All you need to know about the Airline industry

COMMENT | DEREK NSEKO | The era of the flag carrier seemed to be in question and even under scrutiny this past decade. Do we still need them? Can they be viable on the African continent?

The crisis brought about by the Corona pandemic has somewhat cooled that. Airlines across the world, both private and public owned looked to their governments for monetary relief at the height of the pandemic. Airlines in the United States received a USD 54 Billion lifeline relieving payroll challenges for 18 months. While in Europe, the likes of Lufthansa and KLM received record bailouts.

In Africa, a string of airlines went into different forms of bankruptcy protection. In Southern Africa alone, SAA, Air Zimbabwe, Air Seychelles, Air Mauritius had to rethink and implement turnaround strategies. while 75 year old Air Namibia succumbed and went under. In East Africa, Kenya Airways recorded the biggest loss in Kenya’s corporate history while Uganda Airlines, Air Tanzania and Rwandair all saw significantly large negative numbers. For a startup such as Uganda Airlines, the journey to positive territory really starts now as the industry recovers. The next 5 years will be crucial.

Flag carriers have always been viewed as instruments of national pride and identity, almost emblematic. But a national carrier means so much more. Beyond trophy status, it can be positioned as a focal point in the country’s economy, a vehicle for growth. Gulf states such as United Arab Emirates and Qatar have been hugely successful in giving their airlines key economic driver status and today their airlines are almost synonymous with the country’s brand.

There is a whole economy built around the aviation ecosystem and related sectors such as tourism that ultimately contributes significantly to Job creation and GDP. Once measured against effect on GDP is when the true judgement on a thriving aviation sector and national airline importance can be measured.

Cost structure

Image: Airline operating costs. Source: Airlines for America

About 75 percent of Airline costs are fixed. Labour and fuel represent two of the largest cost areas for any airline. This explains why airlines are extremely sensitive to rising oil prices and economic tremors. Additionally, in times of economic turmoil, labour tends to be a target for cost cutting measures. Lay-offs have for example been a major part of the airline industry reaction to the covid pandemic and its economic effects.

Beyond labour and fuel, airlines spend big on aircraft and maintenance. Most airlines with large fleets usually have a mix of owned and leased aircraft while the maintenance costs for African airlines are higher than the global average, contributing to Africa’s high cost base and ultimately affecting the potential to turn a profit.

Professional services and infrastructure fees as well as taxes and levies push the overall costs even further.

Freedoms of the air and traffic rights

Air access and the freedom to fly over and land in a specific country under a commercial air transport operation is governed by a set of rules that were formulated at the Chicago convention in 1944. Today airlines have to abide by multi-lateral and bilateral air service agreements in order to access new markets. The African continent remains highly restricted with a low level of liberalization so airlines and states have to enter Bilateral Air Service Agreements (BASAs), often via long and difficult negotiations and still ultimately restrictive. For example a BASA will dictate the number of frequencies that a designated airline can fly to a country and to where specifically. Because these bilaterals for the granting of traffic rights happen on a government to government level, Airlines have to work hand in hand with their political establishment. Hence governments are important in creating an enabling environment for air transport to thrive. According to the Uganda Airlines business plan, Uganda has a total of 46 Valid Bilateral Air Service Agreements with different countries in the region and globally.

Landing slots

Airports around the world are getting busier than they can manage and that results in capacity constraints. The arrival and departure of aircraft has to be managed in a well co-ordinated and fair way through the allocation of slots. Ultimately, congested airports need to expand capacity but slot allocation is a great relief measure.

Heathrow airport has been known to have some of the highest slot demand in the world. And as you can imagine, some slots are ‘more equal’ than others. For example the early arrival morning slot at Heathrow is considered a prized asset for business. In 2016, Oman air paid $75million to Kenya Airways to buy their morning slot at London’s Heathrow.

Uganda Airlines has interestingly acquired a much sought after Heathrow morning slot for its long haul service to London. It is expected to attract business travellers who can arrive early and get on with the business of the day.

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The writer, Derek Nseko is an aviation expert, a qualified commercial pilot and managing director at iFly Global. He is the founder of Airspace Africa an online publication dedicated to African aviation.
derek@airspace-africa.com twitter: @av8r_derek