How Aviation Can Help African Economies Take Off

201803-06-African Airlilnes

2018-03-06 Fly Africa coverAfrica’s aviation sector is bogged down by many headwinds — weak infrastructure, poor connectivity, high ticket prices and low passenger volumes. Hassan El-Houry, CEO of National Aviation Services, a provider of airport and aviation services, and Eric Kacou, cofounder of management consulting firm Entrepreneurial Solutions Partners, attribute this to various factors such as lack of political will, money-losing national carriers monopolizing the skies, complex rules and regulations that create high entry barriers, and poor safety and quality standards.

Kacou and El-Houry believe that if Africa’s aviation sector is allowed to grow, it can spur wide-ranging economic and social growth. In their book Fly Africa: How Aviation Can Generate Prosperity Across the Continent, they discuss how Africa can unlock the potential of its aviation sector and how a thriving aviation industry, in turn, can transform Africa’s economic and social landscape. They shared their insights with Knowledge@Wharton.

An edited transcript of the conversation follows.

Knowledge@Wharton: Hassan, at the start of your book, you talk about meeting an elderly lady in Dubai who helped you to realize that a single air route can change a hotel’s destiny. Could you tell us how this inspired you to write the book?

Hassan El-Houry: I was in the business lounge at the Dubai Airport and started talking with the lady sitting next to me. She was from Mauritius and her family had owned a hotel for several generations. It had a reasonable occupancy rate, but nothing extraordinary. Then, Emirates Airlines started flying to Mauritius. Soon after that there was a significant rise in tourism on the island.

Just because Mauritius was reachable by one of the top rated airlines in the world, it was “on the map.” The occupancy rates in this lady’s hotel also went up. It was consistently above 90% or 95%. She attributes that success to the flight [connectivity]. That got me thinking that aviation is a huge opportunity in Africa. Writing the book allowed me to dive into aviation and into Africa. Although I work in this sector, the book allows me to feel like I’m a part of that success, that I’m addressing the problems and finding solutions. I think aviation will change the face of Africa and the rise of Africa will change the face of aviation across the globe.

Knowledge@Wharton: Eric, what brought you to your epiphany about the power of air connectivity?

Eric Kacou: When I landed in Canada I realized what life in a more advanced economy looked like. Having access to opportunities that I wouldn’t have had if I had stayed back home in Cote d’Ivoire. Taking a flight literally opened the universe of possibilities for me. It occurred to me that if we could increase the number of Africans that have access to such opportunities, we would be [playing a role in] changing the society by helping them use their talents, become more productive, connect to the global society and have a much bigger impact for themselves and their families.

“Aviation will change the face of Africa and the rise of Africa will change the face of aviation across the globe.” Hassan ElHoury

Knowledge@Wharton: How do you view the African aviation market and what do you think are some of its biggest challenges?

El-Houry: First of all, the skies of Africa, across the 54 countries, are dominated by international carriers like Emirates, Air France, KLM, Brussels Airlines and British Airways. There are very few African carriers. There’s Ethiopian, Kenyan, Royal Air Maroc, South African, Egypt Air and a couple of other small ones. Second, there are almost no low-cost carriers. If you look across the globe, on average, low-cost carriers are about a quarter of all the flights. In Africa, they don’t even reach 10%, which obviously makes ticket prices somewhat prohibitive.

This leads me to the third point, which is that because ticket prices are extremely high, you don’t get as many travelers as you would like to. And because you don’t have as many travelers as you would like, there is very poor connectivity. For example, if you want to travel from Abidjan, which is one of the hubs of West Africa, to a hub in East Africa, there are no direct flights. You have to fly to a second or third country before you reach your final destination.

Finally, the infrastructure is lagging behind the rest of the world. There are of course exceptions like in Abidjan, Cote d’Ivoire, Casablanca and Morocco where the terminal is world- class. But, by and large, the infrastructure is outdated. It’s poor. It was built for a certain number of passengers that is far less than the number of passengers today. However, what makes me happy about aviation in Africa is that there’s an overwhelming sense of optimism. People are talking about growth, investments, new terminals, new airports, new airlines and how aviation is going to change over the next five to 10 years.

