Opportunity in Africa’s Turbulent Skies
As the global economy makes tentative steps towards recovery, the continent’s airline industry is pulling out all the stops to remain profitable against a backdrop of price-savvy consumers and an oil price that’s stubbornly intent on gaining altitude.
It’s been a tough couple of years for everyone and the African airline industry is no exception, with some predicting even more tough times.
“We are expecting a turbulent year for the whole airline industry across the globe,” says Chris Goater, spokesman for the International Air Transport Association (IATA). “We seem to be facing a potent mix of high oil prices and slow growth, which makes things very tough for airlines. Unfortunately, Africa, in particular, is a weak spot. We think that African and European carriers will be the only ones to record a loss in 2012.”
That loss for the continent’s carriers is forecast at $100-million, but if oil climbs above $150 a barrel the amount of red ink could easily double, warns IATA.
“One source of weakness for African carriers is the load factor, which is consistently around ten percentage points lower than the global average. Weak load factors mean weak yields and profits,” adds Goater.
Load factors are also a function of a flooded market, and one industry expert says that the market is simply over-supplied with too many seats and not enough travellers.
“There is too much capacity, offered by too many participants, with the result that supply exceeds demand, with airfares below sustainable levels,” warns Rodger Foster, Chief Executive Officer of Airlink, a regional airline operating in southern Africa. “It is clear that the local airline industry is in distress. The local and regional casualties include Velvet Sky, Zambezi Airways, FlyKumba, and Air Zimbabwe. An age-old problem in South Africa is that airlines continue their quest for market share, regardless of cost, instead of ensuring sustainability.”
With their tiny margins and reliance on volume to add value, low-cost carriers have been struggling against a perfect storm of low demand and high fuel costs. Velvet Sky were hoping to be the newest budget airline in South Africa’s skies, but they remain grounded amid protracted lawsuits over unpaid fuel bills.
Likewise, South Africa’s low-cost carrier 1time is facing a rough ride. While it is still flying, it has embarked on a turn-around strategy of loan repayments and aircraft recapitalisation to counter a $12-million loss in 2011.
On the other hand, kulula.com in southern Africa, Fly540 in East Africa and Jet4you.com in Morocco are some of the success stories – airlines that have brought low-cost air travel to Africa, boosting tourism and economic growth along the way.
“The demand for different types of airline business models exists in Africa and these carriers will find their niche alongside the established players,” forecasts Goater. “Africa has great potential as a market of one billion people, which is set to grow strongly. What Africa needs is political stability and investment in infrastructure to build its tourism and business travel sectors.”
But along with high fuel costs, stiff competition and burdensome airport taxes, there’s another reason more and more African airlines are being grounded: unrealistic consumers.
“Consumers are unwilling to pay the true cost of air travel,” says Foster. “The expectation of local consumers on airlines has become disconnected with reality. Baseline airfare pricing has become unrealistically low and airlines are not pursuing ancillary revenue opportunities as aggressively as their global counterparts.”
Perhaps the key word there is ‘opportunity’, for while some airlines face a bleak 2012, others are taking full advantage of the competitive environment. From new routes to revamped services both on board and on the ground, a number of carriers are confident they can come out tops in the continent’s competitive skies.
“The premium sector from and within Africa is looking quite strong so far this year,” says Goater of IATA. “Within Africa premium traffic is up 15.4%.”
“We have shown growth in business travel from mid-January through to date,” adds Isla Moffett, Arik Air’s Sales and Marketing Manager for South Africa. “We have found that our passenger numbers are up on the Lagos-Johannesburg-Lagos route, probably due to South Africa and Nigeria being the two strongest economies in sub-Saharan Africa.”
Mariska Langerman, Marketing Manager for Holiday Aviation, who represent Ethiopian Airlines in South Africa, has a slightly different take on the current situation, although it’s not all doom and gloom.
“The business travel market has not yet fully recovered after the economic downturn, as companies are still very much scrutinizing travel options in order to get the most value-for-money,” she says. “Having said that, there is also a growing demand as business on the African continent is experiencing a booming period.”
2012 is a big year for Ethiopian Airlines, with the airline recently joining the Star Alliance and promising the introduction of the new Boeing 787 Dreamliner on the route between Johannesburg and Addis Ababa.
From an inbound perspective, “the business travel market into Africa has seen substantial growth over the last year,” notes Hendrik du Preez, Sales Manager of Emirates South Africa. “Southern Africa remains one of Emirates’ most active markets. Over the past five years, Emirates’ passenger numbers across our three gateways – Johannesburg, Cape Town and Durban – have grown from 500 000 to almost one million.”
