Giving Africa Wings

Giving Africa Wings

"Airlines have been alerted to Africa's potential by the rise of Brazil, Russia, India and China, which account for a growing share of Africa's international trade and are themselves among the world's fastest-growing aviation markets."

Significant Growth

It has been a busy time for the aviation industry in Africa. We have seen the industry prosper, with airlines such as Ethiopian Airlines, Kenya Airways, South African Airways and Comair (who operates regional services of British Airways and the low-fare airline, kulula.com) embarking on successful capital raising projects for their fleet renewal and expansion. The beginning of June saw the International Air Transport Association (IATA) holding its annual general meeting in Cape Town where the current importance of Africa as a major player in the global aviation industry was highlighted. Aviation in Africa has gone through something of a transformation in the past 20 years, and given the right investment, the future could look even brighter.

Africa's economic growth accelerated after 2000, currently making it the world's second fastest growing region, outperformed only by its major trade partner, emerging Asia. Knowing the high correlation between air traffic growth and GDP growth and in spite of it coming off a low base, the future of the African aviation industry looks bright.

The Wall Street Journal, June 02, 2013 quotes "Airlines have been alerted to Africa's potential by the rise of Brazil, Russia, India and China, which account for a growing share of Africa's international trade and are themselves among the world's fastest-growing aviation markets."

As was the case in these emerging markets, not long ago, the modest Africa traffic consisted mostly of Western business people and the few Africans who could afford to fly. Now, seats hold rising numbers of African businesspeople and citizens with newfound personal wealth. International construction firms, mining giants and oil companies also fill flights. It should come as no surprise then that leading aircraft manufacturers, Airbus, Boeing, ATR, Bombardier and Embraer, have all forecast an upswing in the demand for new commercial aircraft in Africa worth billions of US dollars.

In fact, Boeing's 20-year market forecast predicts that passenger traffic in Africa will grow at an annual rate of about 5.6 percent - outpacing the world average of five percent. This increased passenger traffic will result in a rise in the number of aircraft needed to support the industry and Boeing predicts in that time period about 900 new aircraft valued at US$120billion will be required. The African aviation market is growing fast and as it grows it continues to offer a multitude of opportunities for manufacturers and financiers alike.

Support Needed

As a financial institution, we at Investec have noted the positive financing environment experienced by the African airline community over the past year but there are still many challenges ahead.

Support is specifically required for the smaller, regional carrier community to enable a broad based renewal and expansion of the African fleet. The sheer size of the funding needs of the African airline industry is daunting. Add to this the huge capital requirements for airport and air traffic control infrastructure and other aviation-related development projects and the funding challenges are obvious. The need to crack this code is critical in light of the important role that the aviation industry plays in Africa's economic development.

This important point was reiterated by South African Deputy President Kgalema Motlanthe in his opening address to the 700 airline industry chiefs at the IATA meeting. Motlanthe highlighted that the aviation industry is essential to foster growth and development in Africa and that the continent's growth hinges on its ability to improve intra-African trade.

Operationally, African airlines continue to deal with a range of complexities, including high fuel prices, currency volatility, limited infrastructure and a local skills base, as well as the market penetration by non-African airlines.

Many airlines would require recapitalisation and sovereign support to sustain their fleet acquisition plans and consequent higher levels of leverage.

Flexible Solutions Essential

Challenge however is the breeding ground of opportunity and the forerunner of innovation and we see the key to the continued success of the African aviation industry in a flexible solutions driven approach to financing the African fleet.

There is a greater prevalence of collaboration between various providers of capital to the industry, including international aviation financiers, export credit agencies, development organisations and local banks.

Airlines require more than just debt finance, but rather a holistic approach to their banking requirements. This may include advisory services, hedging strategies and treasury management, all in line with the expansion of the relationship banking approach. Financiers can no longer offer a one size fits all approach to airlines and innovation will be critical for the industry to continue to soar.

Africa's economic growth is leading to the expansion of its Aviation Industry. In turn we believe that the industry will play a meaningful role in Africa's growth story and its relevance in the international context going forward.