Kacou: The biggest challenge facing aviation services in Africa is also the biggest opportunity. When we look at the statistics, we realize that the continent hasn’t yet managed to unleash the potential of aviation. From the economic trends, it’s clear that a number of mega-cities are going to emerge on the continent — cities with over 10 million inhabitants. They will probably increase from about three or four today to 10 or 15 in the next 10 years to 15 years. As this happens, and as also the middle class emerges, there is going to be a lot of demand for aviation services, because there will be big cities with a concentration of knowledge workers who will need to use their skills beyond the cities where they live.

We are also going to have a lot of exchanges within African countries or even from the West to Africa. The biggest challenge facing the continent is that the aviation sector must mature in a way that it doesn’t become a hindrance to the economic growth. Instead, it must become one of its drivers.

This book is about making sure that we lay out the roadmap which can help leaders, both from business and from the public sector, to agree on what needs to be done for aviation to take its proper role in Africa.

Knowledge@Wharton: What kind of strategies do you see countries, as well as companies, adopting in response to the challenges and opportunities that you described?

El-Houry: If I look at the successful examples across the continent, the first point I would make is that [these] countries have put in place proper governance structures around the aviation sector. If it’s an airport authority, they have spun it off from the government, given it a board, given it a CEO and given it autonomy. If it’s a national carrier, they have put in place a proper board of directors. They have not allowed the politics of the country to spill over into the management of the airline.

So the first thing I think is governance. The second one is privatization — privatizing the airport, the national carriers and service providers. This has been a very successful model across the continent and in fact across the world. It leads to partnerships with companies or entities that are experienced, public-private partnerships, and foreign investors coming into the country, which is always a good thing. So, in a nutshell, I would say governance is number one and then somehow involving the private sector and/or foreign investors.

“The continent hasn’t yet managed to unleash the potential of aviation.” –Eric Kacou

Kacou: Countries that are doing well in delivering aviation think about their aviation sector as a part of [an overall] economic strategy. When we look at countries like Ethiopia, Kenya and Morocco, it’s very clear that the aviation sector is linked to other sectors that are driving growth. For example, there is a lot around tourism. There is a lot around trade. There is a lot around exports. … I think it’s important for countries to start thinking about aviation beyond just planes and airports. It’s important to see aviation as one of the forces that can transform their economy.

Knowledge@Wharton: Could you dive deeper into some of the factors that are holding back the development of aviation in Africa and also what can be done about the poor connectivity?

Kacou: If you look at poor connectivity in particular, I think it’s the result of two issues. First, it is about the actual economics of the business. There is a need to have a certain demand between two points for them to justify a common route. So far, the level of development that we have in the African cities hasn’t created that demand. I’m not just talking about the GDP rates. I’m also talking about their [political] integration. The fragmentation and the disparity of Africa create a number of barriers. Some policy decisions that were supposed to make it possible for exchange and flying to be easier were adopted in theory, but not implemented in practice.

El-Houry: Let me ask a question that, in a way, will answer the concern that you raised. Why can you travel by plane between two cities in Europe with a ticket price of 30 euros or 40 euros? As Eric said, the economics of the business are important, but the economics of the business are not extremely expensive. As an airline, you can break-even selling a ticket price for less than 50 euros. It’s done in Europe. It’s done in the United States. So why can’t it be done across Africa?

Why can’t you fly, for example, from Takoradi in Ghana to San Pedro in Cote d’Ivoire for 50 euros? One reason is that national carriers that are not making money are monopolizing the skies. At the end of the year they go to the government and ask for a subsidy. That kills the market for private businesses that want to provide a service. There are also very high entry barriers for aviation in Africa. Setting up an airline is bureaucratically cumbersome. There are extremely difficult laws and regulations to fly from one country to the next. And a visa-free Africa is still a distance away. Europeans can fly within Europe without a visa, but Africans need visas to travel to most of Africa.

Knowledge@Wharton: How can this be fixed?

El-Houry: There are many things that need to be done. Number one, I go back to my point on governance. Best practices around the world say that the government needs to regulate the aviation sector, but the airports need to be managed by private enterprise. And, if the national carrier is not profitable, there’s no need for the government to subsidize it. There are countries across the continent, like Uganda and Ghana, that do not have a national carrier and yet they have a vibrant aviation sector.

