Transport Global Practice Navigating Beyond COVID-19 Airline Recovery and Regulatory Reform Opportunities in Southern Africa September 2022 © 2022 The International Bank for Reconstruction and Development/THE WORLD BANK 1818 H Street NW Washington, DC 20433 USA All rights reserved Contents Acronyms v Eswatini 34 Acknowledgements vi South Africa 34 General Considerations 39 Brief Summary vii Executive Summary ix 5. Options for Restructuring State-Owned Airlines 45 Airlines’ Business Models and Economic Efficiency 45 Recent Performance of the Air Transport Sector ix Airline Restructuring Options 50 The Difficult Pre-Pandemic Context xi Namibia 50 Airline Restructuring Options xii Botswana 50 Namibia xiv South Africa 51 Botswana xiv South Africa xv 6. Regulatory Challenges and Reform Opportunities 54 Regulatory Challenges and Reform Opportunities xvi Market Regulation 54 South Africa 55 1. Introduction 1 Namibia 56 Botswana 57 2. Air Transport Development in the Southern Prospects for Further Regional and Intercontinental African Region 4 Market Openness 57 Further liberalize the African market 57 3. Impact of COVID-19 on Air Transport in the Southern Increase participation by non-African airlines 58 African Region 9 Encourage more private sector participation 60 Traffic and Connectivity Impact 9 Apply competition rules broadly 61 Tourism Impact 13 Improve safety regulation and standards 63 Financial Impact 16 State Aid in Response to COVID-19 17 7. Summary of Policy Recommendations 68 Recovery Prospects 17 Appendix 76 4. Airline Industry’s Evolution and Preferred Appendix A: Airlines' Market Shares 76 Business Models 26 Appendix B: Details of the Financial Performance of Prominence of State-Owned Airlines 27 South African Airways Group Airlines 77 Botswana 28 Appendix C: Regulatory and Institutional Landscape 79 Namibia 30 Appendix D: Highlights from Competition Commission Cases 82 Appendix E: Country Profiles 91 iii NAVIGATING BEYOND COVID-19: AIRLINE RECOVERY AND REGULATORY REFORM OPPORTUNITIES IN SOUTHERN AFRICA Figures Tables Figure 2.1: International Air Transport Association Air Table 2.1: IATA Air Connectivity Scores, 2009 to 2019 5 Connectivity Scores, 2019 6 Table 4.1: Air Botswana’s Losses and Government Figure 3.1: Airline Capacity Evolution Across African Grants Received 29 Regions (Base = January 2019 = 100) 10 Table 4.2: Annual Subsidies to Air Namibia 31 Figure 3.2: All Airports and Regional Networks Saw a Table 4.3: Financial Assistance to South African Substantial Decline in Air Passenger Flows 12 Airways Since 1999 (R, thousands) 37 Figure 3.3: Evolution of Air Transport Country Table 4.4: Funding for South African Airways 2.0 39 Network, Monthly Flights in 2020 14 Figure 3.4: Number of Inbound International Tourists Table 5.1: Airline Business Models and Their in the Southern African Region 15 Value Propositions 47 Figure 3.5: Annual Inbound Tourists to South Africa from Main Source Market Areas 16 Table 7.1: Immediate Policy Actions for Air Figure 3.6: Southern African Region Capacity Travel Recovery 68 Recovery Forecast 18 Table 7.2: Menu of Policy Responses for a Figure 3.7: Total Percentage Decline in Passengers Competitive and Safe Air Transport Carried and Flights (month on month of Sector—Short- to Medium-Term Actions 70 base year 2019) 18 Figure 3.8: Average Loads Carried per Flight at All Table A.1: Foreign Airlines’ Market Share in 2020 76 Airports Company of South Africa Table B.1: Listing of SAA Bottom-Line Losses Ltd. Airports 19 (Rand, billions) 78 Figure 3.9: Percentage Decline of Regional Flights Table C.1: Regulatory and Institutional Landscape 79 and Regional Passenger Throughput at Table C.2: Liberalization Status of BASAs in Southern All Airports Company of South Africa African Custom Union Countries 80 Ltd. Airports 19 Table D.1: Competition Policy Cases in South Africa 85 Figure 3.10: Average Seats Per Departure Across Africa (month on month, 2019 vs. 2021) 20 Figure 4.1: Air Botswana’s Losses and Government Grants Received 30 Figure 4.2: Private Airlines Increased Their Market Share to 90 Percent in 2021 35 Figure 4.3: South African Airways’ Losses Between 2007 and 2020 37 Figure 5.1: Airline Business Models by Passenger Segments 46 Figure 6.1: Share of Yamoussoukro Decision-Compliant Bilateral Air Service Agreements across the Southern African Development Community Members 55 Figure 6.2: Lesotho and Eswatini Lag Far Behind on Compliance with the International Civil Aviation Organization’s Universal Safety Oversight Audit Programme 64 iv ACRONYMS Acronyms AAC Average Avoidable Cost GACI Global Airport Connectivity Index AASA Airlines Association of Southern Africa GDP gross domestic product ACSA Airports Company of South Africa Ltd. IASC International Air Services Council AfCFTA African Continental Free Trade Area IATA International Air Transport Association ANSP air navigation service provider ICAO International Civil Aviation Organization AOC air operator certificate LCC low-cost carrier AsgiSA Accelerated and Shared Growth Initiative NACC Namibia Competition Commission for South Africa OAG Official Airline Guide ASK Available Seat Kilometer OTD On-Time Departure ASLC Air Services Licensing Council PPP public-private partnership ATNS Air Traffic and Navigation Services PSO public service obligation AUC African Union Commission RPK revenue passenger kilometer AVC average variable cost SAA South African Airways BARSA Board of Airline Representatives of SAATM Single African Air Transport Market South Africa SACAA South African Civil Aviation Authority BASA Bilateral Air Service Agreement SADC Southern African Development Community CAAB Civil Aviation Authority of Botswana SASO SADC Aviation Safety Organization CAGR compound annual growth rate SAX SA Express CASK Cost per Available Seat Kilometer SEP Strategic Equity Partner DOT Department of Transport SOE state-owned enterprise EAS the United States’ Essential Air Service (EAS) ULCC ultra-low-cost carrier EI Effective Implementation score USOAP ICAO’s Universal Safety Oversight EU European Union Audit Programme FDI foreign direct investment WoS Whole of State FSC full-service carrier YD Yamoussoukro Decision FSNC full-service network carrier v NAVIGATING BEYOND COVID-19: AIRLINE RECOVERY AND REGULATORY REFORM OPPORTUNITIES IN SOUTHERN AFRICA Acknowledgments This report was prepared by a World Bank team The team appreciates the support provided by led by Megersa Abate (Transport Economist, Task Desta Woldeargey (Senior Operations Assistant, Team Leader, ITRGK), Charles Schlumberger IAET2) and by Ashish Kumar Sen who edited the (Lead Air Transport Specialist, ITRGK), Caroline report, and by Cybil Maradza for design work. Otonglo (Senior Infrastructure Finance Specialist, IPGFG), Ruxandra Brutaru (Consultant), Dr. The World Bank team would like to thank its Joachim Vermooten (Consultant), Professor counterparts in Botswana, Eswatini, Lesotho, Anming Zhang (Consultant), Oghenevwogaga Namibia, and South Arica for fruitful discussions, Udjo (Consultant), Reshma Sheoraj (Consultant), consultations, ideas, and access to data and and Sylvain Bosch (Consultant). The report greatly information. This work is a product of the staff benefited from the following peer reviewers: of the World Bank. The findings, interpretations, Daniel Saslavsky (Economist, ETIRI), Christopher and conclusions expressed in this work do not J. De Serio (Senior Transport Specialist, IAET1), necessarily reflect the views of the Executive and Bertram Boie (Senior Digital Development Directors of the World Bank or the governments Specialist, IDD05). they represent. The World Bank does not guarantee the accuracy of the data included in The team is grateful for the guidance provided by this work. The boundaries, colors, denominations, Marie Francoise Marie-Nelly (Country Director, and other information shown on any map in this AECS1), Maria Marcela Silva (Practice Manager, work do not imply any judgment on the part of IAET2), Binyam Reja (Practice Manager, ITRGK), the World Bank concerning the legal status of any Ziad Nakat (Senior Transport Specialist, IAET2), territory or the endorsement or