Why are Africa’s low cost airlines struggling?

Adapted from the Economist: AFRICA is flourishing. Most countries are at peace, and average GDP growth is around 6%. Record numbers of children go to school. Life-expectancy has risen by a tenth over the past decade and foreign direct investment has tripled. Consumer spending will double over the next ten years. As part of this growth, low-cost airlines—to fly business people or holiday-makers within and between countries—are springing up. But they are running into problems. 1time and Velvet Sky, two South African low-cost carriers, went bust last year. FastJet, which markets itself as the first pan-African low-cost carrier, has been stalled by lawsuits and losses. What is holding back Africa's low-cost airlines?

There is no lack of demand, on some routes at least. Fly540, based in Kenya, had an annual turnover of $32m last year (up from $12m in 2007). Its flights from Nairobi to Mombasa, and to Zanzibar in neighbouring Tanzania, are popular with Kenya's emerging middle class. Traders from Lodwar, a
desert outpost in the north, take advantage of the Nairobi flight's stop-off at Eldoret to stock up at the supermarket. A flight with Fly540 costs around half as much as a comparable flight on the state carrier, Kenya Airways. Comair, a South African airline, has just ordered four more 737s for kulula.com, its quirky low-cost subsidiary. Mango, another South African low-cost carrier, is also expanding its fleet.

But Africa's low-cost carriers face strong headwinds. The main problem is that, compared with other parts of the world, costs are not low. Governments impose onerous taxes on fuel and tickets, and airlines are charged higher insurance premiums than established airlines in other countries. Poor safety records and the sluggishness of local courts in dealing with bankruptcies raise leasing costs: leasing a five-year-old Boeing 737 might cost a European carrier $180,000 a month, but a Nigerian carrier has to pay $400,000. Europe's budget-airline boom in the 1990s was made possible by an "open sky" agreement. But in Africa, although a similar treaty has existed on paper since 1988, little has been done to enforce it, in part because governments seem to be wary of allowing in new rivals to compete with their national carriers.

At its annual meeting, held in Cape Town last week, the International Air Transport Association (IATA), an industry club, called upon African governments to liberalise air routes and cut taxes on fuel and tickets in order to make the most of air travel’s ability to boost economic growth. “Nowhere is the potential for aviation greater than on the African continent,” declared Tony Tyler, IATA’s chief. In April Africa was the only region to experience an increase in load factor (the proportion of seats filled) in comparison with the same month in 2012, according to IATA, and last year demand for international flights grew by 7.5% in Africa, compared with 6% globally. But just as liberalisation paved the way for the spread of mobile phones in Africa, similar reforms are now needed if aviation is to reach its full potential.

Posted in: Business News