: Landing - Noise - Parking - Common User Terminal Equipment (CUTE) - Jetway charge Passenger bus - Lighting - Counter - Fire fighting and prevention - Check-in - Ground Power Unit - Ground Handling - Follow-me - Hangar - Housing - Terminal - Towing and push-back

Mogadishu is the most expensive airport for airline charges, with more than USD 2000 for an international flight, whilst a busy airport like Algiers charges USD 158 in the same conditions. This reflects the high excessive charges the African governments levy exorbitant charges on the air transport supply chain resulting in airlines overcharging passengers on airfares. Thus, a reduction in taxes, fees and other charges will ensure that air travel in Africa becomes affordable and will subsequently increase air traffic growth rates. Reducing airfare prices will also stimulate demand for passenger seats resulting in an increased level of growth of air services on the continent. Such market adjustments will further enhance the competitive dynamics in Africa, enabling the local carriers to compete against the international carriers in particular on regional routes.

Structural Challenges to the Low-Cost Carrier Model in Africa

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High fixed operational costs stemming from airport levies, fuel charges and government-imposed taxes, eliminate many of the cost advantages inherent to the LCC model. Whilst we have seen successful low-cost carriers in Europe, Asia and North America, the African continent is still lagging behind the rest of the mature aviation markets. The reason can be underlined by national government protectionist policies that tend to shelter national carriers from competition, low rates of financial inclusion, limited purchasing power due to excessive airfare prices at regional level. Literature often questions fuel hedging’s economic sense for airlines, or if hedging instruments (derivatives) even positively affect their financial performance at all. There is only one thing that is clear: fuel costs remain to be a huge chunk of an airline’s overall expenses, and a sharp and disruptive swing in prices will have a dramatic effect on its financial health (See Fig. 3.6). African airlines face fixed and variable costs that are much higher than those of similar-sized airlines in other world regions. Higher operating costs, with aeronautical charges and fuel costs amongst the most expensive in the world make it especially for low-cost airlines a difficult task to hold on to their lean business strategy. Due to the geographic location of most African countries, fuel needs to be transported by road over long distances, which in turn pushes up prices considerably (Chingosho, 2009). This is especially the case for landlocked countries such as Uganda and Rwanda. Additionally, the small market sizes do not allow fuel companies to benefit from economies of scale, which is why they have to spread costs over relatively low fuel sales volumes and fewer customers, which in turn drives up costs. The small size of African carriers translates furthermore into a distinct lack of bargaining power with large fuel companies (Chingosho, 2009). Most African airlines also do not employ fuel price risk management and hedging techniques, which exposes them to unpredictable volatilities in the fuel price. Additionally, high taxes on jet fuel make it on an average of 21% more expensive for African airlines to buy jet fuel than for airlines elsewhere in the world (See Fig. 3.7). Fuel remains one of the core cost factors affecting airline operations and constitutes almost 20% of airline’s cost structure (Samunderu, 2019). To mitigate risks of fuel spikes, airlines adopt hedging strategies. Hedging strategy varies from airline to airline, but most of them hedge for a 1-year term (short-term contract). Rising oil prices pose a big problem for the airlines for it is difficult to pass on the extra cost to the passengers because of high competition and the fact that most tickets are bought well in advance when the ticket price does not reflect the actual fuel price at the time of flight. Financial promise for fuel hedging airlines varies differently, mostly according to the year being hedged. Morrell and Swan (2006) state that airlines have three options to minimize their exposure regarding fuel price volatility. Besides passing on costs to the passengers’ airlines could aim for an increase in fuel efficiency as well as jet fuel hedging via the physical or derivative market. Concerning the issue of fuel efficiency, it is dependent on several factors. The most crucial factor relates to the improvement of aircraft engineering. However, the renewal of the aircraft fleet is highly capital intensive and is additionally related to massive sunk costs in terms of disposal costs of old aircrafts

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3 0%

5%

10%

Emergence of the Low-Cost Carrier Model in Africa 15%

20%

2021** 2020*

2015 2014

23.5% 23.5% 19.8% 19.1% 24.1% 29.2%

2013

32%

2012 2011

35%

19.7%

2018

2016

30%

16.4%

2019

2017

25%

32.3% 29.8%

Fig. 3.7 Share of fuel costs in the aviation industry 2011–2020. Source: IATA (2021)

or maintenance costs of additional ones. Even though leasing of aircrafts might be a further option as it is not as capital intensive, the principle of sunk costs still applies (Samunderu, 2019). Furthermore, the procedure of operations and in particular regarding the infrastructure and operational procedures at airports result in additional inefficiencies, which account for nearly 5% of extra fuel burn (IATA Economics 2017: 4). Besides long-term supply contracts with major oil firms, which include clauses concerning price adjustment in line with world market price movements, the risk exposure can be minimized through future or forward contracts as well as derivative instruments considering options, swaps and collars. Here, the choice in the type of hedging product depends on the airline and its risk averseness. On the African continent, fuel costs are significantly higher than industry averages. The difference with world price international average can be as much as twofold in price per unit and this trend has continued to affect the African airlines. Since the LCC business model necessitates a sustained downward pressure on operational costs, fluctuating and volatile jet fuel prices tend to undermine the model. High fixed operational costs stemming from airport levies, fuel charges and government-imposed taxes, eliminate many of the cost advantages inherent to the LCC model. Furthermore, the number of challenges in African aviation has a greater impact on LCCs than network carriers due to non-physical barriers such as inadequate infrastructure to accommodate LCCs, low internet penetration, lack of skillset in the macro environment, high landing and navigation charges, high taxes, visa requirements limiting business travel and restrictive market access.

GDP Development

95

East African Air Transport Market To understand the potential for growth of air transport in East Africa it is important to develop a picture of the regions’ main economic and social characteristics. The high concentration of air transport development in a few regions is a reflection of the region’s concentrated economies and populations in those regions: Political and economic instabilities have kept East Africa long behind other emerging regions throughout the world in developing the necessary infrastructure and services needed to facilitate a healthy economic growth. One of these is air transportation, which growth has been hindered by a lack of financial investments in the overall infrastructure as well as artificially high fares resulting in low demand levels. Nonetheless, the last years have seen many positive aviation developments both within East Africa and intra-African. There is a partial alignment of the size of the population, economy and the air transport industry in East Africa. Strong intraAfrican traffic growth was primarily facilitated through a booming economy, enhanced living standards and a tourism industry that is developing as one of the fastest in the world which has furthermore brought about the development of new and more competitive airline business models, such as just recently, the low-cost model.

GDP Development The correlation between air travel and Gross Domestic Product (GDP) in the aviation industry (Ishutkina & Hansman, 2009) cannot be overemphasized enough. According to Ishutkina and Hansman (2009), the aviation industry impacts the economy by providing job opportunities and empowering market accessibility, people connection, capital investment, knowledge acquisition, skill development, the supply of labour and resources. The authors stressed that these impacts occur at the macro level and define the relationship between economic impacts and income produced by economic activities. Regardless of world region, the principal driver behind air traffic demand is economic development and as national income rises, so does demand for air travel. Historically air travel demand has grown in the range of 1.5–2.0 times the long-term growth rate in GDP. As GDP per capita increases, the number of air trips taken in that country also rises. In East Africa, this relationship is clearly visible with middleincome Kenyans taking substantially more trips than lower-level income Ugandans. During the last 10 years sub-Saharan Africa has, furthermore, seen sustained growth in GDP in most countries. After sluggish and uneven growth marked by significant internal and external turmoil, the period since 1996 has seen real GDP grow consistently over 3% per annum in sub-Saharan Africa and contracted in 2020 as a result of the COVID-19 pandemic. This is illustrated in Fig. 3.8 and 3.9.

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GDP growth compared to previous year

5.0% 4.03% 4.0%

3.09% 3.27% 3.15%

3.22%

4.41% 4.38% 4.35%

3.08%

3.0% 2.0%

1.5%

1.0% 0.0% -1.0% -2.0% -3.0% -3.04% -4.0% 2015

2016

2017

2018

2019

2020* 2021* 2022* 2023* 2024* 2025*

Fig. 3.8 Gross domestic product (GDP) growth rate in sub-Saharan Africa 2025

5.0%

4.41%

4.38%

4.35%

2023*

2024*

2025*

GDP growth compared to previous year

4.03% 4.0%

3.22%

3.09%

3.27%

3.15%

3.08%

3.0% 1.5%

2.0% 1.0% 0.0% -1.0% -2.0%

-3.04% -3.0% -4.0% 2015

2016

2017

2018

2019

2020*

2021*

2022*

Fig. 3.9 Sub-Saharan Africa: Growth rate of real gross domestic product (GDP) from 2015 to 2025 (compared to the previous year)

The statistic shows the growth in real GDP in sub-Saharan Africa from 2015 to 2019, with projections up until 2025. Sub-Saharan Africa is the area of the African continent south of the Sahara and includes almost all African countries located there. In 2019, the real gross domestic product in sub-Saharan Africa grew by around 3.15% compared to the previous year. Whilst commodity price increases and resulting enhancement of balance of trade position explain growth in some countries, deeper improvements in governance and sound macro-fiscal policies have been instrumental in raising growth levels across the East African Community.

Foreign Trade and Investment

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6% 5.5% 5.1%

5.1%

5% 4.3% 4%

Growth rate

4% 3.1% 3%

2.7% 2.4%

2%

1%

0% Africa

Lan America

Asia Pacific

Middle East

World

Europe

North America

Russia and Central Asia

Fig. 3.10 Air traffic—passenger growth rates forecast 2020–2039. Source: Statista, 2020a

Africa is increasingly being recognized as a global growth pole, whilst the International Monetary Fund (IMF) predicts that over the next 5 years, seven of the world’s ten fastest-growing economies will be in Africa. Figure 3.5 depicts the projected annual growth rates for passenger and cargo air traffic from 2020 to 2039, broken down by region. By 2039, revenue passenger kilometres in Africa are expected to grow by 5.5%. Figure 3.10 depicts the projected annual growth rates for passenger and cargo air traffic from 2020 to 2039, broken down by region. By 2039, revenue passenger kilometres in Africa are expected to grow by 5.5%. Forecast—passenger and air cargo traffic. As a result of increasingly affordable flight rates and cheaper oil prices, passenger and cargo air traffic are estimated to grow substantially through 2039. Africa is the region where passenger air traffic is expected to experience the highest growth rate (Flight Global, 2019). Between 2020 and 2039, the airline industry is projected to increase its carriers’ revenue passenger kilometres by about 4%. Commercial airlines stand to greatly benefit from the increased passenger demand in global air traffic. In 2019, there was a 4.2% growth in global air traffic-passenger demand. In the same year, commercial airlines worldwide generated combined revenue of 838 billion US dollars.

Foreign Trade and Investment Similar to GDP development, East Africa’s international trade has grown rapidly since the countries gained independence and the economic as well as political situation improved.

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Emergence of the Low-Cost Carrier Model in Africa 6

8

10

12

Morocco South Africa

10.23

Tunisia

9.43

Zimbabwe

2.29

Mauritius

1.38

Togo

0.88

Cabo Verde Reunion Madagascar Seychelles Niger Guinea-Bissau

14 12.93

0.76 0.53 0.38 0.38 0.19 0.05

Fig. 3.11 African countries with the largest number of international tourist arrivals in 2019. Source: UNWTO, 2020

The region’s international trade has witnessed a strong growth in the last decade, especially after the re-establishment of the EAC in 2000 gained momentum. Kenya’s “National Export Strategy” between 2003 and 2007 furthermore stimulated and expanded export trade in the years following its implementation. The trade facilitation project liberalized trade flows and made Kenya a preferred business destination. Figure 3.11 illustrates selected African countries with the largest number of international tourist arrivals in 2019 (in millions). The North-African nation of Morocco ranked first amongst the African countries with the most international tourist arrivals, accounting for 12.93 million arrivals in 2019. Following in second place was South Africa, which received around 10.23 million arrivals. The low-cost carrier model might, in theory, be thought ideal for the African growth environment due to the beneficial socio-demographic developments and a high tourism growth, local market characteristics, political and regulatory intervention and external competition have all presented tough challenges for new operators of this model. Moreover, a host of additional challenges that their counterparts face around the globe, make it even more difficult to operate a truly low-cost model. The protection of South Africa’s national carrier has hampered price competition in the South African domestic market. This also reflects the protectionism power possessed by state-owned carriers over other airlines. However, the enormous potential possessed by the continent can only be unleashed only if government intrusions can be eliminated by fully liberalizing the market regionally.

Demand and Supply Patterns

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Demand and Supply Patterns As African economies continue to develop, the propensity to travel is growing which gives increasing opportunities for new and existing carriers to grow their traffic. Thus, it is not surprising that all leading aviation forecasters project African aviation to grow at annual rates of five or more percent. Although still relatively immature by global standards, with only 10% of Africans travelling by air, African aviation has seen impressive growth rates over the last decade facilitated by the rapid economic growth of especially the East African sub-region and an emerging middle class in many countries. Perhaps more noteworthy is that the growth in air transportation in Africa is expected to come from demand in intra-African connectivity, as the region’s economies are more intertwined with each other, which shows potential for intra-African carrier operations. Over the past 5 years, regional air traffic in Africa has grown at an average rate of 30% (ICAO, 2013). The strongest growth in seats supplied to Africa has actually come from intercontinental markets, which connect Africa to other world regions: The lack of sufficient air transportation supply hinders not only the economic development of the region but also cannot cater adequately to the strong demand growth. Again, having the world’s lowest annual available seat kilometres (ASKs), the continent lacks satisfactory air transport networks and availability of flight connections, which are far behind other developing regions. It is not surprising that, given stronger passenger growth and a comparative lack of growth in air transport supply, fares have risen in Africa at a time when they have fallen elsewhere in the world. Higher than average airfares in Africa compared to the rest of the world are a consequence of the general lack of competition from strong airlines on intercontinental routes as well as the income inequalities across African populations, thus, resulting in very low natural demand levels. Travelling on routes within the continent is considerably more expensive per mile flown than intercontinental flights. This is especially prevalent on routes of less than 4000 kilometres and is a reflection of the larger intercontinental markets at higher competitiveness (Chingosho, 2009). Domestic pricing within African countries is most likely skewed by subsidized or fixed pricing on routes, which keeps fares artificially high (Schlumberger, 2010). Low-cost carriers, who are expected to play an increasingly important role in the coming years, could cause a significant reduction in yield in the market. An African consumer still pays almost 50% more on a ticket than his counterpart in Latin America for a flight of around 3000 km (Chingosho, 2009). Both the lack of available alternatives in terms of substitutes or competing airlines and the wealth of those travelling is reflected in the continent’s lower than average price elasticity of demand. Elasticity of demand is for both business and leisure travellers the lowest in the world. This means that demand for either is not affected by a rise in prices, which is mostly due to limited capacity in most markets on the continent.

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Passenger load factor

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Emergence of the Low-Cost Carrier Model in Africa

81.6% 82% 79.8% 80% 80.5%80.5% 78.9%78.7%79.5%

82.6% 82%

77.3% 76.3% 76.3%76.4% 75.2%

75% 70% 65% 60.3% 59.5%

60% 55%

Fig. 3.12 Passenger load factor of commercial airlines worldwide from 2005 to 2021. Source: Statista, 2021

A further reflection of the lower than average demand on intra-continental routes can be found in the continent’s overall low load factors. Chingosho (2009) argues, “because of the low marginal costs of carrying additional traffic, load factors are a critical determinant of profitability. However, load factors for African airlines are generally low compared with the rest of the world”. The combined passenger load factor of global airlines has been gradually trending upwards over the last 15 years; from 75.2% in 2005, in 2019 the passenger load factor was around 82.6%. However, in 2020, due to the coronavirus pandemic, the passenger load factor dropped to below 60% (Statista, 2021). Passenger load factor (PLF) is a measure of how much of an airline’s passenger carrying capacity has been utilized. It is calculated by dividing the revenue passenger kilometres, which is the total number of kilometres flown by passengers, by the available seat kilometres, which is the total number of kilometres flown for every seat in an aircraft (regardless of whether it has been filled or not). A higher passenger load factor, therefore, means that there are fewer empty seats on each aircraft, but does not indicate anything about changes in the total number of kilometres flown per passenger or per seat (Fig. 3.12). In North Africa, countries like Tunisia, Egypt and Morocco benefit significantly from tourism flows. Figure 3.13 shows a forecast of the estimated tourism sector GDP share in Northern Africa until 2025. It is projected to reach 9.8% by 2025. The forecast has been adjusted for the expected impact of COVID-19. With such a high projection the need for a viable air transport network system in the region has become vital.

Infrastructure 10.5

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10.03

9.77

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8.9

Share of GDP in percent

8.5

8.89

8.66

8.54

8.52 7.97

7.88 7.57

7.36 7.5

7.01 6.51

6.5 5.46 5.5 4.43 4.5 3.5 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

Fig. 3.13 Tourism sector GDP share forecast in Northern Africa 2010–2025. Source: Statista, 2020b Fig. 3.14 Cost comparison of daytime landing charges for aircraft over 200 tonnes, 2013 (compiled by the author based on IATA)

Infrastructure In the case of East Africa, several key infrastructure constraints make it difficult for airlines, and especially those trying to adopt the low-cost model to the market, to run with operational ease. Poor infrastructure of most East African airports is seen as a principal reason why the region continues to struggle to fulfil its undoubtedly economic potential. These infrastructure problems can hardly be solved due to limited financial resources and will therefore consequently lead to retaining infrastructure problems. In Tanzania, for example only 5 of 26 civil airports can accommodate an Airbus A319 or similar-sized aircraft. In Kenya, this number is five out of 52, in Rwanda one out of eight, and in Uganda two out of 32 civil airports. In East Africa, service providers in this sector are—with the exception of Kenya and Tanzania—government-owned monopolies. Despite poor service, this implies charges significantly higher than the world average. Moreover, Africa also shows a substantial lack of secondary airports, putting an additional burden on low-cost airlines due to higher costs at main gateways. Figure 3.14 highlights daytime landing charges for aircraft over 200 tonnes at the considered African airports and in

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comparison to London Heathrow (LHR), one of the busiest and most capacityconstrained and, thus, most expensive European gateways, and London Stansted (STN), an airport that is mostly served by low-cost carriers.

Financing and Aircraft Leasing Besides higher fuel costs, African airlines have to pay more to lease planes than carriers in other regions. Insurance costs for African carriers can also be stratospheric due to the poor safety record of most airlines. Aircraft and insurance costs make up nearly a quarter of the total costs incurred. The main benefit of leasing is that it allows an airline to deploy new aircraft quickly—a new order from an aircraft manufacturer (OEMs) such as Boeing, Bombardier or Airbus would likely take years to be delivered, whereas leasing companies already own the aircraft, meaning they can be deployed in a matter of months. In 2017, there were nearly 10,000 leased aircraft globally and leasing accounted for 17% of all new aircraft financing. It is estimated that the aircraft leasing market will be worth 473.6 billion US dollars in 2026 (Flight Global, 2019). Prior to the global pandemic, demand for leased aircraft was very good and there was a significant amount of liquidity. Well-capitalized, strong leasing companies with strong financial backers have been able to weather the storm during the tough times. This will possibly push weaker players out of the market and we can expect industry consolidation at some stage. During 2020–21 at the peak of the corona crisis, most airlines were resorting to strategies that protected cash and generate liquidity and that meant the leaseback market (or purchase and leaseback from lessors´ perspective) has become increasingly active. In 2020 alone, 150 such deals were done. These deals drove a marginal increase in operating leasing penetration, from 47.3% at the start of 2020 to the 47.5% seen today. Some 51 of those purchase and leaseback deals have been new aircraft acquired on delivery. In addition, lessors have accepted 57 new aircraft directly from their own OEM backlog (Flight Global, 2019). The total value of top 50 lessors ´portfolio is US$ 310 billion (Airline Business, 2019). However, in the top rankings Africa has not been able to establish local leasing giants. From the OEMs perspective, Airbus and Boeing have dominated the market and Table 3.7 illustrates leased aircraft fleet share by the manufacturer.

Low-Cost Carrier Aircraft Market On a global scale, the popular low-cost aircraft types include the A320 and Boeing 737. Based on 2019 fleet figures Africa had in total of 56 LCC aircraft types. See the fleet breakdown in comparison with other regions around the globe (Fig. 3.15).

Distribution Table 3.7 Top leading lessors

103 OEM Airbus Boeing Bombardier Embraer ATR Other Total

Number of leased aircraft 5110 4896 744 642 481 488 12, 363

Percentage share 41% 40% 6% 5% 4% 4% 100%

Source: Flight Fleets Analyzer (2019).

Fig. 3.15 Low-cost carrier A320/737 fleet breakdown. Source: Flight Fleet Analyzer (2019)

Distribution The lack of technological development and Internet penetration means that African airlines make about 75% of their sales through Global Distribution Systems (GDSs). Chingosho (2009) details “African airlines tend to pay higher commissions to travel agents and other middlemen than the world average. The commission payable to travel agents for domestic operations is typically about 7% of the ticket price”. “While Africa does have large populations and growing middle classes, the continent does not have the depth of Internet penetration to drive online sales, which are key to the European LCC model”, says Roeland van den Bergh, senior analyst at the Centre for Asia-Pacific Aviation (Cauchi, 2013).

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Maintenance and Ground Handling Services The old age of the African fleet with an average age of 15 years poses an additional cost burden on the airlines due to considerably higher maintenance needs and spare parts not being covered under manufacturers’ warranties anymore (Fig. 3.16).

Labour Overhead employee costs constitute about 30% of total airline costs in Africa, whereas a maximum of 20% is the norm in other world regions. The small size of most airlines, inadequate information systems and government employment policies result in a large number of overhead staff employed in African airlines. Some governments even control the wages and salaries paid to airline employees, which in turn results in an overall low productivity. The lack of a skilled workforce poses additional training costs on the airlines’ already high-cost structure. Not only the fixed costs are higher but also variable crew costs due to the small number of weekly flights carried out in the region, which requires longer layovers at outstations.

2020

2025

2030

16

Average age in years

14 12 10 8 6 4 2 0 Africa

Asia Pacific

China

Eastern Europe

India

Latin America

Middle East

North Western America Europe

Fig. 3.16 Average age of the global operating aircraft fleet from 2020 to 2030, by region or country (in years). Source: Oliver Wyman, 2021

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105

Concept of Sustainability Sustainability was initially conceptualized in 1974 by the World Council of Churches and was later magnified into an idea by the International Union for the Conservation of Nature and Natural Resources (IUCN) as Sustainable Development (Hardisty, 2010). The commonly referenced definition by many researchers (Emas, 2015; Howarth, 2012) was reported in a publication, “Our Common Future”, by the Brundtland Commission in 1987. According to the World Commission on Environment and Development (WCED), “sustainable development” is a process that meets present needs without compromising the ability of future generations to meet their own needs” (Emas, 2015). The concept of sustainable development is basically focused on upholding economic progression whilst protecting the worth of the environment in a long term (Emas, 2015). Sustainability can only be achieved by integrating economic, environmental, and social concerns during the decisionmaking process, which distinguishes sustainability from other forms of policy (Emas, 2015). These concerns are, however, interconnected and generally referred to as the three pillars of sustainable development (Grossman, 2012). However, the scope of this study is confined within the spheres of economic sustainability of LCCs in sub-Saharan Africa.

Economic Sustainability The economics of sustainability may well be seen from Emas (2015) point of view as the utilization of economic tools that can offer policies protective of the environment as well as promote innovation that will turn into profit. According to Emas (2015), barriers to market equilibrium such as the presence of incidental uncharged services will hinder viability in the market. This is because the market accumulates “externalities” such as transaction spillovers, or unaccounted costs for a good or service which should have a fixed charge according to Arthur Pigou (Emas, 2015). On the other hand, Howarth (2012) argued that economically designed policies can also reduce private consumption to improve both leisure and environmental quality that would increase human welfare. In addition, Baumgartner and Quass (2010) termly combined sustainability and economics and postulated that “sustainability economics” should be founded on the concept of efficiency, which is not wasteful in the utilization of scarce resources for achieving human needs and wants, as well as the relationship between human and nature over a long period of time with future uncertainties. In contrast, Bartelmus (2010) supports the normative concept of the term “sustainability economics” but emphasizes a focus on sustainable economic performance and growth. According to Chistilin (2010), “sustainable economic growth involves a process of improving the productivity of an economy that will exceed population surge at the highest period”. The principle of economic sustainability is hinged on the fact that environmental problems in developing countries

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originate from lack of development. Thus, with the level of poverty in developing nations, there is a huge gap between low- and high-income earners. However, the concerns of sustainability should be measured on a macroeconomic level through the gross domestic product (GDP) and global product (GP) for national and global economic success, respectively. Similarly, this measurement is also replicated in the microeconomic level which consists of business and industry environment, where the examination of GDP flaws through decision-making creates an equilibrium between environment, society and economy (Hardisty, 2010). Conversely, to stay within the scope of the research, Reimers-Hild (2010) states that in a highly competitive and globalized environment, organizations need to think differently to survive. Organizations cannot afford to neglect the growing changes in consumer demands, unstable economy and environmental struggles that have globally changed the climate (Reimers-Hild, 2010). Nonetheless, the author states that the concept of sustainability consisting of social responsibility, environmental sustainability and the bottom line (profit), will enable organizations to achieve sustainability through profitability in a highly competitive market (Reimers-Hild, 2010). Nevertheless, being an underdeveloped subject area in sub-Saharan Africa, only a few researchers came close to examining the economic sustainability of airlines in the airline industry. For instance, Heinz and O’Connell (2013) adopted a stepwise Product and Organisational Architecture (POA) (Mason & Morrison, 2008) to determine which of the identified business models in Africa was the most sustainable financially. The authors concluded in the research that FSCs had the most sustainable business model and stated that “different models in Africa may be sustainable in different regions as in the case of LCCs” but failed to determine the longevity of LCCs to stay in business. However, Sarker et al. (2012) undertook similar evaluative research but was aimed at predicting the sustainability of “Low-Cost Carriers” and to identify possible options for LCC growth in the future. The authors also concluded that “cheap fares are the main reasons for the success and survival of LCCs and their sustainability is dependent on branding and seamless customer services”. These findings highlights one key issue in LCC models, and that Africa requires its own bespoke LCC model that is designed for the African customer. African LCCs cannot thrive regionally if there are still state-owned carriers supported by the governments. Also, whilst there is still a lack of understanding about the aviation industry by many African governments, visa restrictions remain a prevalent problem for passengers and lack of secondary airports remains an infrastructure challenge. The Low-Cost business model in South Africa hardly goes beyond the domestic market because the moment they do, they are impacted by regulatory issues such as taxes of the other country and begin to lose the LCC element. As a result, it becomes difficult to remain low-cost and operate regionally. One can see that intra-African travel is “lean” and there are no funds in terms of the revenue potential, as only a few passengers do intra-African travel with the presence of limited city pairs. Due to some of the disparities in the characteristics of carriers operating in Africa, one can conclude that not all LCCs in Africa are suitable for intra-African connectivity. In other words, some airlines can only offer air

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Fig. 3.17 FlySafair route network. Source: www.flysafair.co.za

transport services tailored to the domestic market whilst others have products and services tailored to regional travel (Fig. 3.17). FlySafair, due to the expertise and organization of its parent company Safair, has been able to convey three million passengers since its inception and currently boasts the best on-time performance of all the airlines in South Africa. This “Low-Cost Carrier” within 15 min of scheduled flights have been able to depart 96% of its flights. The LCC also offers the least price to travel on some domestic routes in South Africa. For the past 2 years, FlySafair has put resources into a solid conveyance base. Flights are sold through several online travel organizations including Travelstart, Flightsite and Travelfusion. Also, the carrier offers tickets through different Global Distribution Systems because of an e-Alliance Code Share agreement with Hahn Air Systems, which makes stock accessible worldwide in excess of 9 GDS platforms. FlySafair ticket inventory is also accessible on their code on both Amadeus and Galileo. In addition, FlySafair has nine B737 aircraft in operation, with three of the aircraft being B7373–800 having a seat configuration for 189 passengers. The rest of the six aircraft are Boeing 737–400 aircraft with a seating capacity of 165 passengers.

Low-Cost Carrier Capacity Figure 3.18 illustrates the seating capacity of the low-cost carrier market in Africa based on seat capacity from 2007 to 2016 and broken down by segment. In 2014, low-cost carriers within Africa accounted for over 10% of the seats available.

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Within Africa

To/From Africa

18% 15.3%

16%

15.8% 13.6%

13.4%

14% Seat capacity share

15.4%

11.6%

12%

12.4% 10.3%

10%

8.9%

8%

7%

6%

4.8%

9.3%

8.6% 8%

10.5% 9.4%

8.7%

8.9%

6.8% 7.8%

4% 2% 0% 2007

2008

2009

2010

2011

2012

2013

2014

2015

2016*

Fig. 3.18 Low-cost carriers—Africa’s capacity share by segment 2007–2016. Source: OAG, CAPA, 2017

Conclusion The evidence presented in this chapter reveal that there are common economic and operational characteristics that define the sustainability of LCC in Africa. These characteristics must be considered before LCCs can operate efficiently and sustainably, as their economic and operational performances are dependent on it. The economic environment of sub-Saharan African countries is not resilient to economic shocks due to fluctuating GDP growth, political instability, poor infrastructure, weak currencies, mismanagement of funds etc. (Nwankwo et al., 2015). The LCC models in Africa will have to consider modifying their business models in order to become economically sustainable and efficient operationally. This can only be achieved by operating within the means of the economic environment that suits the differentiated products and services offered to their customers. It is evident that there is nothing “low cost” about the business model in the region, hence, they should be referred to as “New Model Carriers” based on the economic and operational characteristics that define their mode of operation. These “New Model Carriers” are carriers that should operate efficiently by offering tangible products and services tailored to the economic environment whilst meeting the operational conditions of their target markets. Therefore, if African LCCs are to perform profitably and remain sustainable in a highly expensive and restrictive operating environment like Africa, they need to focus on the identified economic and operational characteristics. Furthermore, recommendation for investment in competitive airport infrastructure to enable the prospects of domestic and regional travel in sub-Saharan Africa will be crucial. Nonetheless, being a risky environment to do business, airlines are forced to depend

References

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on external sources for their survival. Hence, African LCC needs to collaborate with other airlines either by agreement or code sharing to be more efficient in their route network, increase their load factors, and stay profitable in the long term. Finally, with the commoditization of air travel in Africa will the LCC model, in its true form, become viable. LCC models need thicker markets, as seen in the USA and Europe to support the high utilization and frequencies with which the model is synonymous. As such, Nigeria (with a population of over 130 million), North Africa (Egypt, Algeria, Morocco, Tunisia) and South Africa (population of 45 million) are highlighted as LCC “hot-spots”. Low-cost aviation in Africa is more prevalent in established markets such as in northern African countries and South Africa. The demise of many low-cost carriers in regions was mostly due to the high costs imposed on airlines, which are not easily manageable.

References AFRAA. (2016). Accessed April 10, 2019, from http://www.afraa.org/index.php?view= download&alias=602-is-africa-ripe-for-the-lcc-airline-business-model-maureen-kahonge&cate gory_slug=2016-articles-and-research-papers&option=com_docman&layout=table& Itemid=160 AFRAA. (2020). Available at https://afraa.org/wp-content/uploads/2020/11/Taxes-fees-andcharges-study.pdf Airline Business. (2019). Market leaders. Accessed Jan 16, 2022, from https://www.flightglobal. com/low-cost-carriers-ready-for-battle/86041.article Alderighi, M., Cento, A., Nijkamp, P. & Rietveld, P. (2004). The entry of low-cost airlines: Price competition in the European airline market. Amankwah-Amoah, J., & Debrah, Y. (2009). Global competition, institutional pressures and stateowned airlines in Africa [online]. Accessed April 18, 2021, from https://papers.ssrn.com/sol3/ papers.cfm?abstract_id=2586408 Bartelmus, P. (2010). Use and Usefulness of Sustainability Economics. Ecological Economics, 69(11), 2053–2055. Baumgärtner, S., & Quaas, M. (2010). What is sustainability economics? Ecological Economics, 69(3), 445–450. Borenstein, S., & Rose, N. L. (1994). Competition and price dispersion in the US airline industry. Journal of Political Economy, 102(4), 653–683. CAPA & OAG. (2017). Africa’s struggles continue as economies weaken and competition intensifies. Airline Leader, 38, 66. CAPA. (2019). Middle East and Africa LCCs: Huge growth opportunities, but challenges. Accessed Jan 16, 2022, from https://centreforaviation.com/analysis/reports/middle-east-andafrica-lccs-huge-growth-opportunities-but-challenges-468679 Cauchi, M. (2013). Budget airlines look to Africa. Accessed June 6, 2013, from http://online.wsj. com/article/SB10001424127887323372504578466710651113012.html Chingosho, E. (2009). African Airlines in the Era of Liberalisation (2nd ed.). Chistilin, D. (2010). Sustainable economic development: The main principles and the basic equation. Revista Romana de Economie, 29(1). Doganis, R. (2006). The airline business (2nd ed.). Routledge.