acceptance of and Bekele Debele (Sector Leader, SAEDR). such boundaries. vi Brief Summary This policy paper explores airline restructuring and pre-pandemic demand, predominantly connecting regulatory reform challenges and opportunities to South Africa’s economic points, allowing South in the Southern African region with particular African and Namibian airlines to operate cabotage focus on Botswana, Eswatini, Lesotho, Namibia services to/from Namibia to the world would and South Africa. Prior to the COVID-19 pandemic maximize the country’s potential to reestablish crisis, the air transport sector in the region faced connectivity on routes that make financial sense. multipronged challenges, including those related to To maintain domestic connectivity, a PSO for those economic regulation, profitability, safety, security, and routes where no operation is feasible, but necessary sustainable financing of critical infrastructure. Much from an economic and security perspective, can be like the rest of Africa, the region is characterized by the evaluated and publicly tendered. dominance of troubled state-owned airlines which have been unable to generate meaningful positive In Botswana, an objective and fundamental returns for many years due to structural inefficiencies assessment of Air Botswana’s viability based and weak governance. They faced elevated costs and on realistic assumptions is necessary. A regional needed several bailouts and turnaround strategies, carrier would be the ideal partner to benefit albeit unsuccessful. from the network scale and spread of unit costs. Similarly, a private majority investor would reduce The new realities created by the pandemic the airlines’ dependence on state grants and foster should become catalysts for airlines business the development of a cost-savvy environment, model improvements. That will entail dropping ringfencing the airline from political influence. With unprofitable routes (unless operated under public promulgation of the airline transition legislation service obligations (PSO)) and rightsizing resources in 2022, there is new momentum to implement a to requirements (including human capital and privatization plan, but there appears to be limited fleets) and restructuring debt obligations. Allowing preparatory work to put Air Botswana on the market. privately owned or publicly traded airlines to operate This calls for a thorough due diligence on the airline within an integrated domestic area comprising the to assess its valuation and viability in the short to Southern African states will naturally eliminate long-term, including corporatization strategies that the need for liquidity injection from state budgets. might result in its restructuring. Restructuring of state-owned carriers should be a priority by establishing the minimum economic scale In South Africa, the transitionary SAA Group, which of activities as part of upfront funded restructuring is still in the process of finalizing its new ownership plans and by releasing funding upon successful structure under a strategic equity partnership, has completion of specific reforms. Public disclosure relaunched flights from its Johannesburg hub to of annual financial and operational reports are also main domestic and regional airports. Caution must key policy options for improving sector governance. be taken to ensure avoidance of overcapacity, which Smaller aviation markets, such as Botswana, has been market feature in this market for years. Namibia, Eswatini, and Lesotho, could consider In the current constrained markets, airlines that the creation of a transregional air operator. Specific have reported profits in the past (FlySafair, Comair, country considerations include: and Airlink) can easily become unprofitable and insolvent, resulting in value destruction in the sector. In Namibia, further steps need to be taken to enable Comair is the latest casualty in this regard, being foreign direct investment (FDI) to cover demand placed under Provisional Liquidation in June 2022. adequately and facilitate sufficient capitalization Regulators and shareholders, therefore, should of domestic airlines. Because of the low level of ensure that the state-owned airlines are not initiating vii NAVIGATING BEYOND COVID-19: AIRLINE RECOVERY AND REGULATORY REFORM OPPORTUNITIES IN SOUTHERN AFRICA operation on routes where there is overcapacity, as owned airlines in South Africa and Namibia this would result in unnecessary spending of public demonstrates that the connectivity previously resources. Economic merits should be the primary provided by state-owned airlines can be replaced consideration for granting of traffic rights, additional by the private sector and foreign airlines frequencies, and points of service. without any subsidies. This implies that state- owned carriers are not indispensable. In fact, The pandemic also presents opportunities to tackle it demonstrates that once market demand has perennial regulatory challenges through: been established and market entry is possible, new suppliers (airlines) will enter the market. 1 Similarly, all (or most) of the economic benefits previously ascribed to the state-owned airline are Further liberalization of the African market: not lost upon the demise of that airline. Many studies have shown the positive impact of liberalization, especially in Namibia and Botswana 4 where passenger volumes have increased. For the Single African Air Transport Market (SAATM) to fully Application of competition rules broadly: State function, countries would have to allow unlimited fifth assistance to airlines needs to be competitively neutral freedom rights that would permit airlines to develop so that it does not distort competition and tilt the a minimum network and generate passenger density playing field against other firms in the aviation industry. at their hub. This would result in cost reduction due The operation and subsidy of air services through a to increased utilization of resources. Within the state-owned airline is costly and diverts funding from context of limited post-COVID-19 operations, fifth other government projects that may have a greater freedom rights would enable access to high-volume need in the post-pandemic recovery period. Recent seat capacity that could sustain lower prices than on history demonstrates that subsidized airlines do not dedicated point-to-point flights. want reform or turnaround. States, should, therefore, allow the exit of state-owned airlines to enable private 2 sector entry into the markets. More participation by non-African airlines: Further 5 liberalization of the intercontinental market involves a delicate balancing act between the desire to jump- Improvement of safety regulation and standards: start the tourism and travel sector vis-à-vis protecting With average Effective Implementation (EI) scores against market erosion for home-based carriers far below 50 percent, Lesotho and Eswatini lag in and airports in the region. The encouragement to terms of compliance with international standards. As foreign airlines to enter and compete is essential for countries with few operators and light activity, both tourism development, especially in the generation may benefit from pooling expert resources with other of inbound tourists from significant tourism source countries in the region. While the SADC Aviation Safety markets. Due to their large network scope, foreign Organization (SASO) exists, it lacks strong political airlines would only incur incremental route costs will and support to provide much needed oversight rather than the full cost of a limited operations with functions among small operators/charters/private underutilized aircraft, which is typical of local airlines. aircraft operators in the region. Strengthening such regional institutions would relieve the pressure on 3 training investment and the ongoing maintenance of compensation necessary to retain experienced Encouragement of more private sector personnel. Development partners could support participation: The entry and expansion of private such activities through regional bodies or through sector airlines following the demise