How the airline industry works

The era of the flag carrier seemed to be in question and even under scrutiny this past decade. Do we still need them? Can they be viable on the African continent? 

The crisis brought about by the Covid-19 pandemic has somewhat cooled that. Airlines across the world, both private and public owned looked to their governments for monetary relief at the height of the pandemic. Airlines in the United States received a $54b lifeline relieving payroll challenges for 18 months. While in Europe, the likes of Lufthansa and KLM received record bailouts. 

READ: Can Uganda Airlines do well where others made losses and went bust?

In Africa, a string of airlines went into different forms of bankruptcy protection. In Southern Africa alone, SAA, Air Zimbabwe, Air Seychelles, Air Mauritius had to rethink and implement turnaround strategies. While 75-year-old Air Namibia succumbed and went under. 

In East Africa, Kenya Airways recorded the biggest loss in Kenya’s corporate history while Uganda Airlines, Air Tanzania and RwandAir all saw significantly large negative numbers. 

Flag carriers have always been viewed as instruments of national pride and identity, almost emblematic. But a national carrier means so much more. Beyond trophy status, it can be positioned as a focal point in the country’s economy, a vehicle for growth. 

There is a whole economy built around the aviation ecosystem and related sectors such as tourism that ultimately contributes significantly to job creation and Gross Domestic Product (GDP). Once measured against effect on GDP is when the true judgement on a thriving aviation sector and national airline importance can be measured. 

Cost structure. About 75 percent of airline costs are fixed. Labour and fuel represent two of the largest cost areas for any airline. This explains why airlines are extremely sensitive to rising oil prices and economic tremors. Additionally, in times of economic turmoil, labour tends to be a target for cost cutting measures. Lay-offs have for example been a major part of the airline industry reaction to the Covid-19 pandemic and its economic effects. 

Beyond labour and fuel, airlines spend big on aircraft and maintenance. Most airlines with large fleets usually have a mix of owned and leased aircraft while the maintenance costs for African airlines are higher than the global average, contributing to Africa’s high cost base and ultimately affecting the potential to turn a profit. 

Professional services and infrastructure fees as well as taxes and levies push the overall costs even further. 

Freedoms of the air and traffic rights. Air access and the freedom to fly over and land in a specific country under a commercial air transport operation is governed by a set of rules that were formulated at the Chicago Convention in 1944. Today airlines have to abide by multi-lateral and bilateral air service agreements in order to access new markets. The African continent remains highly restricted with a low level of liberalisation so airlines and states have to enter Bilateral Air Service Agreements (BASAs), often via long and difficult negotiations and still ultimately restrictive. For example a BASA will dictate the number of frequencies that a designated airline can fly to a country and to where specifically. Because these bilaterals for the granting of traffic rights happen on a government to government level, airlines have to work hand-in-hand with their political establishment.  According to the Uganda Airlines business plan, Uganda has a total of 46 valid BASAs with different countries in the region and globally. 

Landing slots.  Airports around the world are getting busier than they can manage and that results in capacity constraints. The arrival and departure of aircraft has to be managed in a well-coordinated and fair way through the allocation of slots. Ultimately, congested airports need to expand capacity but slot allocation is a great relief measure. 

Mr Derek Nseko is the founder and chief executive officer of Airspace Africa and an aviation consultant.