Removing Blockades To Aircraft Funding In Africa

Compelling Trends

There is a remarkable shift in the trend of airline operation and evolution globally which is underlain by the quest for economic and ecological efficiency gains, as well as enhanced safety, compelled by global pressures and self-imposed regulation within the aviation industry. Airlines are now required to produce incrementally reduced levels of carbon dioxide (CO2) and other environmentally harmful gases, and noise as well. Thus, aircraft makers anticipate accelerated retirement of older aircraft over the next 20 years. In addition, as fuel cost gulps up about 30-40 per cent of expenditure of most airlines, the use of less fuel per flight operation becomes crucial for airlines. Operators are, therefore, compelled to seek aircraft and technologies that provide eco-efficiencies and help their bottomlines overall. Says Bombardier: "It may not be economically feasible to retrofit older aircraft cockpits with the required avionics technology, rendering these types obsolete…Planned airspace modernization in the United States (FAA NextGen), in Europe (Single European Sky) and elsewhere will require advanced flight deck avionics technologies. These dynamics will result in a reduction of the business jet fleet half-life (age at which 50% of aircraft have retired) from 40 years in 2010 to 30 years in 2030. The amount of aircraft that retire within the forecast period will vary considerably by region." For Africa, as there are yet no stringent ecological restrictions within the continent - maybe due to low volume of traffic compared to other regions (Africa controls 3% of global traffic) - the retirements of ageing aircraft may be relatively slower in the short- to medium-terms. Domestic and regional airlines in Africa may face the immediate challenge of economics as key consideration for seeking replacement aircraft. However, State regulations and passenger preferences could still drive airlines to go for more modern aircraft as cover 5already seen in Nigeria where there is a ban on aircraft over 22 years. The demand for newer aircraft would be more pronounced among African carriers on long-haul and regional operations. Also, though helicopters are mainly for charter operations especially in the on-shore and off-shore oil services in Angola, Nigeria, etc., their age, customer specifications and impact of new technologies would also demand their replacement over the next 10 to 20 years in Africa. Airbus and Boeing say resilience of passenger demand following industry and economic crises in the last decade gives confidence over sustainable demand for air travel. By 2030, Airbus predicts there will be 87 mega aviation cities globally with some in Africa. Already, cities like Accra, Lagos, Cairo, Luanda, Addis, Johannesburg, etc. are having more than 10,000 daily long-haul passengers, with increasing participation of African airlines. Anticipated liberalization will equally give African airlines access to African markets, creating need for more aircraft for expansion.

Aircraft Needed

According to Boeing, Africa would require about 800 new aircraft over the next 20 years. However, some may adopt older airplanes from the re-use market as a stop-gap. The Boeing 767 for Kenya Airways is makeshift pending the delivery of the game-changing Boeing 787; Ethiopian also resorted to leasing airplanes like the B757 awaiting the arrival of the 787. For regional aircraft, Bombardier believes the 20- to 59-seat segment remains a key component of the regional airline industry. Demand for new aircraft in this segment is expected to arise in the latter half of Bombardier's forecast period (2010-2030), with some 300 units delivered, and in particular, "Russia, Africa and Latin America will see considerable absorption of used 50-seat regional jets."

Aircraft Cost

The cost of airplanes for African airlines in the near- to longer-terms comes to billions of US dollars. Airbus' least price for the A318 is $65.2 million, for example, while Boeing's 737-600 comes at $59.4 million. Prices could go up $290 million and more. For turboprops, costs could be anywhere around $15 million and higher.cover 1 Generally, the re-use market sees lower costs, though the efficiencies could also be reduced as age and flight cycles increase, etc. Fleet renewal is continuing in various African airlines showing that though new airplanes are costly they are equally essential for African carriers. This passes the message that Africa is not a refuse dump for old or retired airplanes. The main challenge, however, is to ensure that more African carriers can acquire modern aircraft as it becomes more imperative to use aircraft with greater efficiencies.