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Emas, R. (2015). The concept of sustainable development: definition and defining principles. [Online]. Accessed Aug 19, 2018, from https://www.academia.edu/31158981/The_Concept_ of_Sustainable_Development_Definition_and_Defining_Principles?auto=download Franke, M. (2004). Competition between network carriers and low cost carriers–Retreat battle or breakthrough to a new level of efficiency. Journal of Air Transport Management, 10, 15–21. Flight Fleets Analyzer. (2019). Accessed Jan 17, 2022, from https://www.cirium.com/products/ views/fleets-analyzer/ Grossmann, D. L. (2012). Three pillars of sustainble development: Critical issues and perspectives. CESA Working Paper, East West Centre, USA Hardisty, P. (2010). Environmental and economic sustainability. CRC Press. Heinz, S., & O’Connell, J. F. (2013). Air transport in Africa: Toward sustainable business models for African airlines. Journal of Transport Geography, 31, 72–83. Holmes, T. J. (1989). The effects of third-degree price discrimination in oligopoly. The American Economic Review, 79(1), 244–250. Howarth, R. (2012) Sustainability, well-being, and economic growth | Centre for humans & nature [online]. Accessed Aug 19, 2018, from https://www.humansandnature.org/sustainability-wellbeing-and-economic-growth IATA. (2021). Fuel costs of airlines worldwide from 2011 to 2020, as percentage of expenditure. Accessed May 10, 2021, from https://www.iata.org/en/iata-repository/pressroom/fact-sheets/ fact-sheet%2D%2D-fuel/ IATA Economics. (2017). IATA Economics’ Chart of the week [online] available from Accessed 12 June 2022. ICAO. (2013). Enhancing air transport connectivity. Accessed May 3, 2021, from https://www. icao.int/Meetings/ICAO-McGill2013/Documents/7-Chingosho.pdf Ishutkina, M., & Hansman, J. (2009). Analysis of interaction between air transportation and economic. Accessed Aug 19, 2018, from https://dspace.mit.edu/handle/1721.1/41876 Mason, K., & Morrison, W. (2008). Towards a means of consistently comparing airline business models with an application to the ‘low cost’ airline sector. Research in Transportation Economics, 24(1), 75–84. Mhlanga, O., & Steyn, J. (2016). The aviation industry in South Africa: A historical view. African Journal of Hospitality, Tourism and Leisure, 5(4). Morrell, P., & Swan, W. (2006). Airline jet fuel hedging: Theory and practice. Transport Reviews, 26(6), 713–730. Njoya, E. (2016). Africa’s single aviation market: The progress so far. Journal of Transport Geography, 50, 4–11. Nwankwo, S., Ogbuehi, A., & Aiyeku, J. (2015) Macro environmental context of marketing strategy In Sub-Saharan Africa: A preliminary review. Oliver Wyman. (2021). Global fleet and MRO market forecast. Accessed May 10, 2021, from https://www.oliverwyman.com/content/dam/oliver-wyman/global/en/images/insights/ energy/2020/Fleet_and_MRO_forecast_commentary_2020_2030.pdf Reimers-Hild, C. (2010). Sustainability through profitability: The triple bottom line [online] Accessed Aug 19, 2018, from http://digitalcommons.unl.edu/kimmelpapers/9/?utm_source= digitalcommons.unl.edu%2Fkimmelpapers%2F9&utm_medium=PDF&utm_campaign= PDFCoverPages Sarker, A. R., Hossan, C., & Zaman, L. (2012). Sustainability and growth of low cost airlines: An industry analysis in global perspective. American Journal of Business and Management, 1(3), 162–171. Samunderu, E. (2019). Air transport management–a strategic management in the airline industry (1st ed.). Kogan Publishing. Schlumberger, C. E. (2010). Open skies for Africa: Implementing the Yamoussoukro decision (Directions in Development: Infrastructure). World Bank Publications. Statista. (2020a). https://www.statista.com/forecasts/1153551/tourism-sector-gdp-share-forecastin-northern-africa

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Statista. (2019a). Low-cost carrier in-service fleet worldwide as of April 2019, by region. Accessed May 8, 2021, from https://www.statista.com/statistics/869273/low-cost-carriers-in-servicefleet-region/ Statista. (2019b). Market share of low cost carriers worldwide in 2020, by region. Accessed May 8, 2021, from https://www.statista.com/statistics/1088686/low-cost-carrier-market-shareregion/ Statista. (2020b). Market share of low-cost carriers in Europe from 2009 to 2020. Accessed May 8, 2021, from https://www.statista.com/statistics/1117218/low-cost-carrier-market-shareeurope/ Statista. (2021). Passenger load factor of commercial airlines worldwide from 2005 to 2021. Accessed May 10, 2021, from https://www.statista.com/statistics/658830/passenger-loadfactor-of-commercial-airlines-worldwide/ UNWTO. (2020). World Tourism Barometer. Vol. 18, Issue 4. Accessed May 8, 2021, from https:// www.e-unwto.org/doi/epdf/10.18111/wtobarometereng.2020.18.1.4. www.flightglobal.com (2019).

Chapter 4

Demand Patterns in Air Passenger Transportation: Application of Gravity Model

Keywords Gravity model · Spatial economics · Estimation · Demand · Gross domestic product · City pair market · Population · Socio-economic variables · Explanatory variables

Introduction The purpose of this chapter is to illustrate a theoretical econometric model that can be adopted to estimate demand patterns of air travel. The analysis will focus on selected countries within the Eastern African markets. The countries include Kenya, Tanzania, Uganda and Rwanda. The purpose of the model development is to determine whether the volume of passenger traffic between the city pairs is sufficient to justify direct, point-to-point flight connections between city pairs, as inherent in the low-cost model. Estimating potential demand in the East African market is difficult due to the inherent difficulties in measuring demand growth in markets that are underserved and unequal, such as those in East Africa. In mature aviation markets, demand flows can be estimated from observed passenger numbers (Oppenheim, 1995). However, in emerging markets, observed passenger numbers will underrepresent true demand, as a significant number of people interested in traveling between two points are prevented from doing so due to current limitations in service. On a general level, demand for air travel in Africa is expected to grow exponentially. Figure 4.1 depicts the projected annual growth rates for passenger and cargo air traffic from 2020 to 2039, broken down by region. By 2039, revenue passenger kilometres in Africa are expected to grow by 5.5%.

Econometric Modelling When examining the LCC model there are multiple ways how researchers can observe the behavioural patterns of these carriers. For example, spatial econometric modelling is a new approach to examine how full-service carriers respond to LCC © The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 E. Samunderu, African Air Transport Management, Advances in African Economic, Social and Political Development, https://doi.org/10.1007/978-3-031-29324-5_4

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1%

2%

3%

4%

5%

6%

Africa

5.5%

Latin America

5.1%

Asia Pacific

5.1%

Middle East

4.3%

World

4%

Europe North America Russia and Central Asia

3.1% 2.7% 2.4%

Fig. 4.1 Air traffic—passenger growth rates forecast 2020–2039. Source: Boeing, 2019

entry in a dynamic setting. Spatial econometric approaches attempt to capture indirect effects that are missed in standard regression models. Models like spatial probit are used to study entries of LCCs to a particular city pair market. However, in Africa, due to a limited number of airports the method would be rather difficult to capture the effects of LCC entry.

Spatial Econometrics Spatial econometrics is a cross-disciplinary field of study that crosses into statistics, economics, regional science and econometrics. The field originally evolved out of econometrics, which mixes statistics and math with economics. The spatial aspect of econometrics leads to a study of how spatial relationships, or geography, affects the study of analysis of statistical data, providing a geographically centred interpretation of a set of data which can either be route level or airport level data that can be constructed from the industry. The attempt to identify air service market demand is not new. An interest in modelling demand for air transportation began to appear in the literature during the early 1950s, when the effort primarily focussed on forecasting travel propensity between two points (Harvey, 1951; Richmond, 1951). Alongside qualitative techniques used to predict air travel demand, a number of quantitative techniques have been used over time. These mathematical techniques primarily rely on time series and causal methods (Button & Hensher, 2000). Within time series models, demand forecasts are based on a series of past observations, assuming that the factors that influenced the past performance will continue (Doganis, 2010). The suitability of using trend analysis, however, depends merely on the stability in historic developments and the certainty that the assumptions of continuing trends are appropriate also in the particular operating environment under study (Zheng, 2013).

The Spatial Econometric Approach to Estimating Panel Data Model from. . .

115

Causal models use mathematical techniques to postulate precise, deterministic relationships, where regressors and regress are identified, a functional form is specified and a qualitative statement is made about the effects that occur when independent variables in the model change (Greene, 2002). In air travel demand, causal methods attempt to relate changes in traffic levels to changes in selected socio-economic variables. Dependent variables in the estimation of traffic demand are, in general, historical traffic data measured in terms of passenger volumes or tonnes of cargo. The explanatory variables are those variables that are known to have an influence on the demand for air travel.

The Spatial Econometric Approach to Estimating Panel Data Model from the Airline Industry Lately, spatial econometrics1 has been coming more and more into its own set of techniques and methods that are employed to explain certain spatial phenomena. Drawings from literature developments, important applications can be found in the airline industry because such techniques are largely amenable to the route and airport level data sets that can be constructed from the industry. The spatial factor, however, might play an important role in the airline industry and it has its benefit as a technique because most of the previous studies employed standard multivariate linear regression methods by regressing yields and passenger traffic on certain explanatory variables. In general, the need for spatial econometrics arises when: (1) spatial dependence exists between observations (airfares at one point in space depend on airfares at another point in space) and (2) when spatial heterogeneity occurs in the relationships we are modelling. In spatial econometrics, distance affects economic behaviour and the airline markets are no exception. For example, Gatwick and Heathrow airports (or San Francisco and Oakland airports in the US) are in close geographic proximity and price-sensitive passengers might be willing to substitute between the two in order to pay lower airfares. Therefore, airfares on the San Francisco to Atlanta route are correlated with airfares charged on the Oakland to Atlanta route. Thus, when spatial dependence amongst observations is modelled, OLS (Ordinary Least Squares) estimation methods are inappropriate since the estimates might be inefficient or biased and inconsistent depending on the nature of the spatial dependence. Panel models are no exception and therefore, Elhorst (2014) extends the methodology of spatial econometrics to allow for the estimation of spatial panel data models. These models make use of all the advantages of panel data such that such as more variation, less collinearity and increased estimation

1

Spatial econometrics is a subfield of econometrics that deals with the treatment of spatial interaction (spatial autocorrelation) and spatial structure (spatial heterogeneity) in regression models for cross-sectional and panel data Paelinck & Klaassen (1979).

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efficiency whilst incorporating the spatial dependence that may exist amongst observations at each point in time. For example with the use of panel data there are two ways in which spatial dependence can be modelled using spatial econometrics methods: through spatial autoregressive process in the error term (a so called spatial error model) or by including a spatial autoregressive spatially legged dependent variable (called a spatial auto regressive model).

Gravity Model for Forecasting Air Transport Market Potential Gravity models gained popularity from the late 1950s, when passenger numbers were predicted by using simple gravity models employing population and distance variables and were later adapted to embrace other variables such as income, education level, the accumulation level of enterprises and measures of city characteristics such as location advantages and climate. The earlier studies were motivated by an interest in defining markets for air service during the period when commercial air service experienced rapid growth. Later studies have also focused on the supply aspect by introducing fare, time and service frequency by using delineations for business passengers, tourist passengers and cargo in the model. Gravity Model is widely used by transportation researchers, airlines and consultants to determine the demand potential between city and country pairs. It has been found to be extremely useful and preferable to predict demand. This is especially when there is no historical data available or no air service exists or factors describing the current service level of air transportation are not available, than the other describing the current service level of air transportation are not available, than the other forecasting techniques such as time series analysis. A gravity-based estimation or forecasting model manifests the attraction between a city or country pair as a function of their attractiveness. It typically includes parameters such as population, GDP per capita income etc. The resistance typically includes parameters such as distance, time between origin and destination (OD). The equation in its simplest form is illustrated below. This is also the starting point from where the equation is modified or iterated to include the requisite parameters in context of the desired objective. Pij =

k
Pi
Aj D2ij

k – Equation constant. ij – Trips attracted in country i and attracted to country j. D – Distance between country i and j. P – Production factors of country i. A – Attraction factors of country j.

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117

The primary objective is to identify the relevant parameters which are observed to have a strong correlation in determining the traffic forecasts. The selection of parameters is conducted under the ambit and essence of the Gravity Model. In the model equation, common factors that define attractiveness include indicators such as GDP, population, employment rate trade and tourism GDP. The factors that negatively affect the air traffic flow between two countries are called resistance factors. Such factors may include distance, travel time, travel restrictions, cultural or regional factors and taxation. It is important to note that air travel is also characterized by different reasons for the purpose of travel. This could travelling for business, tourism or visiting friends or family. Therefore, such factors need to be incorporated using selected economic and social supply variables. For instance, geo-economic factors allow the researcher to examine factors that describe the economic activities and geographical characteristics of the areas around the airports (catchment) and the routes involved. Aggregate measures may also include historical passenger volumes at each airport.

Estimating Potential Market Demand Using Gravity Model Gravity models are commonly derived from spatial interaction, where the magnitude of traffic between cities is similar to the gravitational pull between masses. Since this chapter is examining the East African markets, the assumption is that the strength of attraction between two places is conditioned by their economic mass and the distance between them is predicted to inversely affect the strength of attraction. The volume of traffic between origin (i) and destination ( j) is therefore given by the magnitude of traffic between cities and is thus similar to the gravitational pull between masses. In its simplest form the model has the following functional form. Equation 1: T ij =

α Pi Pi d2ij

ð4:1Þ

where. Pi and Pj: are the populations of the origin (i) and destination ( j) dij : is the distance between origin (i) and destination ( j), respectively, in millions and /: is a proportionality factor Between the two different approaches have proven to be useful in estimating the model’s parameters and usefulness in predicting air travel demand—regression analysis and econometric analysis. The study conducted here considers an econometric analysis using doubly constrained distribution models as the most appropriate.

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Dependent Variable The goal of this research is to predict the number of weekly passenger traffic between the sample countries’ major economic centres using a number of explanatory variables that are known to have an influence on air travel demand. The dependent variable is, therefore, the volume of weekly passenger traffic linking the major city pairs in the sample countries. Since weekly passenger volumes on the respective routes were not publicly available, weekly capacity data for each city pair in a period of 52 weeks can be extrapolated from OAG Analyser. In order to estimate the demand on these routes, the average load factor for Africa for the year under observation issued and capacity data adjusted accordingly to get more precise predictions of total demand on these routes.

Explanatory Variables Population The population variable theoretically and empirically represents the size of the potential air travel between the city pairs and has been applied differently in various econometric models such as country populations (Adler & Hashai, 2005), catchment area (Hazledine, 2009; Matsumoto, 2007) and airport passengers (Doganis, 2006). This research defines the population mass as the volume of airport passengers at the respective airports as inherent in the doubly constraint gravity model (Matsumoto, 2007). Country populations were considered inappropriate for analyzing air travel demand because of inequalities in income distribution, and, presumably not all passengers can reach the airport of their departure. Air travel in the sample countries is concentrated mostly around one airport, serving a large catchment area. Catchment data is difficult to determine as passenger choices are limited to those airports designated to serve the intra-regional network. Given the restrictions that still exist on the airports that are permitted to receive intra-regional and international traffic, the study considered passenger numbers at airports as the most appropriate proxy for the population variable. The variable includes domestic, regional and international passengers but excludes transit and connecting passengers because of the point-to-point networks with no connections as inherent in the LCC model. Data for passengers at airport terminals was obtained from ACI (2016) World Air Transport Statistics for the year 2016 and also requested from the respective country’s Civil Aviation Authority for crosschecking purposes.

Model

119

Airfare Air travel demand is known to be sensitive to airfares and high airfares are known to suppress demand (Doganis, 2012). The pure form of the doubly constraint model can be further generalized by replacing the effect of distance with a decreasing function of distance and travel cost between origin and destination. Even though demand for air travel in sub-Saharan Africa is with an average of 0.6 relatively inelastic (Muvingi, 2012), it was included in this model because demand for low-cost travel is suspected to show more elasticity due to the high proportion of first-time flyers in Africa on low-cost carriers, whose primary argument to flying is the relatively low fare. Moreover, overlooking airfare in an econometric model might produce a model that fails to adequately forecast potential demand for air travel. An average airfare on the city pairs was taken from ITA Software. A drawback of using ITA is that it does not include all airlines serving the market. To avoid bias due to the exclusion of certain airlines in ITA, a crosscheck of the routes under study was carried out, leading to the conclusion that all major airlines in the researched market are included in ITA. As ticket prices depend on the purchase city, Dar es Salaam in Tanzania was chosen as the purchase city and US Dollar as the preferred currency as it is not as volatile as the East African currencies and is also used in East Africa as the favoured payment method. Return flights were used because return tickets are usually cheaper than one-way fares and give a better understanding of the yield. If fares differed in price for the return flights, the cheapest one was chosen. Half of the total fuel surcharges were added to the lead-in fare. Moreover, 10% of the total amount was added to the lead-in fare because airline pricing is controlled by placing a number of seats at several prices. In contrast to Europe, where the majority of seats are sitting at fares in the top-middle of the fare structure, in Africa this tends to be flat with a huge number of seats sitting at or just above the cheapest fare. This method results in the estimation of the average market yield on the respective route for a one-way trip.

Model In order to develop the model, exponential function to predict air travel demand on the routes is used here. Equation 2: Exponential Function f cij = exp - βcij

ð4:2Þ

The following equation is derived from the above-mentioned model (Eq. 4.1) and its further generalization. The replacement of distance by travel cost leads to: Equation 3: Gravity Model Functional Form with Decreasing Function

120

F(CIJ)

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Demand Patterns in Air Passenger Transportation: Application of Gravity Model

1.6 1.4 1.2 1 0.8 0.6 0.4 0.2 0

0

10 C-2

20 exp(-1.0c)

30 40 TRIP COST (MINS) exp(-0.01c)

50

exp(-0.3c)

60

70

c0.5exp(-0.1c)

Fig. 4.2 Different deterrent functions. Source: Matsumoto, 2007

T ij = / Oi Dj f cij

ð4:3Þ

where. /: is a proportionality factor OiDj: is the traffic between origin (i) and destination (j) f (Cij): is a generalized function of the travel costs with one or more parameters for calibration This model is also referred to in literature as a “deterrence function” as it “represents the disincentive to travel as distance or cost increases”. The different possible shapes of deterrence functions are shown in Fig. 4.2. To meet the requirements of an exponential function, the single proportionality factor / is replaced by two sets of balancing factors Ai and Bj and results in the classical version of the doubly constrained gravity model. Equation 4: Gravity Model Functional Form with Balancing Factors T ij = Ai Oi Bj Dj f cij

ð4:4Þ

One can now subsume Oi and Dj into these factors and rewrite the model as: Equation 5: Gravity Model Functional Form with Adapted Balancing Factors T ij = ai bj f cij The values of the balancing factors Ai and Bj are therefore: Equation 6: Value for Balancing Factor Ai

ð4:5Þ

Model Table 4.1 Trip-end totals matrix including target estimation

121 2011 KGL EBB MBA Total Target

NBO 2782 3410 6644 12836 13632

DAR 356 499 388 1243 1320

JRO 154 210 1093 1457 1547

Total 3292 4119 8125 15536

Target 3,496 4,374 8,629 16499

Table 4.2 Cost matrix for gravity model estimation

2011 KGL EBB MBA

NBO 132.00 99.00 73.15

DAR 177.10 84.78 191.95

JRO 112.75 96.00 186.00

Table 4.3 Adjusted fare matrix for gravity model estimation

2011 KGL EBB MBA

NBO 13.20 9.90 7.32

DAR 17.71 8.48 19.20

JRO 11.28 9.60 18.60

1 Bj Dj f cijÞ

Ai =

ð4:6Þ

j

Equation 7: Value for Balancing Factor Bj 1 Ai Oi f cijÞ

Bj =

ð4:7Þ

i

The balancing factors are interdependent. This means that the calculation of one set requires the values of the other set. This suggests an iterative process, which can be solved using Excel Solver. Firstly, one has to develop trip-end totals as well as cost matrix for the gravity model estimation. The trip-end totals matrix contains a trip-end totals target, which was calculated with IATA’s demand forecast for Africa of +6.2% for the coming years. The matrices are as follows (Table 4.1): In order to bring the cost matrix into an exponential function, the next step is to create an adjusted fare matrix, putting a weight ratio of 10% over the fare (Table 4.2). In order to bring the cost matrix into an exponential function, the next step is to create an adjusted fare matrix, putting a weight ratio of 10% over the fare (Table 4.3). Assuming that the best value of β is 0.10, a matrix of the values exp.(-βcij) is built in a further step (Table 4.4): With these values, one can calculate the resulting total trips and then expand each cell in the matrix by the ratio 16,499/2.7 = 6110. This produces a matrix of base

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Table 4.4 Exponential function matrix and sums to prepare for gravity model run

2011 KGL EBB MBA Total

NBO 0.3 0.4 0.5 1.1

DAR 0.2 0.4 0.1 0.7

JRO 0.3 0.4 0.2 0.9

Total 0.8 1.2 0.8 2.7

trips, which now has to be adjusted to match trip-end totals. To do so, the factors Ai and Bj must be calculated so that the constraints (Eq. 4.8) are satisfied. Equation 8: Constraints of Factors Ai and Bj T nij =

T kn ij k

T=

T ij and t = ij

t ij

ð4:8Þ

ij

where. Tij: is the number of trips between origin (i) and destination (j) T: is the total array Tkij : are trips from origin (i) to destination (j) by mode k and person type n The calculation of factors Ai and Bj is achieved in an iterative process, which in outline is as follows: 1. Set all Bj = 1.0 and solve for Ai; in this context, solve for Ai means finding the correction factors Ai that satisfy the trip generation constraints. 2. With the latest Ai solve for Bj to satisfy the trip attraction constraints. 3. Keeping the Bj’s fixed, solve for Ai and repeat steps (2) and (3) until the changes are sufficiently small. The values for Ai and Bj are the product of the corresponding correction factors. These factors are multiplied by the basic expansion factor 6110, whilst also setting the following constraints: • The set ratios must equal 1. • Total estimations must equal. Demand forecasts for each route are then given in the framed matrix. Now one can carry out an analysis by adjusting the fare and/or demand forecast (Table 4.5). A limitation of this model, however, is that the constants Ai and Bj cause the model to fit an existing set of trip generation factors excellently, but due to the fact that these are constants they might create great distortions in predicting the future.

The Demand Study Survey

123

Table 4.5 Excel Solver results

The Demand Study Survey A coach passenger survey was conducted to gain an understanding of transport demand patterns and travel demand peculiarities in East Africa. Moreover, the survey intended to look at latent demand patterns and the likelihood of coach passengers to switch from land transport to air transportation if the factors influencing their decision are favourable. To understand the factors influencing air transportation demand in East Africa, one needs to understand the factors that affect passengers in this particular market. The survey aims especially at identifying latent demand factors. Such a survey is designed to fulfil the following objectives: 1. To understand the general travel behaviour of coach passengers in the markets under study. 2. To gauge the level of importance passengers put on certain trip factors. 3. To understand how certain trip factors, such as cost, accessibility, safety and reliability of air transport, influence demand behaviour in the markets. 4. To investigate the passenger’s price sensitivity. The survey was conducted at different central coach ways in Nairobi, Kenya and survey passengers travelling between the following markets and rating scales were applied. • • • •

Kenya to Tanzania Kenya to Uganda Kenya to Rwanda domestic Kenya

The following section presents the findings of the demand modelling and survey analysis on the routes under research in the intra-regional East African markets Kenya, Rwanda, Tanzania and Uganda. As a first step, natural demand trends will be forecasted on the routes under study. In a later step, and to cater to the potential of low-cost operations, demand trends are analyzed in terms of their likely response to a change in airfare. Both analyses serve the purpose to give an estimation of whether or not the expected demand is sufficient to justify direct point-to-point flights on the

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respective city pairs. The argument for sufficiency is whether or not a typical low-cost aircraft—in this case, an Airbus A319 with 145 seats configuration—can be filled at a load factor of 100% for at least one weekly return flight on the route. In a later step, the results from the empirical analysis are crosschecked using results from the survey conducted in Kenya.

Demand Analysis: Gravity Model Applying the proposed gravity model to the routes under study, the following demand forecasts arise: These figures represent the demand forecast for the next years when fares are kept at the current average price level for each route (Table 4.2). Comparing the current demand levels (Table 4.1) to the forecasted demand trends, the demand outlook is widely positive. Demand is forecasted to increase on most routes without a stimulation of latent demand through a reduction in ticket prices as shown in Table 4.6. Nonetheless, without a stimulation of latent demand through a reduction in airfare, traffic between Nairobi and Kigali, Nairobi and Entebbe as well as Dar es Salaam and Kigali is believed to decrease if fares are kept at the current level.

Application of Fare Cut to Demand Forecast Since LCCs charge substantially lower fares than their incumbents, fare adjustments are made to predict whether or not a change in airfare may result in higher levels of demand and whether these demand levels are sufficient to justify the operation of a typical low-cost carrier aircraft model on the route. To study the potential for low-cost operations, the potential demand with a fare cut of 30% and 50% is forecasted. This yields the following results (Table 4.7 and 4.8): Most routes experience an increase in demand if the cost of travel decreases (Table 4.9). Remarkable is especially the rise in demand on the route from

Table 4.6 Weekly passenger demand on routes for the next years with 2011 as a Base Year

Table 4.7 Weekly passenger demand on routes for the next years with 2011 as a Base Year when Fare is cut by 30%

KGL EBB MBA

NBO 2655.4 3185.1 7791.3

DAR 288.5 626.4 405.2

JRO 552.1 562.9 432.3

KGL EBB MBA

NBO 2720.5 3310.8 7646.5

DAR 292.1 538.4 490.1

JRO 483.5 525.2 539.1

Application of Fare Cut to Demand Forecast

125

Table 4.8 Weekly Passenger Demand on Routes for the Next Years with 2011 as a Base Year when Fare is cut by 50% KGL EBB MBA Table 4.9 Demand percentage change when fare is cut by 30%

Table 4.10 Demand percentage change when fare is cut by 50%

NBO 2765.5 3395.5 7470.9

DAR 292.0 482.3 545.7

JRO 438.6 496.5 612.2

KGL EBB MBA

NBO 2.4% 3.9% -1.8%

DAR 1.3% -14% 20%

JRO -12.5% -6.5% 24.7%

KGL EBB MBA

NBO 4.1% 6.5% -4.1%

DAR 1.3% -23% 34%

JOR -20% -11.7% 41.7%

Table 4.11 Direction of passenger demand when the fare is cut by 30% and 50%, respectively

Kilimanjaro to Mombasa. Demand on this route is forecasted to rise by 24.7% if the fare is cut by 30% and by 41.7% at a 50% fare cut (Tables 4.10 and 4.11). Similar results can be found for the route Dar es Salaam to Mombasa where a fare cut of 30% leads to a 20% increase in potential travellers and a 50% cut to a rise of demand by 34%. Both routes, therefore, seem to be ideal for the stimulation of latent demand through a reduction in ticket fare. The analysis also shows that on some routes demand cannot be stimulated by a reduction in ticket prices. On the route from Entebbe to Dar es Salaam, a reduction of the ticket price is forecasted to result in a 14% and 23% fall in demand. Kigali to Kilimanjaro is another route on which a stark demand reduction can be observed as demand falls by 12.5% and 20%, respectively. To draw a conclusion, it is evident that other demand drivers must be present on these routes, which have a much stronger influence on the demand than the price for a ticket alone. This also indicates that a change in airfare cannot stimulate demand on

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Table 4.12 Recommendations in order to maximize revenues

tall routes, making it a difficult task for low-cost operators to operate on these routes as they solely stimulate demand through low fares and do not offer any additional services. Based on the findings, the following recommendations for a potential low-cost carrier arise in order to maximize its revenues: The fares should be cut on those routes, where demand increases with a cut in airfares. Even though demand increases on the route Dar es Salaam to Kigali both with a price drop of 30 and 50%, respectively, there is no difference in demand when the fare is cut by 50%. In order to maximize revenues, the carrier should only cut the fares by 30%. This study identifies four routes on which a cut in ticket prices has either a no or a negative relationship to demand. Demand is forecasted to rise on these routes without a cut in airfare and, therefore, ticket prices should remain stable on these routes (Table 4.12). To exemplify the methodology used to analyze the sufficiency of demand for LCC operations, the patterns prevalent on the route from Nairobi to Kigali will be presented in detail. Total capacity on the route was taken from the OAG analyzer and adjusted by the average load factor of African airlines. As a result, the estimated current occupation on the route, or, in other words, the number of people currently flying between Nairobi and Kigali is given in Table 4.13. Kenya Airways and Rwandair currently serve the route Nairobi to Kigali with four to six non-stop flights per day, flying an estimated number of 2208 people. The calculated demand, however, amounts to 2655 people, which leaves room for 447 people, who are assumed to have an interest in flying on this route even if fares are not cut and remain at the current level. This translates into 4.3 flights per week on an A319 at an LCC configuration of 145 seats at a 67.8% load factor. If the load factor is set to 100%, three flights can be undertaken with the demand surplus. If the fares are cut by 30% and 50%, this results in a demand surplus of 512 and 557 people, respectively. At a load factor of 100% 3.5 flights and 3.8 flights, respectively, can be operated, whilst at a load factor of 67.8%, 5.2 and 5.7 flights can be operated.

Application of Fare Cut to Demand Forecast

127

Table 4.13 Flying schedule on the route Nairobi to Kigali with total capacity and estimated occupation of existing flights

Airline KQ KQ KQ KQ WB WB WB WB WB WB

Flights from Nairobi, Kenya (NBO) to Kigali, Rwanda (KGL) Non-stop flights: 4–6 per day, 1 h 22 m duration Airlines: Kenya Airways, RwandAir LocalDepTime LocalArrTime Seats LocaldaysOfOp 0800 0800 1700 2350 0930 1115 1115 1635 1645 2130

0830 0830 1730 0015 0945 1130 1130 1650 1700 2145

98 98 98 72 50 50 102 149 149 50

246 1357 1234567 1357 135 46 27 1 3 56 24 1 3 567 Total weekly capacity Estimated occupation (67.8%)

Seats (total) 294 392 686 288 150 100 204 596 298 250 3258 2208.92

This finding indicates that just from a natural demand perspective alone, the route may be operated at least once a week with a return flight if the fare is not cut and twice weekly if the fare is cut by 30 and 50%, respectively. Nonetheless, it also needs to be taken into consideration that lower fares will not only stimulate latent demand but may also cause passengers to switch from other airlines, as it was shown during the rise of low-cost carriers in Europe. The conducted analysis for all routes shows the following results (Table 4.14): The route from Nairobi to Entebbe is in terms of number of airlines serving the route the most densely operated route. Kenyan Airways, Air Uganda and African Express Airlines serve this route with 7–9 flights in total per day, bringing a total weekly capacity of 5014 seats to the market. Adjusted by the average load factor for African airlines, the estimated weekly occupation is 3399.49 passengers. Due to less demand than actually offered seats it is deemed as unprofitable to start operations on this route if the argument is to fill an aircraft with the potential demand spill-over alone. However, it could still be profitable if passengers switch to the LCC operator due to lower fares than those offered by incumbents. The same pattern is prevalent on the route from Dar es Salaam to Kigali. With the demand spill-over alone, a load factor of either 100% or 67.9% twice a week cannot be satisfied with the current demand spillover and neither with the spillover of stimulated latent demand. Dar es Salaam to Kigali was also amongst the routes, where there seems to be a price-inelasticity of demand, meaning that demand cannot be stimulated by a reduction in airfare. A reduction of either 30% or 50% of the current fare only results in a demand increase of 1.3%. In general, this route seems to have not much demand as only Rwandair is operating it, offering a 200 weekly seat

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Table 4.14 Route demand analysis results

capacity at four non-stop flights a week. This might be due to capacity restrictions on the route, which would also explain the inelasticity of the price. The most densely operated route in terms of total weekly seat capacity is the domestic route from Nairobi to Mombasa. Indeed, this route is also forecasted to be the one that offers the most potential for the operation of a new carrier. Even though it does negatively react to the reduction of ticket price, 12 weekly one-way flights can be operated from natural demand levels without a reduction in airfare alone at a desired load factor of 100%. Dar es Salaam to Mombasa as well as Kilimanjaro to Entebbe and Mombasa are moreover amongst those routes that are deemed to be a good fit to the low-cost operator model in terms of weekly demand. All routes are served at a very little weekly frequency of currently two flights per week and very little competition from full-service network carriers. All three routes have the potential to be served at least once a week with a return flight.