of state- bilateral engagements. viii Executive Summary The objective of this policy paper is to explore policy and operational strategies to build back a safe and competitive air transport sector in the aftermath of the COVID-19 pandemic In 2020, international passengers in select Southern African countries. Specifically, it reviews the in Africa declind by status of the sector in Botswana, Eswatini, Lesotho, Namibia, 70.5% and South Africa and explores airlines’ reform options and policy directions to rebuild an air transport sector that meets international, regional, and local demand. The paper builds on: (1) a recent World Bank policy note that reviews pre-COVID-19 sector challenges in Africa and recommends operational and policy responses to mitigate the impact of the pandemic (Abate et al. 2022), and (2) a technical paper on the impact of the pandemic on air transport connectivity in the Southern Africa Domestic travel fell by region (Zhang et al, forthcoming). Recent Performance of the Air Transport Sector 63.2% The COVID-19 pandemic is posing an existential threat to the air transport sector in Africa. In 2020, the number of international passengers in Africa declined by 70.5 percent compared to 2019, while domestic travel fell by 63.2 percent. The latest International Air Transport Association (IATA) forecast positions Africa at a 76 percent passenger recovery when compared with the baseline year (2019), seven points behind the global average (IATA 2022). Southern Africa saw a 63.6 percent decline in air traffic due to COVID-19 compared to 2019. In 2020, only 12 of 32 foreign ix NAVIGATING BEYOND COVID-19: AIRLINE RECOVERY AND REGULATORY REFORM OPPORTUNITIES IN SOUTHERN AFRICA airlines that served South Africa before the pandemic were still operating due to COVID-19-related restrictions. Most have restarted scheduled service since 2021, but at a smaller scale. The decrease in connectivity and travel restrictions also meant a reduced volume of inbound international tourism to the Southern Africa Region. The pandemic reduced tourism’s contribution to the gross domestic product (GDP) by half, as the region generated only US$13.26 million in tourism receipts and reduced by a third employment in the aviation sector in 2020.i Travel to and from the region was banned by most tourism source countries, which was exacerbated by the identification and announcement of a new Beta and the Omicron variant of COVID-19 (which were first detected in South Africa) and the slow pace of vaccination rollout. Reports indicate that by April 2021, South Africa faced more travel restrictions than any other country in the world. Furthermore, the Omicron variant was identified in South Africa on November 24, 2021, which triggered the imposition of new and harsher travel restrictions in many parts of the world. By December 13, 2021, 90 countries had implemented travel bans on South Africa, with important tourist source countries fully closing their borders. Globally, airlines have been receiving substantial government support to cope with the impact of the pandemic—US$211 billion (confirmed) and US$9.2 billion (tentative) as of May The Southern African Region 2022. Africa’s share is rather small—US$4.9 billion (confirmed) generated only and US$1.3 billion (tentative), or 2.8 percent of the global total— which mirrors African governments’ constrained fiscal space and their ability as well as willingness to rescue the sector. Of the US$13.26 MILLION in tourism receipts, in 2020. confirmed amount, US$2.94 billion (60 percent) represented airline bailouts through equity injection and US$1.9 billion was provided as loans. The bulk of the support has been focused on a few carriers, leaving out providers of infrastructure (airports, air navigation services) and other segments of the aviation supply chain (service providers at airports, airlines suppliers, and related industries). Seventeen African governments provided support to their airline industries; the largest assistance worth R 26.9 billion (about US$1.89 billion) being provided by the South African government for the SAA Group. Most of this sum is not directly linked to COVID-19-related challenges, but to legacy debt and business rescue restructuring funding. Air Botswana expected a loss of US$15.6 million because of the pandemic, which was expected to be funded by the state. x EXECUTIVE SUMMARY The Difficult Pre-Pandemic Context A critical and distinct economic feature of the African air transport market is its sparse air traffic demand. As a result, sufficient aircraft utilization, scale, and network economies cannot be achieved in many parts of the continent. This is the main reason behind the failure of Air Namibia and the underperformance of Air Botswana. Neither carrier operated in a market that assured reaching breakeven load factors or provided sufficient domestic traffic. Therefore, they cannot achieve critical mass and operate below the minimum economic scale for the size and scope, as their markets are too small to generate sufficient revenue to cover their operating and airline infrastructure costs. Much like the rest of Africa, the Southern African region is characterized by the dominance of troubled state-owned airlines. At the end of 2019, five state-owned carriers in South Africa, Botswana, and Namibia accounted for 43 percent of capacity share of these domestic markets (down to 30 percent in 2020) and 80 percent of regional international seat capacity (down to 73 percent in 2020). As the main poorly performing state-owned enterprises (SOEs), Air Botswana, Air Namibia, and SAA contributed to increased government spending, fiscal deficits, and public sector debt through large budgetary transfers and growing contingent liabilities. All three have been unable to generate meaningful positive financial returns for many years due to structural inefficiencies, shady procurement practices, soft fiduciary controls, poor management, and weak governance. They faced elevated costs arising from bloated wage bills and needed several bailouts and turnaround strategies, albeit unsuccessful. These state-owned airlines are directly influenced, and at times, operated by governments, lacking a level of independence that could guarantee professional management. Instead, the airlines suffer from political interference, high costs, and insufficient demand for their size of aircraft or operating scope and scale. Consequently, they have for decades experienced an unhealthy financial situation with low liquidity, years of unprofitability, and insolvency. High indebtedness and limitations on state-owned airlines to access private financing without state guarantees resulted in profound fiscal outlays. Their unviable operations are largely funded by bank loans, supported by state guarantees, which commit states’ national treasuries for repayment. A unique model existed in Eswatini, which was the only airline with a recent mixed private and xi NAVIGATING BEYOND COVID-19: AIRLINE RECOVERY AND REGULATORY REFORM OPPORTUNITIES IN SOUTHERN AFRICA government shareholding. Eswatini Airlink was a corporatized partnership, with a board controlled by the government of Eswatini for strategic and statutory decisions, but the operational, commercial, and financial aspects of the day-to-day functions were contracted to Airlink, a privately held South African airline, in a technical support agreement. After 23 years of this strategic cooperation, in June 2022 this relationship ceased on the back of the Eswatini Government announcing the business updates around the revival of its national carrier, Eswatini Air. Liberalization efforts are on a temporary hiatus as countries operate in emergency mode as a result of the pandemic. Pre- COVID-19, liberalization efforts were gathering momentum under the Single African Air Transport Market (SAATM) initiative to foster a single unified interregional market. Within the Southern African region, South African private Sufficient aircraft utilization, airlines and SAA’s frequencies increased on most routes, and scale and network economies some private sector airlines gained market access, depending CANNOT