[CAVIE/ACCI] The longstanding inadequacy of Africa’s commercial air transport system suggests the returns on the billions of dollars recently pledged to Africa by UK Prime Minister Theresa May and China’s president Xi Jinping will be lower than they should be.
That should trouble investors and investees, who will find that the unavailability of safe, efficient and affordable air transport intra-Africa — manifested in high fares, inconvenient schedules, ill-timed connections, “wrong-sized” aircraft and anachronistic market fragmentation — takes a toll on profits (in costs-of-sale, travel expenses and opportunity cost), thereby reducing the funding’s primary socio-economic goal of economic growth and development.
Because African commercial aviation policy has been generally national, even nationalistic, in nature over the years (before you cast a stone, remember Europe and North America before deregulation), multilateral development banks (MDBs), development finance institutions (DFIs) and even aircraft and engine suppliers have tended until now to regard African aviation as an ironic case apart: it has great potential . . . and always will.
So it is all the more gratifying that Afreximbank has recently expressed interest in my analysis of commercial aviation in Africa, first mooted in 2010 in response to a request to devise an “innovative financing strategy” for African airlines. The most effective, least risky way to create an enabling environment for African airlines to rationalise their behaviour is to establish a world-class commercial aircraft finance enterprise (CAFE), funded jointly by MDBs/DFIs and the private sector.
First let’s consider the status quo. Despite the continent’s size and the inadequacy of alternative forms of transport, African commercial air travel accounts for a mere 3 per cent of the world’s total.
From the get-go, African airlines — subject to the same laws of economies of density and of scale as everywhere else — fight an uphill battle to be profitable. But rather than submit to those laws and pave the way to consolidation, African policies and practices tend to head in the opposite direction, such that in recent times, for example, the rebirth of national airlines in Chad, Guinea, Nigeria, Tanzania, Uganda and Zambia have all been proposed or are well under way.
The impulse is understandable. When discussing the possibility of re-establishing a national Ugandan carrier in 2016, President Yoweri Museveni is reported to have told his cabinet: “Ugandan travellers are suffering because of . . . not having a national airline. I thought that our brothers in Ethiopia, Kenya, South Africa, etc having airlines would serve us all. That, however, is apparently not the case.”
But the existence of so many airlines in such a small market fragments traffic flows, increases unit costs and reduces efficiencies, thereby creating (however inadvertently) an environment where, to borrow the memorable phrase coined by former British Airways head Rod Eddington, “bad money pushes out good” — leaving undelivered the safe, efficient and affordable air transport intra-Africa so desired by the travelling public.
If only shareholder funds were at stake, it might not matter so much. But a fully functioning commercial air transport system that delivers safe, efficient and affordable air travel is needed to support Africa’s jobs drive, a drive that needs to be successful for all our sakes so as to occupy, literally, Africa’s burgeoning working-age population in the coming years. (It is projected to be 1.1bn just 15 years from now.)
Partial adoption of open skies — the Single Africa Air Travel Market (SAATM) came into being last year — and Ethiopian Airlines Group’s admirable continued success (it has just reported net revenue for last year of about $245m) are not nearly enough in themselves. Queue CAFE: the dedicated commercial aircraft finance enterprise for Africa and the Indian Ocean designed to pave the way for airline owners and managers, of their own volition and in their own best interests, to self-select into three principal (and profitable) categories: major, regional/feeder and niche.
Key to CAFE’s success will be an ownership/management structure that allows for partial ownership by MDBs/DFIs on the one hand and partial ownership/management by a blue-chip aircraft lessor team on the other to ensure that:
- commercially viable business plans from state-owned or privately owned airlines are facilitated by means of the supply of right-sized mission-suitable aircraft (for example, an otherwise struggling smaller airline might opt to come under a larger airline’s wing by offering feeder services where the right-sized equipment would be provided under lease by CAFE); and
- crucially, un-commercial business plans are rejected and the promoters are encouraged either to revise their business plans to make them viable or — here’s the rub — abort.
If Mrs May wants to leave an indelible mark on Africa, the air is where to do it. Investment in CAFE will create an enabling environment for the rationalisation of African air transport that will, in turn, create more African demand for aircraft-related goods and services that can be supplied from the UK.
More broadly, it will improve the economic environment in African markets that, post-Brexit, will become more relevant to the UK and increase the prospects for UK exports of goods and services to Africa.
It will help to ‘crowd-in’ progressive international co-investors (such as Afreximbank) who see the pressing need for safe, efficient and affordable air transport intra-Africa. And, as aircraft leasing tends to be a profitable, low-risk investment, it will reward UK taxpayers with an appreciating and monetisable stake in an attractive, impactful and profitable venture. “Shared prosperity” made real. UK taxpayers might like that.
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