• Wed. Oct 5th, 2022

How the airline industry works

ByKimberly A. Brochu

Aug 29, 2022

The era of the standard bearer seemed challenged and even under scrutiny over the past decade. Do we still need it? Can they be viable on the African continent?

The crisis caused by the Covid-19 pandemic has cooled this somewhat. Airlines around the world, private and public, looked to their governments for monetary relief at the height of the pandemic. Airlines in the United States have been given a $54 billion lifeline to ease payroll issues for 18 months. In Europe, companies like Lufthansa and KLM received record bailouts.

In Africa, a range of airlines have opted for different forms of bankruptcy protection. In Southern Africa alone, SAA, Air Zimbabwe, Air Seychelles, Air Mauritius had to rethink and implement turnaround strategies. While Air Namibia, 75, succumbed and sank.

In East Africa, Kenya Airways recorded the biggest loss in the history of Kenyan companies, while Uganda Airlines, Air Tanzania and RwandAir all recorded very large negative figures.

Standard bearers have always been considered instruments of pride and national identity, almost emblematic. But a national carrier means so much more. Beyond the trophy status, it can position itself as a focal point of the country’s economy, a vector of growth.

There is an entire economy built around the ecosystem of aviation and related sectors such as tourism which ultimately contributes significantly to job creation and gross domestic product (GDP). Once measured against the effect on GDP, this is when the true judgment on a thriving aviation sector and the importance of national airlines can be measured.

The cost structure. About 75% of airline costs are fixed. Labor and fuel are two of the biggest cost items for an airline. This explains why airlines are extremely sensitive to rising oil prices and economic shocks. Additionally, in times of economic turbulence, labor tends to be the target of cost-cutting measures. Layoffs, for example, have been a major part of the airline industry’s response to the Covid-19 pandemic and its economic effects.

Beyond labor and fuel, airlines spend a lot on aircraft and maintenance. Most airlines with large fleets typically have a mix of owned and leased aircraft, while African airline maintenance costs are higher than the global average, contributing to Africa’s high cost base and ultimately affecting the potential to earn profits.

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 as part of a commercial air transport operation is governed by a set of rules formulated at the Chicago Convention in 1944. Today, the airlines must adhere to multilateral and bilateral air service agreements to access new markets. The African continent remains very restricted with a low level of liberalisation, so airlines and States must conclude Bilateral Air Services Agreements (BASA), often through long and difficult negotiations and always ultimately restrictive. For example, a BASA will dictate how many frequencies a designated airline can fly to a country and to where specifically. Since these bilateral negotiations for the granting of traffic rights take place on a government-to-government basis, the airlines must work hand in hand with their political elite. According to the Uganda Airlines Business Plan, Uganda has a total of 46 valid BASAs with different countries in the region and the world.

Landing slots. Airports around the world are becoming busier than they can handle, leading to capacity constraints. The arrival and departure of aircraft must be managed in a well-coordinated and equitable manner through the allocation of slots. Ultimately, congested airports need to increase capacity, but slot allocation is an excellent relief measure.

Mr. Derek Nseko is the founder and managing director of Airspace Africa and an aviation consultant.