THE AFRICAN AIRLINE INDUSTRY IN THE EVOLVING MARKET PLACE

A Presentation to TAAG Angola Airlines

15 August, 2011

Global Airline Industry in 2010 African Airlines Performance Airline Cooperation in Africa

Airlines Main Challenges

Way Forward Conclusion

Industry profit of $15 billion 2010

2009 was a loss of 10 billion

African airlines profit in 2010 was $100 million

Globally fuel accounted for 26% of total airline operating

cost

Over 1200 new jets and turboprops were delivered in 2010

High fuel prices, volcanic eruption and tsunami in Japan & political upheavals in North Africa will negatively impact the industry

Profit forecasts for 2011 is about $4 billion African airlines expect a loss of about $100 million Almost 1400 new aircraft are due to be delivered in 2011

Revenue Tonne-Kilometres per Region - IATA Schedule Services - 2010

1,400,000 1,230,788 1,200,000 996,991 1,000,000 800,000 600,000 400,000 197,521 200,000 97,375 332,018 1,025,961

Africa

Asia Pacific

Euroepe

L/America

Middle East

N/America

Domestic

International

Systemwide

African achieved an increase of 6% in 2010 on the consistent year on year positive growth The FIFA World Cup hosted by South Africa in 2010 largely accounted for the 6% growth Tourist arrival in Africa in 2010 was 48.8 million

Global Revenue Tonne-Kilometres Performed per Region - IATA Schedule Services - 2010
Africa 2%
L/America 5% Middle East 9% Asia Pacific 32%

Euroepe 26%

N/America 26%

African airlines market share is small, 2.6% Most airlines are small and under-capitalised African sky is mostly dominated by European and Middle East

New airlines from Asia, North America & Canada entering African markets

In the 1970s and 1980s Africa had 26 inter-continental airlines (including Air Afrique, owned by 11 States) This has been reduced to about 9 airlines

Some may further disappear

In most of the francophone countries, Air France has a de facto monopoly Focus must be on safety, cooperation, economic regulation and internal market liberalisation

African Airline Industry in the 1970s & 80s

KEY
Countries that did not have long haul operators Countries with budding airlines. Dominant carriers are foreign airlines Countries that had vibrant long-haul airlines sharing the market with external competitors

Total Passengers Carried by African Airlines 2005 - 2010

70,000,000 60,000,000 50,000,000 40,000,000 30,000,000 20,000,000 10,000,000 -

Passenger numbers have been growing consistently except for 2009 when there was a slight drop due to the impact of the global financial crisis and its impact of tourists inflows 2010 passenger numbers increased by 13.7% compared to 2009

2005
(10,000,000)
Source: AFRAA/IATA

2006

2007

2008

2009

2010

Yealy Growth

Total passengers carried by African Airlines in 2010 was 60,942 million

African Airlines Performance - 2010

African Airlines Performance - 2010

There has consistently been overcapacity by African airlines on both domestic and international routes This results in the low utilisation of aircraft and lower than industry average load factors 2010 load factor was 69.1% compared with global average of 78.2%

The African scheduled passenger, cargo and charter airlines have a fleet of 1,141
684 are western built jets 392 turbo propellers 65 aircraft from the former USSR

Financial Performance

African airlines profit for 2010 was $100 million KQ & ET made record profits in 2010 Loss expected in 2011 of USD100 million Due to high fuel costs and political disturbances in North Africa in 2011

Despite challenges, some airlines expected to be profitable in 2011

Examples of successful experiences

KQ/KLM strategic alliance so far a great success

Balance through diverse ownership structure

KLM/AF - 26% Foreign institutional investors - 4.47% Foreign individual investors - 1.39% Kenyan government - 23% Kenyan institutional investors - 14.2% Kenyan individual investors - 30.94%

Conducive political and regulatory environment

KQ/Precision Air - 49/51% Ownership

The Group Celestair Model

One holding company (AKFED) establishing and holding equity shares in several national carriers
Air Uganda 100% Air Burkina 79.4%

CAM 51%
Technical Strategic partner An affiliated Company Meridian Aircraft capacity provided through a common leasing company (Finaircraft)

Objective is to achieve synergy and economies of scale through membership in the groups own alliance

The ASKY model

Private sector driven Multi-national institutional/individual ownership Technical/management partnership with Ethiopian Airline Operations to started 2010 Operates flights to 19 domestic and regional destinations

Some unsuccessful experiences

Air Afrique Multi-national carrier (11 African States) Air Senegal/Royal Air Maroc South African Airways/Air Tanzania Virgin Nigeria/Virgin Atlantic

British Airways/Regional Air

Can African airlines survive the Global liberalisation and consolidation? Thriving African carriers under serious attack Consolidation across borders and continents in progress Non-African airlines are establishing subsidiaries and signing franchise agreements BA/Comair, Emirates/Senegal Airlines

Small size and limited network Lack of commercial cooperation

Market access and traffic rights constraints

Ageing fleet
Safety and security perception

Aggressive external
competition

Brain-drain and poaching of

skilled human resources

EU unilateral regulations
Frequent changes of top

High cost of operations fuel,

taxes, charges, fees

management Corporate governance issues

Brain Drain
A major threat to the survival and growth of many African airlines AFRAA has consistently drawn the attention of African aviation stakeholders to this threat and called for action AFRAA has focused training on safety and managerial skills development of airlines

Environmental Issues

Safety, security, the environment and profitability are the key

challenges confronting the industry

Airlines encouraged to modernize their fleet to reduce emissions AFRAA lobbying against the imposition of unilateral regulation of aspects of the industry (EU ETS) by the EU

Liberalise market and work together

Implement the Yamoussoukro Decision to stimulate more flights across Africa

Liberalisation will speed up growth and prepare African airlines internally for external competition

Establish commercial cooperation with other African airlines and expand your market coverage

Some progress on liberalisation have been made in West Africa

Management Stability and Autonomy

Shield airlines management from Government interference in day-today operations Frequent changes of CEOs frustrate implementation of plans

Stringent Cost Management

Modernise fleet and adopt ICT to lower operating cost and deliver competitive service

The emergence of Low Cost airlines (LCCs) should compel Africans to adopt more rigorous cost management strategies

Lobby government to lower taxes on air travel. This will make travel cheaper and stimulate more demand

Adhere to Industry Best Safety Practices

Be IOSA registered
Observe all ICAO recommended safety practices Provide support to Civil Aviation Authority in the discharge of its safety oversight responsibilities

Train and continuously retrain staff to achieve high productivity Actively participate in AFRAA and other industry programmes to keep abreast with new developments States should ratify Cape Town Convention and Protocols to reduce the cost of new fleet acquisition

Africa is one of the fastest growing markets in the world This has resulted in stiff competition and the influx of many foreign airlines

The real opportunity for African airlines is in growing the intraAfrican market

Cooperation among airlines will speed up market penetration, lower

market entry costs and stimulate demand

Internal liberalisation should be embraced to speed up market access

Need for stability in management and tenure

Embrace technology and modern business practices

States and regional organisations should take a unified positions

against the EU unilateral regulation of some aspects of the

industry