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African Business 2022 Q1

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A unique guide to business and investment in Africa. The third issue of African Business marks a departure for this respected guide to business and investment on the continent. The first two journals were published in 2020 and 2021 but as of 2022, African Business is a quarterly journal. Every edition will carry editorial copy that will cover the following general topics, with a wide range of subjects within the broader economic sector: energy; mining and exploration; trade; finance; technology and tourism. In addition to this, special features on topical matters will be published periodically, along with country profiles.

IS THERE SCOPE FOR A

IS THERE SCOPE FOR A PAN-AFRICAN AIRLINE? Eric Tchouamou Njoya analyses the risks and rewards faced by SA Airways and Kenya Airways, who have signed a strategic partnership framework. Njoya is a senior lecturer in air transport at the University of Huddersfield, Department of Logistics, Marketing, Hospitality and Analytics. This article was first published by The Conversation. In November, the two national airlines signed a Strategic Partnership Framework, formalising their plan to set up a pan- African airline in 2023. In my view the partnership will only succeed if certain conditions are met. The most important ones are, first, that there must be strong national and political agreement and will. Second, that the tie-up must be driven by the private sector. My recent research on Air Afrique’s failure found that the airline was doomed by conflicting national objectives and some of the 11 participating countries were unhappy with what they called a subordinate role. Kenya Airways flight staff. Credit: Kenya Airways AAfrica has 357 airlines, the top 10 of which carry more than 60% There are very few profitable African airlines. In 2020, only Ethiopian Airlines made a profit on the continent. And with financial woes compounded by Covid-19, it is likely many more airlines will go under. of traffic. This reflects the fact that many airlines on the continent are very small: some have as few as two aircraft. Between them the airlines carried 95-million passengers in 2019, according to Routes, an online source of information on route announcements. Airlines operating on the continent face particular challenges. First, the industry has to contend with huge disparities in economic and air transport development. There is also an uneven distribution of international air passenger traffic across regions and within countries. The traffic is predominantly centred in a few hubs in the north, east and south of Africa, and in the large and medium-size cities. Other challenges include high costs of operation, market protectionism and safety and security concerns. There are very few profitable African airlines. In 2020, only Ethiopian Airlines made a profit on the continent. And with financial woes compounded by Covid-19, it is likely many more airlines will go under. Two of the continent’s biggest carriers – SA Airways and Kenya Airways – are under financial stress. Both have made significant losses over the past few years and lost market share and destinations to competition. SAA came close to being wound up and Kenya Airways reported losses of 3-million for the 2020 financial year. 28 PARTNERSHIP CAN WORK Several academic studies show that alliances affect the production costs of participating airlines through economies of scale (by means of joint operations of air and ground services), increased traffic density (through network expansion and additional traffic feed) and scope (through increased reach and efficient connections). Joint ventures have been, and will continue to be, the key to the development of airline business. Air France and KLM are good examples of why airlines are better off working together. Both have experienced significant growth since getting together in 2004. Some alliance arrangements may lead to a reduction in costs and increased efficiency. But they do not necessarily lead to a reduction in competition in the market. Apart from these benefits, an alliance between SAA and Kenya Airways would be good for a number of reasons specific to Africa. First, it would help them overcome some of the existing market challenges, such as market access restrictions and increased competition from major non-African airlines such as Turkish Airlines, Emirates and Europeans carriers. Second, the alliance could take advantage of a return to pre- Covid travel levels. The International Air Transport Association anticipates a full return to 2019 air traffic levels in late 2023. It is estimated that air transport will grow on average by 3.2% over the next decades in Africa and by 4.8% if African states implement the Single African Air Transport Market. Third, it would enable them to create and encourage a market services specialisation among airline operators. Airlines may specialise in feeder services and fly to destinations with smaller demand and catchment areas. An example of this type of specialisation is the interlining agreement between Ethiopian Airlines and Airlink. The cooperation deal would also improve the financial viability of the two airlines. They could pool maintenance services and reduce costs by pooling purchases, sales and financial transactions. It would boost customer volumes if cost savings were passed on to customers by means of lower fares.

TOURISM OR Tambo International Airport. Credit: ACSA Introducing services in the SA market would be a great addition for Kenya Airways and vice versa. With their hub-based model, cooperation will help to boost the route networks of both airlines across Africa. ALLIANCES CARRY RISK Many alliances don’t achieve the desired outcome. Examples include KLM-Alitalia and the European Quality Alliance, which brought together Air France, SAS and Swissair. Alliances fail for various reasons. Studies show that ineffective governance, insufficient quality of alliance members and internal competition are the most common reasons. Other studies show that more than 50% of strategic alliances fail due to cultural differences, mistrust or poor operational integration. In the case of Africa, the two airlines have to contend with the fact that there isn’t a single African air transport market. Most of the continent’s 54 countries have their own national arrangements or have underperforming state-owned airlines, resulting in protectionist policies. There is hope that this will change. The Single African Air Transport Market, which by November last year had been signed by 35 countries, envisages a sharing of aviation space. This would enable eligible airlines from one African state to fly into another using only a prior notification procedure. But there’s a great deal of work that needs to be done for this to become a reality. A number of other factors could stymie the proposed alliance. A big one is the governance structure, which is the oversight required to make and implement decisions essential to the success of an alliance. Elements of governance include legal form, communication structures, cultural differences, trust and commitment. Yet another factor will be the extent to which the two governments allow efficient decisionmaking to happen. Airline managers should be left to select a course of action and then to get on with it. This could be difficult, given that the state owns substantial stakes in both SAA and Kenya Airways, in which the Kenyan government’s shareholding is 48.9%. Other factors include trust, transparency and communication about what both airlines do together and what they don’t do together. Establishing trust and ensuring that the airlines understand each other’s goals and objectives and that they are the same are key. RECIPE FOR SUCCESS A strategic alliance is similar to a marriage. In most cases there is no perfect match. To be successful partnerships must be nurtured and well managed. They must map out all the stakeholders that are relevant to the story and are going to help the partners achieve the key performance indicators set out in the alliance. In my opinion, setting clear performance measures is important, as they will set the partners on a path that is measurable. 29 Most of the continent’s 54 countries have their own national arrangements or have underperforming state-owned airlines, resulting in protectionist policies. Jomo Kenyatta International Airport. Credit: Kenya Airports Authority

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