“The corporate travel sector in Africa will continue to grow in 2012-13,” agrees Helena Maxwell, Sales Manager South Africa for Kenya Airways, who notes that the airline has new routes in the pipeline. “KQ is always in the process of planning and expanding to new destinations that can add profit to the existing network. For example: Kilimanjaro in July, Abuja later in the year, as well as Eldoret in Kenya.”
And as stability returns to North Africa, carriers like EgyptAir are recording an uptick in corporate demand for the region.
“We have noticed an increase of travel into Morocco, Tunisia and Algeria,” says Ihab Seif, EgyptAir’s Regional General Manager South Africa, adding that, “EgyptAir has the best links into these countries.”
The Cairo-based member of the Star Alliance is also catering for future traffic into the region, by increasing frequencies to daily flights into destinations such as Casablanca, Juba, Abuja and Tunis. But with resources driving much of Africa’s economic growth, it’s no surprise that airlines are following the demand for oil, coal and minerals.
Of the 217 worldwide destinations served by Lufthansa, a quarter of them are located specifically in oil and gas-producing regions. In Africa, this includes the likes of Equatorial Guinea, Angola, Gabon and Ghana, where special partner offers such as reduced car rental deals and meal vouchers, offer added value for corporate travellers.
Air France and its Dutch partner airline KLM follow a similar strategy on the continent, recently increasing flights from their Paris and Amsterdam hubs to the booming city of Luanda, Angola. American carrier Delta similarly targets resource-rich destinations, with the likes of Lagos, Monrovia and Accra connected through its hub in Atlanta.
West Africa is especially proving a hotspot for airlines, so it’s no surprise that the continent’s fastest-growing airline is one of the major carriers in the region. With hubs in both Abuja and Lagos, Arik Air is rapidly growing its route network, connecting London, New York and Johannesburg with a host of West African destinations.
“Allied with the growth of industrial powerhouses in Asia, and the requirement for the region’s natural resources, West Africa is an area of core focus for many extractive industries as well as the banking sector,” explains Moffett. “Our inherent strength is the network that we operate within Nigeria and West Africa. Where once the South African business traveller may have had to fly to Brussels or Paris to come back into the West, they can now fly direct to their destination with Arik.”
“Arik Air has focused on its West African network and has introduced flights over the past six months to Luanda, Cotonou, Ouagadougou and Bamako to complement existing flights to Accra, Monrovia, Freetown, Banjul and Dakar,” adds Moffett.
In addition to serving the booming capitals of West Africa, Dubai-based Emirates is also seeing growth in a corner of the continent that few would associate with economic opportunity.
“Zimbabwe’s economic performance indicates a GDP growth of 8.2% in 2010 and 7.8% in 2011, driven mainly by the rapid expansion of mining output and exports, and agriculture,” says Du Preez, explaining the February 2012 launch of five flights per week from Dubai to Harare, via Lusaka. “Harare is expanding into an important business and industrial centre in southern Africa. We therefore anticipate strong demand for the service from around our network.”
“Zambia’s rapidly expanding agriculture, tourism, construction, manufacturing and mining industries, together with the country’s strong recovery from the financial and economic crisis is likely to see some positive activity for Emirates in this market.”
Emirates is also one of a handful of airlines to fly its state-of-the-art Airbus A380 and Boeing 777 aircraft to Africa – a canny move as airlines compete on product more than ever before. In addition to its award-winning lie-flat Business and First Class products, the airline is also rolling out OnAir Wi-Fi Internet connectivity on the A380, and later on the Boeing 777.
“Being able to communicate with colleagues while in the air is becoming a priority for corporate travellers, particularly during long-haul flights,” explains Du Preez, who adds that the airline will also soon introduce an enhanced in-seat telephone handset and mode controller in both of its premium cabins.
Enhanced on-board technology and keeping one step ahead of competitors is just one of the trends that airlines into Africa are grappling with. As corporate travellers look for more value when travelling on business, airlines have had to respond accordingly.
“We are noticing a move towards cabin upgrades. The corporate travel market is on its way back, and as such carriers are keen to use this upturn in the market to renovate their products,” explains Moffett.
Qantas Airways, which flies daily from Sydney to Johannesburg, says the “significant growth” in business travel during 2011 and 2012 has prompted it to upgrade its fleet of Boeing 747 workhorses. The airline is also doing away with its First Class product on many long-haul routes, choosing instead to focus on Business, Premium Economy and Economy classes.
