Analysis
An insight into the challenges and opportunities for airlines and MROs in Africa.

Africa’s untapped potential

The commercial aviation sector in Africa is one that is yet to find its feet, but with more than one billion people, a burgeoning economy and poor rail and road infrastructure the indicators for growth are promising. Neelam Mathews provides an insight into the challenges and opportunities for airlines and MROs.

The decision by South Africa’s government to authorise a second tranche of state aid to South African Airways in

January, demonstrates that the region’s booming economy has done little to boost its aviation sector. Financial restraints, the Ebola outbreak, over capacity, inter-state disagreements, a lack of taxes, fees and charges are formidable challenges that continue to strangle the industry.

In 2014, airlines in the region struggled to breakeven according to the latest data from IATA. In its report assessing the economic performance of the industry in 2014 it states: “Profits are barely positive and represent just $2.51 per passenger. Breakeven load factors are relatively low, as yields are a little higher than average and costs are lower. However, few airlines in the region are able to achieve adequate load factors…Performance is improving, but slowly.”

The potential for massive growth can hardly be overlooked as rising incomes, consumption, employment, productivity and a middle class equal in size to India, drive economic growth. IATA predicts that 2015 will be a better year for – up from a $100m loss in 2013. These emerging trends are in line with Boeing’s 2014 market outlook that notes Africa’s labour force will grow by 122 million people by 2020 and will surpass China or India by 2035. With rail and road infrastructure almost non-existent, the only mode of travel is by air, opening up immense opportunities for the aviation sector.

There are, however, factors that are impacting the growth potential of Africa’s commercial aviation and MRO sectors, and driving opportunities outside of the region. “The lack of bi-lateral traffic rights between African nations often result in passengers having to take a flight via Europe to another African nation,” says Tewolde Gebremariam, CEO of Ethiopian Airlines. Meanwhile, the growing penetration of Middle Eastern carriers is challenging the connectivity advantage of East African hubs.

Costs and initiatives


By 2030, Africa’s international tourist numbers could grow from its current 56 million to 134 million. However, taxation on fuel that comprises almost 50 per cent of operating costs has hurt bottom lines of carriers, making fares unrealistic.

"With the recent dip in fuel prices this figure is down to 40 per cent, but it is ironic that 20 countries in Africa produce and export oil and yet it is most expensive here,” says Gebremariam. The Ebola outbreak hasn’t helped business either.

“The last few months have been tough for us because the media has exaggerated the issue. Only three countries were affected on the western coast, but it has affected the entire continent. This resulted in reduced travel to Africa," he added. Ethiopian Airlines experienced a revenue loss of $8m per month with 70 per cent load factors during the crisis even though it does not fly to Liberia, Guinea, or Sierra Leone. Gebremariam confirms that the situation is now imrproving, however, as the affected countries do better at containing the problem.

Leaving the difficulties posed by the Ebola crisis to one side, tourism in Africa is on the rise. “Ethiopia has so much tourist potential,” says Gebremariam. "With direct flights, stability, peace and economic development in the past
ity, peace and economic development in the past two decades, Ethiopia’s image has improved.

Tourism and investments add to a country’s growth. We need to drive that and speed the process.” Ethiopian Airlines is already working to tap into that potential confirms Gebremariam. “We have started in-house tour operations and identified travel partners in the US, the UK and Germany.”

Double standards of the West?

While some barriers to the sector’s growth are due to causes within Africa, there is a grouse against the EU for banning 148 airliens from 16 African states from flying into Europe. According to Elijah Chingosho, secretary general of the African Airlines Association (AFRAA), 80-90 per cent of those airlines exist on paper only and just half a dozen have any intention of flying into the EU. However, Chingosho argues that the list deters some African carriers from attempting to undertake intercontinental operations. “It is ironic that EU carriers fly to those destinations deemed as ‘unsafe’.

For example, Angola is on the banned list but many EU states are requesting for more frequent flights into the country. What the banned list does is discourage customers from flying with African airlines," he says. AFRAA remains positive for the future, however, and is collaborating with ICAO and IATA with a focus on building skills in the region and preparing Africa for IATA’s safety audit.

Partnerships and alliances

Ethiopian Airlines is the largest single carrier in Africa, with a fleet of 77 aircraft (68 passenger aircraft in Africa, with a fleet of 77 aircraft (68 passenger aircraft and nine freighters). Along with South African Airways and Egypt Airlines, Ethiopian is a member of the global Star Alliance, whose members also includes All Nippon Airways, Lufthansa and United Airlines.