Demand Analysis: Survey Analysis

129

The Potential for Low-Cost Operations from a Theoretical Perspective In summary, the gravity model demand analysis shows that most routes present sufficient demand levels to justify direct point-to-point services. Demand on routes such as Kilimanjaro to Mombasa is very sensitive to a change in ticket costs, whereas on routes such as Kigali to Dar es Salaam demand does not react to a change in airfare. It may be argued that the price elasticity on the route Kilimanjaro to Mombasa stems from a substantial amount of holidaymakers and VFR traffic, whilst Kigali to Dar es Salaam connects the countries’ main business centres, therefore showing a very inelastic demand. Nonetheless, even on the routes with an inelastic reaction to the change in travel costs or to shrinking demand when tickets become cheaper, most routes show sufficient demand levels to justify weekly aircraft operations. Nairobi to Entebbe and Dar es Salaam to Kigali were deemed unfeasible from a demand perspective if the potential for stealing traffic from incumbents is neglected. Kilimanjaro to Entebbe can potentially be operated if the desirable load factor to argue for the operation of a weekly return flight is set at 67.5%. Overall, the analysis showed an even split between those markets that react to a reduction of the ticket price with a growth in demand and those where demand drops with a further reduction in ticket costs. A closer examination of the routes, however, reveals that those routes reacting negatively to a reduction in price are those routes with most business traffic between business centres of the respective countries. Routes reacting very good to reduction in price are those, where a lot of holidays and VFR traffic may be expected. This highlights that a potential low-cost carrier will benefit from the stimulation of latent demand, especially by attracting VFR and holiday traffic.

Demand Analysis: Survey Analysis The theoretical approach taken in the gravity model analysis resulted in favourable outcomes for the potential of the European low-cost carrier model on the East African aviation market by studying the natural and latent demand for air services in the countries Rwanda, Uganda, Tanzania and Kenya. Nonetheless, the author deemed it as insufficient to base the argument solely on a theoretical approach, and, therefore, the potential for latent demand on certain routes was further studied by conducting a survey analysis in order to make more precise predictions about demand patterns prevalent in the respective countries. In total, 319 surveys conducted on the routes between Kenya and Rwanda (n = 81), Kenya and Uganda (n = 100), Kenya and Tanzania (n = 69) and domestic Kenya (n = 169) entered the analysis. The core aim was to analyze the potential of latent demand coming from coach passengers, who are willing to switch from land transport to air transport if the reason for not travelling by plane was eliminated. This

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aim was accompanied by the objectives to understand the general travel behaviour of coach passengers in the markets under study and the level of importance passengers put on certain trip factors. A further objective was to understand the passenger’s price sensitivity as it was assumed that the cost of travel is the main reason why people travel by coach rather than by plane. To support the following analysis, key aspects will be taken out of the survey results rather than analyzing each survey question separately.

Analysis of Travel Characteristics This analysis will give the reader an overview of the general travel behaviour of coach passengers surveyed. The respondents selected their purpose of travel from a total of four different options. Where the respondents gave work purposes as an answer to “other purposes”, this was added to business purposes (Fig. 4.3). All routes experience a high proportion of business traffic between origin and destination cities. This is around 50% in the market from Kenya to Tanzania and Rwanda, as well as domestic Kenya. In Uganda, 24% of the respondents state “other travel purposes” as their main reason for travelling during the research period. This is contrary to other markets, where only around 12% (Kenya) and 18% (Tanzania and Rwanda) of travellers had other purposes than the three given. Most “other purposes” include people who are returning home. However, it is unknown if and in how far, this may lead to bias in the sample if people are returning home from a

Fig. 4.3 Purpose of travel

Mode of Transportation and Importance of Certain Trip Factors

131

business trip or family visit. Moreover, religious and spiritual reasons were given as a common purpose for travelling on the route from Kenya to Uganda.

Mode of Transportation and Importance of Certain Trip Factors

100 90 80 70 60 50 40 30 20 10 0

Uganda No. of Respondents

No. of Respondents

As highlighted in Fig. 4.4, the vast majority of coach passengers on all sample routes use coach services frequently and list them as their usual mode of transportation. Only in the more developed countries Tanzania and Kenya, which have a better road infrastructure and a significantly higher urban population than Rwanda and Uganda, the use of minibuses also plays a role as a mode of transportation. Unsurprisingly, air transportation does play an insignificant role as a usual mode of transportation in all markets. It may be hypothesized that this is due to the high fares, airlines charge for their very infrequent services between the cities under research. This argument is also reflected in the responses to the importance of travel time and the cost of travel. Nearly all respondents ranked the “importance of price in choosing the mode of transport” as very important, which gives a first indication of why air travel plays such a minor role in East Africa. Total travel times also do play a role in choosing the mode of transportation but seem to have much less impact than the ticket price. This again hints at a high price sensitivity of respondents in choosing their mode of transportation (Fig. 4.5).

Coach

Car

Plane

No answer

Kenya No. of Respondents

120 No. of Respondents

Minibus

100 80

60 40 20 0

Coach

Minibus

Car

Fig. 4.4 Usual mode of transport

Plane

40 35 30 25 20 15 10 5 0

90 80 70 60 50 40 30 20 10 0

Tanzania

Coach

Minibus

Car

Plane

Rwanda

Coach

Minibus

Plane

Very important

Important

Importance of tota travel me

Neither Less important Not important important nor at all unimportant

Importance of price

Important

Uganda

Importance of tota travel me

No answer

Less Neither Not important No answer important nor important at all unimportant

Importance of price

Very important

Tanzania

Fig. 4.5 Importance of travel time and price in choosing mode of transport

0

5

10

15

20

25

30

0

5

10

15

20

25

30

35

35

No. of Respondents

No. of Respondents

No. of Respondents

0

5

10

15

20

25

30

35

0

5

10

15

20

25

30

35

Very important

Very important

Importance of tota travel me

Neither Less important Not important important nor at all unimportant Importance of price

Important

Kenya

Importance of tota travel me

Neither Less important Not important important nor at all unimportant

Importance of price

Important

Rwanda

No answer

No answer

4

No. of Respondents

132 Demand Patterns in Air Passenger Transportation: Application of Gravity Model

Trip Costs

133

Air Transportation Usage A first indication of the passenger’s price sensitivity in the market is their response that the cost of air travel is the main reason they had never travelled by plane before (Fig. 4.6). Safety concerns were amongst those reasons that had the second most responses as a reason for never having travelled by airplane before. Nonetheless, the percentage of people who would fly rather than taking the coach if it was more affordable is significant. In all markets, at least 90% of respondents would fly if it was cheaper.

Trip Costs In terms of trip costs, and as assumed earlier in this chapter, the primary reason for coach travel amongst the sample population is the trip cost advantage of coach travel over air travel, with either very little to no flight connections between city pairs at very high prices. As outlined earlier an African consumer still pays almost 50% more for a ticket than his counterpart elsewhere for a flight of around 3000 km. Both the lack of available alternatives in terms of substitutes or competing airlines, very low frequencies and the wealth of those travelling are reflected in the continent’s lowerthan-average price elasticity of demand. Thus, one objective of the conducted survey research is to investigate this price sensitivity and to see how much a coach traveller would be willing to pay more—if anything—for the same route. As found in the research conducted, passengers are generally willing to pay slightly more for an air ticket than for coach travel on the same route. On average, passengers travelling between Kenya and Uganda as well as Kenya and Rwanda are generally willing to pay around USD 50 for a one-way ticket between origin and destination. Figure 4.7 combines the actual price paid for a coach ticket and the additional amount passengers would be willing to pay. This is divided into the lowest price that passengers are willing to pay on the route, the highest price stated by passengers and an average between the two. Unsurprisingly, the shorter the route, the less are passengers willing to pay for air travel. With the distance of trip, the willingness to pay more for air travel increases. These findings also underpin the finding from the demand analysis that latent demand can be stimulated with a reduction in ticket price. The average price coach passengers would be willing to pay for air travel on the same route is, however, lower than the average ticket cost on the routes under study. Nonetheless, it signals the potential to stimulate latent demand through a reduction in airfare. On average, most coach passengers on the market between Kenya and Rwanda as well as Kenya and Uganda would switch to air transportation at a ticket cost of USD 50 one-way. For the market between Tanzania and Kenya as well as the domestic Kenyan market, the average ticket price that stimulates most latent demand is around USD 40.

4

Demand Patterns in Air Passenger Transportation: Application of Gravity Model

Fig. 4.6 Main reason for never travelled by plane before

134

Research Study Example

135

Fig. 4.7 Total cost of air ticket

Interim Conclusion • The gravity model demand analysis shows that most routes present sufficient demand levels to justify direct point-to-point services. • Six out of nine routes yielded sufficient demand levels to operate an aircraft at a typical low-cost seat configuration of 145 seats at least on a once-weekly return basis. • Overall, the analysis showed an even split between those markets that react to a reduction of the ticket price with a growth in demand and those where demand drops with a further reduction in ticket costs. • The survey analysis underpins the findings from the empirical demand analysis. • The main reason for passengers never having travelled by plane is the high cost of an air ticket. Nonetheless, over 90% of respondents would consider travelling by plane if it was more affordable to them. • The price at which most coach passengers would consider flying rather than taking the bus is USD 50 on the routes between Kenya and Uganda as well as Rwanda and USD 40 on the routes between Kenya and Tanzania as well as domestically within Kenya.

Research Study Example This study presents the research design, research procedure standards employed, data compilation methods and a comprehensive literature review conducted on the current aviation in the African continent with a particular focus on the regional economic committees that have taken it upon themselves to bring about the socioeconomic integration of the African continent. As part of the qualitative analysis articles from the aviation industry stakeholders such as IATA, ICAO, airlines and ministries were examined for relevant information concerning the liberalization efforts and the challenges therein. The quantitative

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analysis in the study follows the Gravity design model where data collected from airline websites showing the correlation between liberalization and its impact on productivity of the airlines is analyzed. Using Data collected, a quantitative analysis was conducted to study the pros and cons of impact of liberalization on the aviation landscape of Africa. A quantitative analysis based on the data from Pan African aviation industry showed compelling evidence that liberalization has led to an overall growth of aviation notwithstanding the current Covid pandemic. Further validation was done using a triangular technique where the analysis, the data and the models were analyzed to establish the correlation. The quantitative data was analyzed for regression and T-tests using coefficients to arrive at descriptive statistics that indicate a relationship between the state regulatory policy or liberalization and the consequent increase in traffic.

Consumer Surplus Consumer surplus is a term in economics that refers to the amount that consumers benefit by being able to purchase a product for a price that is less than they would be willing to pay. Consumer surplus is a concept frequently used in economic welfare analysis. The concept is illustrated in Fig. 4.8, which shows a standard demand curve representing the relationship between price and quantity demand—as price declines the amount demanded increases. As the initial price P0, the consumer surplus is represented by Area A. Consumers to the left of Q0 were willing to pay a price higher than P0; summing the difference between each consumer’s willingness to pay and the P0 produces a consumer surplus equal to area A. If the price is reduced to P1 (e.g. in the air market, fares are reduced), then the consumer surplus is increased by an amount equal to Area B and Area C. It is this gain in consumer surplus (Area B + Area C) that is provided in this report. As Fig. 4.8 Consumer surplus. Source: Author

Figue C-1: Consumer Surplus Price

Area A Area C

P0

Area B

P1

Demand Curve 0

Q0

Q1

Quantity

Gravity Model: Detailed Description of the Model

137

suggested by the diagram, this gain in consumer surplus is comprised of two elements: • Area B: The fare savings for existing passengers, calculated in this analysis as average fare saving X number of existing passengers. This element represents a transfer of producer surplus to consumer surplus. • Area C: This is a net gain in welfare resulting from additional passengers being able to access air services due to the lower fare. It should be noted that the calculation of consumer surplus benefits is based purely on fare reductions. However, consumers will also benefit in other ways: more direct services, greater frequencies, and more choices of airlines. These benefits are difficult to monetarize and have not been included. As a result, the consumer benefits may be understated.

Gravity Model: Detailed Description of the Model Country pairs are evaluated against regulatory variables where each country pair is considered an independent entity. The dependent variable consists of yearly two-way origin destination traffic between the country pair. This model evaluates passenger traffic as a function of the regulatory variables and the attributes of the relevant air service agreements. This model was originally conceived using crosssectional data from over 800 country pairs. The cross-sectional analysis assumes that a particular relationship between the traffic and the extent of liberalization applies to every market. Each country pair would have specific variables, traffic volumes, airline conditions and degree of liberalization. The study checks the variations in the economic activity and further goes on to explain the variations in passenger traffic between country pairs to variations in the bilateral agreement. This method qualitatively evaluates the efficiency of air service agreements in arriving at the desired objectives. As the sample is quite large and countries across the world have a wide range of approaches to liberalizing aviation, the inferences would have a fair level of reliability. The description of the gravity model is as follows: TrafficAB = F GDPAB, ServiceTradeAB, InterveningAB , BilateralFactors ð0, 1ÞAB Gross Domestic Product (GDPAB) GDPAB is the product of the GDP of two countries with the assumption that the GDP of each country would have identical influences on the level of traffic. The GDP data is a significant variable sourced from World Bank world development indicators. Gross Domestic Product (GDP), calculated from the purchasing power parity method, measures the total magnitude of economic activity in any nation.

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ServiceTrade (ServiceTradeAB) Unlike goods, services are consumed at the same time and place as they are produced: they cannot usually be stored in inventory. Service activities include Insurance, financial assistance, medical services, management and consulting. Since they usually require a close interaction between the seller and the consumer, the sale of services is an important determinant of the demand for travel. It was not possible to obtain data on services trade data for each potential country pair. The model, therefore, uses a gravity-type relationship between each nation’s services trade with all countries to define a country pair propensity. The “Service Flows” term for the country A-b was expressed as: Exports of Services by Country A x Imports of Services by Country B þ Exports of Services by Country B x Imports of Services by Country A .

Intervening (InterveningAB) The traffic between any country pair is anticipated to be less if passengers could choose from other, closer destinations. For example, Australian residents will view New Zealand as easier as and cheaper to reach than the UK. This proximity will correspond to a lower demand amongst Australians for air travel on the Australia– UK route. Similarly, individuals and businesses in the UK may view Canada as a partial substitute for Australia. This would reduce the volume of Australia-destined traffic originating in the UK. The passenger model uses an “Intervening Opportunity” quantity as a determinant of country pair traffic. For each country in a country pair, the model calculates the sum of the GDPs of every country that is 10% or less distant than the other nation in the country pair. The resulting sum measures the size of closer opportunities. The product of the Intervening Opportunity term for both nations in a country pair proved to be a useful predictor of country pair traffic and displayed the expected negative sign.

Variables Pertaining to the Bilateral Agreements: Bilateral Factors (0, 1) AB Bilateral Factors (0, 1)AB are dummy variables capturing the presence or absence of a specific restriction on the bilateral. For example, if the bilateral allows flights only to named points, then the dummy variable takes the value 1; else, if carriers are unrestricted in the airports/cities they can fly to, the dummy variable takes the

Variables Pertaining to the Bilateral Agreements: Bilateral Factors (0, 1) AB

139

value 0. The dummy variables also have “modifiers” to reflect the circumstances of the individual bilateral. For example, the named points dummy is multiplied by a variable derived from the product of the geographic area of the two countries. This captures the fact that liberalizing this term will have minimal impact on geographically small island nations with only one major airport (e.g. the bilateral for Singapore–Mauritius) than on large countries with multiple airports (e.g. The bilateral for Australia–USA) Each of the dummy variables are described below: Permitted Number of Airline Designations. Bilateral Agreements usually specify the number of airlines permitted to fly any route between the two countries. A “0” denotes a dual or multiple designation; a “1” otherwise. This digit is then multiplied by the distance between the two countries. A country pair can only benefit from a multiple designations if one or both countries have more than one airline fit, willing and able to operate the route. Furthermore, each such country must be willing to allow its own airlines to compete. • An airline seeking to operate long-distance services must usually use wide-body aircraft. It will require a network of feeder services using smaller aircraft. In contrast, many short-haul services use much smaller aircraft, and can serve strictly point-to-point markets. The airline operating long-haul services requires very substantial physical and financial resources. Comparatively few countries have more than one airline operating long-distance services. Many are more conservative in allowing competition between their airlines on intercontinental routes, compared to shorter and highly fragmented regional markets. A single designation rule would therefore be more onerous to short-distance services than to longer flights. • Capacity Controls. Many experts consider capacity controls as particularly inimical to market growth, and a key trait of a restrictive agreement. Sometimes the limits are written directly in the agreements. Lengthy negotiations are often necessary to increase the limits. In other instances, such as “Bermuda” agreements, the capacities are subject to a regular process of consultation. In either case, the airlines flying between the two nations have many opportunities to curb capacity growth and maintain high fares. • Two variables were employed to model the impact of capacity controls. The first variable was a “1” if capacity was fully predetermined by the agreement (which corresponds to the most inflexible form of capacity clause) and zero otherwise. A second 1–0 dummy applied if a Bermuda-type clause was in force. Both dummy variables were multiplied by GDP, reflecting a hypothesis that capacity controls become proportionately more detrimental to competition as the size of the market grows. • Pricing: This variable is assigned a “0” if the bilateral allows free pricing without significant government control. It was assigned the value “0.5” if the bilateral included a double disapproval (a more permissive form of pricing enforcement). A “1” indicates another regime, such as country of origin or single disapproval pricing. The product of the per capita GDPs of both countries then modified the resultant quantity. This reflected the belief that countries with a large per capita

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GDP would be most likely to generate large volumes of leisure travellers. They would be especially affected by any price rigidities. Furthermore, airlines are most likely to offer incentive fares on routes with considerable leisure traffic. A restrictive pricing regime, which limits their flexibility, would be a proportionately large obstacle to growth in affluent country pairs. • Fifth Freedom Rights. A “1” indicates the absence of any fifth freedom rights in the bilateral. A “0” depicts an agreement with such provisions. The data did not permit a more precise delineation of fifth freedom rights, such as between “intermediate” and “beyond” rights. • Fifth freedom rights can be most valuable for long-haul services, for which intermediate stops may be technically necessary. An ability to “top off” a long distance flights with incremental short-haul revenue or serve a minor centre as part of a longer flight to a more significant destination may be necessary for a profitable route. These factors suggest that a fifth freedom provision may be more important to nation-pairs that are relatively distant. Furthermore, other significant markets should either occur in close proximity to the great circle flight path between the two nations (for intermediate fifths) or reasonably close to either nation. The 0–1 variable is therefore multiplied by the product of the intervening destinations variable (described earlier) to measure the significance of fifth freedom services for each country pair observation. • Named Points: Some bilateral agreements limit services to a very few rigidly defined destinations: others, following a more liberal approach, allow services to any operationally feasible combination. In many situations, bilateral agreements will stipulate a fixed number of “roving points”, for which each nation can choose the precise destinations later. A very flexible definition of permissible routes is most conducive to competition when it involves nations with large areas and many potential destinations. This variable was assigned a value of zero for country pairs with broad route definitions. Those observations with specific point restrictions were assigned a value equal to the product of variables representing the area of the country. The preliminary estimation process used an ordinary least squares algorithm on a double-log specification. This reflects the assumption that many of the processes being modelled are multiplicative. For example, a restrictive bilateral would cause a greater absolute loss of traffic in a large market than in a small one. As is common with many cross-sectional models, the preliminary specification showed problems with heteroscedasticity, as determined by a significant Goldfeldt Quandt statistic. A general least squares procedure, using the GDP variable as a weighing factor, produced the estimates shown in the table on the following page. The regression provided a reasonable “fit” (Adjusted R-Squared of 0.67) and the signs are consistent with expectations. The coefficients on the bilateral related variables are all negative, providing evidence that the artificial constraints posed by bilateral air service agreements constrain the growth of traffic. Furthermore, these obstacles operate not only between well-studied country pairs such as between the USA and the UK, but also in a huge variety of markets, involving countries of all

Using the Model to Estimate the Traffic Impacts of Liberalization

141

Table 4.15 Gravity Model results with regression, t statistics Variable

Coefficient

Standard Error

T Statistic

95% Confidence Interval Lower -0.9673

Intercept Economic variables: GDPAB ServiceTradeAB InterveningAB

-0.42345

0.277463

-1.52

0.24054 0.14279 -0.05739

0.040627 0.033162 0.005125

5.92 4.30 -11.20

0.1609 0.0778 -0.0674

0.3202 0.2078 0.0473

BilateralFactors (0,1)AB Single designation

-0.02101

0.00732

-2.87

-0.0354

Predetermined capacity

-0.03687

0.01016

-3.63

-0.0568

Bermuda capacity

-0.02578

0.00941

-2.74

-0.0442

Single disapproval pricing Fifth freedoms

-0.03629

0.01077

-3.37

-0.0574

-0.00036

0.00012

-1.64

-0.0006

Authorized points

-0.05866

0.01868

-3.14

-0.0953

0.0067 0.0170 0.0073 0.0152 0.0001 0.0220

Statistical fit: R- squared R-squared adjusted F-statistic Observations

0.6796 0.6714 72.9612 812

Upper 0.1204

sizes, stages of economic development, and political systems in every part of the world. These results, therefore, support the hypothesis that restrictive bilateral agreements constrain traffic development. They lead to the rejection of the null hypothesis—that restrictive bilateral agreements have little impact on traffic (Table 4.15).

Using the Model to Estimate the Traffic Impacts of Liberalization The impacts of liberalization were estimated by specifying changes to the terms of the bilateral, e.g. The Bilateral Factors dummies were switched from 1 to zero, where relevant, on each bilateral agreement. The gravity model then calculated the growth in international traffic stimulated by this change.

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Table 4.16 Results of data analysis: Coordinates Liberalization measure Single to multiple designation Predetermined capacity to open capacity Bermuda capacity control to open capacity Single refusal to double refusal pricing Including fifth freedom rights Named point route annexes to open routes Full restrictive to fully Liberal (“grand limit”)

Maximum permissible traffic growth 50.70% 25.00% 17.80% 14.10% 8.80% 97.30% 166.40%

Source: Author

To avoid “extreme” results whereby unrealistic increases in traffic were forecast, the model “tests” in stimulus predicted by the removal of each restriction. Should the predicted stimulus exceed a particular critical value, the stimulus is reduced to that particular value. Furthermore, a “grand limit” capped the total growth resulting from a full liberalization. The limits were estimated by taking a sample of 600 country pairs in various stages of liberalization. Each attribute of the relevant bilateral agreements was examined in turn and subject to a step-by-step liberalization. The model calculated the conditional expectations of traffic resulting from each agitation of the bilateral for each observation, generating a series of calculated stimuli. For each attribute in the bilateral, a maximum limit on the traffic gain from an incremental liberalization was calculated using Chebyshev’s Inequality. Chebyshev’s Inequality: describes very broad characteristics that govern any statistical population. It is “distribution free” in that it does not require any prior knowledge of the population, except that it has a mean and variance. The Process yielded, for each attribute and for a total liberalization, a level of stimulation that would be exceeded by only 10% of the observations. To eliminate the risks of overestimating the stimulus from liberalization, the model superimposed the limits shown in the table below on any extrapolation produced by the gravity model (Table 4.16): In estimating the traffic, the model takes into account the fact that liberalization is a necessary but not a sufficient condition for traffic growth. No new services will result if there is no underlying demand to support them. The model, therefore, examines the air services already operating between each country pair (the model contains up-to-date summary information on services between the 12 countries from airline schedule data). If any such flights already operate, it is assumed that capacity can expand to accommodate demand. If no such flights exist, the model algorithm determines the aircraft most appropriate for a route of that length. If the traffic available is insufficient to support a reasonable level of service, the model assumes that no direct service will arise. The model then examines the bilateral agreement to ascertain if fifth freedom rights are available. If so, it then allocates the traffic to an appropriate indirect service, reducing the estimated traffic due to the undesirability of the indirect service.

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143

Economic Impact Parameters This section describes the development of the economic parameters (employment, GDP etc.) that are used in the model to estimate the economic impact of liberalization. The parameters used a combination of generalized findings and localized data. Aviation: The economic impact of Aviation can be different in different types of economies and in different regions. Accordingly, for this model, economic impact multipliers were developed for each of the 12 countries. The Aviation sector ratios and economic impact multipliers were estimated based on a number of industry statistical publications, reports and government data, including: • The Air Transport Action Group—Aviation Benefits Beyond borders (2012/13). • Economic Benefits from Air Transport series of reports published by IATA. The reports cover Kenya, Nigeria and South Africa. • Employment and GDP data from the statistical agencies of each country. • Additional employment and GDP data from the World Bank World Development Indicators. • Employment data by economic sector from the International Labour Organisation. Tourism: Tourism-related expenditures, employment, GDP and multipliers were based primarily on the following data: • World Travel & Tourism Council (WTTC), Travel and Tourism Economic Impact 2014 (2013 data). • Employment and GDP data from the statistical agencies of each country. • U.N World Tourism Organization (UN–WTO), Compendium of Tourism Statistics, 2014 (2012 data). In order to determine the economic impact of international tourists arriving at individual countries by Air transportation, various tourism ratios were developed including: • Average expenditure per international tourist visit—International Tourist Expenditure data was sourced from the WTTC. The expenditure data was based on all international visitors but excluding domestic tourism. • Employment per 1$ million of Tourist expenditure—Total tourism-related employment was generally sourced from the WTTC and national tourism satellite accounts published by individual countries. Because the employment figures were only available at the industry level and not attributable to domestic versus international sectors, the employment ratios are based on combined domestic and international data. The tourism data has been adjusted to remove the air transportrelated employment in order to avoid double counting the employment impacts already included in the air transport economic impact above. Catalytic Impacts: The approach taken to estimate the catalytic impacts resulting from liberalization was to use generalized parameters drawn from statistical analysis of historical data. This analysis seeks to determine the contribution of air transport to

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economic growth by examining the relationship between these factors over time or compared between different countries (or both). The analysis attempts to control for other factors that also contribute to economic growth (education spending, government policies, investment, research and development spending etc.) in order to isolate the impact of air transport. The parameter from the study found that a 1% increase in a nation’s air connectivity increased the nation’s productivity (measured in terms of GDP per hour or GDP per worker) each year by 0.0068%. The measure of connectivity used for this parameter was a connectivity index developed by IATA. The index measures the number and size (in terms of passenger air traffic) of destinations served, as well as the frequency of service to each destination and the number of onward connections available from those destinations. Whilst the outcome from this parameter is expressed in terms of GDP per hour or worker, it captures the aggregate net effect of a range of catalytic impacts, including trade, investment and business location, which manifest themselves as greater GDP per worker. For example, greater trade allows businesses to benefit from economies of scale as they sell to a larger market. Investment decisions (expanding operations, developing new operations, introducing new technologies) will also have the effect of improving the value-added produced by each worker. The forecasts of increased passenger traffic were used as a proxy for connectivity. This assumption is likely a conservative one as, historically, the connectivity index has grown at a slightly faster rate than passenger traffic. The connectivity parameter was applied to the percentage growth in traffic to estimate the total impact on GDP. The GDP attributable to the catalytic impacts of liberalization stimulates spending by businesses and individuals in the economy and so can be translated into employment impacts. These were estimated based on the average GDP per worker in each of the 12 countries.

Indicative Findings Whilst these plots illustrate a clear effect on liberalization, they should be treated as indicative only as there are other factors contributing to fares and traffic. The econometric analysis controls these factors, allowing the effect of liberalization to be isolated and quantified.

Frequency Model Results showed how service frequency responds to BASA conditions along with other factors such as passenger volumes, fares and distance.

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145

Results from the Econometric Analysis Findings from the econometric Analysis produced plausible results in terms of relationship between the variables where fully liberalized routes reduced average fares by 9% and partial liberalization had a relatively lesser impact on pairs. Fully liberalized routes increased frequency by 41% and partial liberalization had a smaller effect on frequencies. Thus, indicating a compelling evidence that open skies’ policy leads to lower fares and higher frequency. Once all major restrictions are removed from BASAs, there would be a substantial impact on fares and frequencies. In order to compete with global markets African Airlines must modernize their fleets. The growing trend of mergers and alliances that the global Aviation market is seeing would possibly deny the continent a level playing field in terms of the required resources. Organizations like the ICAO must provide a helping hand to developing nations until they acquire the capacity to compete and operate on their own. Such developing countries should be exempted from the requirement of being nationally owned and controlled for their expansion. The safety and modernization of African Airlines should be in conformity with the ICAO standards. The pace of liberalization across African states should be accelerated and brought on par with global standards. African carriers must be provided greater access to global markets. With increased competition, some of the bigger airlines are displaying a predatory approach which impedes the growth of smaller airlines. Infrastructure inadequacies must be addressed by pumping in resources through a cost-effective regulation of the operational costs. There has to be a structured dispute settlement mechanism to resolve disputes within member states for greater integration. Liberalization has led to some of the carriers consolidating their networks and phasing out unprofitable routes in favour of profitable ones. With fifth freedom rights, stronger carriers have entered the market with competitive fares with regional carriers having to reduce fares. Providing subsidies to unviable carriers in poorer countries will hasten the process of liberalization thereby fueling economic growth. This would also help improve connectivity to remote areas. Efforts should be on to reduce protectionist policies and increase regulatory oversight besides administrative improvements. Air travel within Africa continues to be far more expensive in comparison to global standards. Efforts must be put in to make them more competitive. As of 2010, two-thirds of the air transport service in Africa has been liberalized and this is because the liberalization varies by region across states. Whilst physical aviation infrastructure in Africa has improved, there are many non-physical barriers to development such as visa requirements, cumbersome immigration and higher taxes. Although there is economic growth across regions, there are still parameters of Income inequality that dampen the demand for low-cost carriers. In a majority of the routes, there is a domination of the single carrier with only less than half the states having two or more carriers. It has been found that the largest traffic increase could be obtained from liberalizing the most restrictive agreements to the

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Yamoussoukro Declaration (Example: Nigeria). It has been found that a reduction in civil war helps economic growth through growth of air transportation (Tolchaa, Njoya, Brathen, & Holmgren, 2021). According to Njoya (2016), the signatories of the YD have derived benefits such as increase in Air traffic, improvement in quality of service due to competition, increase in private sector investment into air transport sector, increase in African carrier alliances and higher foreign direct investment. The African aviation industry must restructure through joint ventures and acquisitions to achieve economies of scale, they must focus on fewer markets at higher frequency instead of large markets at low frequency. They must improve credibility by phasing out ageing fleets. They must explore the issue of poor liquidity through debt financing needs to upgrade the fleet. Liberalization in Africa continues to be a goal to be achieved for the entire continent purely in terms of the promise of dividends it brings forth. The various stakeholders such as the airlines, airports, the air network service providers, aviation authorities and regulators stand to gain precious mileage in light of the devastation that the pandemic has left behind. The implementation of the Yamoussoukro Decision and SAATM norms is of paramount importance to achieving this objective. The challenges that have plagued the implementation range from protectionist policies fear of domination, lack of trust, lack of a single regulatory framework and political will. In the short term, airlines must explore measures such as: • • • • •

Direct cash injection Rationalizing operational costs Granting of interim traffic rights Financial promotion A coordinated approach to the calibrated opening of borders.

In the long term, they must seek to harmonize regulations, implement SAATM fully, ease ownership rules, liberalize airport services, and prudently examine costs to strengthen their business management. Airports must look towards debt refinancing, fund promotional campaigns withhold dividend payments and have a calibrated approach to open borders. They must rationalize investment promote private investment; boost planning on infrastructure and revise airport concessions. They should devise models of Public– Private Partnership into the architecture of aviation enterprises. This would help at multiple levels in terms of infusing capital besides bringing in additional stakeholders in the overall implementation and management of the regulations as prescribed by the Yamoussoukro Declaration. At a pan-African level there is a need for greater consensus building in order to obviate the challenges of implementation that range from protectionism to corruption. This is possible if the industry can facilitate a pan-African governing body that is empowered to bring all stakeholders on board to achieve the bigger dream of a single African aviation entity. This would accelerate the pace of growth of the African aviation that has tremendous potential yet to be tapped. The air navigation service providers must explore measures to take other stakeholders on board and in the long-term explore technologies to reduce charges and work towards an integration of pan-African service providers. The aviation

Conclusion

147

authorities and regulators must support the immediate financial needs of aviation authorities and in the long term develop institutional frameworks for sustained finance.

