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African state airlines: Necessity or folly?

African state airlines: Necessity or folly?

IMay 2017, the Nigerian government announced plans to set up a national airline. Considering the country’s chequered history with such ventures, more than a few eyebrows were raised. The last time an attempt was made at setting up a national airline, the Nigerian government entered into an arrangement with Virgin Atlantic, a British Airline.

It did not end well. And if the objective was to restore the national pride that supposedly comes with a national carrier, that too failed. The issues that led the Virgin Group to finally leave Nigeria are complex. When Nigeria had a national airline, it was called “Nigerian Airways” and it was a source of pride.

While African countries like Ethiopia, Kenya and South Africa have since then been able to run airlines that by and large meet the mark internationally, Nigeria has floundered ever since Nigeria Airways ceased to exist officially in 2003 (it stopped major operations years before).

With his re-election bid underway, Nigerian President Muhammadu Buhari has pledged to set up a successor. The original plan was to merge a couple of private airlines, which due to insolvency, had been bailed out by the state’s “bad bank” and thus are effectively owned by the government, but there was a change of plans. Instead, the Nigerian government appointed international advisers for the setting up of a brand new airline in May 2017 and held talks with a consortium led by Lufthansa.

In early February, it emerged Lufthansa’s terms might have been a little onerous for the government. The terms, which included a 75% upfront payment of costs in euros to be domiciled in an international bank, suggest Lufthansa took a few lessons from the nation’s troubled economic history. As the parties could not agree, the Nigerian government appointed the UK-based Airline Management Group in Lufthansa’s stead.

With elections due in about a year and the government in full election mode, how much progress will be made is doubtful. And should the Buhari administration fail to get re-elected, it is not unlikely that the idea would be jettisoned by the new government.

Corruption, cost-cutting, little or no profit

There is a consistency around the sad narratives of state-owned African airlines: corruption. Whether it is Kenya Airways, South African Airways, Air Zimbabwe, to mention a few, their troubles can be traced to fraud, patronage and mismanagement. And to repair the damage, the modus operandi is almost always the same: cost-cutting.

In April, Sudan Airways announced plans to cut 80% of its staff. It had little choice; it does not currently operate any of its planes. Sudan Airways’ troubles are unique, though, having been instigated by international sanctions on the Sudanese government. With hopes that America would eventually delist Sudan from its list of state sponsors of terror, much-needed financing might come about in due course to help with an urgently needed turnaround.

It is a little surprising, therefore, that African governments persist with managing or setting up national airlines.

John Ashbourne, Africa economist at London-based Capital Economics provides some perspective: “For many countries, this is largely a political decision by leaders who see successful flag carriers as a sign of status.”

Whether it is Kenya Airways, South African Airways (SAA), Air Zimbabwe, or Sudan Airways, the tales of woe are similar. They are not making enough money to cover their costs, some are insolvent, and others, like SAA, have been weighing heavily on state treasuries. Kenya Airways, which made a $251m loss in its most recent 2016–17 financial year had to be rescued by the Kenyan government in November 2017.

The resultant restructuring of the airline’s debt upped the equity stake of the government but inevitably diluted the holdings of existing shareholders. It will take at least 10 years for the new management of the airline to clear the airline’s indebtedness; at least that is the period the government’s guarantee covers. Now the priority of Kenya Airways is not so much about making profit as it is about cutting costs to squeeze as much cashflow for servicing its debt.

The story is no different for SAA, the continent’s second largest airline. After years of setbacks under the Jacob Zuma administration, South Africa’s state airline finally unveiled a turnaround strategy in March 2018. Cost efficiency is the goal. Loss-making since 2011, with debt guaranteed by the state to the tune of $1.7bn, SAA epitomises all that could go wrong when a government manages an airline. Now with new management, there is hope that its fortunes might be turned around, possibly by 2023.

Privatisation is an option. There are suggestions flying around in government circles about a potential 49% stake sale. But it is believed the government desires that when that happens, if it happens, it should be a better-run and more valuable SAA that it bequeaths to a potential equity partner.

An example of the sentimental attachment to the idea of a national airline is the recent purchase of Boeing planes by the cash-strapped Zimbabwean government. Only just emerging from the clutches of longtime ruler Robert Mugabe, and in dire need of foreign exchange to revive an economy long in the doldrums, Zimbabwean authorities bought four Boeing 777 planes for $70m in April with plans to purchase even more.

Although purchased via a special purpose vehicle and not yet transferred to the hugely indebted and floundering state-owned Air Zimbabwe, it is quite astonishing that such a venture would be a priority for a government that recently ran a budget deficit of $1.8bn (11.2% of 2017 GDP). There are speculations that the new planes will eventually be part of the fleet of new state-owned aircraft in place of Air Zimbabwe, which with debt of more than $300m is expected to be dissolved or privatised.    

Bright spot

There is at least one good example in the African state airline industry. Ethiopian Airlines is performing strongly. With revenue of $2.43bn from carrying 7.6m passengers in 2015–16, Ethiopian is Africa’s largest airline by revenue.

It is also the largest African airline by profit, according to the International Air Transport Association (IATA). And its growth figures have been through the roof. In the year highlighted, its net profit grew by 70%, in a continent where its peers are making losses upon losses or are simply insolvent.

Unsurprisingly, it is being called upon to help out elsewhere. In January, it signed an agreement with the Zambian government to help relaunch Zambia Airways, a national carrier that was liquidated in 1994.

This is just the latest addition to a burgeoning portfolio. Ethiopian Airlines already partners with Asky, a West African airline, and Malawi Airlines. Is Ethiopian’s success reason to be hopeful?

“Ethiopian’s success does suggest that a few firms will find their niche; but Africa certainly doesn’t need 54 competing national airlines linking their various capitals to London, Paris, and Johannesburg,” says Ashbourne.

Some African countries, smaller ones, for instance, may have to give up on their big dreams, however. Ashbourne suggests that “[they] should either merge their efforts, or focus on building regional networks. There is a lot of opportunity to improve intra-African links, for example.”

Rafiq Raji

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