Ethiopian is also strengthening its reach in the region through forging strategic partnerships with other local carriers, including Togo-based ASKY in West Africa, in which it is a major shareholder, and Malawian Airlines. Talks are also ongoing with the Rwandan government for a stake in cash-strapped national carrier RwandAir, which could give Ethiopian an expanded reach in East Africa, where major player Kenya Airways is burdened with losses. These tie-ups, along with new links to the Congo and South Sudan, which are in the offing, are likely to make Ethiopian a stronger player in the East and West.

Ethiopian’s extended reach will also open opportunities for its MRO division. RwandAir already has maintenance agreements in place to service its two Bombardier Q400NextGen aircraft with Ethiopian and others are expected to follow.

Global alliances, in particular the Star Alliance, look at joint purchases between its member carriers, to help secure the best deal. Presently, other than a spare parts exchange programme, there is no alliance-wide initiative on MRO. On a bi-lateral level there is cooperation between carriers, however, and this is bound to benefit Star's African partners.

Liberalisation and Yamoussoukro
"Unfortunately, aviation has not been given enough attention by governments in terms of policy framework," laments Gebremariam. Unlike ASEAN [Association of Southeast Asian Nations] and the EU, we don’t have a single market policy in Africa. The Yamoussoukro Decision has been discussed for the past 20 years, but has not been implemented fully.”

The Yamoussoukro Decision establishes the arrangement among states for the gradual liberalisation of scheduled and non-scheduled intra-Africa air transport services. It lays down competition regulations, guidelines and procedures for the implementation of legislation, as well as a dispute settlement mechanism and rules ensuring passenger rights are protected.

In 1999, 44 African nations adopted the Yamoussoukro Decision, committing themselves to deregulating air services and promoting regional air markets. The decision was supposed to achieve full liberalisation of aviation across the continent, allowing airlines to fly freely, but implementation has been slow and the potential benefits of liberalising intra-African air markets remain largely unrealised.

Gebremariam argues that the lack of a single policy framework has created barriers for individual carriers in Africa to move freely resulting in “increased cost to passengers and a nonexistent service”.

“For the low cost model to penetrate and make economic sense, the Yamoussoukro Decision has to be adopted and implemented,” he argues. “It is a paradox that Africa is more open to non-African carriers that control the intercontinental traffic than it is to airlines. At present, the ratio is 80-20 in favour of foreign airlines. We would like it to come down to 50-50 and we are working with AFRAA on this.”

IATA spokesman Tony Concil confirmed that the body was doing all it could to encourage African governments to implement Yamoussoukro. “Our hope is the Africa’s economic development will illustrate the need for the enhancing intra-African connectivity,” he says.

Few benefits to LCCs
A recent IATA study, Transforming Intra-African Air Connectivity, notes lack of a liberalisation policy between African countries has resulted in business models that rely on connectivity through a specific hub (such as Addis Ababa, Johannesburg or Nairobi) with few direct connections. Of the top 10 airlines in the region, the four largest carriers operate with connecting hub structures from their respective bases. No major hubs have yet emerged in West or Central Africa.

“Protectionist thinking dampens air transport growth. It is estimated more than half of African city-pairs are served by fewer than five flights per week,” reveals Chingosho. “The African aviation industry faces huge competition, from big carriers based in the Gulf and the Middle East, as well as low cost carriers entering the African market,” one official from Ethiopian told ATE&M.

Budget carriers, which generate high rates of traffic stimulation in more liberal local markets, are starting to develop, but very slowly.

Most countries have not seen significant LCC growth with the exception of South Africa and, to some extent, Kenya. South Africa has two low-cost carriers operating extensive domestic networks.

IATA's study concludes: "The LCC business model may play a role in stimulating the overall market and increase the likelihood of point-topoint access between more primary and secondary markets within Africa. It is extremely difficult for LCCs to flourish in a restricted market. Because of this, LCC growth in Africa has been predominantly in large domestic markets such as South Africa and Kenya.

However, South African Airways’ low-cost subsidiary Mango is doing well and there are plans afoot to start international operations. Another new African LCC is Tanzania-based FastJet, which is backed by easyJet founder Stelios Haji-Ioannou and recently began operating flights to South Africa.

