African airlines deserve more than lip service
Aviation’s post-pandemic recovery was predicted to be uneven across markets and dependent on financial and economic factors, government policies, and the relaxation of travel restrictions and requirements.
Partly, this was caused by the aviation industry grounding to a halt, worldwide, in 2020. To stay afloat, airlines, airports, ground handlers, and other service suppliers accumulated debt in various shapes and forms, which they must now repay.
At the same time, across the board, in industry and governments, hundreds of thousands of staff were retrenched, retired, or furloughed to cut costs and preserve cash. Many industry players are now trying to rehire or hire new people, but for various reasons—such as the slow pace of security vetting of new airport-based workers in the United Kingdom—many entities are ill-equipped to take full advantage of the surges in demand that are being seen as markets reopen. Instead, we have entered the surreal, where airlines are forced to cancel thousands of flights. And Heathrow airport in London, an iconic global hub, has capped traffic at 100 000 passengers a day to prevent operational gridlock.
Fuel prices
By far the biggest headache for every airline is the sharp increase in fuel prices. Even though Africa only accounts for 1.9% of the global air travel market, the continent’s carriers are not immune to this geopolitical shock.
According to the International Air Transport Association's (IATAs) most recent analysis, the global average jet fuel price in mid-July was US$146.4/barrel. At this level, airlines worldwide will incur an extra US$134.3 billion to their combined total fuel bill for 2022.
Although fuel prices have come off their June 2022 peak, in Africa, jet kerosene sells at a premium and averaged US$160.63/barrel for the first ten days of July. This was 79.8% higher than it had been over the same period last year.
To put this in perspective, aviation fuel historically accounted for between 20% and 25% of most African airlines’ cost base. Today, it can be as much as half, if not more, and is their biggest single line item. Although airlines are trying to mitigate the combined impact of jet fuel prices and other inflationary costs, they are running out of headroom.
Jet fuel usually trades at a US$20 premium over crude oil, but this gap has widened to more than US$50 since March.
This compounds the challenge many African carriers face. They generate most of their revenues in weaker home currencies but incur their input costs, often including fuel, in US dollars and euros. Every time the dollar price of fuel goes up or the dollar strengthens against softer local currencies, the revenue-cost gap widens.
It may seem incongruous that jet fuel in Africa, which boasts several oil-producing nations, should sell at such a premium. A large component of the additional cost relates to transport and logistics. Because jet fuel is no longer refined in Africa, it must be imported, shipped by sea, and transported from harbours to inland storage depots and airports, often far from the coast. In some places, it is carried by rail or pipeline, but for the most part, it is transported by road.
In addition to the logistics and associated costs, recent events, such as the trucking blockades on South Africa’s motorway between Durban and Johannesburg and the floods that swept away sections of the rail tracks linking the two cities, underscored the vulnerability of these supply lines.
The floods around Durban triggered a jet fuel supply crisis at Johannesburg’s O.R. Tambo International Airport, which is unlikely to be resolved before the fourth quarter of this year. At its onset, this caused some airlines to cancel flights, with others incurring additional expenses as they diverted flights to refuel at other airports or carried extra fuel (if they could do so). Recently, pressure on fuel supplies intensified with the National Refinery (NATREF) in South Africa shutting down. It operates the dedicated jet fuel pipeline to the airport.
Political will
With so much of Africa’s fortunes dependent on safe, efficient, and affordable air transport, the sustainability of its airlines—both state and privately owned—is crucial. It is time for governments to do more than pay lip service.
The industry does not require state bailouts. Relief from rising statutory charges and taxes on fuel and aviation would be far more effective. The release of blocked funds is crucial, as is the guarantee of secure, reliable, and efficient fuel supplies. Lifting caps on foreign investment and equity in African airlines would also bring much-needed liquidity.
At an intra-Africa level, the biggest and most achievable wins require all African governments to demonstrate their political will by removing the barriers to market entry and ensuring fair and equal treatment for all carriers in each market. This is the basis for the African Union’s Single Africa Air Transport Market (SAATM). Africa’s leaders have been talking about it and signing solemn undertakings since 1988. Having talked the talk, now it is time to walk the walk!
Kamil Alawadhi is the regional vice president, Africa and Middle East, at the International Air Transport Association (IATA).
Partly, this was caused by the aviation industry grounding to a halt, worldwide, in 2020. To stay afloat, airlines, airports, ground handlers, and other service suppliers accumulated debt in various shapes and forms, which they must now repay.
At the same time, across the board, in industry and governments, hundreds of thousands of staff were retrenched, retired, or furloughed to cut costs and preserve cash. Many industry players are now trying to rehire or hire new people, but for various reasons—such as the slow pace of security vetting of new airport-based workers in the United Kingdom—many entities are ill-equipped to take full advantage of the surges in demand that are being seen as markets reopen. Instead, we have entered the surreal, where airlines are forced to cancel thousands of flights. And Heathrow airport in London, an iconic global hub, has capped traffic at 100 000 passengers a day to prevent operational gridlock.
