The scramble for Africa’s airspace has intensified over the past three months as more airlines turn to the continent for a piece of the pie from the growing middle class and the high cash inflows from foreign investors.
This puts the national carrier, Kenya Airways, on a highly competitive path, forcing it to fight hard to retain its market share in a field where it has been a key operator.
Early in the month, South Africa Public Enterprises minister Malusi Gigaba told South Africa Airways (SAA), the state-owned airline, to roll out plans to start flights to every capital city in Africa and cut routes to other continents. This is the same strategy Kenya Airways is pursuing.
“SAA needs a new strategy and to prioritise flights to Africa,” said Mr Gigaba. “It needs a whole new re-think.
South Africa Airways is expected to add flights to Ivory Coast and the Democratic Republic of Congo in August and September, expanding to 26 African destinations.
It has already stopped flights between Cape Town and London as it competes with Virgin Atlantic and British Airways.
In February, the airline entered into talks with the Department of Public Enterprises and the National Treasury for funding of between 4 billion rand (about Sh42 billion) and 6 billion rand.
And around the same time, FastJet, an African discount airline startup backed by Stelios Haji-Ioannou — the name behind the successful Europe discount airline EasyJet — announced plans to revamp Fly540, adding 15 leased Airbus SAS aircraft within a year.
It will be launching flights to Ghana, Kenya, Tanzania and Angola.
“Launching FastJet with the Airbus A319 will offer unit costs low enough for us to cut fares and stimulate the market,” Rubicon chief executive officer Ed Winter said in an interview.
The initial five jets will double Fly540’s capacity to the equivalent of 1.5 million passengers a year within six months, Mr Winter said, with each aircraft potentially carrying upwards of 250,000 passengers.
Those in the know say that Fastjet aims to create a market using fares low enough to encourage many people to fly for the first time and others to travel more.
The airline was established after Rubicon bought Lonrho Aviation, which runs Fly540, in an $85.7 million all-stock reverse takeover which gave Lonrho a 73.7 per cent holding.
This will be the second low-cost carrier airline to operate in Africa, with EasyJet already connecting North Africa to Europe.
It is this success that Mr Stelios seeks to replicate south of the Sahara.
This complicates KQ’s Jambo Jet’s low cost airline strategy and the prospect of flying to every capital city on the continent by 2017.
Several competitors, who are also reducing their focus on other continents and shifting to Africa, are yet another headache for KQ — setting the stage for fierce competition and cheaper airfares.
The global rivals include Emirates, Etihad, Qatar Airways and Turkish Airlines. Last month, Korea Air launched direct flights to Nairobi in what is seen as a bid to gain from this lucrative route.
The move is also set to boost trade, especially in electronics, between the two nations.
Air Uganda and RwandaAir, much newer entrants in the aviation industry, have also increased their flights to different destinations in the region.
Qatar Airways will from November fly to Maputo International Airport three times a week, making it the company’s 20th African destination.
The airline recently launched a daily service from its Doha hub to the Rwandan capital, Kigali.
Early in the month, it launched daily flights to Kilimanjaro in Tanzania, and in August it will begin flying to Mombasa.
These are in addition to its current routes to Dar-es-Salaam and Nairobi.
Not worried by competition
Kenya Airways senior management, however, said they were not worried by the emerging competition, adding that the market has more potential for growth.
“It is not going to really affect us as the African market is quite big and we have room for more competition. So, in our case, the competition is very healthy,” said the management.
Analysts at City Group, in a report dated June 28, say that the prospects for air travel in Africa are relatively high compared with other continents, given the poor surface transport infrastructure, long distances between cities and location of major cities at high elevation.
The African market, whose growth is above the world’s average, accounts for 14 per cent of the global population but represents merely 2.5 per cent of worldwide airline capacity.
“We expect all these factors to drive sustainable air traffic growth, both passenger and air freight, above global averages,” the analysts say in a June 2012 report.
They also said that Airbus, Boeing and Embraer have forecast Africa air passenger traffic volume to grow by 5.4 per cent yearly to 2030.
This is higher than the global average of 5 per cent per annum, and is based on African real GDP growth of 4.4 per cent per annum.
The International Air Traffic Association (IATA) also anticipates African air passenger traffic to grow even faster, at 6.7 per cent annually, up to 2015.
In the three months to March this year, KQ’s passenger traffic to Europe dipped by 4 per cent, compared with a similar period in 2011.