be achieved in many on the attitude of the other Bilateral Air Services Agreement parts of the continent due to (BASA) state. However, route authority and the allocation of SPARSE AIR TRAFFIC traffic rights (frequencies) remained problematic, especially since SAA’s grounding and the backlog of route applications due DEMAND to the expiration of the International and Domestic Licensing Council Members’ terms between March 31, 2021, until the council’s reconstitution with new appointments on March 10, 2022, under the authority of South Africa’s Department of Transport. Only a few of Airlink and FlySafair’s applications were processed under special conditions. The route licensing delay inhibited local carriers from entering the regional market. Airline Restructuring Options The pandemic-related crisis could result in much needed airline restructuring in Africa. The new realities created by the pandemic should become catalysts for business model improvements. That will entail dropping unprofitable routes (unless operated under public service obligations) and rightsizing personnel and fleets and restructuring debt obligations. In the Southern African region, two state-owned groups, Air Namibia and SAA Group, failed to achieve fundamental adjustment because they entered the COVID-19 crisis with a poor financial position and unsustainable business models. Allowing privately owned or publicly traded airlines to operate within an integrated domestic area comprising the Southern African states under this review (that is by allowing cabotage operations to airlines licensed in their territories) will naturally eliminate the need for xii liquidity injection from state budgets. Smaller aviation markets, such as Botswana, Namibia, Eswatini, and Lesotho, could consider the creation of a transregional air operator. Instead of running airlines, the newly vested role of the state should consist of ensuring a legislative framework and creating or empowering responsible governmental agencies to coordinate and manage the implementation of regional aviation policies. Restructuring of state-owned carriers should be a priority by establishing the minimum economic scale of activities as part of upfront funded restructuring plan s and by releasing funding upon successful completion of specific reforms. Transparency on airline board management composition, and its accountability and responsibilities, as well as public disclosure of annual financial and operational reports are also key policy options for improving sector governance. Specific country considerations are summarized below. The new realities created by the pandemic should become catalysts for business model improvements. That will entail dropping unprofitable routes (unless operated under public service obligations) and rightsizing personnel and fleets and restructuring debt obligations. In the Southern African region, two state-owned groups, Air Namibia and SAA Group, failed to achieve fundamental adjustment because they entered the COVID-19 crisis with a poor financial position and unsustainable business models. Allowing privately owned or publicly traded airlines to operate within an integrated domestic area comprising the Southern African states under this review (that is by allowing cabotage operations to airlines licensed in their territories) will naturally eliminate the need for liquidity injection from state budgets. Smaller aviation markets, such as Botswana, The Single African Air Transport Namibia, Eswatini, and Lesotho, could consider the creation Market (SAATM) has garnered of a transregional air operator, or extend the Airlink-Eswatini the acceptance of business model across their borders. 35 COUNTRIES Instead of running airlines, the newly vested role of the state should consist of ensuring a legislative framework and creating or empowering responsible governmental agencies to coordinate and manage the implementation of regional aviation policies. Furthermore, the state should act as a facilitator, ensuring that the quality of the aviation infrastructure meets required international and national regulatory standards; that fees and charges to airlines are fairly and competitively priced; that a percentage of staff employed represents nationals of the respective countries; and that private sector participation in incumbent airlines, at least from the Southern African xiii NAVIGATING BEYOND COVID-19: AIRLINE RECOVERY AND REGULATORY REFORM OPPORTUNITIES IN SOUTHERN AFRICA Development Community (SADC) region, is promoted. Benefits could also be obtained by extending the regional aviation policy to other subsectors. States could agree on offsetting projects by which specific maintenance, catering, training, air navigation, safety, and other services could be supplied from the country’s resources and create a pool of services in the Southern African region that would consider aviation as a whole and not only target specific service providers. Restructuring of state-owned carriers should be a priority by establishing the minimum economic scale of activities as part of upfront funded restructuring plans and by releasing funding upon successful completion of specific reforms. Transparency on airline board management composition, and its accountability and responsibilities, as well as public disclosure of annual financial and operational reports are also key policy options for improving sector governance. Specific country considerations are summarized below. NAMIBIA Further steps need to be taken to enable a non-Namibian airline foreign direct investment (FDI) to cover demand adequately and facilitate sufficient capitalization of domestic airlines. With the liquidation of Air Namibia, the statutory protection monopoly on international and domestic routes was eliminated allowing for the initiation of scheduled services by FlyNamibia (previously named FlyWestair), the incumbent Namibian private sector airline. Because of the low level of pre-pandemic demand, predominantly connecting to South Africa’s economic points, allowing South African and Namibian airlines to operate cabotage services to/ from Namibia to the world would maximize the country’s potential to reestablish connectivity on routes that make financial sense. To maintain domestic connectivity, a public service obligation (PSO) for those routes where no operation is feasible, but necessary from an economic and security perspective, can be evaluated and publicly tendered. BOTSWANA An objective and fundamental assessment of Air Botswana’s viability based on realistic assumptions is necessary. xiv EXECUTIVE SUMMARY Throughout the last decade, the government of Botswana has been searching for an equity partner from the industry to shape the performance of Air Botswana. A regional carrier would be Benefits could also be obtained by the ideal partner to benefit from the network scale and spread of unit costs. Similarly, a private majority investor would reduce the EXTENDING THE REGIONAL SOE’s dependence on state grants and foster the development AVIATION POLICY of a cost-savvy environment, ringfencing the airline from political to other subsectors. influence. With promulgation of the airline transition legislation in 2022, there is new momentum to implement a privatization plan, but there appears to be limited preparatory work to put Air Botswana on the market. This calls for a thorough due diligence on the airline to assess its viability and worth, including corporatization strategies that might result in its restructuring. SOUTH AFRICA The pace and shape of market recovery will determine South Africa’s state-owned airlines’ restructuring options and successes. The recovery is expected to last another two years, but currently there is more capacity available than required by demand in the country. British Airways and Kulula.com (Comair) recommenced operations in September 2021 and liquidated in June 2022. The transitionary SAA has also launched domestic and regional operations with a fleet of six aircraft. SAA’s low- cost subsidiary, Mango Airlines (currently in Business Rescue), is aiming to restart with an eight-aircraft operation, being in direct