Conclusion It is evident from the discussion presented in this chapter that the East African aviation environment is unique both in an economical as well as operational spheres. This presents airlines operating in this market with a host of challenges that are both similar to those of their counterparts in other world regions and unique to the particular East African operating environment. Given the small contribution Africa as a whole currently makes to global air transportation, it is not surprising that research into the suitability of the low cost model on the African market is extremely scarce if not non-existent. Nevertheless, the chapter analysis has contributed to an understanding of the low-cost model and its potential sustainability from a demand perspective and practicability in the East African context. It is clear from the research undertaken that most routes present sufficient demand levels to justify direct point-to-point services between the sample city pairs at a typical European low-cost aircraft configuration. To aid the analysis, an Airbus A319 aircraft at a 145-seats configuration was chosen and, to highlight the viability of the model, the desired load factor was set to 100%. The analysis showed that even without the stimulation of latent demand through a reduction in airfare, the current demand outlook for East Africa is widely positive. Nonetheless, some routes showed a negative development of demand patterns for the coming years if fares are kept at the current level. Amongst these are the markets between Nairobi and Kigali as well as Entebbe and the market between Dar es Salaam and Kigali. Unsurprisingly, the research found that a significant reduction in airfare stimulates latent demand on most routes, as more people are willing to travel if ticket prices decrease. Routes that show a strong elasticity in demand are especially those between Uganda’s and Rwanda’s major cities to Mombasa. This is assumed to stem from a strong holiday and VFR traffic potential on the routes, as Mombasa is a preferred holiday destination both for regional and international tourists. Having applied the chosen aircraft model to the market, the analysis showed a viability of the European LCC model on most routes. Six out of nine studied routes yielded sufficient demand levels to operate an aircraft at a typical low-cost seat configuration for at least a weekly return flight. Nevertheless, some routes show resilience to the stimulation of latent demand by a reduction in airfare. It may be assumed that demand is influenced by other factors, which are a stronger driving force behind demand for air travel. The conducted survey analysis assists and underpins the findings of the theoretical approach. It is shown that the coach passenger’s price sensitivity is very high, and, thus, the main reason to travel by coach is the low-ticket charges. Nonetheless,

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90% of respondents indicated that they would consider travelling by plane if it was more affordable to them. Besides, the survey results imply that if fares for one-way tickets in the market can be brought down to USD 50 and USD 40, respectively, the potential for low-cost airlines to stimulate latent demand is immense in all markets under research. Therefore, it can be concluded that the European low-cost model is practical in the East African market from a demand perspective. Glossary First Freedom: The right to fly and carry traffic over the territory of another country without landing. Second Freedom: The right to land in another country for technical reasons such as refueling or maintenance without boarding or deplaning passengers or cargo. Third freedom: The right of a carrier from a country to carry passengers or cargo to another country. Fourth freedom: The right of an airline from one country to land in a different country and board passengers travelling to the airline's own country. Fifth freedom: There is the right of an airline from one country to land in a second country, to then pick up passengers and fly on to a third country where the passengers then deplane. Sixth Freedom: The right to carry traffic from one country through the home country to a third country. Seventh freedom: The right to carry traffic from one country to another state without going through the home country. Eight freedom: The right to carry traffic between two points within a foreign country (domestic traffic) as an extension of a service starting or ending in the airline's own country. Ninth freedom: The right to carry traffic between two points within a foreign country with no requirement to start or end the service in the Airline’s own country.

References Adler, N., & Hashai, N. (2005). Effect of open skies in the Middle East region. Transportation Research Part A: Policy and Practice, 39(10), 878–894. Boeing. (2019). Commercial market outlook 2020–2039. Accessed May 18, 2021, from https:// www.boeing.com/resources/boeingdotcom/market/assets/downloads/2020_CMO_PDF_ Download.pdf Button, K. J. & Hensher, D. A. (2000). Handbook of transport modelling. Doganis, R. (2006). The airline business (2nd ed.). Routledge. Young (2012), Private Equity Round-up – Africa. Doganis, R. (2010). Flying off course (4th ed.). Routledge. Doganis. (2012). The airline industry in a period of structural instability (unpublished Lecture Notes). Elhorst, J. P. (2014). Spatial econometrics. From cross sectional data to spatial panels. Springer. Greene, W. H. (2002). Econometric analysis William H. Greene (5th ed.). Prentice-Hall.

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Harvey, D. (1951). Airline passenger traffic pattern within the United States. Journal of Air Law and Commerce, 18, 157–165. Hazledine, T. (2009). Border effects for domestic and international Canadian passenger air travel. Journal of Air Transport Management, 15(1), 7–13. Matsumoto, H. (2007). International air network structures and air traffic density of world cities. Transportation Research Part E, 43, 269–282. Muvingi, O. (2012). Restructuring air transport to meet the needs of the southern African development community. Cranfield University. Njoya, E. T. (2016). Africa’s single aviation market: The progress so far. Journal of Transport Geography, 50, 4–11. https://doi.org/10.1016/j.jtrangeo.2015.05.009 Oppenheim, N. (1995). Urban travel demand modelling: From individual choices to general equilibrium. Wiley-Interscience. Paelinck, J. H. P., & Klaassen, L. H. (1979). Spatial econometrics (Vol. 1). Saxon House. Richmond, S. B. (1951). Forecasting air passenger traffic by multiple regression analysis. Journal of Air Law and Commerce, 22, 434–443. Tolchaa, T. D., Njoya, E. T., Brathen, S., & Holmgren, J. (2021). Effects of African aviation liberalisation on economic freedom, air connectivity and related economic consequences. Transport Policy, 110, 204–214. Zheng. (2013). Forecasting: Econometric methods (unpublished Presentation). Cranfield.

Chapter 5

Africa’s Air Transport Infrastructure: Challenges, Complexities and Opportunities

Keywords Air transport infrastructure · Financing · Public–private partnership · Investments · Revenues · Air traffic · Airport privatization · COVID-19 The global industry size of airports is enormous and they are well over 4000 airports across the globe with scheduled traffic. According to Airport Council International (ACI), a global trade group for the world’s airports, these generated revenues of US $172.2 billion in 2017 up 6.2% year-on-year. The airport industry has steadily expanded in recent years, driven by strong growth in passenger traffic. In 2019, total trips exceeded 9 billion—up 3.4% year-on-year (IFC, 2021). In African airports, the picture is different. Africa’s aviation growth trajectory seems to have gained traction, as demand for air travel is projected to hit 5.8% growth rate (IATA, 2021) within the next 20 years signalling a myriad of opportunities for investors, airlines and airport operators. While it is evident that the aviation industry has the potential impetus to fuel economic growth within the African continent, several impediments still exist that may undermine faster progress. Indeed, aviation is a catalyst driver for growth and development, making beneficial impacts such as driving inbound investments for economies, creating employment opportunities. As passenger volumes continue to grow and airlines worldwide expand their fleets, airport infrastructure is fast becoming a growth bottleneck. Even though Africa makes up 12% of the world’s total population, but only has 2.5% of the world’s passengers. So, why is there such a massive gap? The continent has over 2900 airports and only a small number are considered to be fully modernized hubs and an estimated 261 in Sub-Saharan Africa (World Bank, 2010). The airports in Africa can be clustered into three groups: (i) Major international airports. Currently, there are five major international airports (Addis Ababa, O.R. Tambo and Nairobi, Cairo International Airport and Cape Town). These major airports act as gateways to the continent for intercontinental traffic and hubs for distribution. The airside infrastructure in such major hubs as O.R. Tambo and Nairobi, meets high international standards in runway length, instrument-loading systems and so on. © The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 E. Samunderu, African Air Transport Management, Advances in African Economic, Social and Political Development, https://doi.org/10.1007/978-3-031-29324-5_5

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(ii) Medium-sized airports. The medium-sized airports are connected to the hubs and primarily serve international and domestic traffic. (iii) Small airports. These small and often nonviable airports act as the distribution points for frequently declining domestic air traffic. Africa has all the components necessary to build a robust and prosperous aviation industry. However, for all the potential that exists in the region, Africa’s airlines still struggle to compete with overseas carriers.

Airport Operations To understand airport operations, one has to examine the airport operating model. Over the last number of years, airports have attempted to recalibrate their business model in order to drive revenue streams. The principal source of revenue comes from aeronautical activities related to airlines (slots), passenger and freight processes and non-aeronautical revenues, which comprises commercial revenues, from sources such as land lease, duty free, retail and parking fees. The profit model of an airport is shown in Fig. 5.1 and highlights some of the key characteristics underlining airport operations. In advanced markets like Europe and the USA, airports have effectively become business models designed to drive significant levels of revenues from two key streams, thus, non-aeronautical and aeronautical revenues. The composition is structured as depicted in Fig. 5.1. The figure illustrates how non-aviation activities with significantly higher profitability can create various airport opportunities (Fig. 5.2). In Africa, the government under the wing of the civil aviation authority generally manages airports, hence they are functional infrastructures. They lack wellestablished retail and concessions, which are key sources of non-aviation-related revenues. For Example, London Heathrow airport boasts vast retail space, which is ideal for passengers travelling in transit to spend in the airport’s duty-free shops. In Asia, Changi airport, one of the largest transportation hubs in Singapore has cinemas, and fully-fledged shopping malls.

African Civil Aviation Commission The African Civil Aviation Commission (AFCAC) was created by the Constitutional Conference convened by the International Civil Aviation Organization (ICAO) and the then Organization of African Unity (OAU, now African Union AU) in Addis

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Industry structure – Airports: Range of non-aviation services Based on the non-aviation strategy, non-aviation services have to be further analyzed, i.e. either a service go-to-market strategy has to be developed or an exit plan prepared Gastronomy

Hotel

 Event mgmt  Restaurant –Terminal –Public area –Cafeteria  Ancillary services: –Cleaning –Laundry –Delivery –…

 Hotel accomodation  Guest relations services  Transportation / shuttle services  Conference center  Ancillary services: – Cleaning – Laundry – Catering

Advertising & e-trade

Real estate service

Retail

 Purchasing  Inventory mgmt  Shelf stocking  Marketing, advertising & sales concepts  Sales  Logistics  Casinos / gambling / entertainment

Service evaluation framework

 Rental  Marketing  Contractual administration  Maintenance of real estate / space –Terminal –Offices –Service areas –Shops –…

 Airport advertising  Online sales/ marketing of airport publications and events  Airport TV  Airport loyalty programs

Core vs. non-core

1. External market revenue? 2. Degree of market competition? 3. Consumer demand beyond airport? 4. Internal capability to build available

CORE NON-CORE

Parking

 Operation / administration of parking spaces  Security, VIP, valet parking  Car wash and fueling  Car shop, inspections, (maintenance)  Transport / courier

Security

 Protection of spaces / individuals – Checkpoints – Access passes – VVIPs  Temporary employees  Transportation / courier services …

Insurance

Medical / health services

 Brokering / administration of corporate insurances  Liability insurances  Health insurances (Staff and outside)  Pension / 401k plans  Aviation risk mgmt and insurance

 Corporate medical functions  In- and outpatient medical services –Cleaning –Vaccinations –Travel medicine –Surgical/ specialized medicine

Go-to-market – Maintain and optimize – Exit 1. Develop go-to-market strategy outside of airport 2. Develop go-to-market strategy within airport 3. Maintain, focus on cost optimization 4. Exit / do not enter

Fig. 5.1 Industry structure—Airports: Range of non-aviation services

Airport Revenue Model Example : Airports applying innovative business designs focusing on generating non-aviation revenues achieve higher performance than airports with traditional business designs

Traditional airports Strong aviation focus

5% Lease / rentals concessions 30%

Innovative airports Innovative concession and partnering concepts

Typical performance metrics:  Growth 5 - 10% p.a.  ROS approx. 10%

Aviation 65%

Equity holding / consulting, etc. 20%

Lease / rentals concessions 50%

 Market cap / revenue approx. 1x Aviation 30%

Revenue breakdown

Typical performance metrics:  Growth 10 - 20% p.a.  ROS > 20%  Market cap / revenue approx. 3-5x

Revenue breakdown

Source: Author

Fig. 5.2 Airports—The economic rationale: Non-aviation with its significantly higher profitability creates various airport opportunities

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Ababa, Ethiopia, in 1964. AFCAC was fully established and began functioning in 1969 and on 11 May 1978 became an OAU Specialized Agency in the field of Civil Aviation. From inception, ICAO technically, administratively and financially managed AFCAC through African Member State’s contributions. AFCAC became autonomous from ICAO management on 1st January 2007. AFCAC today comprises 54 African States and is managed through a triennial Plenary (consisting of all member States). The Bureau is made up of a President, five Vice-Presidents (representing Northern, Western, Eastern, Central and Southern Africa Regions) and the Coordinator of the African Group at the ICAO Council. A Secretary General heads the Secretariat. AFCAC’s vision is to “foster a safe, secure, efficient, cost-effective, sustainable and environmentally friendly Civil Aviation industry in Africa”. The Third meeting of the African Ministers in charge of civil aviation matters which was held on 11th March 2007, in Addis Ababa, Ethiopia entrusted AFCAC with the attributions and responsibilities of the Executing Agency for the implementation of the Yamoussoukro Decision (YD). The Assembly of the Heads of State and Government in Accra, Ghana on 29th June 2007 endorsed the Resolution. To accommodate these added responsibilities, AFCAC adopted a new Constitution at a meeting of Plenipotentiaries, which was held in Dakar, Senegal on 16 December 2009, and the Constitution came into force on 11th May 2010. AFCAC's key objectives include: • Promote and Encourage development of sustainable air transport system in Africa. • Promote and Encourage development of sustainable air transport system in Africa. • Coordinate, promote and supports the sustainable development of Air transport with in African Civil Aviation to facilitate and accelerate the Integration and free movement of people and goods. • To promote and encourage the development of common African civil aviation policy.

Investment and Growth in Air Transport The lack of investment has stifled any promise of full growth. For decades, Africa has suffered from this lack of investment, strategic vision and tactical mismanagement, which has subsequently led to a decaying of infrastructure, outdated equipment and unsafe systems on the ground and the air. Outdated air traffic control systems are putting lives of passengers at risk, and in Zimbabwe, the country is using an old procedural control system, which is a method of providing air traffic control service without the use of a radar. It is normally used in regions with sparsely populated areas and oceans, where radar coverage is not feasible, or as a backup

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system in the case of radar failure. The radar system works by sweeping the area it covers with radio waves and recognizing flying objects. However, modern commercial aircraft and many general aviation aircraft carry transponders, which send signals to the radar with the flight number, speed, altitude and other information. The Civil Aviation Authority of Zimbabwe (CAAZ) is negotiating a bridge loan of US$33.3 million from Afrexibank for the procurement of a new radar system. Even though air traffic in Africa is not as dense as in Europe and other major air transport regions, the costly old systems will not be able to cope with congestion in the sky. Due to the global COVID-19 pandemic, the aviation industry has been dealing with multiple pressures due to reduced revenues and airports and airlines are faced with the task of building back passengers’ confidence in air travel and ensuring safety to resume air travel. However, Africa has already underlined problems that have hindered the full development of air transport. From an airport perspective, the following factors need to be considered: • Airport infrastructure in most African countries is outdated and not built to serve the growing volume of passengers or cargo. • Airlines and airports are often managed by government entities or regulatory bodies. • High cost of construction. • Limited revenue streams, apart from aeronautical fees. • Lack of optimizing land use to drive non-aeronautical revenues. • Lack of strategic vision and tactical mismanagement. • Low level of aviation safety and security—This means the continent has experienced a high accident and incident rates primarily resulting from poor regulatory oversight, deficient infrastructure, flight crew errors and undesired state of aircrafts. • Infrastructure capacity and operations limitations—Infrastructure limitations, both at airports and air navigation services constrain the sector's capability of handling higher traffic demand while keeping the required levels of safety and efficiency. Amongst the 200 airlines blacklisted by the EU, more than 50% are African. • Limited access to finance—There is a limited access to finance for the African aviation stakeholders, in particular, for African carriers, given the widespread low profitability results and the lack of solid business plans and strategies. There is no aviation-leasing platform in the continent for African airlines compared to their counterparts in other regions (Europe, North America, South America, Asia Pacific etc.). Lease rates for most African airlines are extremely expensive. This may include 1.25–2% of the aircraft’s market value plus a security deposit (2–3 months payment). In comparison to airlines from other regions ( 20%  Market cap / revenue approx. 3-5x

Revenue breakdown

Source: Author

Fig. 5.5 Airport revenue model

(KCAA) provides oversight of safety and security, economic regulation and the development of civil aviation. The provisions of the International Civil Aviation Organization (ICAO), Standards and Recommended Practices (SARPs), the Kenya

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International Air Traffic Handled at JKIA and MIA 1978 to 2016 2,500,000 2,000,000 1,500,000 1,000,000 500,000 -

ARRIVALS

DEPARTURES

Fig. 5.6 Air Traffic handled at Jomo Kenyatta International Airport and Mombasa International Airport from 1978 to 2016. Source: KNBS, 2016

Civil Aviation Act, 2013 and the national civil aviation regulations, guide KCAA. For example, due to increased flow of international arrivals, the two main airports in Kenya have seen a surge in passenger numbers (See Fig. 5.6).

Changing African Aviation: What Lays Ahead of Africa’s Skies? Lack of market access has also been problematic and continues to put a challenge on African carriers. However, liberalization of air transport in Africa could open a myriad of opportunities for airline carriers, allowing them to increase their network reach with no restrictions. Against the backdrop of CAGR of 5.8%, significant shifts in terms of embracing the continent’s open skies policy through the endorsement of the Single African Air Transport Market [SAATM] which has been dubbed a seismic event in terms of opening up Africa’s air transport market will have fundamental impact on the continent. This signatory accord is expected to stimulate economic growth and boost air transport connectivity. Increased intra-African air connectivity is essential if Africa is to seize the opportunities for development. The lack of air service liberalization meant that not even the low-cost carriers (LCCs) make up 10% of total flights, hence prohibitive prices. Africa’s failure to integrate and liberalize its intra-regional air transport market has been cited as a significant reason why growth in the air transport market has not reached its huge potential. Most countries rely on restrictive bilateral service agreements. This is a paramount reason why insufficient integration and lack of non-restrictive open skies policy present a major barrier to air transport growth in Africa. Open skies agreements do not only enable better competition, it allows carriers of two or more countries to operate any route between the countries without

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interference in decisions about routes, capacity and pricing. The result is better service provision, affordable airfares an efficient service for the consumers.

African Airport Infrastructure Infrastructure is considered a key component of the investment climate, reducing costs of doing business and enabling people to access markets. In general, Africa, by every measure of infrastructure coverage, lags behind their peers in other parts of the developing world. The differences are particularly large for paved road density, telephone maim lines and power generations. The gap exists for both low- and middle-income groups (World Bank, 2010). The main investment need lies in air traffic control and surveillance equipment, which with a few exceptions is largely inadequate. There are several key infrastructure constraints that make it difficult for airlines, and especially those trying to adopt the LCC model to the market, to run with operational ease. Poor infrastructure of most African airports is seen as a principal reason why the region continues to struggle to fulfil its undoubtedly economic potential. These infrastructure problems can hardly be solved due to limited financial resources and will therefore consequently lead to retaining infrastructure problems. In Tanzania, for example only 5 of 26 civil airports can accommodate an Airbus A319 or similar-sized aircraft. In Kenya, this number is five out of 52, in Rwanda one out of eight, and in Uganda two out of 32 civil airports. Thus, poor infrastructure undoubtedly adds to huge running costs. Airports are often stuffed with highcharging monopoly suppliers, in addition to other government taxes. In East Africa, service providers in this sector are—with the exception of Kenya and Tanzania—government-owned civil aviation authority monopolies. Despite poor service, this implies charges significantly higher than the world average. Moreover, Africa also shows a substantial lack of secondary airports, putting an additional burden on low-cost airlines due to higher costs at main gateways. Another further constraint is the infrastructure in Africa. The African Development Bank estimates “that the financial requirement to close Africa’s infrastructure deficit amounts to USD 93 billion annually until 2020” (InfrastructureAfrica, 2015, p. 1). In particular, airports in Africa do not have the capacity for an increase in transportation of passengers and cargo (i.e. landside access and warehouses) (Chingosho, 2009). Underdeveloped infrastructure in terms of road, rail, water and other forms of transport hinders travel between cities and countries in Africa (Chingosho, 2009; Heinz, 2011). Considering the low connection between African countries by road and their worsening condition, road transport is the most dominant transport system, transporting around 80% of goods and 90% of people via motorized vehicles. Furthermore, the railway network shows an undeveloped intra-Africa connection. The report published by AfDB in 2011 indicates that $3 billion are needed to modernize the ageing rail network system in Africa.

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Fig. 5.7 Cost comparison of daytime landing charges for aircraft over 200 tonnes. Source: Author

Figure 5.7 highlights daytime landing charges for aircraft over 200 tonnes at the considered African airports and in comparison to London Heathrow (LHR), one of the busiest and most capacity-constrained and, thus, most expensive European gateways, and London Stansted (STN), an airport that is mostly served by low-cost carriers. All considered African airports are more expensive than LHR, with NBO charging twice and four times the price for landing than LHR and STN, respectively. For example, Senegal in 2015 increased its landing charges by 13% on top of airport development fee of USD$68 per passenger. Some critics even argue that African countries are less transparent with how they use the money for these charges. Another key challenge is the inadequate experience of non-aeronautical revenue generation and not fully exploiting the land mass opportunities by developing modernized infrastructure. Evidently, modernizing infrastructure and operations requires both investment and expertise, ideally from public–private partnerships. This could be the unlocking key to boost progress through privatization hence; Africa needs to open its doors for private capital investment flow. Of course, the complexity of infrastructural gap due to tight government budgetary constraints— government vs private is still a challenging aspect because the majority of these infrastructural projects are government or quasi-government owned. On the local level, banks have relative weak capital coffers, which also limit access to infrastructure capital loans. Investors see some underlining risks in financing airport projects in Africa, namely uncertainty related to forecasts of passenger growth numbers. Other risks are embedded in currency markets, whereby most domestic airport infrastructure with project revenues generated in local currencies, but servicing foreign debt and equity involves payment in foreign currency.

Challenges and Complexities The majority of Africa’s airlines continue to struggle in terms of revenue streams and lack of effective operating models. Air Zimbabwe, which is currently sitting on an estimated $300 m debt, continue to suffer from lack of capacity and massive losses.

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Unless there is a shift in the policy on ownership and control, foreign investors will continue to shy away from Zimbabwe and other African aviation markets. The other side of the coin is, however, not sombre when it comes to Zimbabwe’s tourism sector, which is a major pillar in driving the once-thriving economy. However, an acute shortage of foreign currency remains a major problem despite the country witnessing an increase in the number of tourist arrivals since 2017. With the new Tourism Master Plan, the country will aim to stimulate a double-digit growth in tourism numbers. However, improving airport development by securing capital to finance airport infrastructure development remains a key catalyst driver to steer Zimbabwe’s stagnant economic growth. With limited foreign cash inflow, the Zimbabwe government has to take advantage of the increased tourist destination demand in Africa and attempt to encourage capital flow towards tourism. This of course is challenging taking into account that the government coffers remain visibly weak, so privatizing parts of the tourism service chain may provide a vehicle for raising capital. Thus, aiding growth for an ailing economy requires robust policies and strategies designed to influence foreign investment flow, and verbal rhetoric promises may not be sufficient to catapult economic growth. Steering investors into airport infrastructure development means that out of Zimbabwe’s 21 airports, there are only three airports that provide commercial activity, Harare International, Bulawayo and Vic Falls. The ones that will provide much investor interest will be Harare and Vic Falls because Bulawayo is more or less considered as industrial, hence investors will shy away from Bulawayo. Therefore, the mechanism required to stimulate investment flow means that Harare needs to develop air connectivity with international destinations, which means a viable carrier servicing international markets needs to be in place. Only 12 destinations are serviced from the Harare airport and still does not have enough flight capacity to define itself as sub-Sahara hub. Other countries like Rwanda and Ivory Coast are heeding the call to attract private capital investment, but this comes with a hurdle too because any modernization of infrastructure and operations requires both investment and industry expertise and ideally from public–private partnerships. In the case of Zimbabwe, the civil aviation body is still predominantly state controlled and this only hinders the momentum of creating vibrant aviation growth, which requires “new” best practices. Africa needs to open its doors for private capital investment. This, however, does not eclipse all the legacy carriers in Africa, because three kingpin carriers Kenya Airways, Ethiopian Airlines and not a better South African Airways have certainly paved way for Africa’s aviation growth propensity. However, South African Airways has embarked on a massive restructuring, involving overall capacity being cut by around a quarter and domestic capacity by more than a third as aircraft are trimmed from its fleet. However, Kenya Airways, which continues to display its new fleet and expansion of route network, is now serving direct flights from Nairobi to New York nonstop. That is a remarkable feat even against a turbulent and cyclical market pattern, like recent spikes in fuel prices. Most of the African legacy carriers also face the challenge of operating old fleets, which inherently put pressure on aircraft, cost drivers in particular, maintenance, repairs and overhaul (MROs).

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Even though the African continent is experiencing this surge in growth, it still lags behind the rest of the world in terms of aviation development. What has contributed to the stagnation in growth is mainly to do with increased government protectionism in particular sheltering national flag carriers from competition, which has hampered possibilities of galvanizing Africa’s economic progress in air transport development. Despite limiting factors such as these, Africa’s privatization equation remains visibly slow even though some key markets like South Africa, Nigeria, and the rising East African tiger, Rwanda that is rapidly fostering economic growth, thanks to the shift of political stability and an increasing tourist flow to some of its natural gorilla sanctuaries. One can truly say that Rwanda is becoming a beacon for economic progression after bouncing back from economy battered by civil and political unrest.

Private Sector Engagement in Airport Infrastructure There has always been a desire to improve African airports’ infrastructure in order to ensure that stakeholder expectations are fully met. These expectations include spacious airports, parking aprons for aircraft, good runways, modern baggage carousels improved and efficient technology (FIDS; CUTE, CCTV installations etc.) and efficient ground handling services. This means airports have to provide passengers with a total seamless customer journey experience. This involves various actors across the entire service value chain (See Fig. 5.8). It is evident that there is no one size fits all option of financing, designing bespoke models to cater for the African market may prove to be the effective way through leveraging the private sector to improve airport infrastructure development. Most desired option will be through Public–Private Partnerships (PPPs) with the options through: Service Concessions, Management Contracts, Built-Operate-Transfer (BOT), Built-Own-Operate-Transfer (BOOT) and Multiple Concessions. PPPs are an investment opportunity for the private sector, but traffic has to be above certain thresholds and is not a panacea for government inability to fund necessary airport infrastructure projects. It is also important to note that PPPs with a fair allocation of risks and rewards provide a means to raise necessary funds and expertise based on a realistic business case. The challenge is also how to manage risks; hence, risk mitigation strategies have to be developed to protect the public and private partners, including, e.g. re-definition of the airport value chain, tax advantages and direct subsidies. Successful PPPs are based on attractive assets, clearly defined concessions and a sound business plan. Table 5.1 summarizes the conditions. Since, most African airports are run under government control, it is imperative that a via investment climate is established that private sector engagement from both domestic and international firms. Thus, a regulatory environment and the qualifications of the project partners are prerequisites for goal achievement. The following ideal factors in the development of airport projects are key.

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Mapping of service interfaces between airlines, airport and third party service providers

Passengerarea (Entity A)

   

Baggagearea (…)

Y

p (…)

(…)

b

(…) (…)



PassengerTerminal

(…)

S

(…)

  

Parking areas(de-icing) Pushes

 

(…)

(…)

(…)

(…)

CargoTerminal

Baggagearea (…)

Fig. 5.8 Mapping of service interfaces between airlines, airport and third-party service providers. Source: Oliver Wyman, 2017

Table 5.1 Pillars of successful PPPs Airport Size-traffic volumes at satisfactory levels

Concession Rights and obligations—of the Public and Private sectors should be clearly defined and the technical specifications met

PAX profile—purchasing power to make commercial ventures viable Traffic volume—regular and growing flow of traffic Connectivity—the major markets (tourism and business) should be effectively served

Exclusivity—airport development should be safeguarded from a detrimental level of competition Termination rights—clearly linked to contractual defaults

Business plan Feasible strategy—generating additional traffic and maximizing aeronautical and non-aeronautical revenues Realistic assumptions— with high and low scenarios and sensitivity analysis Financing structure—could make or break a deal Integration—in the overall regional and industrial context

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Regulatory Environmental Factors • Governments should be more open to foreign direct investment (FDI) with respect to the investment code and legal framework. • Political stability is paramount to promote investment confidence and also tax laws and foreign exchange transfers. • Provision of a transparent aviation tariff scheme which leaves room for adjustment induced by legal or macroeconomic factors. • Clear approval mechanisms and clear division of tasks amongst various authorities.

Project Parties • To have the necessary know-how, resources and capabilities for the development of the project. • To have the financial capacity to fulfil necessary equity payments and sponsor support obligations. • To be well connected with the local authorities. • To have specified their relationship amongst each other and third parties in a welldrafted contractual and financial structure.

The Theories of Resources and Capabilities: Strategic Management Perspective Resource-Based View To better understand the reasons why joint airport development with other parties is key, here we examine the theory of why it is paramount to have resource sharing in order to deliver better project outcomes. The government’s privatization strategy of airports means that at least 50% of the project start-up costs should be absorbed by the state. However, the long-term debt/equity ratio as based on a realistic business plan shall not be lower than 70:30 during the term of concession. Private sector firms that will provide the much-needed resource skills will consider such airport projects, when air traffic is above certain thresholds. Risk mitigation strategies have to be developed to protect public and private partners. The next section examines the theory of resources and how this is paramount towards achieving firm-level performance and resulting in the creation of competitive advantage. The resource-based view (RBV) of the firm is built on Penrose’s, 1959 pioneering work, which viewed firms as “bundles of resources and capabilities”. The RBV view makes explicit indications that variance in the firm performance can be best

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explained by examining strategic resources of a firm such as core competences (Prahalad & Hammel, 1990), dynamic capability (Teece et al., 1997). The RBV theory has been widely used by managers in project management. Penrose (1959) argues that unused productive services of resources “shape the scope and direction for knowledge” and this further echoes the point that a firm may achieve higher rents not because it has better resources, but rather the firm’s distinctive competence involves making better use of resources. A firm is said to have a competitive advantage when it is implementing a value-creating strategy not simultaneously implemented by any current or potential competitor. The reason such a strategy is not ordinarily implemented by rival competitors is because they may lack the possession of a valuable resource base. Thus, the strategy literature has established a close relationship between resources (or competences) and competitive advantage. This indicates that the basic approach to strategy formulation begins with the organization competencies or internal capabilities and resources, which are distinctive or superior relative to those of rivals and these, may become the basis for competitive advantage if they are matched appropriately to environmental opportunities. The RBV rationale also emphasizes value maximization of a firm through pooling and utilizing valuable resources (Wernerfelt, 1984; Peteraf, 1993). That is, firms are viewed as attempting to find optimal resource boundaries through which the value of their resources is better realized than through other resource combinations (Das & Teng, 2000). A RBV theory seems particularly appropriate for examining airport development projects because firms essentially use partnerships to gain access to other firms’ valuable resources. Thus, firm resources provide a relevant basis for studying airport development partnerships. The RBV states that firms are fundamentally heterogeneous, meaning that their resources and internal capabilities differ from each other. Consequently, firms with varying resources and capabilities can compete in the market environment. Firms that only hold marginal resources will ultimately fail in a competitive industry. Those firms, which have superior resources relative to their competition can achieve competitive advantages if they are matched appropriately to market opportunities. Furthermore, the RBV further indicates the conditions under which alliances will be preferred over mergers and acquisitions. These conditions are typically associated with the argument that participating firms can obtain or retain resources through collaboration. While partnerships, and mergers and acquisitions can accomplish the objective of obtaining a selected firms’ resources, the RBV suggests two conditions that favour partnerships over mergers and acquisitions. Firstly, strategic partnerships serve a more viable option than mergers and acquisitions when the target firm possesses not all resources are valuable to the acquiring firm. Second, since a certain degree of asset specificity is usually involved, some of the less valuable resources in mergers and acquisitions cannot be easily disposed of without taking a loss.