The start-up carrier has also invested in Fly540, a regional airline with operating certificates in a number of African nations. While FastJet plans in the long-term to grow into a pan-African carrier, it is already facing difficulties with regulatory roadblocks preventing it from operating in Angola, Kenya and Ghana.

“LCCs will potentially bring air travel to many secondary points that were not viable previously," says AFRAA's Chingosho. “To capture the benefits that an LCC can bring, governments need to embrace the sector and facilitate its growth through significant reduction of charges, taxes and fees on fuel and passengers.”

Fleet outlook

Currently, African airlines operate 120 regional jets, 430 single-aisle aircraft and 150 widebodies. By 2033, Boeing predicts that operators in the region will have taken delivery of 1,080 aircraft approximately two-thirds of which will expand the region's fleet.

However, this is not to say that replacement of ageing aircraft will not be an important component of demand. Boeing's report concludes: "Although the average age of Africa's in service fleet has declined by 25 per cent, it remains higher than world average." Single-aisle aircraft will continue to account for the largest proportion of the African fleet with 740 new narrowbodies expected to enter into service by 2033 compared with 280 small and medium widebody aircraft and just 60 regional jets.

ATR, Bombardier and Embraer are much more bullish about the market for regional aircraft. ATR estimates that over the next 20 years, there will be demand for around 400 50-90 seat turboprop aircraft in the region and Bombardier predicts that deliveries of 20-99 seat aircraft will top 440. Embraer meanwhile forecasts that airlines in African and the Middle East will take delivery of 530 new regional jets in the 70-130-seat segement over the next 20 years - representing eight per cent of worldwide demand. The Brazilian OEM estimates that 65 per cent of new deliveries will be supporting growth while the remainder will replace retiring aircraft.

Airline traffic within the continent is expected to grow by 6.7 per cent in the next 20 years, with traffic between Africa and Europe predicted to increase five per cent and to the Middle East by 7.3 per cent.
As fleets expand, the continent will require 17,000 new pilots and 19,000 more trained technicians, according to Boeing, Africa's share of the $58bn global MRO market is just three per cent, with AFRAA's former secretary general, Nick Fadugba, citing inadequate MRO facilities are being partly to blame.

Africa is a net importer of airframe maintenance services. According to the US-based Aeronautical
Repair Station Association (ARSA) in its Global MRO Market Economic Assessment, during 2014 African operators generated $296m worth of airframe maintenance and work and local MRO providers were only able to meet 70 per cent of this demand. With approximately $89m worth of this work performed outside Africa and with local MROs attracting just $33m-worth of airframe maintenance work for airlines based in other regions, ARSA estimates that African MRO providers performed a total of $240m worth of airframe maintenance (excluding modifications) last year.

One MRO provider making inroads into the African market is US-based AAR which supplies cargo systems for South African Airways and last year serviced landing gear on Kenya Airways' fleet of 777s. In July 2014, AAR also won a contract to provide component support for Kenya Airways. Middle Eastern MRO JorAMCo has also won work in nearby Africa. Last year it signed a deal with Nigerian charter carrier Med-View Airline, for heavy maintenance  on its fleet of three 737s, and with Congo-based Services Air Cargo for base maintenance services on its A310 aircraft.

The trend for African airlines to import MRO services is even more stark in the engine overhaul sector, where African airlines generated $579m-worth of engine MRO work in 2014, but just 15 per cent was performed within the region, according to ARSA. African engine MROs also provided just $5m-worth of services to carriers from outside the region, resulting in a total of $94m-worth of engine MRO work being carried out in Africa last year. An engineer from Ethiopian Airlines MRO division told ATE&M that demand in the region exceeds supply "due to lack of skilled manpower."

As in many other regions in the world, OEMs are expanding their presence in the MRO market. In January, Royal Air Maroc signed a 10-year OnPoint contract with GE Aviation for the maintenance, repair and overhaul of the GEnx engines which will power its fleet of five 787s, the first of which was delivered at the start of the year.

Captive MRO market

Only Egypt Air, Ethiopian Airlines, Kenya Airways, Royal Air Maroc, RwandAir and South African Airways own their MRO centres resulting in the majority of the carriers sending their aircraft outside the continent for maintenance. On average, carriers spend more than $3m per C-Check on every aircraft that is sent to Europe and the US.
Chairman of Airline Operators of Nigeria (AON) and president of JedAir Nogie Meggison believes that establishing more aircraft MRO facilities within Nigeria would offer the aviation industry significant benefits. Meggison argues that granting foreign carriers multiple entry points into Nigeria has contributed to the stunted growth of indigenous airlines.