competition with Lift Airline, a low-cost carrier (LCC) owned by Global Aviation, a member of the private sector consortium in the process of purchasing SAA. This is contrary to the new SAA business plan, where Mango Airlines’ division would disappear and remain as a sub-brand fare category. The business plan supports the continuation of the intercontinental flights, as of 2022, although it recognizes that these were the routes that generated the greatest losses and registered pre-pandemic load factors of only 70 percent. SAA has relaunched flights from Johannesburg (OR Tambo International Airport, JNB) to Cape Town, Accra, Kinshasa, Harare, and Lusaka, competing with Airlink on three destinations (Cape Town, Harare, and Lusaka). The non- competed destinations of Kinshasa and Accra were returned to as part of the network relaunch. As previously profitable destinations, SAA commanded a monopoly on these routes (for direct services), but it is returning to a regional market which has seen intensified competition, largely from Airlink. With its xv NAVIGATING BEYOND COVID-19: AIRLINE RECOVERY AND REGULATORY REFORM OPPORTUNITIES IN SOUTHERN AFRICA agile regional business model and suitable fleet Regulatory Challenges mix of Embraer aircraft which can be adapted and Reform Opportunities based on load factor to reduce costs, Airlink has a competitive advantage in this new environment. While there has been an easing of market regulation, critical regulatory hurdles remain Overcapacity can do more damage than good. in the five countries that are the focus of this In the current constrained markets, airlines that paper, and the broader SADC region, to make have reported profits in the past (FlySafair, Comair, the air transport sector truly competitive. and Airlink) can easily become unprofitable and Domestic airlines are regulated, often subsisting insolvent, resulting in value destruction in the as state-owned services that do not consider sector and overreliance on SOEs that have proven commercial interests but, instead, maintain a incapable of offering a sustainable solution in the system of domestic travel that is economically past. Comair is the latest casualty in this regard, unsustainable. Paradoxically, the region is also being placed under Provisional Liquidation in June home to some of the most profitable privately 2022. Regulators and shareholders, therefore, owned airlines. This shows the possibilities if should ensure that the state-owned airlines are governments exited the business of running not initiating operation on routes where there is airlines and created a conducive enabling overcapacity, as this would result in unnecessary environment for the private sector to participate spending of public resources. Economic merits and thrive. should be the primary consideration for granting of rights, additional frequencies, and points of While the pandemic has exacerbated the region’s service, under respective BASAs. perennial regulatory challenges, it also presents opportunities to tackle some of them. Considering SAA’s network scope has been challenged the unique challenges of the African air transport due to its poor financial position. The airline sector as well as the various state support given currently lacks network scope in comparison in response to the COVID-19 pandemic-induced to Airlink’s growing network of 13 countries crisis globally, policy options for sustainable and 45 destinations from JNB. Although Airlink recovery of the southern Africa include: has expedited the development of partnerships with all major international airlines operating 1 into South Africa, SAA remains the airline with the most expansive partnership network in the Further liberalization of the African market: country. Furthermore, there are public concerns Although incipient, some findings show the that SAA will not be able to raise the start-up positive impact of liberalization, especially capital required, and that the relaunching of in Namibia and Botswana where passenger routes will require a minimum of six months of volumes have increased. For SAATM to fully capital investment before they yield positive function, countries would have to allow unlimited returns, maintaining the airline at a loss. It is, fifth freedom rights that would permit airlines therefore, imperative that the due diligence to develop a minimum network and generate process, between the Takatso Consortium, the passenger density at their hub. This would result preferred Strategic Equity Partner (SEP), and in cost reduction due to increased utilization of the government of South Africa, determines resources. Within the context of limited post- the approach and content of the capital-raising COVID-19 operations, fifth freedom rights would efforts of the future investor without recourse to enable access to high-volume seat capacity that state aid for avoidable operational inefficiencies.ii could sustain lower prices than on dedicated xvi EXECUTIVE SUMMARY point-to-point flights. The scheduled air transport journeys from major source markets, is rerouted markets of African states should be liberalized as through other intermediate airports, bypassing a matter of policy to allow entry to African airlines routes between South Africa and other African under the African Continental Free Trade Area countries, like the Cape Town-Windhoek, Cape (AfCFTA) to create an internal aviation market Town-Walvis Bay, Johannesburg-Windhoek, instead of piecemeal liberalization via BASAs. and Johannesburg-Walvis Bay routes. This will reduce such connecting domestic traffic for The COVID-19 disruption can be a catalyst for airlines like Comair (British Airways), Airlink, and change, and should be viewed as an opportunity FlyWestair. to generate regional partnerships to create network density. Greater benefits can be obtained The encouragement to foreign airlines to by liberalizing the market and enabling the enter and compete is essential for tourism operation of profitable airlines from South Africa development, especially in the generation of in the smaller aviation markets of neighboring inbound tourists from significant tourism source countries. Despite its recent discontinuation, the markets. Such airlines have an advantage of Eswatini Airlink solution yielded positive results market access (through the advantage of network for more than two decades. A similar solution scope or loyalty schemes). Due to their large would enable the operation of domestic Namibian network scope, foreign airlines would only incur and Botswanan markets and their regional incremental route costs rather than the full cost traffic, with the adequate aircraft size, without of a limited operations with underutilized aircraft, requiring further capital investment. Regarding which is typical of local airlines. This requires a the Southern African market, the establishment market access approach that encourages more of a competitively neutral national aviation capacity (frequencies) for foreign airlines (to policy and transparent governance practices like promote tourism) and less protection of a state- the European Union (EU) Aviation Law, which owned carrier against competition from such prohibits state aid and fosters the development foreign airlines. of a competitive market should become a priority. 