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Core Competencies Prahalad and Hammel (1990) to provide an approach on how to gain and sustain a competitive advantage in a business introduced the concept of core competences (CC). The theory is derived from the idea that in the short run price and performance characteristics of current individual products determine the competitiveness of a business whereas in the long run a firm’s competitiveness is determined by its capability to develop competences that support the value creation. Within any given industry where competing firms offer their products and services, some firms are able to operate successfully while others fail to do so. Those firms that can achieve above-average profitability are often said to have competitive advantages that allow them to exceed their competition. While some advantages may only last for a short period because they can be easily neutralized by the competition by acquisition or imitation, other advantages are long lived. These long-term and therefore sustainable competitive advantages lead to firms being able to constantly maintain exceptional profitability. A firm’s internal resources also referred to as core competencies, can obtain following Barney competitive advantages. Core competence has three main traits: (1) it increases perceived customer benefits, (2) it is not easily imitated by competitors, and (3) it can be leveraged to various markets. Core competencies allow firms to achieve better performance than other organizations within the same industry. Generally, a core competence is described as a firm’s capability to perform some aspects in a consistently superior manner compared to its competition, leading to more effective and efficient performance. Additionally, core competencies allow firms to quickly adapt to changing market conditions by providing a platform for continuous innovation.

Dynamic Capabilities The dynamic capabilities framework was developed by Teece et al. in 1997 in order to present a Schumpeterian-oriented approach to addressing the often-discussed question on how companies can achieve sustainable competitive advantage. The framework was developed from the theoretical background in the field of strategic management. Hence, aspects of models like competitive forces, strategic conflict or the resource-based perspective were taken into account. The term “dynamic” describes a company’s ability to address changing business environments by reconfiguring the existing competences and capabilities, even if the scope of change is not clearly predictable. Capabilities are defined as a firm’s capability of “adapting, integrating and reconfiguring internal and external skills, resources and functional competences to match the requirements of a changing environment” (Teece et al., 1997). The dynamic capabilities approach aims at identifying firm-specific capabilities and combinations of resources and competences that lead to exploitable internal and external competences a firm needs to react to a challenging and fast-changing

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environment. Dynamic capabilities are determined by three main factors that constitute the foundation for the framework. First, managerial and organizational processes refer to the routines and practices that can be found in daily operations. It furthermore implies the learning capability of firms. Positions, as the second factor, cover the assets a company has. Amongst others, these can be technological assets, complementary assets, and financial assets, reputational and structural assets. The third factor, paths, refers to the different strategic options a firm can choose from and the paths that are connected to it. A chosen path has direct implications for the current competences of the firm but also affects future opportunities, which is why chosen paths present long-term decisions regarding certain competences. A company’s current position was massively influenced by the choices it made in the past. This phenomenon is referred to as path dependencies since past choices automatically shape the future. Summing up, a company’s capabilities and competences lie in the firm-specific processes that are influenced by the positions and paths. Adaption, integration and reconfiguration of competences can lead to achieving competitive advantage under the condition that the firm’s processes and positions are hard to imitate meaning competences have to be distinctive.

The Impact of Tourism on Promoting Public–Private Partnerships Tourism promotes public–private partnerships. Effective tourism planning requires collaboration and partnerships between the public and private sectors. Consultation enables participants to take joint responsibility for policy choices, facilitates the collection of economic data, and has positive outcomes for national planning. Public–private partnerships in conservation, infrastructure development and investment promotion have been used for many years in Southern Region. Examples include the approach taken by Kenya Wildlife Service, SANParks in South Africa, the Madagascar National Parks Initiative, and Gorongosa National Park in Mozambique. The WWF reports that more than US$19 million has been invested by the private sector in tourism joint ventures in communal conservancies in Namibia since 1998. Even though the African continent is experiencing this surge in growth, it still lags behind the rest of the world in terms of aviation development. Privatization will be a key tool in securing funding for these types of projects. Given the aviation industry’s strategic importance for modern economies and the need to improve and expand infrastructure to respond to the expected increase in air traffic, airport privatization presents itself as a viable solution. Figure 5.9 illustrates some of the challenges facing African airport infrastructure development. It is paramount that private sector engagement will facilitate Africa’s airport infrastructure progress and this means that national governments have to start embarking on privatization agenda. The government and airlines are fragmented

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Lack of commercialization strategies

Airports managed as cost centres rather than revenue sources

Lack of privatisation and profitability views

Lack of funding strategies

Lack of financial resources

Fig. 5.9 Airport expansion projects in Africa

and much of the investment does not fully deliver the necessary improvements. For the last few years, Africa infrastructure has benefitted from some significant improvements and many countries are looking towards investing in the fast-growing continent. Even though Africa has about 15% of the world’s human population, its air traffic handles about 5% of air passengers, which is a steady growth from 2.5% in previous years.In fact, majority of airports in the continent are undergoing expansion in a bid to cater for rapidly growing passenger and cargo traffic volumes. Booming tourism and renewed interest in investing in Africa by foreign companies has left many countries struggling to boost the capacity of their airports. Rwanda has prioritized the aviation industry and has set a zero-tax levy for companies with regional headquarters in Rwanda. Mota-Engil Africa, part of Mota-Engil Group, is an African Engineering company that signed a binding agreement with the Bugusera Airport Company (Airport Concessionaire), for the construction of the Bugusera International Airport in Rwanda, the largest International Airport in the country. Mota-Engil, leader in Portugal with a consolidated position in the ranks of the 25 largest European construction groups, is already well established in 13 countries on the African continent. The construction of Bugusera airport will be capable of handling 1.7 million passengers and is projected to reach 3 million passengers by 2030. This airport infrastructure will serve as a hub gateway to Rwanda and has the potential to attract major carriers, especially from the Gulf. In a quest to ensure further development of Zimbabwe’s biggest airport, Robert Gabriel Mugabe International Airport (RGMIA) enabling it with the capacity to handle bigger passenger numbers and cargo volumes, CHINA Exim Bank has deployed US$37,5 million to fund its rehabilitation and expansion. The funding is part of a US$153 million deal agreed upon with the Chinese lender over 5 years ago. It brings to US$300 million the funding committed to Zimbabwe’s two biggest airports since 2016, when the Chinese helped Zimbabwe complete the US$150 million Victoria Falls International Airport expansion, which increased its capacity to 1,5 million from 500,000 passengers a year.

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In Ghana, similar projects are in place with the expansion of Kumasi International Airport. The project involves the construction of a new passenger terminal with the capacity to handle more than 1 million passengers per year. It also includes the construction of other multiple service facilities at the airport as well as the extension of the existing runway from the current length of 1981 m to 2300 m, in a bid to enable the airport to accommodate wide-body aircraft such as Boeing 737–800. The West African region aviation industry is putting an urgent call to address its infrastructure gaps. Given the current high levels of awareness of how air connectivity has become such a unique and indispensable catalyst for socio-economic growth on the continent. Air connectivity is also seen as one of the most challenged yet most potentially rich economy enhancers. With more than $5 billion investment opportunities in 2020, the region is set to become the next aviation hub. Ghana’s government hopes for private sector help to re-develop its air transport infrastructure to build capacity, including the construction and rehabilitation of airports, runway development, purchasing of airport vehicles and new airline routes that will support the air traffic growth and improve services. Ghana is set to lead West Africa as its future travel hub by investing more than $2 billion in airport rehabilitation and expansion to sustain an efficient air transport system. Benin has set its 10-year project outlook starting with its infrastructure investment including the new $550 million airport, Glo-Djingbe International Airport. The new airport will serve as an economy booster from 2021 onwards. Ethiopia’s 2030 vision is set to triple the size of its airport in Addis Ababa, in comparison to its initial phase. South Africa is investing $800 million in airports and plans to expand its two major airports by 2023. The rise of the economic development in African regions, having six out of the ten fastest growing economies in the world like Ghana, Cote d’Ivoire, Djibouti, Senegal and Tanzania-, boosts the movement of individuals in and to the continent, whether for tourism, for investment or for business purposes. Consequently, more than nearly a hundred airport projects are expected to be developed in the future years all over the continent to satisfy this transportation need. All countries emphasize the vital role of transportation in facilitating trade movement and economic growth, employment and social inclusion. Economic competitiveness is unanimously cited as the first and foremost objective of national transport strategy. The rise of the economic development in the African regions, having 6 out of the 10 fastest growing economies in the world like Ghana, Ivory Coast, Djibouti, Senegal and Tanzania, boosts the movement of individuals in and out of the continent, whether for tourism, investment or business purposes. Consequently, the African region is bracing itself in a surge of over a hundred airport projects, which are expected to be developed in the future in order to satisfy the growing need for air transport services. Table 5.2 lists some selected investment projects that will change Africa’s airport landscape. According to the IATA infrastructure report 2021, some US$1.2–1.5 trillion is expected to be injected into financing global airport infrastructure development up to 2030. This airport investment is geared to develop cost-efficient facilities that balance capacity with demand, while delivering the functionality, levels of service and operational efficiency required to justifying the investment being made.

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Table 5.2 Airport investment projects in Africa Country Ghana

Benin Mali

Uganda

South Africa

Sudan Tanzania

Tanzania

Airport Tamale Airport Kumasi Airport Sunyani Airport Modern Air Navigation Services Centre Kotoka International Airport (KIA) Ho Airport Glo-Djigbé International Airport Mali Losinj Airport

Budget $136 million $80 million $70 million

$274 million $25 million $617 million

Phase I $552.9

Cape Town International Airport

$540 million

Tabora Shinanga Songwe Mwanza Arusha Mtwara Kilimanjaro

Target date 30 months

Phase II Rehabilitation New

3Q 2020

2021

New Proposed new terminal building and runway extension

Hoima International Airport Entebbe International Airport

Port Elisabeth International Airport O.R. Tambo International Airport Khartoum Airport Msalato International Airport Sumbawanga Airport

Status Phase II

Phase I, II and III (new control tower and the rehabilitation of the current runways) New runway, and new international and domestic departure lounges

R4.5 billion

Phase II–VII

$1.4 Billion $ 1.5 billion

Ongoing New

$ 2.6 million

Rehabilitation

Starts 2019 December Begins construction in 2020 2021 2033

2023

4Q 2020

$ 44 million (continued)

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Table 5.2 (continued) Country Nigeria

Airport Murtala Muhammed International Airport Rehabilitation of 20 airport terminals Port Harcourt Airport Anambra’s Elusive Cargo Airport Project

Ethiopia Zambia

Angola Somalia Zimbabwe

Algeria

Sierra Leone

Addis Ababa Bole International Airport Ndola Simon Mwansa Kapwepwe International Airport Copperbelt International Airport New Luanda International Airport Bosaso international airport Grand Reef Airport Robert Gabriel Mugabe (RGM) International Airport Beitbridge Airport Houari Boumediene International Airport Xai Xai Airport Freetown International Airport

Budget $38 Million

Status Rehabilitation

$ 600 million Portion of the $7.2 billion $4 billion

New

Target date

Part of the Airport City Project

2Q 2020

New Terminal

2024

$522 million

New

2021

$397 million $3.8 billion

Ongoing New

2020

$4 billion $153 million

Expansion Rehabilitation

2021

$100 million $674 million $50 million $318 million

New

Expansion

2022

In Burkina Faso, a new project is underway. Ouagadougou Airport serves the capital and largest city of Burkina Faso, Ouagadougou. The airport is located near the city centre and is a hub for national carrier Air Burkina. The European institutions have been taking concessions on the new Burkina Faso airport and foreign investment on the continent is set to increase. The current route map shows that the airport’s activities are focused in the West Africa region, with the exception of Nigeria, where there is no current service (See Fig. 5.10). Despite a massive influx of airport investment projects in Africa, overstating the regional market potential can lead to declining traffic and overall non-profitable investments like the case of Ollombo airport in the Democratic Republic of Congo (DRC).

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Fig. 5.10 Ouagadougou Airport: current route map. Source: CAPA—Centre for Aviation, 2021 Table 5.3 Declining PAX numbers

Year 2013 2014 2015 2016 2017

PAX numbers 15,799 15,919 21,325 12,604 * 9024

Source: LCG Research, 2019 *-58% decline in pax numbers

Case Study: Ollombo Sassou N’Guesso International Airport Since 2005, the government of the DRC in partnership with Weihai International Economic & Technical Cooperative Co., Ltd. (WIETC) a Chinese contractor with a major presence in building key infrastructure and Egis Group, a French multinational company involved in the areas of infrastructure and transport systems, planning, water and environment. Egis is also involved in the business of setting up projects and operations for roads and airports. These two companies have made significant investments to modernize the ailing country’s infrastructure. An investment of $54 million for the construction of a new 25,000-square metre terminal and air traffic control tower was based on the economic potential of the mining and farming resources of the region. The airport started operations in 2013 followed by a massive slump in passenger numbers in 2017. The statistics shows a grim picture of high investments with very low declining passenger traffic (See Table 5.3). Since 2016, there are currently no scheduled services to and from the airport limiting flights to private non-scheduled flights. This reflects some of the implications associated with high-investment projects, which do not necessarily generate high passenger volume.

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Air Traffic Control The Air Traffic Control (ATC) controls and supervises departing, landing and en-route aircraft by assigning pilots appropriate altitudes, headings and procedures ensuring aircraft separation. The primary mandate of air traffic control is to ensure the safe transport of people and cargo by keeping aircraft at a safe distance from each other and expediting the flow of traffic. The other functions include: • • • • • •

Tower/aerodrome control Departure control Ground radar Air traffic data publications En-route control and flight information Approach control

The Role of the African Development Bank in Airport Infrastructure Financing The African Development Bank (AfDB) has played a pivotal role in supporting aviation infrastructural improvement in Africa. This also includes supporting the air safety programs in the Economic Community of West African States (ECOWAS), West African Economic Monetary Union (WAEMU), Economic Community of Central African States (ECCAS) and Common Market for Eastern and Southern Africa (COMESA) as well as the Democratic Republic of Congo (DRC). The AfDB has issued concessional loans for financing projects. In 2020, the bank signed a loan agreement with the government of Tanzania and the loan was valued at $495.59 million for financing three major projects, which include the following: • Msalato International Airport construction project with a share of the sum of $271.63 million. • Construction of the Bagamoyo-Hororo/Lungalunga-Malindi road tarmac ($168.76 million). • The rest, which is $55.2 million, will be used for good governance and private sector development programs. Table 5.4 illustrates AfDB’s framework and guidelines for Air Transport Financing.

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Table 5.4 AfDB’s framework and financing guidelines for air transport Intervention Area 1: Airlines Aircraft purchasing financing • Focused on new single aisle/narrow-body aircraft for reliable airlines with contrasted experience. • Different financing mechanisms: PDPs, guarantees, traditional commercial debt financing under very specific circumstances, non-concessional financing. Leasing platform financing • The purpose is to facilitate the setting up of a trustworthy and efficient leasing company for operating lease purposes, which provides leasing opportunities for those African carriers. • It will be financially supported by: Private Equity through equity participation and/or loan by the private sector. Technical assistance to airline financing • For airlines that are not eligible for aircraft purchase financing support. • The purpose is restructuring and strengthening their businesses to meet the Bank’s requirements (business plan strategy, fleet strategy etc.) • Technical assistance for state-owned carriers to increase the private sector participation in aircraft purchase financing. • The Bank will assume a proactive action towards African carriers: cooperate with AFRAA/IATA to sensitize carriers about opportunities.

Intervention Area 3—Air Navigation Service Providers (ANSPs) The financing guidelines for Air Navigation Services Infrastructure development projects will follow the same rationale as for airport infrastructure financing Remedial investments and technical assistance financing • Grant funds for Air Navigation Service (ANS) infrastructure deficiencies identified by ICAO in low income fragile countries. • Finance technical assistance activities for specific ANSPs (i.e. development of national Performance Based Navigation (PBN).

Source: www.afdb.org

Intervention Area 2: Airports Remedial investments and technical assistance financing • Finance support for brownfield projects to resolve deficiencies and operational limitations. • Loans might be provided for remedial actions and technical assistance at small and secondary airports in low-income and fragile states. • Under exceptional cases (private investment difficult to obtain), the Bank could consider providing financing support to the whole infrastructure development. • Concessional and concessional loans will be provided to cover rehabilitation investments in more standard conditions. Airport expansion projects financing • The AfDB will mobilize resources for the expansion and enlargement of the African airport network, facilitating the private sector participation. • Financing support to cover the capital investment required for airside components development, in coordination with public sector window. • The private sector will mainly focus on landside infrastructure, maintenance and/or operations default. • Both concessional and non-concessional loans will be provided to cover capacityenhancement infrastructure projects. • The Bank’s support to greenfield projects will be restricted to those projects with duly justification (i.e. highly underserved region with high potential traffic prospects). Intervention 4—Policies and Institutional Framework • Finance support to regional safety and security organizations to empower them to carry out oversight functions on behalf of the states. States should be supported as well at developing their safety and security systems and strengthening their institutional frameworks. • The Bank will provide financial support for technical studies. • Grant funding will be the main financing instrument to develop policies and institutional framework. • Financing instrument to be delivered and defined on a case-by-case basis.

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COMESA Airspace Integration Project As part of coping with the growing volume of air traffic worldwide and improving air traffic navigation safety, the International Civil Aviation Organisation (ICAO) mandated in 2010 the progressive replacement of existing ground-based air navigation aids by a more cost-effective satellite-based air navigation technology known as Communication Navigation Surveillance/Air Traffic Management (CNS/ATM). With this system, Air Traffic Services from a single control centre can cover large geographic areas, thereby facilitating rationalization of investments in infrastructure and equipment. The project is largely financed by the AfDB with a budget of US$ 899.776,4. This project was implemented between 2015 and 2016 with the objective to develop a framework for formulation and harmonization of safety, economic, environmental and performance policies and regulations, and to build the initial capacity of the multilateral regulatory agencies of the unified airspace and deploying a regional specialized satellite-based navigation technology. The sector goal of the project is aimed at delivering a safe, efficient air navigation services in a unified airspace to support trade, tourism and regional socio-economic integration in COMESA. The project design was based on extensive consultation with COMESA member states, National Civil Aviation Authorities of member states, airline companies, development partners such as the World Bank, European Union, United States Agency for International Development (USAID) and other various civil aviation stakeholders. The COMESA Airspace Integration Project is expected to liberalize air transportation by harmonizing borders in over 15 countries. The project will also support the transition from an existing ground-based navigation system to satellite-based system. The following outcomes are the key factor expectations: 1. Establish a cooperative legal and regional institutional framework. 2. Prepare a detailed analysis of strategic options for the provision of upper airspace navigation services. 3. Promote private sector participation in financing and operating regional air transport infrastructure and services. If successfully implemented, the common aerospace infrastructure will provide an excellent framework for pooling of technical expertise and cost sharing on regional projects like aviation safety oversight organizations. For example, EAC, CASSOA hosts the East African civil aviation personnel licensing examination. This ensures uniformity in the region as all personnel (pilots, air traffic controllers, instructors, flight operations officers and cabin crew and maintenance technicians) are examined at the same standard prior to licensing. All East African Community states have adopted aviation regulations, technical guidance materials, forms and checklists drafted by the East African Community (EAC), Civil Aviation Safety and Security Agency CASSOA. Enforcement is left to the national civil aviation authorities.

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CASSOA periodically dispatches technical teams to inspect facilities in EAC states, to advise on how the same can be improved and bring them in line with ICAO standards and recommended practices. Burundi, the smallest East African state is a recent beneficiary. In March 2016, Burundi requested, and CASSOA sent a team of experts to evaluate and advise on rehabilitation of aerodrome movement areas, and erection of a modern control tower at Bujumbura international airport. CASSOA undertook to assist Burundi by supervising the project up to completion, train technical staff at Bujumbura airport and equip them with the necessary skills for future construction projects at the airport. Burundi could not have achieved this on its own due to lack of resources and expertise. In Europe, EASA sets standards for EU members, and for airlines of non-EU members that fly into the EU. Common infrastructure ensures harmonization of regulations, policies, technical procedures and standards for the benefit and safety of all countries in the regional integration project. COMESA has made significant progress in developing several initiatives covering trade integration. A free trade area was established by eliminating non-tariff barriers that included removing exchange restrictions and foreign exchange taxes, eliminating import and export quotas and simplifying customs formalities. Despite the progress, COMESA still faces donor dependence in funding key regional integration programs, poor infrastructure, networks, persistent macroeconomic vulnerability, limited policy coordination and human capacity constraints. Coordinating a project of such a magnitude requires well-incorporated countrylevel effort and meeting country specificities and ensuring full understanding, consensus and ownership by member states in order to ensure effective implementation. The project achieved a great success through the creation of ownership and implementation mechanisms by its Steering Committee. However, it is important to note that national sovereignty of airspace remains a major challenge in airspace management because countries are very sensitive to national security. Issues when it comes to entrusting operations of their airspace to foreign entities. Although private sector engagement is key in bringing in the capital input and know how, national security remains an issue and member states were concerned to the involvement of foreign private sector players.

Location Kigali was confirmed as the location of the project because Rwanda over the years has demonstrated strong commitment towards Africa’s open skies policy and availing facilities. Figure 5.11 illustrates some of the airport and air safety programs being financed through the AfDB. The AfDB has also made commitment to support African carriers through multiple financial mechanisms:

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Morocco’s airports Enfidha airport (Tunisia)

Dakar Airport Ethiopian Airlines Ghana Airports Nairobi Airport PASTA-CO, ECOWAS

Msalato Airport

WAEMU, ECCAS DRC Airports COMESA Airspace Integration

Fig. 5.11 AfDB airport infrastructure financing. Source: AfDB, 2020

1. Direct financing of airlines for established airlines with strong balance sheets. 2. Aircraft financing, in particular, for the element not generally covered by Export Credit Agency (ECA). 3. Support for an aircraft leasing entity in order to improve access to smaller African airlines, including secondhand aircrafts. 4. Develop financial instruments such as a guarantee, top-up insurance or adapted leasing facility to meet their fleet expansion needs. Source: www.adfb.com As already discussed earlier in the chapter, the infrastructure gap in Africa has renewed calls for airport terminal capacity expansion, modernization, increase in runway capacity, fuel depots and maintenance hangars. This will mean increase private sector engagement to push for capital investments in projects.

The Financing Gap When examining fleet acquisition, over 30% of the world’s airline fleet is now leased and this has become a growing trend in the industry. However, there is no aviationleasing platform on the continent for African airlines compared to their counterparts in other parts of the region (Europe, Asia, North America, South America etc.).

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Security Trust

First and second Ex-Im Bank collateral package Mortagage Loan Aircraft

Lessor

e.g. Ex-Im Bank First mortgage

Second mortgage

Financial (full payout) lease

Corporate loan Securities AfDB + Other Banks

Airline (Lessee)

Fig. 5.12 Transaction structure of AfDB loan. Source: AfDB, 2020

The AfDB has pledged its commitment to support Africa’s financing in the aviation industry. This has included aircraft financing and in 2011 and 2016 the bank extended over US$200 million to Ethiopian Airlines to finance aircraft acquisition meeting fleet modernization program. Such investments contribute to set the standards for the aviation sector in Africa and operate more modern and fuelefficient fleets. An example of a transaction structure of AfDB loan is shown in Fig. 5.12. The key challenges confronting airport development include the need for airport terminal capacity expansion and modernization, increase runway capacity, fuel depots and maintenance hangers. Over the 12 years, the AfDB has injected over US$850 million in airport terminal construction or expansion.

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Leveraging Private Sector Engagement to Foster Airport Infrastructure Improvement The economic gains associated with private sector engagement in the development and operation of airports have gained traction in many regions, but Africa still lags behind the rest of the world. Most governments have opted for “airport privatization” and facility development in an attempt to finance and develop their own airports. This includes greenfield investment (construction of a new airport site from scratch). This may also include construction of a new airport close to an existing airport in order to absorb air traffic, such as relieving traffic from near airports reaching capacity limits. Other approaches may include upgrading the existing airport infrastructure such as modernizing terminal building, incorporating new airfield ground lighting system, increasing public car parking space and improving runaway surfaces, aprons etc. Countries engage in massive airport and infrastructure expansion because such projects are expected to deliver the following benefits: • Capacity constraints—this means the “new” airport should be capable of providing airlines with more capacity for traffic growth. • Dealing with bottlenecks and challenges related to on time performance. • Easing over traffic congestion. • Ideally, an airport infrastructure improvement should also lift the attractiveness of the facility attracting investors, boosting passenger numbers and attracting new airlines expansion of existing airlines. For example, the West African region aviation sector is putting an urgent call to address its infrastructure gaps. Given the current high levels of awareness of how air transport connectivity has become such a unique and indispensable catalyst for socio-economic growth on the continent. With more than $5 billion in investment opportunities in 2020, the region is set to become the next aviation hub. For example, in Ghana the government is gearing towards more private sector participation and hopes the sector can help re-develop its air transport infrastructure in terms of building more capacity, including the construction and rehabilitation of airports, runway development, purchasing of airport vehicles and new airline routes that will support the air traffic growth and improve services. Traditionally, the privatization approach was applied to develop motorways, bridges, tunnels, power transmissions and telecoms under Build-Operate-Transfer (BO schemes). These schemes allow the national governments to award commercial concessions to development consortia to construct and operate the airport facility for a guaranteed period. The concept of privatization of airports was originally applied on a project-by-project basis as. A way for national governments to determine whether this was feasible on the basis of fostering growth. There are many ways to structure airport privatizations depending on the government’s objectives and its assessment of how best to achieve them. In analyzing past privatizations, Oliver Wyman (2017) identifies four key success factors for effective privatization:

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Spread share ownership: Mitigate entity operational risks

Customer centric focus:

Improve transparency of operations:

Better adjustment to market changes

Finance timings

Provision of innovative solutions to customers

Flexibilities to cope with market uncertainties

Leverage private capital Private sector engagement can provide capital injection for infrastructure improvement Reduce investment burden for governments

Privatization

Fig. 5.13 Core elements relevant to the privatization of airports

• Clear objectives are required to guide scope and transaction design. • Well-defined governance structures to ensure strategy follow-up. • Establishing regulatory frameworks before commencing the privatization process. • Transparent communication with stakeholders to ensure public support is built. Well-designed privatization transactions that take advantage of these key success factors reduce uncertainty for both investors and governments. In turn, the lower risk attracts more-patient investors with lower return expectations. There is no one size fits all models to privatize airport operations and below examines some of the popular models and Africa requires its own bespoke models. Since accessing capital for funding airport improvement is key, below we examine some key elements that are of particular relevance. See Fig. 5.13. 1. Leverage private capital—Engaging with private sector can provide airport civil aviation authorities with a tremendous amount of capital, which is fundamental for infrastructure improvement. Accessing the capital will also reduce investment burdens for governments.

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2. Raise customer satisfaction—Most airports operated by public entities do not put so much focus on customer journey experience. This will include provision of service quality across the entire service chain. The difference between expectations and perceptions of a service encounter constitutes service quality. However, no universal definition is sufficient for all occasions and all purposes. Quality of a service is the result of a comparison between actual and expected performance. Similarly, service quality is seen as the difference between customer expectations about what they want, and what they get. High levels of service quality have the potential to lead to higher customer satisfaction. This is demonstrated in the way that customers who are satisfied are likely to become psychologically attached to the firm and are more willing to buy again. Customer satisfaction is a function of the difference between pre-purchase expectations and post-purchase perceived performance of goods or services consumed. Kotler et al. (2012) and Nysveen et al. (2013) agree that satisfaction is a function of the degree to which performance expectations are confirmed through performance. 3. Create a dynamic workforce—Privatization goes hand in hand with extensive training of airport staff. International operators play a pivotal role in bringing in best practices to the respective operations.

Airport Privatization Models It is imperative that some models are more conventional than others. However, 3 major models have emerged over time and namely include: • 100% private ownership. • Privatization through a long-term concession. • The sale of less than full ownership of an airport. Figure 5.14. illustrates these model options.

The Impact of COVID-19 on Airports The devastating and unprecedented impact of the global coronavirus pandemic and the subsequent travel restrictions on the airport industry and the entire air transport ecosystem are now well known. After a decade of consistent and robust growth in global passenger traffic, the COVID-19 pandemic virtually halted activity at airports around the world in the second quarter of 2020. As a result, the total number of passengers for the year fell sharply from 2019, to a level that the world’s airports had not seen since 1997. Already projections in 2019 painted a very gloomy picture as

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Full Private Ownership The government fully transfers ownership and control to the airport private sector

Long- term Concession Airport operator receives long-term concession (25+ years) to operate the airport, often on a revenue share basis

Partial Privatization This includes the privatization of the airport but the government keeps a significant ownership stake

Sector Policy and Regulation o

There is a need to clarify aviation sector policy

o

Airport operator and regulatory functions need to be separated

Fig. 5.14 Airport privatization models

the industry suffered an unprecedented drop in performance numbers. Airlines, airports and the entire aviation value chain have taken a huge hit in earnings and the figures say it all. Figure 5.8 showed that all in all revenues were hit and no region was spared leaving the world revenue drop by a staggering 56%. Recovery so far has proved to be a hurdle as the world faces waves of the pandemic and continued restrictions on air travel. Because of the global outbreak, both demand and capacity for air cargo fell even though the airlines were charging high rates. However, cargo revenue constitutes roughly around 10% of airport revenues. The speed of the recovery continues to depend substantially on several stakeholders and the level of coordination pursued by national governments worldwide. While the global travel market is still mostly depressed, more and more countries are moving towards the gradual reopening of their borders to vaccinated travellers. Before the pandemic hit in 2020, Africa’s passenger traffic at the key airports was growing and Table 5.5 illustrates the figures. Airport revenues have also been severely damaged as airport operators continue to grapple with weak demand for air travel. Figure 5.15 illustrates the grim reality

The Impact of COVID-19 on Airports Table 5.5 African airports passenger volume before pandemic 2019

183

Airport Johannesburg Cairo Addis Ababa Cape Town Casablanca Nairobi Kigali

Passenger numbers (2019) 24, 321,694 17, 524,104 12, 091241 10, 623,250 9, 929,337 9, 130,954 1, 782,817

Revenue loss in billion U.S. dollars

Source: African Business, 2020 Q1 '20

Q2 '20

Q3 '20

Q4 '20

Q1 '21

Q2 '21

Q3 '21

Q4 '21

Q1 '22

Q2 '22

Q3 '22

Q4 '22

18 16 14 12 10 8 6 4 2 0

Fig. 5.15 Coronavirus: quarterly revenue loss of airports by region 2020–2022. Source: ACI, 2021

facing global airports in terms of massive revenue losses. African airports however continue to face several challenges to growth; namely, the slow implementation of the Yamoussoukro Decision, security threats and political instability, as well as infrastructure and safety gaps due to lack of resources. The safari industry in Africa has been feeling dramatically the impacts of the coronavirus (COVID-19) pandemic. As of June 2021, nearly 60% of safari tour operators related having 75% or more of bookings cancelled. Around 18% of businesses registered 50% of cancellations. The safari industry in East and Southern Africa accumulated more than 12 billion US dollars in revenue in 2018. Due to COVID-19, the top wildlife tourist destinations in the continent, namely South Africa, Botswana, Kenya, Rwanda, Tanzania, Uganda and Zambia, saw a strong reduction in tourism flow. As air transport continues to face uncertainty and tough climate, a full return to 2019 levels is not expected until 2023 and demand across the globe remained tepid in 2021. The majority of African carriers were already in poor financial shape before the pandemic, but the ensuing loss of revenue has driven a majority to the brink. As long as the restrictions and pandemic continue, the carriers will continue “bleeding

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Table 5.6 Quarterly total airport revenues in 2020 by region Region Africa Asia Pacific Europe Latin AmericaCaribbean Middle East North America World

Forecasted (pre-COVID-19) 4300 49,900 59,300 10,500

Estimated under (COVID-19) 2100 20,500 22,200 5200

Percentage change -51.2% -58.9% -62.6% -50%

13,200 34,700 171,900

6200 18,300 74,500

-53% -47.3% -56.7%

Source: International Finance Corporation, 2021

cash” and the African governments do not have the financial resources to support their struggling national flag carriers. Airport revenues in 2020 across the globe were severely weakened and the prospects of a bounce back remain weak. See Table 5.6 for total airport revenues in 2020. Finally, the pandemic will also affect “hubbing”, the dominance of hub airports such as Addis Ababa and Johannesburg, with passengers unwilling to transfer in busy airports and instead seeking direct flights to specific destinations, including secondary cities. In recent years, we have witnessed a stream of literature on hubbing and its impacts (see Brueckner et al., 1994; Button, 2002). The reason for prominence is simple, by combining passengers at a common connecting point, carriers can offer more service to more cities at much less cost than if they tried to connect all these cities by direct flights. However, it is true that new carriers can inject new ideas into market and can act as a stimulus for incumbents to improve their own performance (Button, 2002). Basing this argument on contestable market theory, the sectors such as air transportation have few sunk costs incurred by carriers offering new services and entry, which should be totally free (Baumol, 1982). The fact that some hubs have an extremely large share of their traffic covered by one single carrier (national flag carrier) or two carriers has led to the suggestion that services have been relatively inefficient and these carriers exercise some form of market power. These could mean that some artificial entry barriers could exist, meaning that the existence of large hub and spoke operations prevents smaller carriers offering point-to-point services between the city pair market at non-hub ends of the spoke (Bruechner et al., 1992). Industrial Organization (IO) theory suggests that larger suppliers actually exercise market power because they are free from competitive pressures. Hence, large hub-based carriers (e.g. Ethiopian Airlines—Addis Ababa, BA-London Heathrow; Air France/KLM twin hubs at Charles De Gaulle Amsterdam Schiphol, respectively, Lufthansa at Frankfurt) because they have a large share of market at their hubs. To assess market power enjoyed by a company, measures of market concentration such as Hirschman Herfindahl Index (HHI) are widely used.