Number two, have a very strict safety and security and quality environment. In Nigeria, you could be on an aircraft that is leaking and has smoke coming out of the cabin. It actually happens and that naturally deters travelers. Number three, liberalize the visa requirements. Number four, liberalize the skies so that airlines can travel freely between countries. I think with just these four steps you will see a huge increase in the number of travelers and a significant drop in ticket prices.

Knowledge@Wharton: What are some of the barriers to the development of budget airlines in Africa? Do you see any countries or companies moving towards providing a budget solution in Africa?

El-Houry: There are low-costs carriers in Africa and they are growing in number. Of course, it’s not at the number that we would like to see ideally, but I am optimistic. I do see positive signs. To answer your question about ticket prices, they are, or should be, determined by supply and demand. As you liberalize the skies and limit subsidies to national carriers, there will be a reduction in ticket prices.

Kacou: While looking at ticket prices we also have to look at what are the components of those prices. An airline that’s flying from point A to point B has to cover a number of costs. They have to pay for the airline, the fuel, the staff, the overhead, etc. In every one of these items I can point to inefficiencies that would explain a high ticket price. For example, if one is flying an airbus when a small air jet would do, chances are that there will be very low occupancy, which means that the cost per person will go up. If the company is importing its jet fuel, it will be at a higher price. If the crew flying the airline is an expat crew, it’s an additional cost.

“If the national carrier is not profitable, there’s no need for the government to subsidize it.” –Hassan El-Houry

These are all inefficiencies that from a monthly cost translate into higher ticket prices. Also, the volume of passengers flying from point A to point B doesn’t justify a lower price. But there is an exception to this. For some of the British airlines, the African routes are amongst the most profitable ones. These are the routes where they are able to have extremely high prices because of political arrangements and negotiations. These are quasi-monopolies which make the situation worse.

Knowledge@Wharton: How do you see the competitive dynamics playing out between the large foreign airlines and the domestic African airlines? And how can the African airlines start flying from outside the shadow of these large international carriers?

Kacou: This is a difficult question because the airline business is one that is usually subject to network effects. What I mean by that is the more connections we can offer between point A and point B, the more likely we are to attract passengers. Airlines like Emirates, Air France or British Airways do well on some of the African routes because they offer a lot more options to go from the starting point to the final destination than the average small player. So when an entrepreneur wants to compete with a big player, they must have some code shares with different companies, and get landing rights at different airports. It’s not easy, especially in an environment where the regulations are not open and transparent.

I think it’s important that domestic airlines look at their strategies carefully. Many of them are probably not viable because of the strategy they have. For instance, they could be having the wrong aircraft or operating from the wrong point A to point B.

But aviation is not just about airlines. There are a number of services like cargo handling, engineering services and airport management which are all as important and lucrative. Domestic players can operate more easily in these areas because of the nature of these businesses.

El-Houry: I agree with Eric that this is a very critical question and I’m sure that there are many people who are trying to crunch the numbers around this. But my take is that the growth rates and the increase in number of passengers has been tremendous. If you go back to the 1970s there were probably fewer than 5 million passengers in Africa. Today, there are more than 120 million to 130 million passengers in and out of Africa. The market is growing tremendously and there is room for both African carriers and international carriers to succeed. The only difference is that in the past the international carriers had a large percentage of the total market, but now, as the regional or the African carriers increase their frequency, acquire more aircraft and fly more passengers, they are starting to increase their share of the market. I also think that many second tier cities will be served by the regional carriers whereas the international carriers will serve the capital cities.

“The aviation sector creates a number of jobs in direct and indirect ways.” –Eric Kacou

Knowledge@Wharton: In your book you wrote that between 2001 and 2007, there were at least 31 African airlines that went out of business. Could you talk a little bit about the reasons for those failures and what lessons other African airlines can learn from their experience?

El-Houry: There are a number of reasons. One of them goes back to governance, which I spoke about several times. The other one I would say is safety. A lot of African carriers start off very well, but they cut corners when it comes to safety and security and quality. This results in an unfortunate incident. Not necessarily a crash, but some sort of incident. So they get barred from flying into Europe or the Middle East or certain countries, and they have to stop or discontinue some of their profitable routes. This starts to impact the financials and the company is forced to shut down. Some of the carriers were impacted by foreign exchange fluctuations in the currency in which they’re doing business. Another reason is just politics. If there is an airline founded by someone who is well-connected politically and the politics in the country changes, the airline is no longer in favor. I would say that these are the major reasons why carriers tend to close, in addition to, of course, cumbersome regulations around flying and the non-implementation of open-sky agreements.

