The bumpy road to consolidation of African airlines

Earlier this year, Kenya Airways (KQ) and South African Airways (SAA) – the two leading aviation companies in Africa – next to Ethiopian Airlines, the largest and the most profitable carrier in the continent, announced their decision to establish a Pan-African airline next year. The move comes as the two airlines struggle to stay afloat and recover from the impacts of the coronavirus pandemic, worsening their financial positions, a major setback for the duo that were not in a good shape even before the pandemic came to the picture.

In 2020, KQ declared USD 333 million in losses, just eight million lower than the loss recorded by SAA, which was even forced to suspend operations due to insufficient revenues to cover expenses. While both carriers are going through restructurings, they would have collapsed had it not been for the support of their respective governments.

In the aftermath of the coronavirus pandemic, KQ received USD 750 million from the Kenyan government to service its debt and an additional USD 944 million to bailout the aviation company. The SAA also secured USD 729 million from the South African government to pay its debt.

Through consolidation of their assets, the managers of both companies, which are in precarious situations, believe they could achieve efficiency, increase scale of operations and subsequently reduce unit cost, with long-term plan of forming a Pan-African Airline Group.?

“We have to consolidate the very fragmented African aviation industry and market to be formidable under the AfCFTA,” said Allan Kilavuka, CEO of Kenyan Airways, during the fifth edition of the African Business Forum, which was held at the premise of the United Nations Economic Commission for African (UNECA).

Kilavuka has his own justifications for bringing the issue of consolidation to the table as a solution to the aviation markets crisis in the continent.

“We have over 300 airlines in Africa, yet we continue to start new ones every day, which is the exact opposite of what is happening in other continents. While other airlines outside the continent consolidated their aviation market, ours is characterized by fragmentation,” said Kilavuka, adding, the aviation industry is very complex and expensive from both human and capital resources point of view.

The growing tendency for market consolidation in the African aviation market comes as countries and leading airlines start to consider mergers or setup a joint airline, as a solution for the financial quagmire they are in.

Thanks to its profitability and achievements, Ethiopian Airlines, which has raised the aviation standards on the continent, is the preferred choice of many states and companies to consolidate in an attempt to revive their national carriers and build a successful firm.

A part of its Vision 2025 Multiple Hub strategy, Ethiopian is collaborating with several African carriers to expand its connectivity in the continent, while efficiently utilizing resources by sharing experts and other resources.

In West Africa, Ethiopian Airlines holds a 25 percent stake in Asky Airlines, while it owns 49 percent of Malawi and Chad national airlines, which has helped the 75 year old company, expand its operations in Central and East Africa. It is further boosted by its 99 percent share in Mozambique Airlines and a stake in Guinea and Congo.

In Southern part of the continent, Ethiopian has launched a national carrier in Zambia, with more consolidations on the horizon. The African Airlines Association, having 44 members that represent 85 percent of international traffic in the continent, wants other African airlines, which are trapped in debt and mismanagement, to follow suit.

The Association’s Secretary General, Abdérahmane Berthé, believes African Airlines need to devise new approaches of doing business in the face of increasing concerns on the sustainability of African Airlines. According to Berthé, a crucial element to the success of African airlines is consolidation and collaboration.

“The engagement of States, airlines and all the relevant stakeholders is necessary to effectively achieve the required outcomes on airline consolidation in Africa,” said Berthé, who suggested airlines operating in Africa rethink their business models and enhance cooperation, during the fifth edition of the Africa Business Forum.

Despite the pressure exerted by industry leaders for consolidation and merger, the issue is not as rosy as it may seem.

The renowned investment consultant, Zemedineh Nigatu?had advised African airlines to consolidate (merge) or perish for long. While some followed up on his advice, most others never merged. “Sadly, the option of consolidation (merging) is no longer a viable option for them since all “stand-alone” African national airlines are now financially bankrupt, according to him.

Zemedineh found the recent announcement of merger between South African Airways (SAA) and Kenya Airways (KQ) as a positive step in the right direction. “However, in my view, its probability of success is low as both airlines are bankrupt and they continue to fly only because of huge taxpayer subsidies. These subsidies can’t continue indefinitely,” said Zemedineh, who believe they should have done the merger many years ago when they were both financially and operationally stronger.?

There are many countries that failed while trying to consolidate their airlines.

East African Airways Corporation, an airline that was jointly run by Kenya, Tanzania, and Uganda, and started operations in 1946 dissolved in 1977, after going through a financial demise amid deteriorating relations among the founding countries. In the same region, the long-standing joint-venture between Kenyan Airways and Air France-KLM failed to bring the desired outcome.

In the mid-1990s, ATC, present day Air Tanzania, partnered with Uganda Airlines and South African Airways to form Alliance Air, but that did not work out. In fact, the venture ended in a 50 million dollars loss in 2000, while an attempt to resurrect the partnership (this time between ATC and SAA, also failed after accumulating a USD 19 million in losses. Recent consolidation attempts by Ethiopian airlines in Mozambique, Zambia and Chad, among others, are yet to bear fruit.

Kaleyesus Bekele, an aviation journalist with two decades of experience in the industry, is among those who have observed the bumpy road to make consolidation successful. Though he believes consolidation will bring efficiency in concept, Kaleyesus says the reality on the ground is quite the opposite.

“Of course, when an airline consolidates their market or merges, it helps them save resources and maximize their income. But previous experience indicate that it did not bring the desired outcome because of several reasons, including the involvement of state actors in the affairs of airlines created as a result of partnership,” said Kaleyesus, who is currently a correspondent of Aviation International News (AIN) and African Aerospace Magazine.

For Kaleyesus, the success of consolidating the aviation market in Africa lies in the willingness of state actors let national carriers to be governed by their management with almost no interference.

“Equally important is undertaking a feasibility study before making a decision to merge or create a joint venture,” Kaleyesus said. Zemedineh, on the other hand, believes going forward the option for African governments and private investors is to start new national airlines but only in joint venture partnerships with bigger, financially and operationally strong airlines. Stand-alone African airlines are definitely not viable at all, according to him.?While his is a recommendation shared by many industry insiders, time will tell if African aviation companies would learn from their past and make the right decision that will determine their survival in the market.