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Herfindahl Index Herfindahl–Hirschman Index (HHI) is an alternative approach to assess market power in the form of industry concentration. The HHI gives a broader measure of dispersion by accounting for the market share of each airline carrier rather than the combined market share of the largest firm. It is given by: n

ðMarket Share of firm 1Þ2 þ ðMarket Share of firm 2Þ2

HHI = i=1

þ ⋯ðMarket Share of firm nÞ2 The concept of hubbing is now pushing airlines to forge tighter relationships with airlines in order to establish operational efficiency as well as better ways to drive revenues under current market conditions. The pandemic has also forced African airports to rethink their business models in order to drive revenues. Non-aeronautical revenues represent 26% of total revenues for African airports, compared with a global average of 40%. Therefore, airports need to diversify and Airports Company South Africa (ACSA) is an example of how diversification can be achieved. The company provides technical advisory and consultancy services to other airports worldwide, and operates airports in India, Brazil and Ghana. Amongst the services that ACSA provides to other airports are: • • • •

Engineering design reviews for airport infrastructure. Designing baggage handling systems. Auditing for safety, security and compliance. ACSA is also diversifying into land development. In 2020 it announced the first phase of its Western Precinct development at the OR Tambo International Airport near Johannesburg. • The project is planned to include retail, hotel, conferencing, logistics and parking facilities. The economic crisis will continue to drive lower demand for air travel and in summary; it has affected the following variables: (i) Passenger traffic—the pandemic has reduced passenger traffic worldwide and the closure of airspace in 2021 led to a huger drop in global air traffic. Throughout 2020, many airports remained open for cargo operations, which provided some relief for airports. (ii) Future risks—both future prospects ( financial health) for airlines and a structural change in demand may exacerbate the current situation. This may result in the following outcomes: massive bankruptcies present a major risk for airports, especially for airports that serve as hubs for struggling airlines. Structural demand change is also another impacting outcome. This means that airports have seen a structural change in demand from the crisis and airport performance will continue to be affected by lower than expected GDP growth around the globe.

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Given the severity of the pandemic crisis, government intervention is required in order to support and ensure the aviation sector’s survival. Whilst airports continue to streamline costs to preserve revenue critical action is required from governments and this includes the following measures: (a) Protecting airport revenues. (b) Alleviate airport slot usage requirement (to free up slots for cargo requirements). (c) Reconsider concession fee payments. (d) Provide relief from airport taxes. (e) Call for financial assistance from governments. Considering that most African countries are battling other financial challenges, raising capital to support one sector will prove to be extremely difficult. However, this raises the issue again mentioned earlier in the chapter regarding privatization. Therefore, the recovery of airports will also depend on the airport type and the host country’s response to COVID-19.

Conclusion As a conclusion, as the pandemic continues to obliterate air travel, there is no prospect of revenue generation from passenger traffic in the short term. It is evident that flight cancellations and reduced load factors will continue to put tremendous strain on the cash flow of airlines with low liquidity are likely to be the hardest hit. Some governments may need to provide financial bailouts for their troubled national carriers. This means that African governments should push the agenda for SAATM implementation in order to reap the benefits of air transport market liberalization. This will further create a more favourable cost environment for airlines and will certainly give impetus for some efficient transnational start-ups. In a way, African airports need to use the crisis to rethink how they can develop more diversified revenues. However, the COVID-19 outbreak has hit airports hard, which could stall development in Africa as well as emerging markets. Because of a sharp drop in air travel, airlines have been forced to cut capacity resulting in a sharp fall in revenues. Given the importance of airports to the economic development of cities, countries and regions, the broader impact of COVID-19 on the global economy is unprecedented.

References ACI. (2021). Pandemic resurgence and increasing uncertainty are delaying recovery. Accessed Nov 21, 2021, from https://aci.aero/2021/11/01/the-impact-of-covid-19-on-the-airport-busi ness-and-the-path-to-recovery-3/

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AfDB. (2020). African aviation recovery conference: Coordinating efficient response to the COVID-19 crisis effects on the aviation sector in Africa. Accessed Jan 5, 2022, from www. afdb.org African Business. (2020). Covid affects African Airlines. Accessed Jan 13, 2022, from https:// african.business/2020/12/trade-investment/covid-19-pushes-african-airlines-to-the-brink/ Baumol, W. J. (1982). Contestable Markets: An uprising in the theory of industry structure. American Economic Review, 72, 1–15. Bruechner J. K., Dyer N. J., & Spiller P. T., (1992). Fare determination in airline hub and spoke networks. Department of Economics, University of Illinois, Working Paper. Brueckner, J. K., Dyer, N. J., & Spiller, P. T. (1994). Economies traffic density in the deregulated airline industry. Journal of Law and Economics, 37, 379–415. Button, K. (2002). Debunking some common myths about airport hubs. Journal of Air Transport Management, 8, 177–188. CAPA. (2021). Another new airport for Africa with European involvement: Burkina Faso. Accessed Nov 20, 2021, from https://centreforaviation.com/analysis/reports/another-newairport-for-africa-with-european-involvement-burkina-faso-578632 Chingosho, E. (2009). African Airlines in the Era of Liberalisation (2nd ed.). Das, T. K., & Teng, B. (2000). A resource based theory of strategic alliances. Journal of Management, 26(1), 31–36. IATA. (2021). Airport infrastructure. Accessed Nov 8, 2021, from https://www.iata.org/en/ programs/ops-infra/airport-infrastructure/ IFC. (2021). The impact of COVID-19 on airports: An analysis. Accessed Jan 13, 2022, from https://www.ifc.org/wps/wcm/connect/industry_ext_content/ifc_external_corporate_site/infra structure/resources/the+impact+of+covid-19+on+airports Infrastructure Africa. (2015). Sub-Saharan Africa airport projects on the increase. Accessed Sep 12, 2021, from http://www.infrastructure-africa.com/wp-content/uploads/2015/08/Sub-Saha ran-Africa-airport-projects-on-the-increase_7th-Aug-2015.pdf Florida, R., Mellander, C., & Holgersson, T. (2015). Up in the air: the role of airports for regional Economic development. The Annals of Regional Science, 54(1), 197–214. https://www.airporttechnology.com/projects/bugesera-international-airport/ Heinz, S. (2011). Sustainable business models for airlines in Africa. Cranfield University. Kenya National Bureau of Statistics. (2016). Kenya Statistical Abstract 2015 (pp. 256–257). Government Printer. Kotler, P., Keller, K. L., & Armstrong, G. (2012). Marketing management Edition 14, Global Edition. Prentice Hall. LCG Research. (2019). https://www.lcgassociates.com/ Neal, Z. P. (2011). The causal relationship between employment and business networks in US cities. Journal of Urban Affairs, 33(2), 167–184. Nysveen, H., Pedersen, P. E., & Skard, S. (2013). Brand experiences in service organizations: Exploring the individual effects of brand experience dimensions. Journal of Brand Management, 20(5), 404–423. Oliver Wyman Report. (2017). Leveraging the private sector to improve airport infrastructure. Upsides and risks of airport privatization. Accessed Sep 13, 2021, from https://www. oliverwyman.com/content/dam/oliver-wyman/v2/publications/2016/jan/upsides-and-risks-ofairport-privatisation.pdf Penrose, M. A. (1959). The theory of the growth of the firm. Blackwell. Peteraf, M. A. (1993). The cornerstone of competitive advantage: A resource-based view. Strategic Management Journal, 14, 179–191. Prahalad, C. K., & Hammel, G. (1990). The core competence of the corporation. Harvard Business Review, 3, 79–91. Teece, D. J., Pisano, G., & Shuen, A. (1997). Dynamic Capabilities and Strategic Management. Strategic Management Journal, 18(7), 509–533. Wernerfelt, B. (1984). A resource based view of the firm. Strategic Management Journal, 5, 171– 180. World Bank. (2010). Africa development forum–Africa’s infrastructure, a time for transformation. Available at https://openknowledge.worldbank.org/handle/10986/2692

Chapter 6

Tourism Development in Sub-Sahara Africa and Impact on Regional Airline Business Models

Keywords Tourism development · International arrivals · Economic development · Environment · Climate change · Emissions · International Civil Aviation Organization As countries seek to strengthen their economies, cooperating with neighbouring states has brought about ease of doing business that would otherwise constrain growth and development of such countries. Such cooperation often linked to economic, social and political interests brings about, amongst other things, free trade or easing of barriers to trade, free movement of goods and an increase in regional safety and security. One such vehicle that has been used for regional cooperation is tourism. Thus, the potential of Africa’s tourism remains largely untapped. United Nations World Tourism Organisation (UNWTO) Highlights Edition 2015 reports that the African region receives a 3% share of tourism receipts and 5% share in worldwide arrivals. On a larger scale, tourism in Africa has experienced not only strong growth in terms of arrivals, but also in terms of expenditures and revenues. Inbound tourism expenditures on travel, that is international tourism receipts, recorded an annual average growth rate of 9% from 1995 to 2016 in nominal terms (UNWTO, 2017). Tourism has indeed established itself as a catalyst driver for economic growth resulting in growth GDP per capita, hence establishing a middle-class strata. International tourism receipts are expenditures by international inbound visitors, including payments to national carriers for international transport. These receipts include other prepayments made for goods or services received in the destination country. They also include receipts from same-day visitors, except when these are important enough to justify separate classification. For some countries, they do not include receipts for passenger transport items and the data is recorded in US dollars. Table 6.1 shows a selected list of countries in Africa with their international receipts. As of 2019, South Africa ranked third with international tourism receipts of 8.38 billion US dollars whereas Morocco and Tanzania registered 8.18 and 2.61 billion US dollars, respectively. Furthermore, the total tourism receipts of selected African countries amounted to approximately 38.42 billion US dollars (Fig. 6.1).

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 E. Samunderu, African Air Transport Management, Advances in African Economic, Social and Political Development, https://doi.org/10.1007/978-3-031-29324-5_6

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Table 6.1 Benefits of air transportation Social benefits • Broadens leisure, cultural experiences • Widens choice of holiday destinations • Facilitates accessibility to remote areas • Reduces poverty through the creation of jobs • Facilitates efficient delivery of human aid

Economic benefits • Employment creation • Facilitates world trade • Provides accessibility to tourist destinations • Increases productivity through market expansion • Improves efficiency of supply chain Source: Nyajeka (2016)

International tourism receipts in billion U.S. dollars

9

8.18

8.38

8 7 6 5 4 2.61

3 2 1

0.19

0.25

0.35

0.38

0.59

0.77

0.82

0.82

1.18

1.45

1.78

0

Fig. 6.1 African countries with the largest international tourism receipts. Source: UNWTO, 2020

According to the definition of the UNWTO, tourism is an activity in which a person travels to and stays in a place outside their residence for not more than one consecutive year for leisure business or other reasons. In its 2015 report, the UNWTO stated that tourism benefits the economy as a whole through increased demand for accommodation, transportation, entertainment, hotels and catering as it also contributes to the expansion of other related businesses. In addition, by working in the supporting industries or in tourism itself, the sector generates income for both households and governments with the latter receiving taxes. As a result, by generating foreign exchange, increasing income and employment opportunities, tourism industry is a major contributor to most countries’ GDPs. Based on their diverse needs and motives for travelling, tourists are categorized as follows: the business tourist, education tourist, adventure tourist, culture tourist, eco-tourism, leisure tourist, health/medical tourist, religious tourist and sport and recreation tourist. Over the past six decades, tourism has experienced continued expansion and diversification, becoming one of the largest and fastest-growing economic sectors in the world. Many new destinations have emerged, challenging the traditional ones of Europe and North America. Despite occasional shocks, international tourist arrivals have shown virtually uninterrupted growth from

Definitions of Tourism

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277 million in 1980 to 528 million in 1995, and 983 million in 2011. The current shock that the tourism industry is experiencing is that of COVID-19, which the World Health Organisation (WHO) declared a global pandemic on 11 March 2020. The World Travel and Tourism Council (WTTC) anticipates that the international tourism sector will likely return to pre-pandemic levels within a 19-month period, depending on the duration of the pandemic and the measures to be implemented to contain it. According to Tourism Towards 2030, the UNWTO’s recently updated, long-term outlook and assessment of future tourism trends, the number of international tourist arrivals worldwide is expected to increase by 3.3% a year on average from 2010 to 2030. This represents some 43 million more international tourist arrivals every year, reaching 1.8 billion arrivals by 2030. As an internationally traded service, inbound tourism has become one of the world’s major trade categories. Based on the information from countries with data available, tourism’s contribution to worldwide gross domestic product (GDP) is estimated at some 5%. Tourism’s contribution to employment tends to be slightly higher and is estimated in the order of 6–7% of the overall number of jobs worldwide (direct and indirect). For advanced, diversified economies, the contribution of tourism to GDP ranges from approximately 2% for countries where tourism is a comparatively small sector, to over 10% for countries where tourism is an important pillar of the economy. For small islands and developing countries, the weight of tourism can be even larger, accounting for up to 25% in some destinations. International visitor arrivals in Kenya declined sharply to 567.8 thousand in 2020. In the year before, over two million people visited the country. The fall represented an effect of the COVID-19 pandemic in the tourism sector. Like other nations worldwide, Kenya implemented measures to contain the spread of the virus, such as lockdowns and flight restrictions. As a result, the passenger flow in the two main Kenyan airports was drastically low between March and July 2020. After flights were resumed, the volume of visitors increased, although remaining under the pre-COVID-19 level.

Definitions of Tourism Tourism can be described as a social phenomenon as its focus is on people. To understand contemporary tourism, one ought to have knowledge and understanding of the meanings and implications of the multiple mobilities of people, capital, culture, information, goods and services (See Fig. 6.2). Tourism may also be described as a system that involves a variety of companies and organizations that provides for the activities of the tourist and those who cater for them (Leiper, 1990). Tourism is globally noted as being a major driver of economic and social development. Tourism generates foreign earnings, creates incomes, stimulates domestic consumption and creates employment, especially for low and semi-skilled workers particularly benefiting women and the youth.

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Fig. 6.2 Tourism system. Source: Adapted from Leiper (1990)

OECD Trend and Policy define tourism as a social, cultural and economic phenomenon related to the movement of people outside their usual place of residence for personal leisure, business or professional purposes. Under this definition, reference is generally made to visitors (who may be either tourists or excursionists; residents or non-residents) and tourism which has to do with their activities, some of which imply tourism expenditure. The duration of staying outside the usual environment is up to 6 months in the case of domestic tourism and up to one consecutive year in the case of foreign tourism. The Domestic Tourism Growth Strategy 2012–2020 (2011) provides a similar definition of tourism but highlights that it is done without remuneration: The activities of persons travelling to and staying in places outside their usual environment for not more than one consecutive year for leisure, business and other purposes not related to the exercise of an activity remunerated from within the place visited.

Another definition, which expresses the same elements, is that of the Tourism Society (as cited in Shukla and Ansari (2013). It defines tourism as the temporary short-term movement of people to destinations outside the place where they normally live and work, and activities during their stay at these destinations. It also includes movement for all purposes mentioned that tourism is about travelling for pleasure, though he leaves out where to, for how long whilst the purpose is also not well defined. The Tourism Society, UNWTO (2017) shows that tourism is an activity that leads people to move away from their normal surroundings, though not defining what the normal surroundings are. Tourism is one of the largest industries in the world, contributing 9% of world Gross Domestic Product (GDP), and one of the biggest income generators for developing countries (UNWTO, 2015). According to Novelli et al. (2012) tourism is also seen by many people as a means of stimulating local economic development and is often described as the new source of wealth creation in underdeveloped countries.

Types of Tourism

193

Individuals become tourists when they voluntarily leave their normal surroundings, where they reside, to visit another environment. People usually engage in different activities, regardless of how close or how far the environment (destination) is. The above definitions show that there are quite different definitions of tourism that exist across the international system. These definitions all agree that travelling occurs to and from a destination for a specified period and include the consumption of activities at the destination itself.

Types of Tourism Tourism may be viewed from different perspectives, generally based on purpose, behaviour or geographic spread such as sustainable tourism, educational tourism, sports tourism, foreign tourism and domestic tourism. Swarbrooke (1999) notes that all forms of tourism that respect both the visitors and the hosts, together with their cultural heritage and biodiversity fall under the realm of sustainable tourism. He adds that sustainable tourism attempts to make as low an impact on the environment and local culture as possible, whilst helping to generate future employment for local people. Mawere and Mubaya (2012) argue that sustainable tourism can also be termed ecotourism. The aim of sustainable tourism is to ensure that tourism development brings a positive experience for local people, tourism companies and the tourists themselves. Sustainable tourism implies responsible tourism that is sensitive to its environment or surroundings. Edu-tourism refers to any program in which participants travel to a location individually or as a group with the primary purpose of engaging in a learning experience directly related to the location (Bodger, 1998). Weed and Bull (2004) categorize sports tourism as a segment of special interest tourism where the desire to pursue sports activities at the destination is the major motivation to travel. They argue that travellers generally have more reasons to travel than one although one motive may play a more dominant role than others may and in the case of sports tourism, sports-related motivations supplement the generic tourism ones. According to Palatkova (2011), tourism can also be classified into domestic and foreign (international) tourism depending on the nature of the trip and for the purposes of this study the domestic and foreign tourism provides the most appropriate context. Domestic and international tourism depend on each other. If domestic tourism in the country has a low number of tourists, this destination has also low attractiveness for international travellers. In addition, vice versa, if a country has a high number of international arrivals it means that this destination is also attractive to local citizens.

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Foreign Tourism Foreign tourism according to Palatkova (2011) refers to tourism, which takes place across the borders of the national country. Tourists ought to spend at least a night in collective or private accommodation in the receiving country and their duration of stay must not exceed 12 months. International tourism is an important foreign exchange earner and an export for many low-income countries as well as for developed ones. Many developing countries are paying attention to economic policies for promoting international tourism as a potential strategic factor to development and economic growth (Webster & Ivanov, 2013). The interest in international tourism has been strong, primarily for economic reasons as this form of tourism plays a major role in trade and monetary flows amongst nations. Hence, the need to promote the development of this type of tourism. Figure 6.3 shows the number of international arrivals in outbound tourism (crossborder travel) in the years from 1990 to 2019 by region of origin. Tourists made most of the arrivals in outbound tourism worldwide in 2019 from Europe, with 703 million (Statista, 2019).

Domestic Tourism Domestic tourism refers to tourism, which takes place within the borders of the country for example, South African residents travelling on a trip within South Africa that lasts more than one night, but less than 1 year and the purpose of the trip is not an activity that is remunerated. Domestic tourism involves residents visiting their own country, but not staying for more than 6 months in the place visited. Domestic tourism statistics are very important: • To measure the contribution of tourism to the overall economy. • To measure the effect of tourism on gross domestic product. Europe

Asia Pacific

Amerika

Middle East

Afrika

800 700

Billions

600 500 400 300 200 100 0 1990 1995 2000 2005 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019*

Fig. 6.3 Number of international arrivals in outbound tourism from 1990 to 2019 by region of origin. Source: Statista, 2021

The Value of Tourism

195

• For marketing policies and promotion. • To sustain area development policies (to ensure a high-quality environment in the tourist areas).

The Value of Tourism Tourism is very important at international, regional, national and individual levels for a number of reasons. Tourism provides the opportunity for people to take a different approach to life by realizing both the beauties of other countries and their own. Tourism runs parallel with increasing prosperity in the world and literature suggests that tourism is an engine for sustainable development. Tourism is a strategic economic activity for any state and its importance in national economies is growing worldwide. Tourism includes a wide range of products and destinations involving both the public and private sectors and as such, has great potential for contributing to several of the major objectives of countries, such as sustainable infrastructure development, promoting public–private partnerships and empowering women, young people and marginalized people. Furthermore, tourism is particularly important in the provision of employment opportunities for young people.

Kenya Tourism Kenya’s strategic geographical location continues to facilitate her growing role in connecting international regions and cities by air. The tourism sector contributes 10% of Kenya’s Gross Domestic Product (GDP). The sector is an enabler to the achievement of the “Big Four” development agenda, the Sustainable Development Goals (SDG) and the Africa Agenda 2063. The Kenya National Tourism Blueprint 2030 identifies the centrality of the tourism sector in Kenya’s development. However, it does not refer to security as a key concern for the sector. The second Medium Term Plan (MTP) for tourism under Kenya Vision 2030 views tourism sector as important in supporting the country’s economic development through its contribution to the GDP, foreign exchange earnings, employment and poverty reduction. MTP II also outlines the role insecurity plays in stifling development of industry in Kenya. MTP II identifies the need for an expanded Tourism Protection Service in order to renew confidence of the tourists visiting Kenya. Kenya’s Vision 2030, the NTB and MTP II concur that insecurity is a key limitation to the development of tourism.

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Tourism Development in Sub-Sahara Africa and Impact on Regional. . .

Engine for Sustainable Economic Development Tourism should be developed for its potential to enhance economies. Important aspects amongst tourism’s benefits are that; it boosts economic regeneration; it offers a future, meaning that it holds out a promise for growth; it is one of the fastest growing economic activities and it is a key driver towards economic growth. The UNWTO (2015) defines tourism product development as a process whereby the assets of a particular destination are moulded to meet the needs of both national and international customers. The above-mentioned development involves compiling a portfolio of activities for visitors to see and do at a destination. The portfolio should cover such aspects of local tourism as active pursuits, like sports, hiking and water and leisure-related activities, cultural heritage, organized entertainment, health and wellness, and recurring festivals and events. Tourism is one of the largest industries in the world, contributing 9% of the world Gross Domestic Product (GDP), also one of the biggest income generators for developing countries. Tourism acts as a catalyst driver stimulating local economic development and is often described as the new source of wealth creation in underdeveloped countries. According to UNCTAD (2017) since tourism is a fast-growing sector, tourism can be an engine for inclusive growth and sustainable economic development. Tourism can have a broad range of impacts for the economy, for the natural and built environment, for the local population and for visitors themselves. The tourism industry has emerged as one of the leading service industries in the global economy in recent decades with economic flows generated by international tourism becoming vital factors in economic growth and international economic relations in many developing countries. Because of an ever-increasing number of destinations opening up and investing in tourism development, modern tourism has become a key driver for socio-economic progress through the creation of jobs and enterprises, infrastructure development and the export revenues earned. Thus, the tourism sector has become an increasingly important industry to many developing countries as a source of revenue as well as a source of employment. Tourism generates a vital amount of foreign exchange earnings that contribute to the sustainable economic growth and development of developing countries.

Tourism as a Generator of Employment Currently, more than 200 million people are underemployed in sub-Saharan Africa and 10 million more seek jobs every year (World Bank, 2016). As tourism grows, the sector’s job creation and income-generating potential rise exponentially. Tourism is a major job generator, which includes providing alternative employment opportunities for women, young people, highly qualified and unskilled people that support the fostering of regional development. Tourism also provides employment on a seasonal

The Impact of Tourism on Infrastructure Development

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basis since tourism varies and peaks at different times of the year, for example if a tourist wishes to go on a ski trip, they may go on holiday during the autumn or winter season as they can expect snow and during this period additional job opportunities are created. Tourism compares well to other sectors in terms of opportunities for SME development, career advancement, and lifelong learning potential. One in 20 jobs in sub-Saharan Africa is already in travel and tourism (UNWTO, 2016). Tourism is also a more efficient job creator than many other sectors due to the multiple downstream effects, which means. WTTC (2018) states that in the employment sector, the tourism sector directly supported about 9.3 million jobs, which is 2.6% of total employment on the African continent in 2017. This is equivalent to 1 in 11 jobs in the continent’s economy. A study in Zambia by the Natural Resources Consultative Forum (2007) found that a US$250,000 investment in the tourism sector generates 182 full-time formal jobs. This is nearly 40% more than the same investment in agriculture and over 50% more than in mining. Tourism in Zimbabwe has also been contributing immensely to employment creation in the country. Its contribution to total formal employment for the sector was at 7% in 1980. It continued to grow over the years and reached 9.1% in 2006 remaining constant before starting to decline during the period 2008–2011 because of the disturbances experienced in the country, which affected the country. In 2018, the sector registered a contribution of 7.8% to total employment creation.

The Impact of Tourism on Infrastructure Development The tourism industry can provide considerable benefits to host communities through economic development, infrastructure development, and as a medium for protecting the environment and culture. In an effort to attract visitors, governments and private sector business people often invest in infrastructure improvements that have positive impacts on the economy and on rural communities. For example, South Africa invested US$2.6 billion in upgrading the Johannesburg, Cape Town and Durban airports in preparation for an influx of sports tourists for the 2010 FIFA World Cup. Tourism can stimulate the development of local infrastructure such as roads, water, sewage and sanitary systems and telecommunications providing economic benefits as well as a healthy environment. The development of infrastructure can be spearheaded by both the private sector and the public sector. On the other hand; poor infrastructure development negatively affects tourism development. Tourism promotes public–private partnerships. Effective tourism planning requires collaboration and partnerships between the public and private sectors. Consultation enables participants to take joint responsibility for policy choices, facilitates the collection of economic data and has positive outcomes for national planning. Public–private partnerships (PPPs) in conservation, infrastructure development and investment promotion have been used for many years in Southern Region. Examples include the approach taken by Kenya Wildlife Service, SANParks in South Africa, the Madagascar National Parks Initiative, and Gorongosa National

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Park in Mozambique. The WWF reports that more than US$19 million has been invested by the private sector in tourism joint ventures in communal conservancies in Namibia since 1998.

Tourism Stimulates Socio-Cultural Heritage Conservation The socio-cultural positive impacts include assisting in viability of local services, creating a sense of pride, revitalizing local cultural traditions, events and crafts; and leads to opportunities for social and cultural change. The negative socio-cultural impacts include creating a feeling of invasion by tourists; overcrowding and traffic congestion; increase in crime; reduction in local services, for example food shops replaced by gift shops; import of new cultural ideas thus changing the existing way of life and distorting culture through commodification. Tourism stimulates cultural heritage and environmental conservation. Scholarly research in cultural tourism has been aplenty ranging over a wide array of topics. Amongst others, topics can be site-specific such as museums and heritage and/or historical sites, event-specific such as festivals (Akhoondnejad, 2016), visitorspecific such as visitor perceptions (Chen & Chen, 2010). Cultural tourism is often seen as one of the fastest growing sectors of the tourism industry and it has been growing relatively fast in recent decades (Smith & Richards, 2013). Cultural tourism incorporates socio-cultural, economic and environmental aspects and traditions of societies. Within Africa, many countries are positioning themselves to take advantage of newer trends and alternative forms of tourism that can protect natural resources and stimulate cultural diversity whilst generating economic growth. Arguably, cultural heritage does not end at monuments and collections of objects, but includes intangible and verbal traditions as well as customs inherited from descendants passed on to their children, in the form of manners, activities, drama and others.

Empowering Women, Young People and Marginalized Populations Tourism empowers women, young people and marginalized populations. Tourism has the potential to stimulate regional development, reduce poverty, empower marginalized communities and help protect the environment. Women make up an estimated 70% of the World’s poor (UNCTAD, 2017). Empowering women to participate in economic development at all levels and in all sectors is essential to build strong economies and stable, just societies. Tourism is one of the few economic sectors in which women outnumber men in certain positions and are paid the same. In Africa, a 2010 study by UNWTO and UN Women found that 31% of

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employees in the hotel and restaurant sector were women compared to 21% in other sectors. Tourism generated 25% employment in which women's participation is more than men in Africa. Tourism is a tool to empower women from various aspects. Several tourism studies point to the crucial link between tourism, peripheral development and women empowerment to an extent that UNWTO presented an Action Plan related to women empowerment through tourism. The Action Plan focuses on poverty reduction and the enhancement of women’s dignity and role in the workplace. During a conference in Berlin in March 2008, the United Nations World Travel Organization (UNWTO) implemented an Action Plan to Empower Women through Tourism. The objectives of the plan are derived from the United Nations Millennium Development Goals, which seek to benefit the poor, protect the environment and empower women. Of all people employed in the tourism sector, 60–70% are women. Young people also derive productive employment from tourism. In Namibia, after just 1 year of training, an unskilled labour can learn to be a tour guide and thereby increase his or her income significantly. By engaging young people in productive employment, tourism can provide an alternative to out-migration, urban poverty and armed conflict.

Tourism in the Southern African Development Community The Southern African Development Community (SADC) is a regional grouping composed of 16 member states: Angola, Botswana, Comoros, Democratic Republic of Congo, Eswatini, Lesotho, Madagascar, Malawi, Mauritius, Mozambique, Namibia, Seychelles, South Africa, Tanzania, Zambia and Zimbabwe. It was established in 1992 and has focused its efforts on regional economic growth and development and eradication of poverty. As a regional economic bloc comprising mostly developing and least developed countries in which unemployment is rife, it is fair to say that SADC would benefit from developing a healthy tourism sector, 28 million international tourists visited SADC in 2018, and it is projected that this number will increase to 38.6 million by 2025. Its overall contribution to the SADC GDP was US$68.2 billion in 2017. On the continental front, the SADC’s share of tourists visiting Africa stood at above 47% in 2016. Within the 47%, South Africa accounted for 59% of the visitors (UNWTO, 2020). Notwithstanding the overall growth experienced by the tourism sector globally, the smaller SADC member countries have not really reaped the benefits. This is partly because these countries have not been able to compete with more established tourist destinations globally. In countries, such as Angola, the Democratic Republic of Congo (DRC), Lesotho, Malawi, Swaziland and Zambia even when tourists do visit, they spend only a fraction of what they spend in leading destinations.

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Challenging factors include: • The remoteness of the SADC region from many of the places in which most international tourists reside. • Lack of direct international flights to and from some of these places. • The inability of the SADC member countries to improve their tourism value chain by developing new tourism products or enhancing existing ones has contributed to the poor competitiveness of these countries. With almost all the countries and regions around the world seeking to tap into their tourism potential in order to grow their economies, competition for the benefits is set to intensify. For the SADC region, the challenge is to improve its attractiveness as a destination market against the very best in the world if it is to claim a bigger share of the profits in the tourism stakes. International arrivals in developing countries increased by an average of 18% a year between 1990 and 2018. The share of international tourist arrivals received by emerging and developing regions increased from 32% in 1990 to 47% in 2018. The number of tourists’ arrivals in the region has also shown the development of the tourism sector.

Key Characteristics of the Tourism Sector in Africa As already described above, tourism development in Africa has had a significant impact on the welfare gains of the region. The sector has continued to expand since the mid-1990s with number of tourist arrivals to the region doubling from 24 million between 1995 and 1998, to 48 million between 2005 and 2008 and increasing to 56 million between 2011 and 2014 (see Fig. 6.2). This means the continent witnessed a significant growth of 6% in terms of international arrivals. International tourism showed particularly strong growth from 2002 up to 2008/2008 financial meltdown. Whilst the crisis led to a setback, arrivals soon recovered to a new peak in 2010, before they dropped in the wake of the Arab Spring. It is also fundamental to note that not all African countries have fully exploited the benefits of tourism. Evidently, wars, conflict and the threat of terrorist attacks have definitely affected the flow of tourism on the continent. In particular, Egypt, Tunisia and Kenya have all experienced terror attacks causing a massive drop in international tourism arrivals (Samunderu, 2019). The key impediments that have affected full tourism service and trade growth include the following challenges: • Enhancing the full capacity of tourism in order to foster inclusive growth. • Strengthening inter-sectoral linkages. • Tapping and unlocking the potential of intra-regional tourism through deepening regional integration. • Harnessing peace and stability for tourism.

