Africa’s budget airlines still struggling to emulate Europe’s low cost revolution

Low-cost airlines are widely expected to meet the demand for intra-African aviation, though the business model which has proved so successful in the American and European markets is still struggling to gain traction in African airspace as quickly as investors had hoped.

In a continent which is home to more than one billion people, and which hosts more than 50 cities with populations of more than one million – most of them poorly-served by road and rail infrastructure ­– the economic case for low-cost carriers would seem self-evident.

Yet it is proving to be anything but. South Africa has seen a series of budget carriers come and go, including 1time and Velvet Sky – both of which went into liquidation in 2012. Now it looks as if the no-frills budget airline Fastjet, which flies domestically in Tanzania and operates international services to Johannesburg, Lusaka and Harare, is in terminal descent.

The ailing budget carrier last month posted its third profit warning in under a year. Fasjet is now expected to lose US$20m before tax in 2016, down from an earlier forecast of a US$1m profit. Although it has cash reserves of around US$20m – enough for six months – outgoing CEO Ed Winter has burned through more than US$100m over the last three years, prompting Sir Stelios Haji-Ioannou, whose EasyGroup Holdings owns 12% of Fastjet, to demand Winter’s head.

Winter blamed regulatory holdups in Zambia and Zimbabwe, sharp currency depreciations triggered by the commodities downturn, and a slowdown in the Tanzanian economy as a result of the protracted presidential and legislative election campaign. Sir Stelios insisted that management not circumstances were to blame, and highlighted Fastjet’s ‘bloated cost base’ as the cause.

A brief tour of Africa’s post-independence aviation landscape shows that both are right. The African aviation sector has been experiencing something of a revival in recent years, after decades of contraction in which dozens of national flag carriers disappeared and hundreds of routes were withdrawn, as one airline after another went bankrupt. That contraction left a more commercially viable sector in its wake, but one in which African cities are heavily under-served.

Cairo and Cape Town are still the two main continental gateways, although a smaller number of regional hubs in Addis Ababa, Nairobi and Accra have been expanding their regional and continental footprints as they seek to claw back a bigger share of the aviation market from international rivals. Although there are more than 3,000 airports between Egypt and South Africa, fewer than 280 host regular scheduled flights – and significantly less if long-haul flights to and from the continent by non-African operators are excluded.

The main full-service carriers – including South African Airways (‘SAA’), Ethiopian Airlines, Kenyan Airways, Egypt Air, Royal Air Maroc, TAG (Angola), Comair (Cameroon), Air Arik (Nigeria), Air Botswana, and Rwanda Air – collectively account for a mere 20% of the African air market, and less than 3% of global aviation traffic.

With some exceptions, most are loss-making, are subsidised by the state, are heavily over-staffed, and are burdened by the practice of handing out free flights to friends and extended families of employees – Air Botswana was turned from loss to profit simply by banning the practice.

Nevertheless, the International Air Traffic Association (‘IATA’) estimates that aviation in Africa generates more than US$80bn in gross domestic product, and supports some 6.9m jobs. This would rise far more rapidly if African governments stopped protecting their domestic carriers, enabling increased competition to drive down prices and boost occupancy rates. IATA also estimates pent-up demand of 5m passengers a year, who are deprived of the opportunity to travel because of government protection and lack of competition.

But after decades of preferring to open up their domestic markets to third countries rather than each other, the tide is beginning to turn – albeit painfully slowly – as governments increasingly put aviation at the heart of their national growth strategies.

Ethiopian Airlines – Africa’s most profitable carrier – has been in the vanguard of this movement, and is seeking to become the dominant African player. Its fleet of 787 Dreamliners currently serve 80 destinations on five continents, and is capturing ever-increasing amounts of business from Gulf carriers Etihad and Emirates.

After decades of contraction, African aviation is finally growing again, and there is an urgent need for regional carriers to feed business and leisure travellers to the handful of hubs that operate long-haul destinations.

So, if the business case for budget carriers is improving, why are carriers like Fastjet failing?

Ed Winter is right to claim that currency depreciation triggered by the commodities downturn, slowing growth in key markets like Tanzania, and regulatory tardiness in granting new landing rights, have hit Fastjet’s bottom line and network expansion ambitions. But so too is Sir Stelios in stressing the vital importance of keeping operating costs as low as possible.

Low-cost economics only really work for the short-haul sector – four hours or less. Ryanair turnarounds take 18 minutes, compared to 2 to 3 hours for British Airways, enabling its aircraft to fly more hours a day. It is not for no reason that catering and luggage are kept to a minimum on budget carriers, to reduce the risk of delays.

Along with high utilisation rates, low-cost carriers also need sophisticated airport infrastructure to execute such fast turnaround times – electronic payments, online check-in, investment in advanced ticketing, and professional ground staff – things we all take for granted in Europe and the US, but which have yet to have much of an impact at most African airports. Most African airlines are still accepting cash!

This competitive edge is doubly important in the face of anti-competitive behaviour of some state-owned airlines. SAA, to name just one, regularly lowers its prices to kill off the competition, running up losses of more than R2bn over the past decade. But its management doesn’t care because it knows it will get yet another bailout from the Government.

Despite the 2001 Cape Town Convention, and its Aircraft Equipment Protocol, allowing financers and lessors to recover aircraft in the event of insolvency or default, they are still reluctant for aircraft to be domiciled in Africa because of the continent’s higher risk profile and poor maintenance track record. None of these problems are insurmountable, but for most of Africa’s budget carriers, they are still a work in progress.