EA airlines brace for a tough 2014

Saturday January 18 2014

Regional airlines like KQ, Precision Air, RwandAir and Uganda Air are facing increased competition especially from Middle Eastern carriers. TEA Graphic

East African airlines face a difficult year ahead due to projected low demand in the African market as infrastructure constraints and heavy taxation continue to pile up costs.

Latest projections by the International Air Transport Association (IATA) show that Africa is the only region to see a decline in demand towards the end of last year.

Most of the East African airlines, such as Kenya Airways, rely largely on the African market for their business. Africa accounts for nearly half of KQ’s $1.1 billion turnover.

The outlook is further complicated by the operations of the airlines which are faced with a trend where passengers are demanding top-of-the-range safety and service, yet airlines operate small old planes which can no longer do the job and global airlines scrambling for routes in the already busy airspace.

According to IATA, November 2013 saw traffic fall two per cent, compared with the same month in 2012. Capacity climbed 2.6 per cent, pushing load factor (aircraft utilisation level) down three percentage points to 63.5 per cent, by far the lowest for any region. As a result, African carriers are expected to suffer a loss of $100 million in 2014, registering a stagnant growth from 2013, IATA has predicted.

The outlook comes at a time when airlines in the region have began regrouping as they prepare for what could be the busiest year in East Africa’s airspace.


Auditors last month raised fresh doubts over the future of Tanzania’s largest commercial airline, Precision Air, given its surging losses and liabilities while the government dithers on approval of a bailout plan.

An audit report by Ernst & Young painted a gloomy picture of the loss-making firm, saying its liabilities had exceeded its assets by Tsh83.14 billion ($53 million). The airline has been facing serious cash flow challenges occasioned by an overambitious expansion plan that saw it add new aircraft.

The bad shape of Precision Air’s finances saw it apply for a capital injection of $32 million from the government a few months ago, a bid that has not borne fruit. In the year ended March, the airline posted a Tsh30.4 billion ($18.7 million) loss.

READ: Precision may not last long in the air, auditors now warn

Kenya Airways officials said 2014 will be a better year, riding on the new aircraft whose delivery is expected later this year. This year, the airline expects to receive two 777-300 ER aircraft, the largest on KQ’s fleet with a capacity of 400 passengers and over 20 metric tonnes of cargo to add on the four 777-2000 that the airline already has.

“2014 is going to be an interesting year for us. We will have 4,400 passengers at any one time once these aircraft land,” said Titus Naikuni, the chief executive officer.

KQ posted Ksh384 million ($4.5 million) profit after tax in the six months to September 2013 compared with Ksh4.8 billion ($55.8 million) loss after tax in the same period last year on account of a drop in passenger numbers and high fuel costs.

Regional airlines like KQ, Precision Air, RwandAir and Uganda Air are facing increased competition especially from Middle Eastern carriers such as Etihad Airways, Emirates, Qatar Airways and Royal Air Jordanian, which are opening up more routes on the continent where the carriers draw more than half of their revenues.

READ: Growing African market is very important to Emirates

“Over the past few quarters, this territory has attracted immense attention owing to the untapped business opportunities it offers. However, the opportunities have not yet materialised into any substantial profitability,” said IATA.

Analysts said going into 2014, regional carriers face a tough year to grow a global market share and attain profitability due to the stiff competition on intercontinental routes while intra-African connectivity is underdeveloped as a result of market access restrictions.

This coupled with high operating costs, heavy taxation, infrastructure deficiencies and rising insecurities have hampered the airlines’ growth, putting the industry at stake.

“The level of investor confidence in the African region remains shaky compared with other regions given the unending uprisings from different corners of the continent. There are opportunities but these cannot compare favourably with other regions,” said Eric Munywoki, an analyst with Old Mutual Securities.

“While Africa sought to ride on the natural resources, other regions are upgrading their manufacturing sector which translates to a higher growth in the airline industry” he said.

As Africa suffers from low demand, IATA projects that profits from the Middle Eastern carriers will grow from $1.6 billion in 2013 to $2.1 billion in 2014. North American carriers are expected to generate $4.9 billion in profits in 2013, and $6.3 billion in 2014.

Airlines have cited increased operational costs on dwindling fortunes.

One of the key reasons why air travel on the African continent remains expensive is because most airports charge airlines high fees compared with others around the world as they look to recoup their investments, airline executives say.

Also, the fact that fewer international and local planes fly into the airport means those few airlines flying into the airports absorb most of the costs. This is one reason why Kenya Airways has maintained higher fares on shorter African routes compared with the same distance in Europe.

READ: Investors decry high cost of flying in East Africa

South African Airways according to Bloomberg News missed an August 31, 2013 deadline to submit its annual financial report to parliament and hasn’t set a date to release results for the year through March 2013.

Analysts say the government-owned airline might have made another loss given the financial struggles it has been going through and insecurities owing to miners’ demonstrations that rocked the country over the last few years.

The burial of former South Africa’s president Nelson Mandela on December 5, attracted air traffic believed not to be enough to push the carrier to profits.

For SAA  renewing its fleet is part of a turnaround strategy  aimed at returning to profitability by 2017.

Analysts said the airline might be seeing continued losses hence quoting three years ahead. The government gave the carrier, Africa’s biggest, a five billion-rand ($466.6 million) debt guarantee in October 2012 to ensure it can borrow from financial markets to support a recovery.

Monwabisi Kalawe SAA CEO said he anticipates better financial results for the year through March 2013, although SAA will continue to need state support over the next four to five years.

The company’s balance sheet is weak and its cost position too high, Business Day newspaper reported in October citing Mr Kalawe, diminishing any hopes for the airline’s profits in the next three years. The carrier offers 26 destinations across the African continent.

Ethiopian Airlines, another fast growing African carrier, plans to order single aisle for regional routes. Its Vision 2025 includes plans to double its fleet to 112 planes and carry 18 million passengers over 92 routes by 2025.  

Analysts said more code share deals and partnerships between African Airlines and their international counterparts could boost their operations including routes and fleet size and quality, enabling them to compete favourably for a sizeable global and domestic share.

Analysts said low cost carriers will struggle to keep pace with the long haul carriers domestically. Unless Africa’s economic growth is faster to provide a sizeable market to the two more partnerships are expected. Recently KQ handed its Rwanda cargo operations to RwandAir.

“Our cargo on the Rwandan market has remained insignificant and we need to be more aggressive on the market and it was wise to hand it over to someone as we strategise,” said Denis Munai, Kenya airways station manager in Kigali in an earlier interview.

Another low-cost African airline Fastjet with operations in Tanzania has demonstrated a positive growth in the African market. Last week, the carrier announced it carried a total of 37,458 passengers in December, the highest number of passengers in one month since it commenced operations in November 2012. 

The average yield per passenger was a record $97, compared with $50 in December 2012. Total revenue for the month was $3.6 million, exceeding $3 million for the first time. The low cost carrier which is putting pressure on other carriers in the market will commence flights to and from Lusaka in February.

Meanwhile Precision Air, Tanzania’s largest commercial airline is struggling to rise again after it made losses worth Tsh30.4 billion ($18.7 million) in the year ended March 2013. A second blow came in when the government turned down a capital injection plea of $32 million. 

Additional reporting by Alex Ngarambe