Passenger uplift to Europe stood at 113,184 in the three months to March 2012, compared with last year’s passenger traffic of 118,035, in what the airline attributed to fewer passengers travelling to Europe.
Within Africa, excluding Kenya, passengers increased by 8.3 per cent to 419,877 compared with the same period last year, while those within Kenya increased by 4.2 per cent to 181,762.
“There were compensating changes evidenced in the network with incremental destinations launched to Jeddah in Saudi Arabia, N’djamena in Chad and Ouagadougou in Burkina Faso, while Europe shrunk due to capacity rationalisation,” the national carrier said.
Citi Group analysts say plans by KQ to launch Jambo Jet as a separate low-cost airline before year end, with a lower cost structure than the main fleet, could eventually take over the airline’s short-haul operation in East Africa. This would also serve as a defence against would-be entrants such as Fastjet.
The analysts say that European network airlines have traditionally been Kenya Airways’ main competitors but this is shifting towards Middle Eastern airlines, which have tripled their capacity to Africa over the past 10 years.
Emirates is the most aggressive competitor in the Africa-Asia market, followed by Qatar Airways and Etihad.
Emirates has a 41 per cent share of Africa — whereas Kenya Airways, in sixth place, has a 16 per cent share, the analysts say.
Kenya Airways has a market share of 50 per cent on average into and out of Kenya, but only 22 per cent on Middle East routes.
There is also rising competition from other carriers like Ethiopian Airlines, which is targeting to be Africa’s largest airline by 2025 with 199 aircraft, almost double those planned by Kenya Airways and EgyptAir.
Kenya Airways has cancelled two unprofitable routes to Muscat and Rome, an indication of its growing focus on profitability rather than increasing route network and capacity.
Standard Investment Bank analysts also see KQ scaling back its expansion plans if demand for air travel does not go as expected.
“If demand for air travel is not as robust as anticipated, we think it is possible for KQ to scale down its initially planned expansion, possibly by letting some options for new aircraft to lapse,” the analysts note in their July 4 report.
Kenya Airways, however, enjoys the advantage of Kenya’s strategic location in Eastern and Central African region and is best placed to benefit from the fast-growing intra-Africa and Africa-Asia traffic.
The national carrier further benefits from East Africa’s strong tourism attractions, its membership to the global SkyTeam alliance and a 26.7 per cent ownership by strategic partner KLM, as well as the new long-term investor, World Bank’s International Finance Corporation with a 9.6 per cent stake after the rights issue that closed on April 27 this year.
The airline sought Sh20.6 billion for fleet expansion and modernisation, but raised Sh14.5 billion, 70.06 per cent.
However, IFC has committed to extend Sh6.8 billion ($80m), covering the Sh6.18 billion shortfall after the rights issue results.
In its 10-year modernisation blueprint, KQ looks set to triple its fleet to 107 from 35 currently and increase the number of destinations to 115 from the current 55 by 2021. It also intends to expand its cargo fleet to 12 from the current one freighter.
The airline has already placed orders for 21 aircraft for delivery in the 2013-2016 period.
It has ordered Boeing 777-300 ER, Boeing 787-8 and Embraer 190, which are set to offer direct cost savings of about 15 per cent over its older existing aircraft, given their fuel efficiency.
Its other competitor closer home, Ethiopian Airlines, has also placed orders for 10 Boeing 787 to spearhead its expansion plan.
In an earlier interview, the airline’s senior vice president, Mr Zemene Nega, said they seek to increase the airline’s destinations to 129 from 79 currently globally and to raise passenger traffic to 18 million each year from 4.5 million passengers currently by 2025.
KQ, however, has to confront key challenges, including high fuel costs, delays in airport expansion, global economic conditions, staff restructuring during the set-up of the low cost carrier, and shortage of qualified captains.
IATA says the cost of fuel remains the main challenge, denting profitability for airlines globally.
The association says that for every dollar increase in the average annual oil price, airlines face an additional Sh134 billion ($1.6 billion) in costs.
“The risks that the airline (KQ) is facing include high cost of fuel and delays that may arise from expansion of the Jomo Kenyatta International Airport,” Standard Investment Bank research analyst Eric Musau said.
Following a warning that KQ would report a 25 per cent decline in profits in the 2011/12 financial year, it posted a 53 per cent drop in after-tax profit to Sh1.66 billion, from Sh3.5 billion recorded the previous year.