In this article, I attempt to develop further the arguments made earlier this year for the creation of a commercial African aviation asset finance program, partly capitalized with equity or subordinated loans from Africa's infrastructure budget (because, in Africa, an aircraft is not a bus: it's a bridge) and financed by export-credit financing and commercial debt. Consider the following comment from Mr. Gerard J. Arpey, Chairman and CEO of American Airlines, in the September 2010 edition of American Way, the airline's in-flight magazine: "At American Airlines, we are certainly proud to have participated in Brazil's transformation. To illustrate how far we have come: we launched our first Brazil service in 1990, with one flight a day from Miami to Rio, continuing on to Sao Paulo. By November of this year, we plan to operate 75 weekly flights to and from Brazil." (There was no message of "Obrigado" to VASP and Varig, the major Brazilian airlines that declined and perished during the same period.)

Are There Lessons Here For Africa?
Yes: enormous change can occur over relatively short periods and non-African airlines covet Africa's air traffic - it's the nature of the beast. As it happens, I am writing this article in my hotel room in the city of Johannesburg, proud host of daily Air France and Lufthansa A380 services from Europe. On 9 June 2010, Le Figaro, the French daily commented on the phenomenon: "In 2008/2009, nine of Air France's 10 most profitable routes were to Africa … The battle for African skies has only just begun.".On 7 October 2010, Les Echos, another French newspaper, commented: "Air France/KLM's response to Lufthansa's expansion in Africa is Plan Léopard under which, among other things, additional services to Africa will be offered this year and next." Separately, a British Airways representative claimed: "We are forecasting a 10 percent increase in revenue for Africa this financial year, which ends March 31, 2011" (Reuters, 14 April 2010). And what of Emirates, the world's largest A380 customer? In a press release going back to 18 February 2009, HH Sheikh Ahmed bin Saeed Al-Maktoum, Chairman and Chief Executive, Emirates Airline and Group, said: "All of our new capacity will be deployed in markets where we see growth potential, particularly Africa and the Middle East."

Yamoussoukro Decision
In a separate but related development, the World Bank issued a press release on 27 September 2010 entitled: World Bank Study Urges Air Services Liberalization to Promote Safety and Development in Africa. Mr Charles Schlumberger, the World Bank's lead air transport specialist and author of the study Open Skies for Africa - Implementing the Yamoussoukro Decision pleaded: "A historic opportunity is being missed. Ten countries have not signed on to or completed proper ratification of this decision, and many others that are signatories have not implemented it." What really caught my eye was the following comment: "Meantime, most countries in Africa that have abandoned their ailing carriers and opened up to foreign operators now have air services, both passenger and freight, that are more efficient, safer, and with more competitive prices." The press release continues: countries that have abandoned national airlines are in a position to redirect state resources thus saved to investments that have more positive impact on economic development. In addition, lower transport costs achieved through enhanced competition reduces a significant trade barrier for African countries, while also improving prospects for increased tourism.

(Reference to tourism brings to mind a passage from The Challenge for Africa by Mrs Wangari Maathai, the Nobel Peace Prize winner: "The tourism economy, while an important sector in a number of African countries, is often conducted at a remove from the African people themselves: the tourists arrive on planes owned by foreign companies and often stay in hotels or lodges owned by foreign corporations; they exchange money at foreign banks and may be transported to wildlife reserves on buses or in taxis also owned by foreign companies. Few revenues reach ordinary Africans.")

Readers will hopefully forgive me for not being brave or foolhardy enough to disagree with the World Bank. If the World Bank says that some countries should abandon their national airlines, I daresay it has a point. For too many years, governments and peoples have been subjected annually to the 'black-hole' syndrome of their national airlines requesting additional subsidisation (again) while too often offering unreliable, infrequent, inconvenient and expensive services.

But, on a national level, I would query whether governments (with very few exceptions) will be any the more inclined to ask themselves the bald emotive question: "Should we abandon our national airline: Yes or No?" However, they might find the inspiration to ask themselves the more objective question: "What is the fair market value of our aviation potential and what is the best way of realising it?"

From my aircraft-centred perspective, non-implementation of the Yamoussoukro Decision across the continent has demonstrably NOT been the best way of realising value for individual countries as it has not been possible to grow fleets to the requisite size where the 'virtuous circle' rules of cheap pricing, extended manufacturer warranties and low finance costs apply. Indeed, it could be argued that non-implementation of the Yamoussoukro Decision (and the Declaration before it) has been the single-most influential factor in creating a vacuum that non-African airlines have been only too keen to fill.