“We are in the process of refurbishing our B747 fleet and have worked extensively with our customers while designing the Qantas customer experience,” explains Lauren Egger, Sales & Marketing Executive with Qantas Airways, who says the upgrades will feature larger screens, more spacious cabins and new ergonomic seating. And while the on-board experience is crucial, airlines are also competing heavily around what they have to offer on terra firma. And that begins with checking in your luggage.
Qantas, for instance, has revamped its baggage policy and while Economy passengers lose out on a few kilograms, travellers in Premium Economy and Business Class will be left smiling at the airline’s new ‘per-piece’ baggage policy.
“Our Premium Economy passengers will be able to take two pieces [of luggage] up to 23 kilograms each – a total 46 kilograms – versus the weight system which was at 23 kilograms. Business Class passengers will be able to take three pieces of luggage up to 32 kilograms each, a total of 96 kilograms, versus the weight system that allowed 32 kilograms,” says Egger.
EgyptAir has also revamped its baggage allowances, allowing Economy Class passengers on all international flights to check in two bags of 23 kilograms each, while Business Class customers are allowed two pieces of baggage at 32 kilograms per piece. Gold members of the EGYPTAIR Plus frequent flyer programme receive even more benefits, and are allowed an additional suitcase up to 23 kilograms.
And while there are plenty of grumbles around airline loyalty programmes, they remain an important offering for frequent travellers. Just look at the numbers: the 20 million global members of Lufthansa’s Miles&More programme can’t be wrong, right?
“Frequent flyer membership continues to be valuable for corporate travellers,” confirms Egger, “in particular, when it comes to their tier status. Customers who have a high tier status with a particular frequent flyer programme will remain loyal, as the benefits are rewarding.”
“We see some corporates moving towards a very defined travel policy, but many travellers are still driven by the loyalty points that they are able to personally accrue when justifying their choice of carrier,” says Moffett.
Loyalty programme membership and, ‘the great benefits that go along with it’” play ‘a major role’ when travellers decide which airline to fly, says Seif, who adds: “EGYPTAIR Plus frequent card holders can carry additional baggage, and receive access to lounges, priority on standby, priority baggage and free upgrades and tickets, using miles that they have accumulated.”
Of those benefits, lounge access is one of the most sought-after. Access to a well-equipped airport lounge remains high on the list of priority for corporate travellers – no doubt part of the reason Lufthansa has spent €15-million opening and refurbishing lounges worldwide. Cairo International Airport’s state-of-the-art Terminal 3, home to EgyptAir, now boasts six luxury lounges for corporate travellers.
“Lounge access offering the convenience of constant contact with colleagues around the world, and around-the-clock comfort, is a non-negotiable,“ adds Du Preez from Emirates, “especially when multiple destinations are being visited.”
And particularly with multi-stop itineraries, corporate travellers are getting more organised – and price-savvy – than ever before.
“Last-minute bookings are being eliminated, and travel is planned in advance to try and obtain the best fare possible,” explains Du Preez. “Many companies will try and combine business travel to multiple destinations in order to avoid the cost of backtracking.”
“Generally, the corporate market does forward plan and therefore pre-book and issue tickets in good time,” agrees Moffett, who adds that Africa’s often-onerous visa arrangements also ensure that last-minute bookings are rare amongst corporate travellers. “A South African traveller generally needs to obtain a business visa to travel to various African countries, and this does have an impact on whether they are able to travel or not.”
Perhaps it all boils down to the old adage that ‘time is money’. With a fragile global –and continental – economy to negotiate, corporate travellers can’t waste time getting from A to B. And while they’re on their way there they ideally need to get some work done. We want more and to pay less. It’s a tough climate for airlines and, as oil sticks stubbornly above $100 a barrel, it’s only going to get tougher.
Throw in price-savvy, well-connected customers, and it’s clear that the skies above Africa are only going to get leaner and more competitive as the decade rolls on. It means airlines – especially those without the deep pockets of state-owned enterprises – are going to have to get better at doing business. Better product, better fares and better at keeping costs down. There’s hard work ahead for African airlines, but that can only be good news for the corporate travellers checking in.
With only one accident for every 2.7 million flights, 2011 was the safest year in history for commercial aviation. And although Africa remains the region with the worst safety record, “there are signs of improvement”, says Chris Goater, spokesman for the International Air Transport Association. “In 2011, Africa had a significant reduction in the number of total accidents compared to 2010, and aviation remains the safest way to travel.”