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It is imperative that in order to ensure that tourism development in Africa reaches optimum level, certain key barriers and impediments require policy intervention. It is evident that sub-Saharan Africa has experienced economic prosperity for the past 15 years due to investment strategies employed by governments of the countries in the region. Njoya (2013), on the other hand, who investigated the mutual relationship between air transport and the development of tourism in African countries, attributed the source of economic boom in developing countries to tourism growth. Moreover, Africa, despite having a population of 1.02 billion and the population density of 87 persons per square-miles, the continent is largely regarded as the lowest in terms of air transport utilization (Button et al., 2018). Stimulation of economic growth in several countries through tourism will improve the aviation market as well leading to a massive generation of employment opportunities on the continent.

The Role of Aviation in Tourism Development The history for southern African countries is the same in that prior to their independence most southern African countries’ air services were primarily based on European relationships and agreements. However, after independence, most of the newly independent southern African states created their own, mostly governmentowned, national air carriers, many of which failed or are currently struggling. Air transport supports the development of tourism to and within Africa. In 2014, 5.8% of 1.133 million international tourists’ arrivals worldwide, from which 55.8% have air transport as their preferred mode of travel (from outside and within the African continent). Additionally, African tourism creates 20.5 million jobs, being 7.1% of total employment in Africa estimated for the year 2014 (AfDB, 2015). Southern Africa’s air transport industry is predominantly located in SADC countries, which have made relatively little progress in implementing the YD on a regional basis. Several SADC states, which are also members of COMESA (Angola, Malawi, Swaziland, Zambia and Zimbabwe), have made far more progress in liberalizing their air services. One of the prime factors underlying the SADC’s progress is the South African carriers’ domination of the air transport market. South Africa has bilaterally liberalized air transport services with a number of African states, where existing bilateral air services agreements have been revised, based on key elements of the Decision. These countries include Benin, Botswana, Burkina Faso, Cameroon, Congo, Egypt, Ethiopia, Gabon, Gambia, Ghana, Kenya, Lesotho, Liberia, Libya, Rwanda, Senegal, Sierra Leone, Togo and Uganda. The aviation industry has played a major role in the global economy Regulation of aviation industry globally is done by the International Civil Aviation Authority (ICAO) which ensure safe, secure, efficient, economical and environmentally sustainable operations at the international, regional and national levels. ICAO also functions as the major forum for cooperation in all fields of civil aviation amongst its 191 member states, industry and other aviation partners (ICAO, 2006).

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The Civil Aviation Authority of New Zealand indicates that a passenger in the aviation sector means any person carried by aircraft, other than a crewmember. The aviation industry is the only truly worldwide transportation system and has a massive influence on the world economy. The aviation industry is seen as a high-risk venture and many investors are hesitant to invest in it. The structure of the aviation industry must continue to change because of mergers, acquisitions, divestitures and spin-offs and through strategic alliances in order to promote cost reduction, better service and traffic growth. The performance of the African Aviation industry is noted to lag behind the rest of the world. The industry also suffers from diminishing market potential, high fuel prices, safety records, need for skilled human resources, internal liberalization and high taxes.

Challenges in Aviation Industry The proposed Africa Civil Aviation Policy (2011) states that notwithstanding the abundant resources, most African countries are still relatively poor and the Continent continues to record poor development statistics. In many other sectors in Africa, civil aviation lags and operates well below its share of the international civil aviation market. African airlines are generally undercapitalized; operate narrow route networks and small and ageing aircraft fleet. This entails that they are weak and unable to compete with the global mega carriers. To reverse this trend and facilitate the growth of its civil aviation, Africa’s leaders must continue to create an enabling and conducive environment that attracts private sector capital investment in the industry. This underscores the urgent need for the African States to forge a common approach to civil aviation. However, whilst many adverse historical political-economic reasons could be advanced for its unsatisfactory performance, much higher socioeconomic indicators could be achieved if the African States joined their efforts to forge and implement common strategies for the harnessing of the continent’s potentials. Policies limiting air connectivity present one of the major barriers to the growth of travel and tourism. This was recognized by UNWTO’s Executive Council in 2012, which decided that promoting increased air connectivity should be one of the priorities of the Organization. Since 2000, the majority of the literature agrees that tourism development is continuously fluctuating because of political and socioeconomic challenges that continue to plague. However, it can also be seen that tourism development is declining due to conflicts between tourism policies and aviation policies. The majority of countries including Zimbabwe have the responsibilities of transport and tourism assigned to different areas of government and generally, give transportation a higher hierarchical or de facto importance.

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Air Transport and Tourist Flows The air transport industry plays a role in the development of the world economy, stimulating exchanges between countries and facilitating international economic relations. At the same time, the economic well-being of this industry depends on the state of the world economy as increasing demand for mobility, globalization of world markets and changing consumer behaviour lead to growth in traffic flow and segmentation of the air transport industry. Economic downturns, on the other hand, bring financial distress to the airlines’ difficulties, which at times have been financially disastrous. Despite a catalogue of external shocks, the airline industry is indeed a global service industry with long-term growth potential that encourages creation of jobs, international development and cooperation as well as technical progress. The liberalization of market access in Europe, North America and other regions of world air transport has added a new dimension to competition and customer orientation in the airline. Air transport is of interest to tourism development and tourist flows because it is a fundamental in the global tourism interaction sphere. Air transport and tourism are interlinked. Tourism is a driving factor for and, in some cases, a stimulator of change in air transport; most notably, the development of new business models such as LCCs and charter airlines. Air transport has a major quantitative influence on tourism such as: • Air transport is the main form of transport to many tourist destinations. • The availability of cheap air transport can also be considered as one of the main driving forces in international tourism growth. In well-developed markets, air transport is the new main mode of transport for overnight stays of more than four nights. The state of the global aviation sector is therefore important to understand as it can often single-handedly shape tourist flows where air access is part of a dominant network provision for accessibility and connectivity. It is important to note that aviation plays a very crucial role in tourism development and several key points can raise at the outset: Firstly, the expansion of air networks has meant the introduction of tourism to many non-Western countries. For example, the government of Zimbabwe has needed to provide regular subsidies to Air Zimbabwe in order to ensure a regular flow (or as regular as possible) of tourists to the country. In addition, the ability of an airline to fly from one place to another is often carefully regulated by international bilateral agreements in air services (commonly known as Air Service Agreements). Thus, the political relationship between two countries or more can often further dictate the flow of tourists between places, regardless of the physical ability of airline to service a destination. In other words, an airport at a destination may be fully capable of servicing one or more international flights from an operations perspective, and a viable market may exist to justify a certain frequency of service, but the appropriate permissions and certifications at the government level must be in place before services are initiated. This again defines the unique

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peculiarities of the airline industry. Finally, air service expansion has also meant considerable expansion of domestic services in both developed and developing countries (Doganis, 2006).

Growth and Change in the Global Airline Industry In spite of seemingly chronic sense of volatility in the airline industry, aggregate growth rate has been quite dramatic since the origins of mass air travel in the 1960s (Derudder & Witlox, 2009). Despite some intermittent falls in this aggregate growth pattern (such as the industry slump after “September 11” and the SARS outbreak in Asia) and structural constraints on its future (e.g. rising fuel costs and concerns about air transport environmental impact), the aviation industry remains confident about long-term growth. Indeed, the International Air Transport Association (IATA) expects that international air passenger numbers will continue to grow at an average rate (AAGR) of 5.3% between 2007 and 2011 which is only slightly lower than the average rate of 7.4% seen between 2002 and 2006 (Airline Business, 2008). These predictions are based on the assumption that demand growth will be weakened by slower global economic growth and high oil prices, but at the same time boosted by further liberalization of markets and the emergence of new markets and services. It is well argued that the long-term aggregate growth in demand for air transport has largely been driven by growing gross domestic product (GDP) per capita and disposable incomes (Derudder & Witlox, 2009). Furthermore, Graham and Goetz (2008), stress that the growing demand for air transport has also been fueled by radical changes on the supply side. Thus, the geopolitics of air transport has been of particular importance here, as government regulation and control have increasingly been replaced by an “ethos of liberalization” (i.e. the relaxation or removal or regulations on passenger fares, airfreight rates, market entry and exit, choice of routes and aircraft, level of service, and forms of competition and collaboration) and to privatization. To gain a deeper insight into the airline industry’s prospects and challenges, one must appreciate the changing market environment within which it has been operating and which has affected its development in recent years. To establish a definition of the relevant market, in air transport cases, the European Union Commission for Competition, applies the so-called “point of origin/point of destination” pair approach. According to this approach, every combination of a point of origin and point of destination should be considered a separate market from the customer’s viewpoint. The other trend underlining the development of air transport is that traffic growth rates have been declining (Doganis, 2006). In the decade 1966–1977 the world’s air traffic measured in terms of passenger kilometres grew at an annual rate of 11.6%, effectively doubling every 6 or 7 years. In the following decade up to 1987 annual growth was less, but still high at 7.8%. However, during the period 1987 to 1997 the

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traffic growth declined further to around 4.8% per year. In the 8 years, 1998–2006 annual growth fell to about 2.0% (Doganis, 2006). However, these global growth rates mask the fact that growth has been very uneven, with wide variations between different parts of the world and between different airlines. In particular, for the last 25 years or so, traffic to, from between the countries of East Asia has been growing much faster than the world average. The reasons for this are clear. Throughout this period, until the Asian crisis of 1997–98, Japan and the tiger economies of South East Asia were developing much more rapidly than traditional economies of Europe and North America. Their exportoriented economies generated considerable business travel, whilst rising per capita incomes stimulated leisure and personal travel. The 1980s saw a rapid growth of new Asian airlines such as Singapore Airlines (SIA), Malaysia Airlines, Thai Airways, Garuda and Cathay Pacific. Combining superior in-flight service with aggressive marketing, they both stimulated demand and captured a growing share of it. As a consequence of above-average traffic growth in East Asia and the dynamic expansion of Asian airlines, the world’s airline industry has experienced a dramatic transformation in favour of East Asia/Pacific airlines and away from traditional US and European international airlines. In terms of tonne-kilometres carried (passenger and freight) four of the world’s top 15 airlines are from East Asia—Japan Airlines, Singapore Airlines, Korean and Cathay Pacific and Qantas also belong to this group. Furthermore, a significant growth in national connectivity is expected in the Chinese and Indian domestic markets. Finally, a critical trend in recent years has been the gradual but steady decline in the real value of airline yields; that is average revenue produced per passenger—kilometre or tonnes kilometres carried. Several factors have caused this. The liberalization process, which has spread over more and more, has reduced or removed capacity and price controls. New airlines emerged to compete with established carriers and in order to capture market share they reduced fares only to be matched in many cases by their competitors. Thus, the falling level of operating costs also enabled airlines to offer tariffs that were lower in real terms. The impact of lower costs on fares was reinforced by the growing liberalization of international air transport during the 1980s and 1990s and this meant that increased and open competition created further pressures to streamline costs whilst liberalization also led to the gradual removal of tariff controls, thereby facilitating price competition. Thus, the downward pressure on yields in-turn means that cost reduction must be a long-term priority for airline management in both legacy and LCCs. Cost cutting is no longer a short-term strategy to deal with short-term economic downturns in the airline business cycle.

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International Framework for Aviation Regulation Paris Convention Article 1 of the Paris Convection states that the Convention for the Regulation of Aerial Navigation, known as the Paris Convention, is an important treaty signed on 13 October 1919 to control global aviation and give recognition to the sovereignty of member states. The Convention for the Regulation of Aerial Navigation (“Paris Convention”), which was signed on 13 October 1919 to provide the foundation for regulation of the international airline industry, is the pre-eminent multilateral agreement for the international aviation regime, evolving from the Paris Peace Conference of 1919. This Convention recognized the need for every nation to exercise “sovereignty” over the airspace above its territory, setting forth the fundamental policy, which underlines all aviation negotiations today. Sovereignty remains a fundamental and firmly entrenched principle that underscores all negotiations in the aviation industry.

Convention on International Civil Aviation (Chicago Convention) The modern structure of international air transportation controls can be traced back to the failure in 1944 of the Allied powers at the Chicago Convention to reach an agreement on how the post-Second World War air transportation system should operate. Whilst representatives from 52 governments managed to agree on the legal and technical framework for the operation of international air services, their inability to reach a consensus on economic regulation meant that it fell to pairs of governments to negotiate the precise terms of air services provision between their countries (Doganis, 2006). The hope was that those signing would grant freedom of access, to airports and to airspace above their territory, to all other signatories. The Convention is a significant treaty in international civil aviation, and its purpose is to provide a global uniform standard and regulatory framework for air transport. The Convention was also instrumental in bringing about governance and control in the international aviation market and governed air routes, fares and frequency. It is regarded as a “protectionist framework” in the civil aviation industry. Some of the main outcomes of the Chicago Convention involved standardizing different types of scheduled operations, categorized according to the various “freedoms of the skies” to be described below. The result was a myriad of BASAs between countries that, in general, stipulated which airlines could fly between

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them, the capacity of each airline, the fares to be charged and, often, how the revenues generated were to be shared between the carriers. Article 1 of the Convention on International Civil Aviation reads: The contracting states recognize that every State has complete and exclusive sovereignty over the airspace above its territory.

This article emphasizes and supports the spirit of the Paris Convention, and is considered by the international airspace community to be the founding doctrine of sovereignty in the airspace as it forms the basis for the control of airlines by states. The Council of ICAO may act as an arbitrator between contracting States of the Chicago Convention on matters concerning flight and execution of the Chicago Convention and special arbitral tribunals given by treaty or agreed by the parties to a dispute (Article 84 of the Chicago Convention of 1944). However, in practical experience, the ICAO Council used in contention resolution a few times and the arbitration procedures under the Chicago convention have experienced little success.

Bermuda Type Agreements The Chicago Convention of 1944 laid down a basis upon which the international bilateral air services agreements system was founded. The bilateral regulation of international air services evolved over many decades. Although the foundation for the regulation of international air transport services was first laid in the 1920s, few bilaterals were concluded in those early decades, due initially to the small volume of international air transport activities and thereafter to the virtual cessation of many commercial flights during the World War II period. In circumstances where states cannot enter into a suitable multilateral treaty governing scheduled flights, the requirements are that they enter into bilateral air transport agreements. The earlier bilateral agreements were modelled on the Bermuda Agreement, which served as the model for most countries negotiating bilateral air transport agreements. A general concept of bilateral agreements is that only designated carriers, as agreed to by the contracting party, can exercise the air traffic rights granted in the agreement. This was a compromise arrangement that attempted to reconcile the very liberal, free market ideas of the USA on the one hand and the more restrictive ones of countries such as Australia that wanted a single global carrier on the other. In 1946, the UK and the USA concluded a model bilateral agreement commonly known as Bermuda I, whereby the USA agreed that the International Air Transport Association (IATA) would set international tariffs and fares. In exchange, the UK allowed US carriers to determine their passenger capacities and frequency of service. Additionally, the agreement provided for liberal fifth freedom traffic rights for both parties, which lasted for the next 40 years, but had to be renegotiated due to disagreements between the two countries as the industry changed over the years. Until 1978 bilateral air services agreements were more or less restrictive in terms of market access through traffic rights granted to carriers; capacity levels that carriers

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were allowed to offer; fares at which their services were priced as well as which carriers were designated to operate the services. The more liberal bilaterals, frequently referred to as the Bermuda type, differed from the more restrictive predetermination type of agreements in two respects: fifth freedom rights were more widely available and there was no control of frequency or capacity on the routes between two countries concerned. Bermuda type agreements were still restrictive as they often allowed only one airline from each country to operate a route. This also meant that fifth freedom operators could only fly on the routes involved if the authorities at both ends agreed. The bilateral system is condemned for being anti-competitive in the global operating systems of the aviation sector and often used as a “protectionist” tool by governments for national airlines whilst denying emerging airlines the opportunity to access the civil aviation market. Notwithstanding this criticism, the practice of entering into bilateral agreements with the nationality and ownership clause remains in effect.

Regional Tourism Development The development of tourism occurs within the context of a localized planning framework, which always affects, negatively or positively, the interests of the region. Although governments generally believe that tourism development will generate new jobs, enhance community infrastructure, and assist with the revitalization of the flagging economies of regional areas, tourism as a development option has come under increasing censure due to the alleged paucity of revenues, the inequality of benefit distribution, and the perceived social costs to resident communities. The recognition in recent years that communities can have some influence over the development of tourism has created interest and a growing stream of literature on community-based tourism and regional development in tourism. Any stage of tourism development requires sufficient performance measurement, and analysis and this is why it is necessary. A tourism region is an area that has been explicitly delineated as having relevance for some aspect of tourism planning, development or analysis. Most such tourism regions belong to a larger economic and administrative unit whose role is that of developing the region into a marketable tourism product. Local or regional tourism destinations have been identified as the most important destination type on which to focus developmental initiatives including planning and marketing. The basis of such a regional tourism development strategy is the realization that each region has its own strengths and weaknesses in terms of its position in the minds of travellers. The essence of regional tourism development has been recognized in line with the need to achieve sustainable tourism.

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Tourism’s Contribution to Local and Regional Development Whereas the developed economies tend to accumulate much of their wealth through tourism, the developing economies usually regard tourism as doctoring their environmental, social and economic ills. Despite the growing significance of tourism globally, its positive impact has not yet been maximized by a number of countries in sub-Saharan Africa, and tourism product development has not yet been prioritized as a major economic booster. Most low- to middle-income sub-Saharan African countries with significant tourism potential plan to receive tourists in the absence of a comprehensive policy to guide tourism product development, despite the UNWTO, noting that 83% of the countries concerned bank on tourism for their survival. Whilst some countries (South Africa, Kenya, Botswana and Tanzania) have been acknowledged as being destinations that have plans and policies, as well as detailed implementation plans in place, and, consequently have a vibrant tourism sector, others (Cameroon, Gambia, Madagascar and Nigeria) merely have plans in place that provide objectives for the tourism sector. In the case of Zimbabwe, the WTTC (2017) reports that the country’s current plans and policies are based on the tourism trends of more than a decade ago, making them no irrelevant, considering the economic and political fluctuations that have so negatively affected tourism well-being in the country since 1999. For instance, Zimbabwe’s National Tourism Policy focuses on attracting and retaining the trust of the previous major/source tourist markets (that is, the United Kingdom (UK), Germany, the Netherlands, Canada, and Australia). The tourism trends and statistics of the country provided by the Zimbabwe National Statistics Agency (ZIMSTAT and the Zimbabwe Tourism Authority (ZTA) prove that the source markets’ arrivals shrunk by 60.3% between 1999 and 2015, whereas the Asian and African markets grew by 65% and 37%, respectively, during the same period. The pattern remained consistent throughout the first quarter of 2017, with a 5% increase in the number of tourism arrivals, but with a 9% drop in tourism receipts, from the source markets involved, whereas the Asian and African markets have increased by 3% and 84%, respectively, over the same period. Subject to the current investigation is the extent to which the nature of the current tourism product development strategies and marketing efforts, as well as the guidelines of the current tourism policy, have influenced the above-mentioned tourism performance of Zimbabwe. UNWTO (2020) states that UNWTO collaborates closely with the African Union (AU) to advocate on the role of tourism in Africa and its positioning on the AU Agenda 2063. The launch of the Single African Air Transport Market (SAATM) is a milestone achieved towards Open Skies policies and the implementation of the 1999 Yamoussoukro Decision. WTTC (2018) states that 23 African countries have adhered to the SAATM and it will be necessary for more countries to join. Aviation industry is key to tourism development and we have identified it as one of our priority areas for UNWTO’s agenda for Africa. The SAATM, a flagship project of the African Union (AU) Agenda 2063, is an initiative of the AU to create a single,

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unified air transport market in Africa, the liberalization of civil aviation in Africa, and is an impetus to the continent’s economic integration agenda.

Regional Tourism Policies Hall and Jenkins (1995) view tourism policies as more than what governments do. They emphasize that policymaking is a political activity, which is influenced by (and constitutive of) the economic and social characteristics of society, as well as by the formal structures of government and other features of the political system. In the tourism context, besides being a declaration of intent policy provides guidelines for tourism development actions. An overview of national tourism policies indicates that often they encompass objectives such as socio-economic development, employment creation and development of peripheral areas, and are increasingly directed towards achieving sustainable tourism development in the long term. Southern Africa represents an emerging tourist region in the international tourism economy Policy development for tourism, therefore, is of rising significance. Tourism policies are becoming central to tourism planning and cannot be made in isolation, it is imperative that all stakeholders be included in tourist development projects. Southern Africa was criticized over its latest visa requirements legislation in 2015, and was warned that these new visa regulations could seriously affect its tourism industry. Therefore, due to the scope of tourism as a global economic sector, governments need to realize its potential for long-term investment and to achieve sustainable economic, social and environmental objectives when formulating tourism policies. In Africa, the YD, which entered into force in 2000 and became fully binding in 2002, remains the single most important air transport reform policy. One of the vital parts of the decision was intra-African liberalization, the objective of which was to develop air services in Africa and to stimulate the flow of private capital in the industry. The reasons for not applying the YD range from non-implementation of certain elements of the decision (for example, establishing competition rules, a dispute settlement mechanism and an operational monitoring body) to simply ignore it by continuing to implement the traditional restrictive bilateral air service agreements (BASAs). In 2015, the South African Department of Tourism launched a Tourism Incentive Programme (TIP) to ensure the country attracts more tourists; the TIP will also include a subsidy for tourism businesses to participate in trade exhibitions and marketing road shows both locally and internationally. Concerns relating to tourism policy includes the participation in the formulation of tourism policies as well as ensuring all stakeholders are involved in tourism development; the viability of tourism incentive programmes; the short-term investment of government in the tourism industry the lack of bilateral travel export agreements and implementation of complicated visa requirements.

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The vision of the National Tourism Policy (implemented in 2014) is to be “the destination of choice and leader in the development and sustainable tourism in Africa by 2018”. After 2014, tourism arrivals increased by 2.1% in 2015. Such an increase was, however, less than the estimated 2.7% indicated in the new tourism policy. Further to the above, despite the 5% increase in the number of tourist arrivals in 2016, compared to the previous year, the tourism receipts were recorded to have dropped by 9%, from $886 million in 2015 to $819 million in 2016. The tourism performance of Zimbabwe, after enactment of the above-mentioned policy, clearly shows that the country is far from achieving its vision stated in its National Tourism Policy. The aforementioned statistics raise the need for an assessment of the current policy framework linked to product offerings and development. Kenya’s tourism development policy has been characterized by inconsistency, poor coordination, lack of a vision and overall development strategy, and poor implementation. Nothing testifies to this better than the evident lack of consensus on the demarcation of the different tourist regions in the country by the key tourism development stakeholders, notably: the Kenya Tourist Board (KTB). The Ministry of Tourism and Wildlife (in charge of policy), and the Central Bureau of Statistics (CBS) (in charge of national statistics). Each of these institutions recognizes a different classification of the country’s tourist attractions. One distinctive dimension of tourism policy in the region relates to policy development to uplift the role of previously disadvantaged communities in the tourism industry with South Africa’s initiatives for Black Economic Empowerment an excellent illustration. Other parallel policies have been applied also in Botswana and Namibia. Although the level of conceptualization and implementation of these programs for expanding local citizen involvement varies from country to country, the core objective of these forms of policy intervention in Southern Africa has been to address the economic dispossession and marginalization of local citizens from tourism product development that occurred during colonial and apartheid periods. Arguably, the role of government within the tourism policy process varies from one country to the other depending on a range of variables that include the values influencing policy approaches.

Importance of Aviation Sector and Tourism Industry It has long been recognized in the tourism and air transport literature that international air transportation, is an important facilitator of aviation and tourism industry. Air transport, airport infrastructure, efficient and safe airline services, and worldwide air transport networks are an essential support for tourism. Cognizance is increasingly being given to the importance of international aviation for tourism, as well as the impact of restrictive aviation policies on air passenger traffic flows and tourism. The aviation sector has a pivotal role in fostering tourism growth in Africa. However, impediments already discussed in this chapter underlines the challenges Africa’s air transport market is facing. Hence, in analyzing the role of airports in

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tourism development is vital to appreciate the nature of airports and their contribution to the tourism sector. Many countries are revising their international aviation policies to exploit the benefits of tourism.

Economic Benefits of Aviation In 2018, travel and tourism accounted for 10.4% of the total global GDP and more than 313 million jobs (including direct, indirect and induced employment) at 9.9% of total employment globally. Direct travel and tourism employment in Africa rose to 9.3 million (2.6% of total employment), with 6.8 million jobs in sub-Saharan Africa and 2.5 million jobs in North Africa in 2017. This is an 11.2% increase from 2016. Globally, tourism accounts for 3.8% of direct employment as a percentage of total employment, compared to 2.6% in Africa, 4.4% in North Africa, and 2.3% in sub-Saharan Africa. The aviation sector is important for the development of the economy and employment creation. WTTC states that Africa’s aviation industry alone supports 6.9 million jobs and contributes US$ 80 billion to GDP of the continent. In 2017, Africa’s share of investment in aviation and tourism was US$ 28.2 billion, or 5.7% of total investment in the continent. For example, the Maldives relies on aviation-enabled tourism to support 42% of its economic output. Projections show that by 2034, aviation will provide 99 million jobs and generate USD 5.9 trillion in GDP, a 122% increase from 2014. According to UNWTO, the African Union (AU) Agenda 2063 and the 2030 United Nations (UN) Agenda for Sustainable Development took special recognition of tourism as one of the engines of inclusive growth and development, including positive impacts on job creation, environmental preservation, and effective resource management. According to the UNWTO (2020), the continent’s total foreign receipts in 2017 amounted to US$ 177.6 billion, contributing 8.1% of total Gross Domestic Product (GDP). UNWTO (2020) states that aviation’s total global economic impact is US$ 2.7 trillion, including direct, indirect, induced, and catalytic effects of tourism; and 54% of international tourists travel by air. In the Southern African region, a number of airlines fulfil the role of connecting the regional and global markets: Precision Air flies regionally in East Africa. LAM Mozambique flies regionally in Southern Africa, whilst South African Airways connects New York and D.C. to South Africa, and onwards. Air Namibia flies from Frankfurt to Namibia, and onwards. TAAG Angola flies from Europe and South America to Angola, and onwards. Air Botswana flies regionally in Southern Africa. Proflight Zambia flies domestically in Zambia and regionally in Southern Africa. Air Seychelles flies from Johannesburg to Seychelles, and onwards. Air Mauritius flies from European cities and South Africa to Mauritius, and onwards. Air Austral flies from Paris to the Reunion Island, and onwards. According to recent estimates by the cross-industry Air Transport Action Group (ATAG), the total economic impact (direct, indirect, induced and

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tourism-connected) of the global aviation industry reached USD 2.7 trillion, some 3.5% of the world’s gross domestic product (GDP) in 2014. Thus, air travel supports economic activity by providing a better delivery service (Tseng et al., 2005). Air travel is not only necessary to connect people but also to support economic activities across regions, which is useful for their development. The correlation between air transportation and economic development is required for a policymaker to arrange proper policy regarding the cause and effect that arise from their relationship.

Social Benefits Tourism and aviation sectors provide a better quality of life to people in various ways that include providing a sustainable development in supporting communities and widening a consumer choice. The International Airline Transport Association indicates that the industry is expecting increasing numbers of travellers over the coming years and travellers will not only be increasing in age but also increasing in morbidities. Global forecasts from the International Air Transport Association (2018) reveal that air passenger numbers will nearly double over the next 20 years, growing from 3.8 billion in 2016 to 8.2 billion by 2037. Africa boasts a rich and diverse cultural heritage, as well as natural assets in terms of landscapes, unique flora and fauna. Its heritage, if properly harnessed, should be able to position the continent as the preferred tourism destination. In addition, Africa remains one of the fastest-growing regions for the travel and tourism sector globally. For instance, in 2016, international tourist arrivals grew by 8% with 62 million international tourists, according to the United Nations World Tourism Organization (UNWTO). At the same time, such transport is critical in setting up and maintaining business relationships between distant economies. Air transportation makes it possible to reach some of the world’s remote places and helps to grow the tourism industry and economy of the developing country However, 51,554 routes were served globally in 2017. Air transportation plays a central role in developing the tourism industry. Over 52% of international tourists now travel via air transportation. Tourism is a very important process of development for some regions, especially developing countries. Air transportation provides the only global transportation channel, which makes it important for worldwide tourism and business. Aviation provides the only rapid worldwide transportation network, which makes it essential for global business and tourism. By 2034, both air passenger traffic and airfreight traffic are expected to more than double, compared to 2016. Passenger traffic is expected to reach over 14 trillion RPKs with a growth of 4.6% per annum, and freight will expand by 4.4% annually over the same period, to 466 billion FTKs. Example: Tourism in Kenya Although tourism has been and continues to be an important source of revenue for Kenya, and a source of livelihood for many, its

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dynamics have changed in the wake of terrorism and increased competition. The tourism industry in Kenya has suffered from the issuance of travel advisories by foreign governments in the last 2–3 years as these advisories resulted in a reduction of foreign tourists. The country also faces increased competition from alternative tourist destinations such as South Africa, the Far East and Asia. The industry is, however, still very vulnerable to the dynamics affecting global tourism and the players realize the need to bolster the economy against this volatility. Both the government and the industry players are responding to this challenge by increasing marketing activity, targeting tourists from diverse locations and providing incentives for local tourists amongstst other efforts. Strategic moves To meet the current demand and to strategically place themselves for the future, individual players are investing in and making internal changes to their businesses to increase their capacity and improve their processes.

Strategic and Operational Measures to Be Taken by Airline Carriers to Foster Development of Tourism in Africa In order to understand the different measures being adopted my African carriers in order to facilitate tourism growth on the continent, it is important to first examine some concepts related to strategy.

Strategic Controlling Strategic control = the process of monitoring and correcting a firm’s strategy and performance. An organization does a strategic analysis of the external environmental conditions, evaluates its internal capabilities for responding to those conditions, formulates a strategy for sustaining a competitive advantage and then implements this strategy. Once implemented, this strategy must be monitored and adjusted as needed. Effective strategic control systems allow corrective action to be taken.

Operational Controlling Operational control is aimed at the allocation and use of organizational resources. The evaluation techniques are classified into three parts:

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215

• Internal analysis (SWOT; VRIO etc.) • Comparative analysis (Competitor analysis) • Comprehensive analysis (Market audit) The following measures are key to fostering the development of tourism in Africa: • Ensuring supply of safe, reliable and comfortable service. • Airlines together with their governments should work in enhancing aviation safety and security. • Airlines should support tourism organizations in promoting tourism products as they have more access: • Through their route network system, Internet etc. • Joint promotion by airlines and tourism organizations to enhance the image of African destinations. • Developing incentive commission structures. • Participation in tourism brochures. • Range of tourism packages (short and long) with wide price options. • Complementary destination packages. From an airline perspective, carriers should support the development of tourism by tailoring their route network system to specific needs of remote tourist destinations. However, there should be no preferred domestic carriers in terms of policy, which means that all carriers should compete on level playing fields, have an equal and fair opportunity to operate in markets they wish to serve and not be pressurized to serve on unprofitable route networks. This can be fully achieved when Africa embraces a full open skies policy. This also includes the fact that airlines can lobby with their respective governments to reduce operational costs for airlines at African airports (fuel, landing, airport taxes). Other measures include: • Encourage and facilitate the emergence of efficient low-cost air service links to boost tourism. • Joint rally with tourism organizations for their governments to ease restrictions at airports to foster greater international movement (e.g. entry and exit formalities). • By supporting the full implementation of the Yamoussoukro Decision (YD). • Ensure that tourism and transport policies are consistent and mutually supportive. • Actively pursue creation of regional hubs in Africa with a view to increasing the service of air transport and make them more accessible to tourists. Finally, it is imperative to note that more cooperative promotion and partnership amongst African airlines are required in order to facilitate easy transfer of tourists. In South Africa, the availability of airport infrastructure has facilitated growth in tourism flows. There are no restrictions on air transport to develop domestic tourism. Airport Council of South Africa (ACSA) manages the major airports in South Africa. These include Oliver Tambo, Cape Town, Port Elizabeth and King Shaka. Non-ACSA airports effectively provide very important secondary and tertiary support to the main ACSA airports:

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• Primary: Commercial scheduled operations and secondary routes, e.g. Polokwane and Lanseria. • Secondary: Airports supplying the essential feeder to major hubs, e.g. Richards Bay, Margate and Pietermaritzburg. • Tertiary: Airports mainly for General Aviation and private business operations, e.g. Wonderboom and Grand Central. • Private Airstrips/Aerodromes. Finally, in order for South Africa to fully achieve market potential, the commercialization, privatization and development of airlines and airports on business principles must be encouraged. This also requires a concerted partnership is required for all stakeholders to ensure that tourism vision and strategies are realized whilst sustaining airline viability and profitability.