3 2 Encourage more private sector participation: More participation by non-African airlines: The entry and expansion of private sector airlines Further liberalization of the intercontinental following the demise of state-owned airlines in market involves a delicate balancing act between South Africa and Namibia demonstrates that the the desire to jump-start the tourism and travel connectivity previously provided by state-owned sector vis-à-vis protecting against market erosion airlines can be replaced by the private sector and for home-based carriers and airports in the foreign airlines without any subsidies. This implies region. For example, apart from the direct impact that state-owned carriers are not indispensable. on tourism to South Africa, COVID-19-prompted In fact, it demonstrates that once market demand travel measures taken by South Africa’s tourism has been established and market entry is possible, source countries imply that the country’s role as new suppliers (airlines) will enter the market. a gateway hub for connecting intercontinental Similarly, all (or most) of the economic benefits traffic to its neighboring countries has declined previously ascribed to the state-owned airline and will further reduce in the future. As a are not lost upon the demise of that airline. Such result, regional traffic between South Africa, benefits are merely provided by the substitute Namibia, and Botswana, as part of international replacement airlines that enter the market. xvii NAVIGATING BEYOND COVID-19: AIRLINE RECOVERY AND REGULATORY REFORM OPPORTUNITIES IN SOUTHERN AFRICA 4 fleet, capacity, and network) to provide opportunities for private sector airlines. Apply competition rules broadly: State assistance to airlines needs to be competitively neutral so that 5 it does not distort competition and tilt the playing field against other firms in the aviation industry. Improve safety regulation and standards: The operation and subsidy of air services through Safety standards in the five countries are a state-owned airline is costly and diverts funding rather heterogeneous. With average Effective from other government projects that may have a Implementation (EI) scores far below 50 greater need in the post-pandemic recovery period. percent, Lesotho and Eswatini lag in terms of Recent history demonstrates that subsidized compliance with the International Civil Aviation airlines do not want reform or turnaround. As a Organization’s (ICAO’s) Universal Safety Oversight result, the state should allow the exit of state- Audit Programme (USOAP). As states with few owned airlines to enable private sector entry into operators and light activity, both may benefit from the markets. Where state financial aid is granted, pooling expert resources with other countries in a “balancing test” between the beneficial effects the region. As advocated by ICAO, there is a need of the aid against its adverse impact on trading for the industry to grow to critical mass levels in conditions and the maintenance of undistorted all facets, including infrastructure development competition (and the assurance that the aid is and maintenance, efficient and effective air traffic proportionate) needs to be considered. Other management, aviation safety, and adequate steps may have to be taken to create room for non- human resources. In order to optimize resources, receiving private sector airlines and to ensure a grouping like-minded states to pool their resources competitive market for consumers. into regional institutions so that they can benefit from economies of scale is paramount. While the While the Southern African region has seen a SADC Aviation Safety Organization (SASO) exists, significant involvement of competition authorities it lacks strong political will and support to provide in the air transport sector compared to other much needed oversight functions among small regions in Africa, steps have to be taken to operators/charters/private aircraft operators mitigate any impact of state financial aid on the in the region. Strengthening such regional maintenance or expansion of the competitiveness institutions would relieve the pressure on training in the market. This includes measures beyond investment and the ongoing maintenance of those necessary for the timely return to viability to compensation necessary to retain experienced neutralize the distortions of competition created by personnel. Development partners could support the state aid (for example, cancellation of scheduled such activities through regional bodies or through routes, the surrender of slots, and reduction of the bilateral engagements. xviii EXECUTIVE SUMMARY References Note Abate, Megersa, Charles Schlumberger, Ruxandra i See 2021 South Africa, Annual Research: Key Brutaru, Andy Ricover, and Theo Francois. Highlights at the World Travel & Tourism 2022. “The COVID-19 Pandemic and African Council’s website at https://wttc.org/Research/ Aviation.” Mobility and Transport Connectivity Economic-Impact. (MTC) Series, Policy Note, World Bank, Washington, DC. https://openknowledge. ii SAA launched a new service before conclusion worldbank.org/handle/10986/37038. of a sale and purchase agreement with Takatso Consortium by the Department of IATA (International Air Transport Association). Public Enterprises. This would provide R 3 2021. “Industry Statistics: Fact Sheet.” billion (US$204 million) of equity funding October 2021. https://www.iata.org/en/iata- for the airline group. However, the 2021 repository/publications/economic-reports/ annual budget reflects a requirement for the airline-industry-economic-performance--- funding of a new unreleased corporate plan october-2021---data-tables/. (of September 2020) for R 19.3 billion. This IATA. 2022. “Air Passenger Numbers to Recover in was to be funded with R 3.5 billion from the 2024.” Press Release No: 10. March 1, 2022. government and R 5.3 billion from private https://www.iata.org/en/pressroom/2022- funding sources. Takatso, however, earmarked releases/2022-03-01-01/. only R 3 billion which is R 2.3 billion less than Zhang, Anming. Forthcoming. COVID-19 and Air what was originally envisaged. The additional Transport: Analyzing Policy and Operational R 3.5 billion was earmarked by the 2022 Responses for Quicker Economic Recovery in annual budget. Selected Southern Africa Countries. Sauder School of Business, University of British Columbia. xix NAVIGATING BEYOND COVID-19: AIRLINE RECOVERY AND REGULATORY REFORM OPPORTUNITIES IN SOUTHERN AFRICA 1. Introduction The COVID-19 pandemic has resulted in an initiative. The slowdown in air connectivity is also unprecedented downturn in air transport activity negatively impacting the African Continental Free globally, impacting economies and livelihoods Trade Area (AfCFTA) as well as the Protocol on the that are dependent on travel and tourism. The Free Movement of Persons and removal of visa situation has been exacerbated in developing restrictions. These challenges call for a strategic countries where the aviation sector has long approach to support countries and the entire been facing multipronged challenges, including aviation value chain to ensure acceptable levels profitability, safety, security, and sustainable of safety, security, and efficiency and maintain financing of critical infrastructure, that predate jobs while ensuring public confidence in air travel. the current crisis. Due to connectivity disruptions The recovery of the aviation sector is also vital to caused by the pandemic, many countries’ air tourism and economic recovery and will depend transport sectors and key travel-dependent on the mobilization of proper policy tools and industries are under stress. coordinated action by national governments with the support of international institutions. There is a growing need to ensure that the aviation sector returns to some degree of The objective of this policy paper is to review operational stability. Many governments are the status of the aviation sector in Botswana, facing increasing fiscal constraints due to declining Eswatini, Lesotho, Namibia, and South Africa by tax revenues vis-à-vis increasing spending assessing the current and expected needs and priorities mainly for health and social safety nets. by exploring various strategies and policies that At the same time, many national airlines—many ultimately guide the World Bank Group’s policy of them state-owned—are facing bankruptcy position and potential operational responses. and requesting state intervention in the form of This policy paper mainly focuses on the state- government bailouts. Critical infrastructure and owned airlines in the region and explores airlines’ service providers, such as airports, air navigation reform options and policy directions to build back service providers (ANSPs), and regulators, are a competitive air transport sector in the aftermath also in a dire situation. The growing need for state of the COVID-19 crisis that meets international, support could