Fuel prices
By far the biggest headache for every airline is the sharp increase in fuel prices. Even though Africa only accounts for 1.9% of the global air travel market, the continent’s carriers are not immune to this geopolitical shock.
According to the International Air Transport Association's (IATAs) most recent analysis, the global average jet fuel price in mid-July was US$146.4/barrel. At this level, airlines worldwide will incur an extra US$134.3 billion to their combined total fuel bill for 2022.
Although fuel prices have come off their June 2022 peak, in Africa, jet kerosene sells at a premium and averaged US$160.63/barrel for the first ten days of July. This was 79.8% higher than it had been over the same period last year.
To put this in perspective, aviation fuel historically accounted for between 20% and 25% of most African airlines’ cost base. Today, it can be as much as half, if not more, and is their biggest single line item. Although airlines are trying to mitigate the combined impact of jet fuel prices and other inflationary costs, they are running out of headroom.
Jet fuel usually trades at a US$20 premium over crude oil, but this gap has widened to more than US$50 since March.
This compounds the challenge many African carriers face. They generate most of their revenues in weaker home currencies but incur their input costs, often including fuel, in US dollars and euros. Every time the dollar price of fuel goes up or the dollar strengthens against softer local currencies, the revenue-cost gap widens.
It may seem incongruous that jet fuel in Africa, which boasts several oil-producing nations, should sell at such a premium. A large component of the additional cost relates to transport and logistics. Because jet fuel is no longer refined in Africa, it must be imported, shipped by sea, and transported from harbours to inland storage depots and airports, often far from the coast. In some places, it is carried by rail or pipeline, but for the most part, it is transported by road.
In addition to the logistics and associated costs, recent events, such as the trucking blockades on South Africa’s motorway between Durban and Johannesburg and the floods that swept away sections of the rail tracks linking the two cities, underscored the vulnerability of these supply lines.
The floods around Durban triggered a jet fuel supply crisis at Johannesburg’s O.R. Tambo International Airport, which is unlikely to be resolved before the fourth quarter of this year. At its onset, this caused some airlines to cancel flights, with others incurring additional expenses as they diverted flights to refuel at other airports or carried extra fuel (if they could do so). Recently, pressure on fuel supplies intensified with the National Refinery (NATREF) in South Africa shutting down. It operates the dedicated jet fuel pipeline to the airport.
Political will
With so much of Africa’s fortunes dependent on safe, efficient, and affordable air transport, the sustainability of its airlines—both state and privately owned—is crucial. It is time for governments to do more than pay lip service.
The industry does not require state bailouts. Relief from rising statutory charges and taxes on fuel and aviation would be far more effective. The release of blocked funds is crucial, as is the guarantee of secure, reliable, and efficient fuel supplies. Lifting caps on foreign investment and equity in African airlines would also bring much-needed liquidity.
At an intra-Africa level, the biggest and most achievable wins require all African governments to demonstrate their political will by removing the barriers to market entry and ensuring fair and equal treatment for all carriers in each market. This is the basis for the African Union’s Single Africa Air Transport Market (SAATM). Africa’s leaders have been talking about it and signing solemn undertakings since 1988. Having talked the talk, now it is time to walk the walk!
Kamil Alawadhi is the regional vice president, Africa and Middle East, at the International Air Transport Association (IATA).
Comments
Jochen Sell
During a recent panel discussion held in Cape Town attended by some big names in the aviation industry, i.e. Rodger Foster of Airlink, Sameer Adam of ACIA Aero Leasing, Joao Po Jorge of LAM - Linhas Aéreas de Moçambique, Helen Brume of African Export Import Bank - Afreximbank and Federico Curto of Avion Express, some issues were highlighted: • The average African airline loses money on every passenger carried. When you consider history, this is effectively a failed industry and the premiums to access capital reflect that accordingly. • If your jurisdiction has not ratified the Cape Town convention, you WILL pay higher rates for leases and financing. Lessors and financiers have to protect their assets against risk of default, which unfortunately has crystalised into reality in the past. • It's absurd that Africa has 300 airlines to serve the same population as China and India who have no more than 10 major carriers each. African airlines have to look at consolidation and partnership. • African airlines are better served to buy the weather spot on CNN than to fly half empty widebodies to just park at Heathrow airport. It is cheaper, better bang for buck and more people will see it. You cannot have a preconceived mandate to run a prestige route and expect to build a viable business plan around that. • Operators in Africa don't take enough time to actually develop their business plans and strategy before rushing out to raise funds and start their airlines. Successful airlines however will focus on reliability, on-time performance and things the passenger actually wants in order to be competitive. • Some airlines may require financial support from their governments, but there needs to be a clear deliniation between that and interference in the actual management of the airline. That leads to lack of efficiency and uneconomic decision making. • Competition makes airlines need to deliver performance. If state owned enterprises act in an uncompetitive manner, there needs to be an impartial watchdog that is able to ensure fair market access and enforce penalties if necessary to secure a level playing field.