Removing Hindrances To Aircraft Funding

For African airlines to have easier access to aircraft funding, deliberate efforts are compulsory to eliminate blockades barring airlines from sources of aircraft funding. Mainly, airlines rely on banks and financial institutions, as well as export credit agencies (ECAs), government guarantees and initial public offer (IPOs), etc., to raise funding for aircraft acquisition. The relationship or perception between airlines and these sources need be healthy; for IPOs, airlines must secure investor confidence. Some African governments have become more supportive to well performing airlines such as South African Airways and Kenya Airways, according to sources from these airlines. The US Ex-Im Bank has participated significantly in aircraft acquisitions in Africa over the years and shows renewed commitment to more African airlines' acquisitions like Rwandair's B737-800, Precision Air ATR-42 cover 2and -72, Kenya Airways B787, and even to small domestic and charter carriers in Africa that have removed blockages that discourage funding. Furthermore, it is widely held that bigger airlines in Africa are more likely to get funding support than smaller carriers. Conversely, airlines like Precision Air and South African Express Airways, Air Namibia and Rwandair are not as big as EgyptAir, Kenya Airways or Ethiopian which lead fleet transformation in Africa; but they have also attracted funding for new aircraft.

This simply means that all airlines must adopt healthier business models and management systems to become more attractive to financiers. South African Airways' ability to come back into the black is predicated upon the airline's resolve to cut costs which makes revenue more meaningful, according to a Manager at the airline.

Further, there are concerns that the economic crisis in Europe has cut down interest of financial institutions in the region in funding aircraft acquisitions. The impact of this, however, is expected to be mitigated by renewed resolve of the US Ex-Im Bank towards Africa, added to strengthening funding energies from China, Japan and India. BOC (Bank of China) Aviation, for instance, recently signed first-ever agreement with South African Airways for the lease of two new A320-200 aircraft scheduled for delivery in 2012. Ms. Siza Mizmela, Chief Executive Officer of South African Airways, anticipates "a long-term relationship," and Mr. Steven Townend, Deputy Managing Director & Chief Commercial Officer of BOC Aviation looks forward to "building on this initial deal."

The Cape Town Convention also provides easier access to aircraft, and more States are encouraged to ratify and domesticate the Convention to benefit their airlines. According to Mr. Kostya Zolotusky, Managing Director, Capital Markets Development, Boeing Capital, as the number of signatories to the Cape Town Treaty - which ensures the rights of aircraft creditors - continues to expand, "airplane assets have recently become even more valuable components of financier portfolios around the world." However, to clear the hindrance of airlines' cover 3inability to benefit from the Convention, States must ratify and domesticate the Convention. Lured by robust economic trends, African financial institutions also show interest in funding aircraft acquisitions, though some tie this to stringent conditionalities. In their present state, however, even willing financial institutions need to strengthen their financial position to gain capacity to support huge cost of aircraft.

Airlines can also consider the option of leasing or sale and lease back of aircraft - as against outright purchase, which would require greater funding and limit the number of willing financiers. Mr. Zolotusky says this is a current trend among airlines. He also notes that observers have spotted trends, over the years among lenders, of placing greater emphasis on the value of airplanes as assets, and relying less on airline creditworthiness as the basis for funding airplane purchases. This is because "the value of airplane assets had proven very solid, both through cyclical industry downturns and a punishing series of economic shocks, including geopolitical conflicts, spiking oil prices, regional currency crises, the SARS epidemic, and even the financial turmoil of the global recession," he says. While aircraft collateral has greatly expanded the scale and scope of aviation finance, airline credits have remained an important part of the overall industry financing structure, he also adds, stating that "this raised the question of which side of the airplane-asset/airline-credit equation investor confidence would settle in the long-term." Thus, African airlines can explore opportunities provided by these considerations.

Further, the notion that Africa is a region with poor credit rating has been largely disproved by several successful aircraft deals in all parts of Africa. While airline management must be improved, airlines and other partners including governments should ensure they bridge this gap of understanding to encourage financiers see the good side of African airlines and tap into the financing cover 4opportunities in Africa. And Economic and fiscal policies in Africa must be such that would allow African airlines to grow within and outside State boundaries,  which would be driven by liberalization and market access for African airlines through the unreserved implementation of the Yamoussoukro Decision.

This will assure financiers that airlines have the best market environment to flourish given Africa's growing economy. At the African Union level, States should ensure control of civil or political crises to encourage financiers to support airlines in these regions in Africa.

Last Line

The growing need for newer and replacement aircraft in Africa is not in doubt given impelling circumstances driving airline activities today. Whereas airlines face difficulties to acquire needed aircraft, it is essential that African airlines clean up their operations from within, and make greater effort to understand the array of finance sources available in the market and the preferences of various financiers. African airlines, like others elsewhere, must keep to global aircraft benchmarks to remain competitive.

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