present an opportunity for policy regional, and local demands.i makers to rethink their approach toward creating a sustainable, efficient, and vibrant aviation sector As the main poorly performing major state- that supports their economic priorities. owned enterprises (SOEs), Air Botswana, Air Namibia, and South African Airways (SAA) have In much of the developing world, the pandemic contributed to increased government spending, poses a serious threat as it has slowed down fiscal deficits, and public sector debt through hard-won gains toward making the aviation large budgetary transfers and growing contingent sector more competitive and safer. In Africa, liabilities. All three have not generated meaningful the pandemic has put the brakes on recent positive returns for many years due to structural progress toward the full implementation of inefficiencies and governance weaknesses. They the Yamoussoukro Decision (YD) through the faced elevated costs arising from bloated wage Single African Air Transport Market (SAATM) bills and needed several bailouts and turnaround 1 1. INTRODUCTION strategies, albeit unsuccessful. SAA was placed in example, safety and security systems, cargo an insolvency protection mechanism in December handling infrastructure, and so on, and so 2019 and Air Namibia was liquidated in February forth) in a constrained fiscal space? 2021. SAA, under a promise of a new ownership structure involving public-private partnership e. What are alternative approaches to (PPP),ii commenced operations in September safeguarding basic connectivity for isolated, 2021 with a new business plan, part of the low-income countries? business rescue process approved in September 2020. While the prospects of a new national f. What roles can regional entities (for carrier in Namibia are still unknown, other airlines example, the Southern African Development have filled the connectivity void left since Air Community, the Economic Community of Namibia’s liquidation. Similarly, in Botswana the West African States, the Common Market pandemic has exacerbated contingent liabilities for Eastern and Southern Africa, and so on, associated with parastatals (about 5 percent of and so forth) play in the harmonization and gross domestic product; (GDP)), which includes optimization of air routes? Air Botswana. Altogether, there is a common urgent need to expedite plans to rationalize g. What potential aviation models could exist for state-owned airlines, including restructuring, regional cooperation? privatization, liquidation, and enhancement of their governance.iii h. What should be the role of development partners like the World Bank Group? This policy paper explores airlines’ reform and policy response strategies by focusing on the following The rest of the report is organized as follows: high-level policy and operational questions: • Chapter 2 provides a general context for air a. In the current environment, under what transport development in the Southern African conditions would the private sector consider region by reviewing pre-pandemic trends; it feasible to participate in different segments of the air transport market (international, • Chapter 3 summarizes the impact of the regional, and local) if relevant legal regimes pandemic on traffic, tourism, and airline allowed such participation alongside or in finances, and discusses the level of state aid replacement of the purely public model (such and recovery prospects of airline capacity; as state-owned national carriers)? • Chapter 4 sheds light on the airline industry’s b. What are the barriers to private sector evolution and preferred business models; participation in the aviation sector? • Chapter 5 presents options for restructuring c. Is there a case for African airlines to be state-owned airlines in the region; treated as national strategic assets serving the broader public interest? • Chapter 6 highlights salient regulatory challenges and reform opportunities; and d. Under what conditions can public funding of airlines be justified in the context of • Chapter 7 summarizes the main policy fiscal pressure faced by countries in a recommendations phased as: (1) immediate post-pandemic economic environment? In policy actions for air travel recovery, and (2) a particular, where would public funding be menu of short- to medium-term actions for a more suitable across the value chain (for competitive and safe air transport sector. 2 NAVIGATING BEYOND COVID-19: AIRLINE RECOVERY AND REGULATORY REFORM OPPORTUNITIES IN SOUTHERN AFRICA References Southern African region by analyzing how the connectivity landscape has changed or is Zhang, Anming. Forthcoming. COVID-19 and Air evolving with COVID-19. Transport: Analyzing Policy and Operational ii The South African government remains a full and Responses for Quicker Economic Recovery in effective shareholder still as the new ownership Selected Southern Africa Countries. Sauder structure has not yet been implemented. The School of Business, University of British sale and purchase agreement were signed, Columbia. as announced to the cabinet, on February 23, 2022. The deal is subject to filing and Note approval by the Competition Commission and other regulators. i A background paper to this policy paper iii Botswana IMF Country Report No. 21/98 and (Zhang, forthcoming) presents a detailed Namibia IMF Country Report No. 19/295. connectivity impact of the pandemic on the 3 2. AIR TRANSPORT DEVELOPMENT IN THE SOUTHERN AFRICAN REGION 2. Air Transport Development in the Southern African Region Air transport is essential for the economic expenditure and US$150 billion in FDI (IATA growth and societal development of any country, 2019). In Namibia, the travel and tourism sector as it enables the direct flow of passengers and contributed 11 percent to the GDP in 2020, goods, promoting links between businesses, of which air transport alone represented 0.9 people, and governments. It also facilitates the percent (Nakale 2021). In Botswana, the aviation flow of foreign direct investment (FDI), improves sector contributed 0.4 percent to the overall international trade, promotes tourism, improves national GDP and boosted the contribution of information exchange, and generates higher tax other sectors by 0.9 percent (Confidente Namibia revenues from increased economic activity (IATA 2019; ATAG 2018). The low contribution of the 2006). In 2019, the African aviation industry aviation sector in Botswana and Namibia reflects supported 7.7 million jobs (472,000 in South the level of underdevelopment of the sector in Africa) and generated economic activity worth these countries as well as its untapped potential. US$63 billion (US$9.4 billion in South Africa), as Although there are no empirical estimations of for every US$1 created by the sector it generated the contribution of air transport to the economies US$6 elsewhere in Africa.i of Eswatini and Lesotho, as landlocked countries, air connectivity is vital for their international trade With 1.3 billion inhabitants, Africa is the world’s and tourism sectors. second-largest continent in terms of population and size. However, it ranks lowest in terms of The five Southern African countries cover 2.6 aviation development having generated only million square kilometers, 42 percent of the 100.4 million passengers, the equivalent of 2.24 size of Europe (excluding Russia), which makes percent of the global output, in 2019 (ICAO 2019). air transport critical to ensuring connectivity. The five countries of the Southern African region— Although efforts have been made to improve Botswana, Eswatini, Lesotho, Namibia, and South regional connectivity, little improvement is seen Africa—generated 33 million seats (14 percent of on the railway lines (SADC 2012). Road transport total seats in Africa), of which 68 percent were has improved, but air transport is favored for domestic seats, and transported 27.7 million the movement of high-value goods and people passengers in 2019. South Africa generated due to the long distances. While South Africa 92 percent of passengers within the subregion. developed its domestic market and international Johannesburg’s OR Tambo