At a recent MRO conference, he lamented that Aero Contractors - a state owned air charter and MRO firm based at Murtala Muhammed International Airport in Ikeja - had the only facility in the country with third-party approval and capability for conducting MRO, namely A- and B-checks on 737 classics and C-checks on the Dash 8.

Ethiopian Airlines provides MRO services - primarily line maintenance - to 24 customers, mainly from Africa, and has ambitious expansion plans for two widebody hangars. Ethiopian's FAA - and EASA-certified facility at Bole International Airport in Addis Ababa offers airframe services on Boeing aircraft, including the 737CL, 737NG, 757, 767, 777 and 787, as well as on the MD-11 and Bombardier's Dash-8 (up to and including the next generation Q400).

The airline MRO provides heavy checks, structural inspections, repairs and modifications, as well as major avionics installations, composite parts repair, and interior and exterior refurbishment, including painting services. Alongside airframe MRO, Ethiopian's maintenance division also offers overhauls on CFM56-7B and CFM56-3 engines, as well as on Honeywell's GTCP331-200 auxiliary power unit, and modular maintenance on PW2000 and PW4000 engines. And with the airline awaiting delivery of 20 737 MAX aircraft, powered by LEAP-1B engines, its MRO facility is gearing up for next generation technologies.

While the first deliveries of this fleet enhancing order are not due until 2018, the need for skilled technicians and pilots is already being felt. Ethiopian's aviation academy has dramatically boosted capacity in recent years from 200 to 1,000 students a year. Recently, it invested more than $55m to ensure that by 2025, it will be able to cope with 4,000 students each year.

Alongside the skills gap, another challenge that has faced MROs in Africa in the past has been access to parts inventory. One deal made last summer, however, seems to indicate that this may be changing. Chicago-based MRO giant AAR signed a five-year multi-million dollar agreement with Kenya Airways (with assistance from the US department of commerce) to provide component support for the carrier's fleet of 737NG aircraft. Under the rate-per-flight-hour contract, AAR is placing inventory onsite in Nairobi while offering additional rotable pool support from its newly established supply chain hub in Brussels.

Maintaining regional aircraft

While Africa's current fleet of regional aircraft is relatively small, both Embraer and ATR are convinced of its growth potential. At the end of 2014, ATR to significantly expand its MRO network of global network of approved MRO providers, with Africa named as one of the key regions it was targeting. 

Currently African airlines account for 10 per cent of ATR sales worldwide, with 37 per cent of carriers flying around 110 ATRs. One diehard ATR customer in the process of upgrading its fleet is Air Algerie, which took delivery of the first of three ATR72-600s on December 22, 2014, expanding its fleet of 12 ATR 72-500s. Deliveries will continue until June 2016.

In 2012 ATR opened a training centre in Johannesburg and now the turboprop company is in the process of selecting two local MRO companies to support its customers in the region. One ATR aftermarket provider that already has a prescence in Africa is Rheinland Air Service (RAS). In 2013, the German MRO acquired an MRO in Namibia's capital of Windhoek and has since opened a new hangar enabling it to service ATR and Embraer E135/145 aircraft. RAS has confirmed it plans to further expand the site by 2018, giving it capacity to service six ATRs at a time.

Airlines in the region currently operating Embraer fleet include Air Côte d'Ivoire, EgyptAir Express, Kenya Airways, LAM, Mozambique and Royal Air Maroc. John Slattery, Embraer's chief commercial officer, confirms: "We have a good penetration with the ERJ145 in South Africa [and] we're seeing a lot of East-West traffic which is great." However, he agrees that there is demand for MRO facilities and skilled engineers in the region. "Africa needs centres in private-public partnerships," he argues. 

Alongside plugging the skills gap, African MRO providers have the challenges of competing with the more established global players - not to mention the OEMs - as well as dealing with the challenges of of an immature commercial aviation market. That said, the outlook for economic growth in the region, and for airlines, is looking positive over the long term there are certainly business opportunities available. It will be interesting to see how this burgeoning sector develops over the next five to 10 years, and see which of the local players blossoms and which of the established global MROs make a bid to break into the market.

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