Airline and Regional Tourism Policies Tourism and transport policies ought to be coordinated to pursue optimal growth in connectivity and secure economic benefits for communities. Air transport itself is an important factor for tourism as it seeks to provide the most efficient way of travel. In some countries, it constitutes up to 100% of tourist share coming by air transport. Tourism and Air Transport Policies presented at the 20th Session of the UNWTO (Victoria Falls, 24–29 August 2013) concludes that air transport is key for tourism. It has long been recognized in the tourism and air transport literature that international air transportation in general, and international air passenger transport in particular, is an important facilitator of travel and tourism, hence, countries have to pursue regional tourism development in the context of aviation policies. The links between tourism and aviation are becoming more explicitly recognized and these influence governments’ aviation policy formation, especially in international aviation, which in many countries remains a relatively tightly regulated industry. In South Africa, the government has recognized the importance of tourism and how it is linked to effective air transport development. One of the main objectives of the Airlift Strategy is to align air transport with other national strategies, one of which is the National Tourism Policy. The African Union states that the proposed Africa Civil Aviation Policy indicates that following the end of World War 2, the International Civil Aviation Organization (ICAO) was created with the signing of the Convention on International Civil Aviation (Chicago Convention), on 7 December 1944. The objective of ICAO, now a specialized agency of the United Nations, is to promote the development of a safe, secure, regular, efficient and economical international civil aviation. The Chicago Convention in 1944 generated new reforms and agreements to regulate the “capacity and frequency, airfares, freight levels, and air traffic freedoms” of 52 states. Bilateral agreements between the states were signed to operate aircraft across borders (Pels, 2008). The major aim of ICAO is to regulate safety,

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communications and other technological aspects of the international aviation industry. The International Civil Aviation Organization Handbook states that ICAO has regional and sub-regional offices within Africa that are supposed to ensure that in implementing the YD, all policies are according to the international standards. In November 2011, the Draft African Common Civil Aviation Policy was presented in Angola at the Second Session of the African Union Conference of Ministers Responsible for Transport. This step could be interpreted as another important milestone in the pursuit of intra-African air liberalization on the Continent. However, it must be noted that little success has been achieved in the past regarding efforts to improve civil aviation in Africa due to lack of political will, as well as numerous institutional and procedural constraints.

Impact of COVID-19 on International Tourism and Air Transport The loss in global commercial aviation profit is expected to reach another 51.8 billion US dollars in 2021, after a loss of 137.7 billion US dollars in 2020. On the other hand, prior to the COVID-19 shock, it was estimated that commercial airline operations during 2020 would generate over 29 billion US dollars. In regional dimensions, the Middle Eastern and African carriers reported combined losses even before the COVID-19 shock (See Fig. 6.4). Governments have been compelled to assist the aviation industry by providing financial injections in order to alleviate the impact of COVID on the industry. Figure 6.5 shows the different types of aid packages delivered to the industry.

Worldwide

North America

Europe

Asia Pacific

Middle East

Latin America

Africa

60

Profit/ loss in billion U.S. dollars

40 20 0 -20 -40 -60 -80 -100 -120 -140 -160

Fig. 6.4 Profit and loss of airlines worldwide 2010–2022. Source: IATA, 2021a, 2021b

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6 0

20

40

60

80

100

120

140

Total

180 161.9

99.7

Direct aid*

40.1

Wage subsidies

Corporate taxation

12

9.5

Industry taxation

Fuel charges

160

0.7

Fig. 6.5 Government aid to airlines due to COVID-19 as of September 2020, by type (in billion US dollars). Source: IATA, 2021a, 2021b

0%

-10%

Year-on-year change

-20%

-30%

-40%

-50%

-60%

-70% Middle East

Africa

Europe

Latin America & Caribbean

Asia Pacific

North America

Fig. 6.6 Year-on-year change in seat capacity due to coronavirus in 2020, by region. Source: ICAO, 2021

The aviation industry was greatly impacted by the coronavirus. In July 2021, the global seat capacity of the aviation industry was 31.2% below the same month in 2019, with North America being the most impacted region (See Fig. 6.6).

COVID-19 Impact on Air Cargo Capacity

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COVID-19 Impact on Air Cargo Capacity Because of the COVID-19 pandemic, the world stopped traveling. Closed borders and strict travel requirements meant that actual flight movements were severely impacted, which caused a knock-on effect on air cargo logistics and global trade. But whilst the world returns to the skies once again, air cargo industry players adapted to a very different landscape. Global international air cargo capacity was down -6% (vs. 2019) between 4–17 April 2022. Asia to Middle East to Europe is up +9% due to continuous rerouting of capacity (Accenture, Seabury Consulting, 2021). Within the period from April through May 2020, there has been a large increase in various commodities in air cargo trade globally. Facemasks experienced the most notable increase with 235,000 metric tons more transported within this period compared to the same period last year. A variety of medical equipment such as medical gloves, gowns and ventilators (See Fig. 6.7) dominates the top ten list. Compared to 2019, the rate of change regarding international tourist arrivals in North Africa in 2021 dropped by 78.4%. This represented an adverse effect of the coronavirus (COVID-19) pandemic on the travel and tourism industry in the sub-region. Comparatively, in sub-Saharan Africa, the year-to-date change in international tourist arrivals dipped by 76.4%, also signifying a negative effect of the pandemic situation. Overall, inbound tourist arrival change rate in Africa during the studied period stood at minus 77.2% (See Fig. 6.8).

0

50

100

Face masks

150

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250 235

Medical gowns

56

Medical gloves

15

Laptops

14

Nonwoven fabrics

10

Men's woven garments

9

Ventilators

8

Medicaments

7

Laptop parts

7

Disinfectants

6

Fig. 6.7 Increase in top commodities in global air cargo trade April–May 2020. Source: Accenture; Seabury Consulting, 2021

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6 -90%

Tourism Development in Sub-Sahara Africa and Impact on Regional. . . -80%

Sub-Saharan Africa

North Africa

-70%

-60%

-50%

-40%

-30%

-20%

-10%

0%

-63%

-78%

Fig. 6.8 Year-to-date change in tourist arrivals in Africa amid COVID-192020, by sub-region. Source: UNWTO, 2021

12

11.2

Job loss in millions

10 8 5.6

6 4 2

2.9 2

2

Africa

North America

0.9

0 Middle East

Latin America

Europe

Asia Pacific

Fig. 6.9 Job loss in industries associated with air travel due to COVID-19 by region 2020. Source: IATA, 2021a, 2021b

As of 07 April 2020, it is estimated that roughly 11.2 million people working in air travel-related industries in the Asia-Pacific region lost their jobs due to the coronavirus outbreak. In the Middle East, this number was equivalent to under one million unemployed people (UNWTO, 2021). The severe downturn in air traffic this year caused by COVID-19, followed by a slow recovery w resulted in a loss of up to 46 million jobs normally supported by aviation around the globe, according to new industry figures released today. Under normal circumstances, aviation and the tourism it facilitates support 87.7 million jobs worldwide. Over 11 million jobs are within the sector itself, employed at airlines, airports, civil aerospace manufacturers and air traffic management. (See Fig. 6.9). The near-total shutdown of the system for several months, as well as the stop/start nature of the reopening means that air travel will not recover to pre-COVID levels until around 2024.

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Global Perspective: Impact of COVID-19 From the time of the first outbreak of corona virus to the time that the WHO declared it as a pandemic, COVID-19 has had a disastrous impact at the global level. Besides the impact on the health and mortality of humankind, governments across the world have seen major disruptions in their socio-economic activity. Aviation industry is heavily dependent on domestic and international mobility and given that the pandemic has brought about the kind of travel restrictions, understandably it is the hardest hit industry. Airlines have had to deal with border closures, lockdowns, and seat restrictions and so on. According to an estimate by ICAO, globally there has been a 79% decrease in seats in the second quarter of 2020. This brought about an economic slowdown that has seen enormous financial difficulties and in some cases bankruptcies in the aviation sector. As the global aviation industry grappled with the pandemic and in response has adopted measures, there have many reasons why its impact and expected recovery varies from country to country. A plethora of factors such as different lockdown and quarantine times, low propensity to travel due to fear, existing air connectivity and other regulatory mechanisms could have resulted in the COVID crisis changing its dimension. Overall, all global markets were severely impacted by the pandemic and recovery picture has been mixed. For example, during the peak of the pandemic between 2020 and 2021, weekly flights were severely disrupted (See Fig. 6.10). The pandemic has seen drastic changes in interregional and regional traffic segments, where operations have remained suspended due to Covid. However, some of the airlines have seen a recovery to 50% of the pre-pandemic capacity by October 2019, which could be attributed to a faster evolution of regional and interregional traffic. Airlines are making a concerted effort to re-establish as many routes as possible and service as many markets as possible. The decrease in demand has prevented recovery of supply to pre-crisis levels. This has affected connectivity and traffic in the region, thereby seriously influencing revenue projections. According to IATA, the continent had an accumulated loss of over 3 Billion US Dollars between 2012 and 2019 and the current pandemic has driven them further to the brink of collapse. The epidemiological status of each country has seen the relevant migration restrictions applied. Some of the countries have has no restrictions where the countries have reopened, whilst some have soft restrictions where the countries require a negative PCR test in some certain hours of arrival. Some of the countries have hard restrictions wherein they have an entry ban from certain countries with a mandatory quarantine requirement. In addition, some countries have closed their airports or flights suspended, permitting only repatriation flights. These measures have conditioned the demand directly affecting the financials of the market. The recovery of the aviation industry will depend directly on the efficacy of each country to control the pandemic through various measures including vaccination. These measures depend on a variety of factors including regional connectivity,

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Global

Spain

Hong Kong

Germany

Singapore

Italy

France

United Kingdom

Australia

Sweden

United Arab Emirates

South Korea

United States

India

China

Japan

20%

0%

Year-on-year change

-20%

-40%

-60%

-80%

-100%

-120%

Week starting on

Fig. 6.10 Weekly flights change due to COVID-19. Source: www.oag.com 2021

operational volume, passenger segmentation and economic constraints to include. All the stakeholders of the aviation industry. The economic measures would provide economic packages that would pave the way for Fiscal spending to enable the growth of the industry. It could include specific allocations, bailouts and subsidies. They could be measures focused on individual airports, airlines or stakeholders. There could be holistic measures intended to provide assistance to all sectors of the aviation industry. Many African countries now look up to the high-level task force of the African Union, the ICAO recovery task force and the AFRAA recovery plan to enable the path to recovery. For instance, Egypt as a country has been the recipient of the AID package on a holistic approach. The nation has seen a 13.1 million tourists in 2019 with a 7 billion gross value contribution to GDP with over 150 international destinations served pre COVID. The stimulus package included 3.2 billion dollars of which 191$ million went to Egyptair. A further 63$ million dollars as loan guarantees, 50% discount on landing fee and 20% discount on ground handling, waiver of tourist visa and reduction of aviation fuel price by 0.10$ per gallon in order to promote tourism (ALG analysis, IATA, Oxford Economics, IMF). Globally

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airlines have had to survive for 2 months with little or no revenue on average due to the uncertainty of the pandemic. Therefore, the urgency of government support cannot be underscored for the Aviation environment. Aviation contributes to GDP either directly or indirectly, especially in countries that rely on tourism. In the African context, the narrow domestic markets will have to plan redeployment strategies in order to overcome the financial strain. Globally, the equity injection in terms of direct assistance has come in the form of government grants, direct loans, loan guarantees and credit line guarantees besides airline nationalization or partial takeover. Other measures include tax exemptions, tax deferral, fuel tax reduction, operational charge reduction, general fee waivers and besides stimulus packages. These help the airlines to adapt to the new environment besides providing the much-needed boost to their cash flows in the short and long term. In the African context, IATA and AFRAA have increased the budgetary allocations to the national budgets in support of airline nationalization where the countries, airlines have had accumulated losses. • The South African government has provided an equity of 650$ million dollars towards the nationalization of South African airways. • The Moroccan government has provided an allocation of 624$ million dollars to Royal Air Maroc as state-guaranteed loan. • The Kenyan parliament has approved an equity injection of 500$ million to Kenya Airways. • As a long-term finance plan, the Egyptian government has approved a $191 million stimulus package towards air transport and tourism to Egyptair. • The Ivory Coast government has provided a grant of 24$ million to Air Cote d’Ivoire to tide over the crisis. • Rwandair has received a rescue plan from the Rwandan government. These would not be sufficient if the pandemic were to see further variants that would prolong the agony globally. They may have to be sustained with a further infusion of capital if the financial projections, (pre-COVID) have to be realized. However, there have also been certain airlines that have managed to stay afloat in spite of being denied a package like Ethiopian Airlines. Besides Airlines, airports also contribute to the local economies in terms of job creation, as they are part of the infrastructure. In spite of not receiving, any revenue airports will have to sustain with their high fixed costs of having to maintain security, terminals and maintenance of airfields. In the context of Africa, where the private sector is not well developed the airports are mostly managed either directly or indirectly by the government and public corporations. The Air navigation service providers have had to continue support to airlines in spite of a drastic fall in revenues. Therefore, governments have been called upon to extend their support to navigation service providers and other aviation-dependent industries. Globally tourism industry job loss figures could be as high as 197$ million with Africa accounting for 17 million jobs where Africa stands to lose 120 billion in GDP terms as against 5543 billion globally. The travel and tourism industry has also seen

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Africa

Middle East

Asia Pacific

Europe

North America

Latin America

Total market

25%

FLF growth/loss

20%

15%

10%

5%

0%

-5%

Fig. 6.11 Aviation monthly freight load factor by region. Source: IATA, 2021a, 2021b

an impetus provided to the Kenyan government promising 4.7$ million to the tourism sector and Ethiopia allowing banks to reschedule loan payments to hotels. However, despite a sharp drop in commercial passenger demand in 2020, the cargo freight load factor increased sharply due to demand for COVID-19 vaccines, personal protection equipment and other medical-related products. Figure 6.11 paints the picture across all the regions. The next section focuses on a case study example of South African Airways. This case study highlights how COVID-19 accelerated the carrier’s financial woes even though pre-COVID, the airline was already experiencing financial problems.

Case Study: South African Airways (SAA) Brief History South African Airways (SAA) is the national flag carrier of South Africa. The airline was founded in 1934 and operates from its hub O.R. Tambo International Airport located in Johannesburg. The airport was formerly known as Jan Smuts airport until 1994 after the fall of apartheid. The carrier operates a hub and spoke model and links over 40 domestic and international destinations across the Africa, Asia, Europe, North America, South America and Oceania. In 2006, SAA joined Star Alliance making it the first African carrier to sign with one of the largest airline alliance groups.

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Fleet Structure As of December 2021, SAA has the following aircrafts in its fleet composition (Table 6.2).

Prime Period In 1992, SAA was operating long-haul flights to Miami with a Cape Town to Miami International Airport nonstop Boeing 747–400 route. The carrier also flew nonstop to Perth in Australia and it continued to expand its route network (Bangkok, Singapore as well as mapping out strategic cooperative alignments with carriers like America Airlines (AA) and Air Tanzania. SAA became a symbol of a successful African airline carrier. In 2010, SAA was ranked amongst some of the top airline carriers in the MENA (Middle East North Africa) region and Sub-Sahara. See Fig. 6.12. The years that followed, SAA continued its strategic moves by establishing a feeder carrier South African Express (SA Express). This established carrier provided feeder traffic to SAA’s main hub airport. Initially, SAA had a 20% equity stake in SA Express and the other equity holders included Alliance Airline Holding (51%), SA Enterprise, (24%) and Abyss Investments (4.1%). At this stage, SA Express catered for some of the low-density route networks, a move that was seen as creating a competitive barrier to market rivals. In 1995 SAA continued to forge collaborative code-sharing agreements with Lufthansa. The following year SAA rebranded its symbol by embracing a more colourful symbol, which became dubbed as the “rainbow” carrier. A move by observers saw as significant in its effort to shake off its political past. Since around 2004 onwards, the once successful SAA was beginning show signs of cracking business model. Its balance sheet looked very weak, the company experienced negative equity, and its management was embroiled in corruption scandals. Such demise, spiraled as the carrier continued to bleed cash and over the next 15 years, the CEO turnover rate was high as the government continued to bail Table 6.2 South Africa Airways fleet structure Aircraft type

Currently in service

New aircraft orders

Airbus A-319-100 Airbus A320–200 Airbus A330–300 Airbus A340–300 Airbus A340–600 Total

3 2 1 4 4 14

– – – – – –

Source: www.saa.com

Passengers C Y 25 95 24 114 46 203 38 215 42 275

Total 120 138 249 253 317

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35,000 31,422

Passengers in Thousands

30,000

25,000

20,000

18,172

15,000

12,392 9,517

10,000

7,100

6,634

6,034

5,000

5,309

4,456

4,102

0 Emirates Airline*

Saudi Arabian Airlines

Qatar Airways

EgyptAir

Etihad Airways

South African Airways

Royal Air Maroc

Gulf Air Air Arabia

El Al

Fig. 6.12 Top 10 Airlines in Africa and the Middle East in 2010 by Passenger Numbers (in 1000). Source: World Airline Report, 2011

out the carrier. Realistically the business model was no longer sustainable in its current form, therefore a massive restructuring effort followed in order to put brakes from collapse. Political interference, a weak rand and poor leadership drove the company into massive financial losses. Taxpayers had to fork out R25 billion in bailouts and guaranteed loans as the ailing carrier continued to exhibit poor operational performance. The real extent of SAA’s financial losses remains unclear to these dates because since 2017, the carrier has not been reporting its financials. So, what triggered such a downward spiral in the company’s performance? • New entrants and increased competitive rivalry. Since 1991, when the South African government deregulated domestic markets, SAA commanded a 95% market share. The entrants of new market rivals diluted SAA’s dominant market position. However, not all the new competitors were successful and the list of failures included, Sun Air, Phoenix Airways, Nationwide and Filestar. However, these carriers blamed a climate of unfair competitive practice from the incumbent carrier, which continued to be injected by government capital funds. The aggressive power of two established market rivals started to unleash punches on a fragile SAA and this resulted in SAA losing the market share on domestic routes the damage continued on international routes as well. Comair (which operates Kulula and British Airways in South Africa) and FlySafair, which is now South Africa’s largest domestic carrier. For years, SAA dominated a large number of routes between Africa and the rest of the world. Rivals like Ethiopian Airlines punctured that dominant market position.

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• Political meddling Most observers have criticized SAA’s practices and government involvement in commercial operations and managerial decisions of the airline. SAA operated a lucrative route between Mumbai and Johannesburg until 2015 when the Gupta family influenced SAA into relinquishing this route to Indian airline Jet Airways. Other events involved the acquisition of new Airbus planes, which Chairman Dudu Myeni clashed over with the Finance Minister. Poor decisions continued to rock the airline management structures and this was followed by a catalogue of mishaps between the government and the airline management subsequently resulting in key figures being axed by the government. • Poor asset acquisition Acquiring the right size of an aircraft to operate specific routes is a key fleet planning and operational decision. However, this seemed not to be the case with SAA’s senior management. Since 1991, SAA has spent billions on a range of A340 planes, which have proved to be a key pitfall in its operational strategy. The acquired planes were not well suited for the challenges of long-range operations from its hot and high hub, Johannesburg (5500 ft.). As fuel spiked during the global financial meltdown in 2007, the four-engine type was less capable than rival twins or highercapacity quads used by Emirates and the other Gulf carriers. • Mounting debts As the carrier continued to submerge in massive debts, action was taken to suspend its all operations in September 2020 forcing the airline to file for liquidation and bankruptcy protection. The company was indeed in financial distress and an insolvency issues mirrored this. Figure 6.13 illustrates the flow base insolvency Cash Flow $

Cash flow shortfall

Contractual obligations

Firm cash flow

Insolvency

Fig. 6.13 Flow base insolvency. Financial distress

Time

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6 Tourism Development in Sub-Sahara Africa and Impact on Regional. . .

concept. Flow base insolvency occurs when the firm’s cash flows are insufficient to cover contractually required payments. Financial distress is a situation where a firm’s operating cash flows are not sufficient to satisfy current obligations and the firm is forced to take corrective action. However, financial distress may lead a firm to default on a contract, and it may involve financial restructuring between the firm, its creditors and equity investors or asset restructuring. Think of the two sides of the balance sheet. Financial restructuring involves the following: • • • •

Issuing new securities Negotiating with banks and other creditors Exchanging debt for equity Filing for bankruptcy Whereas asset restructuring typically involves the following:

• Selling major assets • Merging with another firm • Reducing capital spending and R&D spending Soaring debts of at least R17 billion, meant that SAA had a massive repayment burden and did not have enough cash flow to support operations and compete on price and improve the general service offerings. Trapped in this financial black hole, SAA continues to hemorrhage cash. • Leadership vacuum SAA has experienced decades of tumultuous leadership crises and even up to date, currently does not have a sitting CEO. The last years have seen either the CEOs being sacked, clashing with the government or embroiled in scandals of all sorts. Crippling strikes also caused a huge financial dent to the airline as trade unions demanded to halt the downsizing of the workforce. This resulted in further estimated R50 million in costs to the airline. • Anti-competitive practices Against a backdrop of poor performance, SAA was again involved in anticompetitive practices, which violated competition rules. The airline was forced to pay large fines after running an incentive scheme for travel agents who received commissions from SAA. In 2016, this forced the carrier to pay Nationwide, a competitor that went bankrupt, almost R105 million in damages. Kulula.com also was awarded R1.1bn in damages. • COVID-19 impact Whilst the coronavirus pandemic has had a wide-ranging impact across African carriers, the timing of the crisis has been particularly calamitous for South Africa’s struggling airline sector.

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SAAs financial woes existed way before the outbreak of the corona pandemic and prompted the halting of passenger services and vital revenue streams. The global crisis has only exacerbated the carrier’s underlining problems. In December 2020, the debt-ridden SAA was put into formal business rescue. Business rescue practitioners embarked on a major restructuring and cash-saving measures, including streamlining its network, and job cuts. The restructuring efforts proved to be complex with government officials outlining opposition to some of the network cuts. Struggling SAA has required a series of state bailouts over the years, as it battled with its historic debt burden. The airline has also struggled for boardroom continuity, with successive stepping down of various CEOs. Whilst South Africa’s cash-strapped state-owned carriers are feeling the brunt of the crisis, conditions in the country—including a tough economic climate was also causing problems for private operators. Privately owned South African carrier Comair called off its planned acquisition of aircraft leasing specialist Star Air Cargo and Star Air Maintenance as it also battles mounting challenges. Comair has initiated a labour restructuring process as part of further efforts to reduce costs.

The Outlook for the Aviation Sector The global COVID-19 pandemic which crippled the aviation industry continued to exert pressure on the sector in 2021 although analyst predictions show that in 2022 capacity is projected to grow at 47% recovering to around 2015 levels (Cirium, 2021). As already discussed in the previous chapters, the industry will continue to face a tough climate towards recovery. However, the environmental impact of air travel has now taken central stage as governments, policymakers and aviation actors aim to reduce carbon emissions. Around 2% of all human-induced carbon dioxide (CO2) emissions are from the global aviation industry (ATAG, 2020), which may not seem a lot. However, looking only at the transportation section, aviation is responsible for 12% of CO2 emissions from the sector (ATAG, 2020). To put this into perspective, in 2019, 915 million tons of CO2 were produced from flights worldwide. In the aviation industry, around 80% of aviation CO2 emissions are from flights over 1500 kilometres (ATAG, 2020), as there is no other mode of transportation that could easily and quickly cover the distance.

Overview Environmental Policies in Aviation One of the major players in the environmental policies generation and implementation is the International Air Transport Association (IATA) with general director Willie Walsh. In 2009, the IATA put forward an “ambitious and robust carbon strategy with targets and a four-pillar action plan” (IATA, 2021a, 2021b). The three targets this strategy outlined were as follows. Target 1 was to improve fuel efficiency

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between the years 2009 and 2020 by 1.5% per year (IATA, 2021a, 2021b). The second target outlined was to only have carbon neutral growth from the year 2020 onwards. Finally, the last target was to reduce the net-aviation CO2 emissions by 50% by 2050. In addition to the three targets just mentioned, the IATA also included a four-pillar action plan. The four pillars are technology, operations, sustainable aviation fuel (SAF) and carbon offsets. In terms of technology, IATA believes that the new aircraft technology is on average about 15–20% more fuel-efficient than the models being replaced (IATA, 2021a, 2021b). For operations, the IATA mentioned that this pillar would include reducing weight on the current fleet as well as increasing the usage of single-engine taxing. For SAF, the problem currently is that it is 2–4 times more expensive than regular jet fuel, making it less accessible for airlines to use as a regular alternative. The IATA mentioned that as a short-term target for this problem it hopes to “build SAF usage to 2% of total amount fuel consumed by 2025” (IATA, 2021a, 2021b). For the final pillar, the IATA acknowledges that carbon offsets are necessary as a global marketbased measure to “fill any remaining emissions gap until those other measures have taken full effect” (IATA, 2021a, 2021b). The IATA has also put forward an environmental assessment. This is a voluntary program “based on principles in compliance with environmental obligations” (IATA, 2021a, 2021b). This assessment is an evaluation system that is designed to assess and improve individual airline’s environmental management. The program is set up as a staged approach to set airlines up for success. In stage one, the airlines focus on setting up the framework for the environmental management system (EMS). In addition, airlines identify and comply with all legal requirements. The second stage has airline equipped with a fully fledge EMS. This EMS will provide airlines “with all the tools required to be on top of their environmental management game” (IATA, 2021a, 2021b). However, COVID-19 has put all these initiatives and policies in a different perspective as the aviation industry is now also recovering from an unprecedented loss in demand, making any additional financial burden significant. Environmental policies, which include elimination of waste and reduction of emissions amongst others restriction, that were impacting the industry could now slip into the background as the airlines try anything to survive the crisis. In this fight for survival, voluntary commitments like CORSIA will most likely take a back seat behind the short-term fight to outlast the crisis: One method of survival that an increasing number of airlines are utilizing is seeking governmental support. This support is being given in form of subsidies and other financial support, but the focus on environmental sustainability has slipped into the distanced future: In the early stages of the pandemic many health concerns were raised, but they seem to have been replaced with talk.

Aviation Industry Adaption to Climate Change

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Aviation Industry Adaption to Climate Change In this final section, the overall adaption of the aviation industry to climate change will be assessed. According to Daley and Preston (2009), climate change in the aviation industry is a problem that is recognized with broad consensus. The industry now is focusing on the formulation of effective policies and the correct implementation that will produce positive change. As mentioned by Daley and Preston, international climate change policy frameworks have been developed in the UNFCCC and the Kyoto Protocol of 1997 that do include the aviation industry to some extent. In addition, regional climate change policies are also currently being developed. However, the authors also point out that the aviation industry has been lagging behind as only domestic aviation is included as part of the national emission under the Kyoto Protocol. Unfortunately, as Daley and Preston point out international aviation emissions were excluded from the Kyoto Protocol, as it is extremely difficult to allocate these emissions. The solution of overall emissions limitations for Kyoto Protocol members, according to the authors, will give non-members a competitive advantage. In addition, the ICAO has been declining any kind of taxation of kerosene and emission trading systems. The ICAO prefers voluntary measures in order to address the emission problem within the aviation industry. As previously mentioned, the international aviation industry is not included in the Paris Agreement for the strategy of the reduction of emissions. The purpose behind this omission is to allow the ICAO to attempt to reduce emissions with their own measures. However, the mentioned voluntary measures the ICAO has implemented or are going to implement are being claimed as not effective enough according to the authors. This was especially pointed out by the European Parliament’s Committee (2015). In the report, the European Parliament’s Committee stated that the actions by the ICAO and the initiatives taken to address emissions in the aviation industry are insufficient and were started too late. The report claims that the initiatives will only slow the growth of emissions, but the ICAO’s actions will not lead to actual emission reduction. Therefore, the report by the European Parliament’s Committee, sees a need to increase the ambition within the ICAO urgently in order for the aviation industry to meet any emission reduction goals in the near future. Whilst the ICAO has agreed to go for a carbon-neutral growth starting in 2020, the report does point out that the policies and initiatives to ensure this goal was put in place too late. Whilst talking about the initiatives and actions of the ICAO, Gössling et al. (2015) outlines the issue raised from a different perspective. According to this article, the aviation sector, which includes the IATA and ICAO, still believe that their actions will lead to the results wanted. These actions, according to Gössling et al. (2015) include new engines and airframes (fleet renewal), improvements in air traffic management and the increased use of biofuels. However, the authors also mention that the offsetting in form of CORSIA is not part of the strategy that was outlined by the IATA. As previously mentioned, offsetting will be key as it will help reduce emissions whilst other measures such as the introduction of more biofuel

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usage are still being implemented. However, this is a sizeable barrier to the implementation of biofuels. According to Gössling et al. (2015), this barrier is the needed production scale to supply the aviation sector and the needed production land that is necessary to produce the quantities necessary. Whilst the initiatives implemented by ICAO are encouraged and heading in the right direction, there will be a need for incentives and regulatory action from the outside to reach the goals set out. A principle that has received consensus in the world of environmental regulations is the Polluter Pays Principle (PPP). The principle has not been mentioned in connection with the aviation industry, it is a principle with a similar idea that has been suggested within the aviation industry. The PPP is “based on a commonsense approach for the mitigation of environmental (Kravchenko, et al., 2012, p. 50). The simplified belief that underlies this principle is that the person or company, who is deemed responsible for the pollution, should pay the expenses of the emissions. In 1972, the PPP was recognized by the Organization for Economic Cooperation and Development (OECD). The OECD added it to allocate costs of pollution and control measures. However, the PPP can be applied in different ways in order to get the best results. The first application is to adjust fees or taxes to cover the pollution cost in compliance with the domestic law. The other application is to charge the cost of basic pollution control measures to the people or organization responsible for emission. Whatever the application may turn out to be, the important aspect to note is that the principle is widely endorsed and recognized as something that needs to be implemented. Kravchenko et al. (2012) also outline the three elements that the PPP is based on. These are the need to take preventive action, the necessity to rectify the environmental damage at the source and that polluters should pay for their own damage. Overall, the Polluters Pay Principle has four advantages according to Boadu (2016). The economic advantage is that PPP promotes efficiency. The principle also promotes justice as a legal advantage. The other two advantages of the PPP are that it harmonizes international environmental policies and defines cost allocation within a state. Riley et al. (2020) sum up the points mentioned in a very good way. As the authors point out, the literature around these issues, tend to focus more on other stakeholders within the aviation industry such as airports (usually hubs). Therefore, it can be difficult to get a good picture of the situation for airlines around this situation. An important bit of information that Riley et al. mention is that many players in the aviation sector either do not have the funding necessary or are too short-term focused to make the necessary investments in long-term planning that are necessary for environmental policies to work. Therefore, the needs to be a wider engagement within the aviation industry with issues such as environmental policies and sustainability. According to the authors, aviation needs to adapt, as the consequences of climate have not been considered enough within the sector.

Conclusion

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Conclusion Liberalization in Africa ontinues to be a goal to be achieved for the entire continent purely in terms of the promise of dividend it brings forth. The various stakeholders such as the airlines, airports, the air network service providers, aviation authorities and regulators stand to gain precious mileage in the light of the devastation that the pandemic has left behind. The implementation of the Yamoussoukro Decision and SAATM norms are of paramount importance to achieving this objective. The challenges that have plagued the implementation range from protectionist policies fear of domination, lack of trust, lack of a single regulatory framework and political will. In the short term, airlines must explore measures such as: • • • • •

Direct cash injection Rationalizing operational costs Granting of interim traffic rights Financial promotion In addition, a coordinated approach to calibrated opening of borders.

In the long term, they must seek to harmonize regulations, implement SAATM fully, ease ownership rules, liberalize airport services and prudently examine costs to strengthen their business management. Airports must look towards debt refinancing, fund promotional campaigns withhold dividend payments and have a calibrated approach to open borders. They must rationalize investment promote private investment; boost planning on infrastructure and revise airport concessions. They should devise models of Public– Private Partnership into the architecture of aviation enterprises. This would help at multiple levels in terms of infusing capital besides bringing in additional stakeholders in the overall implementation and management of the regulations as prescribed by the Yamoussoukro Declaration. At a pan-, African level there is a need for greater consensus building in order to obviate the challenges of implementation that range from protectionism to corruption. This is possible if the industry can facilitate a pan-African governing body that is empowered to bring all stakeholders on board to achieve the bigger dream of single African aviation entity. This would accelerate the pace of growth of African aviation that has tremendous potential yet to be tapped. The air navigation service providers must explore measures to take other stakeholders on board and in the long term explore technologies to reduce charges and work towards an integration of pan-African service providers. The aviation authorities and regulators must support the immediate financial needs of aviation authorities and in the long term develop institutional frameworks for sustained finance.

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