What to do ?
So, on the one hand, some countries still resist implementation of the Yamoussoukro Decision and, on the other, airlines still have great difficulty in sourcing affordable financing for replacing and/or renewing their fleets. In the August-September 2010 edition of this magazine, I offered the following perspective on the financing prospects of African airlines: "With Middle Eastern airlines growing inexorably and European airlines penetrating African skies more and more (with US airlines in tow), maintaining the relative attractiveness of African airlines as borrowers and/or lessees will (with some exceptions) continue to be an uphill battle. Consolidation and rationalisation will no doubt play a part in making African aviation more efficient over time but enormous real and opportunity value will be foregone unless and until Africa and its friends put in place supply-side solutions for African carriers."

While I was preparing the related article, I received an email from Ato Girma Wake, outgoing CEO of Ethiopian Airlines, containing the following words of wisdom: - If we want to buy outright from the OEMs, despite the existence of Export Credit Financing, it is very difficult to raise Pre-Delivery Payments which amount up to 30% of the aircraft list price (not the negotiated price of aircraft, which is very different). Even though this amount is partly [recovered by the airline] on the aircraft delivery day, it still is a big problem for many African airlines to raise at the beginning.

- Export Credit Financing covers only 85% of actual aircraft price and airlines will either have to finance the difference from own funds or will have to get commercial banks that are willing to offer junior loans for the purpose - usually at a rate which makes it [a very expensive proposition]."

In the short space of time since then, even the relative advantages of export-credit financing (the main source of secured financing for those African airlines in a position to acquire new aircraft) are under threat, as reported by the Wall Street Journal on 7 October 2010: "Twenty-five top airlines from the U.S. and Europe have joined to oppose billions of dollars in controversial government loan guarantees to their competitors for airplanes bought from Airbus and Boeing Co."
So, is there a way to achieve, at least in part, the necessary economies of scale for African airlines to remain competitive in their re-fleeting initiatives and at the same time assist viable African airlines to achieve their potential, irrespective of their ultimate ownership? Yes: by the establishment of a commercial aircraft finance entity (CAFE) for Africa, premised partly on the recognition that, due to Africa's geopolitical uniqueness, aircraft form part of the continent's infrastructure. Aircraft=Bridge: an aircraft is not so much a bus as a bridge. (Pour les francophones: <<c'est plutôt un pont qu'un avion>>). Should aircraft be considered to form part of the continent's infrastructure, they could seek to qualify for a portion of the $45 Billion spent annually thereon. Aircraft leasing and financing being a highly profitable business (typically double-digit annual returns), the returns on any infrastructural investment could be significant.

CAFE's equity capital could be raised from professional aircraft investors and those vehicles that traditionally engage in African infrastructure financing (e.g. ADF, AfDB, ICA) and secured debt could be sourced from a club of banks active in the aviation industry globally and possibly a syndicate of African banks and/or insurance companies, if prompted by the likes of AfDB and well disposed international lenders. (In due course, CAFE should also qualify for export-credit guaranteed financing.)

Consider the benefits:
1. CAFE's operations would be  transparent, 'ring-fenced', easy to understand and profitable;

2. CAFÉ's leasing/financing of new and used aircraft to airlines would introduce an additional layer of discipline (lessee covenants and the monitoring thereof) in terms of safety and efficiency;

3. Airlines would benefit from a new, reliable and (within reason) customer-friendly source of aircraft supply;

4. It would ultimately be in the best interests of both CAFE and the airlines to negotiate equitable maintenance reserve and redelivery conditions;

5. Existence of CAFE would provide a new bench-mark for leasing terms and conditions in Africa; and

6. Ownership of CAFE should be monetizable in whole or in part over time, depending on the success of the program. Should smaller nations fear that CAFE would be monopolized by the larger nations or their carriers, protections could be put in place that would ensure access to CAFE for all qualifying airlines (i.e. those with viable business models).

It is important to emphasize that the case for CAFE is neither a call to protectionism nor an endorsement of African ownership. In simple terms, our argument centres only on value. Successful implementation of CAFE will enable viable airlines to modernize their fleets with less difficulty, thereby competing more effectively and serving their stakeholders better. Should consolidation occur in due course (and it is far more likely than not if international merger activity is a guide), successful implementation of CAFE will help owners of viable African airlines to negotiate from a position of strength in such eventuality. Mrs Wangari Maathai also writes in her book that "it cannot be overemphasized: Africans must decide to manage their natural resources responsibly and accountably."  Africa's skies form part of its natural resources and the Future is happening now. Time for CAFE.

mtie@crabtree-capital.com

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