Knowledge@Wharton: Both of you mentioned the critical role of looking at aviation not just as something that deals with airlines, but the infrastructure around the airlines as well. Given the tremendous disparity that exists across Africa, how do you see the funding of infrastructural development, especially for aviation, changing? Multilateral agencies like the World Bank or the International Finance Corporation (IFC) used to participate actively in infrastructure development. How is that changing with the entry of countries like China, which have launched infrastructure projects not just in Africa but all over the world? How is that dynamic changing and what do you think are the implications for Africa and for aviation?

Kacou: I would say that the dynamics are very positive because there are many more options now. Apart from the traditional development partners who continue to play a very big role, there are also a number of investors and funds who are looking to invest in such projects. The legal framework for public-private partnerships has also improved in a number of countries, as well as the ability to do these projects, like managing an airport or building a new runway.

What is really important is that the projects must be negotiated and implemented very well. Most of those projects have a very long time horizon. We have investors who are committing resources today for a return that’s going to come in 10, 15, 20 years. So it’s important that we create a deal structure which both parties live up to. Unfortunately the experience on the continent is that this is not always the case. It’s also very important that the infrastructure that’s developed is actually informed by analysis and studies [so that we don’t end up having] a white elephant.

El-Houry: I haven’t met a leader who has not told me that they want to make their country or their city or their airport the next Dubai. They see the glitz and glamour, but I don’t think they see the sacrifices that Dubai had to make to reach the “Dubai” status. For instance, for a very long time, Dubai gave discounts of fuel to airlines just to get them to fly and stop in Dubai. Aviation infrastructure is extremely expensive. It requires leaders to look at the long-term. But when you have elections every three, four, five years, leaders are also forced to think short -term. They have to balance the long-term view with the short-term view, and that’s somewhat difficult.

Knowledge@Wharton: How do you see the relationship between the prosperity of the aviation sector and the rest of African society and African economies in general?

Kacou: I think the headline challenge that Africa has for economic development is job creation. So everything we are talking about is about making sure that we can address the issue of unemployment and under employment. The aviation sector creates a number of jobs in direct and indirect ways. For instance, in tourism, in hospitality and in retail. If you look at major airports today, they’re much more than an airport. They are also a mall. They’re also a spa. They’re also a hotel.

Number two, I believe that aviation can do a lot by way of economic integration. The [diversity] of Africa is both a curse and a blessing. It is a curse because our countries are fragmented. The population of 1.1 billion people is similar to that of India, but India is one country, Africa is 54 countries. If we can get aviation going, we can start seeing more integration. We can start seeing Ghanians working with Kenyans to develop products that they can sell to people from Morocco or Egypt. So, to me, aviation can play many, many roles which are very positive.

El-Houry: To add to Eric’s point on employment, aviation is unique in that it creates both skilled and semi-skilled jobs. And the skills you learn in aviation are transferable to other sectors, whether it’s language, customer service, or things relating to cargo. It’s estimated that by 2034, aviation will support 100 million jobs in Africa and $6 trillion of economic activity. This includes other industries like hospitality, tourism, logistics and so on. Because aviation is integrated into almost every other sector, it’s one of the backbones of the economy.

Kacou: What is most important is for all of us to realize that aviation can generate prosperity through profit and purpose. We need to challenge some of the preconceived notions that we have about aviation on the continent. This will help us make the investments and policies which are required for this sector to thrive.

El-Houry: In the past, aviation was seen as a luxury for the privileged few across the continent. And therefore, the government took advantage of that to tax the rich through aviation. They imposed very high taxes on tickets or people traveling in and out of the country. However, now, as more and more people are taking to the skies, as governments are realizing that aviation is an important economic activity, they are starting to reduce the taxes. I am extremely optimistic about the aviation sector in Africa. I’m also extremely optimistic about the impact that Africa will have on the world’s aviation sector.

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