International Airport connectivity, its neighbors have some of the (JNB) was the main hub for the Southern African poorest connectivity rates, with annual passenger Development Community (SADC) member states, volumes rounding 0.75 million and 1 million the most significant gateway for international for Botswana and Namibia, respectively, and and intraregional traffic, and the second-largest approximately 75,000 annual passengers for airport on the continent after Cairo International both Lesotho and Eswatini. In comparison, Airport (CAI).ii Belgium, which is the size of Lesotho, had 17.7 million passengers in 2019. In 2019, the aviation sector in South Africa contributed 3.2 percent to the national GDP, Between 2014 and 2019, Africa’s connectivity including US$8.8 million in foreign tourism improved by 30 percent, reaching 970 unique 4 NAVIGATING BEYOND COVID-19: AIRLINE RECOVERY AND REGULATORY REFORM OPPORTUNITIES IN SOUTHERN AFRICA city pairs within the continent but with significant growth rates by region, Africa grew by 15 percent differences across regions (IATA 2021).iii from 2014 to 2019, while all other regions grew Improved connectivity has also been observed at a much higher rate: North America (+22 in the intercontinental markets, with the number percent), Europe (+36 percent), the Middle East of unique global city pairs growing from less than (+28 percent), the Asia-Pacific (+33 percent), 10,000 in 1995 to more than 23,000 in 2019. At and Latin America (+21%) (IATA 2021). South the same time, the real cost of transportation has Africa is highly ranked in the International Air dropped by more than 70 percent bringing with Transport Association (IATA) connectivity index— it significant economic benefits.iv South Africa 39th out of 219 countries with a 22 percent offered the highest volume of seats per connection connectivity growth rate. Its neighbors rank and its connectivity level grew by 22 percent significantly lower—Namibia ranks 146th with 28 because of the solid increase in its domestic percent connectivity growth, Botswana 165th market and existing routes. However, the growth with 15 percent growth, Lesotho 201st with of South Africa’s connectivity level is much lower an 8 percent decrease in growth, and Eswatini than that for Egypt (+32 percent), Morocco (+51 200th with a 12 percent decrease. When looking percent), Algeria (+32 percent), or Ethiopia (+93 at the air connectivity level per 1,000 people in percent). This slower growth in South Africa was 2019, South Africa scored 1.92 (+5 percent), mainly a result of new visa restrictions and tourism- Namibia 1.54 (+7 percent), Botswana 0.76 (-4 unfriendly policies that hampered the growth of percent), and Lesotho 0.09 (-14 percent), being inbound tourism that had been helped since 2006 situated on the lower end of the scale. In 2019, by the lifting of frequency and capacity restrictions South Africa’s air connectivity was about 30 on foreign airlines. times that of Namibia’s and about 62 times that of Botswana’s. In the same year, Namibia’s air There is a substantial difference in the air connectivity was about twice that of Botswana’s. connectivity scores of the states under review The air connectivity of Eswatini and Lesotho is (table 2.1 and figure 2.1). When comparing very small compared to the other countries, only air connectivity relative to population size and about a tenth of that of Botswana. Table 2.1: IATA Air Connectivity Scores, 2009 to 2019 Economy Air Global Global Global Average Average connectivity Ranking Ranking Ranking Annual Growth Annual Growth score 2019 2009 2014 2019 (10 years) (5 years) 2009-2019 2014-2019 South Africa 113,147 32 38 39 4% 4% Namibia 3,779 136 145 146 4% 6% Botswana 1,817 162 160 165 4% 3% Eswatini 188 192 195 200 -1% -2% Lesotho 187 196 197 201 1% -2% Source: IATA 2021. 5 2. AIR TRANSPORT DEVELOPMENT IN THE SOUTHERN AFRICAN REGION Figure 2.1: International Air Transport Association Air Connectivity Scores, 2019 120,000 113,147 105,000 Air Connectivity Score- 2019 90,000 75,000 60,000 45,000 30,000 15,000 3,779 1,817 188 187 0 South Africa Namibia Botswana Eswatini Lesotho Source: IATA 2021. Africa’s weak air transport connectivity is also Domestic seats in South Africa accounted for reflected in the low connectivity of African 70.8 percent of total capacity and 67 percent airports in the context of the global airport of the total passengers, totaling 17.2 million. network.v In 2019, prior to the COVID-19 In the rest of the African market, domestic seats pandemic, no African airports were ranked among represented 26.4 percent of the continent’s total the top 70 connected airports in the world. The output and generated only 1 percent of the total average ranking for the top 10 African airports revenue passenger kilometers (RPK).vi Botswana that year was No. 202 in the world, whereas the had the second-highest domestic market share average ranking for the top 20 African airports with 51 percent, followed by Namibia with 15 was No. 298. percent. All Southern African countries exhibit a low propensity to fly, averaging 0.4 trips per The air passenger and air freight patterns in inhabitant, far below the world average of 1.2 the five countries that are the focus of this trips per inhabitant. study are centered on South Africa’s top three busiest airports: Johannesburg’s JNB, Cape The air cargo flows in South Africa were also Town International Airport (CPT), and Durban’s distinguished from all the routes inside Southern King Shaka International Airport (DUR). In Africa. As for international air traffic, the most 2019, the Southern African region totaled active passenger and cargo flows in 2019 were 27.7 million passengers, of which 64 percent between JNB in Johannesburg and Hosea Kutako were domestic and 18 percent intercontinental International Airport (WDH) in Windhoek, Namibia. travelers, approximately 4.9 million passengers. This is related to a liberalization development: In Intraregional volumes accounted for 1.54 million October 2016, South Africa and Namibia signed a passengers or 6 percent of the total. Almost Bilateral Air Service Agreement (BASA) to operate all passenger and cargo movement from/to an unlimited number of flights per week per side airports in Namibia and Botswana are dominated for passenger services by designated airlines by international traffic with the predominant and the exercise of fifth freedom traffic rights at destination being South Africa. Besides, there is intra-African points (Mhlanga 2017). However, no domestic air traffic in Lesotho and Eswatini, both passenger and cargo flows experienced a which are only connected to South Africa. dramatic drop in May 2020. 6 NAVIGATING BEYOND COVID-19: AIRLINE RECOVERY AND REGULATORY REFORM OPPORTUNITIES IN SOUTHERN AFRICA References Carriers.” African Journal of Hospitality, Tourism and Leisure 6 (2). http//www.ajhtl.com. ATAG (Air Transport Action Group). 2018. Aviation Nakale, Albertina. 2021. “Air Namibia Liquidation Benefits Beyond Borders. October. https:// Bad for Tourism,” New Era, February 15. aviationbenefits.org/media/166711/abbb18_ https://neweralive.na/posts/air-namibia- full-report_web.pdf. liquidation-bad-for-tourism. Cheung, Tommy K. Y., Collin W.H. Wong, and SADC (Southern African Development Anming Zhang. 2020. “The Evolution of Community). 2012. Regional Infrastructure Aviation Network: Global Airport Connectivity Development Master Plan. August. https:// Index 2006-2016.” Transportation Research w w w. s a d c . i n t / f i l e s / 7 5 1 3 / 5 2 9 3 / 3 5 3 0 / Part E: Logistics and Transportation Review Regional_Infrastructure_Development_ 133: 101826. https://doi.org/10.1016/j. Master_Plan_Executive_Summary.pdf. tre.2019.101826. Confidente Namibia. 2019. “Air Namibia’s Note Economic Impact Downplayed.” June 13, 2019. https://confidentenamibia.com/air- i See more Africa analysis at Air Transport Action namibias-economic-impact-downplayed/. Group’s Aviation: Benefits Beyond Borders IATA (International Air Transport Association). website at https://aviationbenefits.org/ 2006. “Measuring Network Benefits.” around-the-world/africa/. Economics Briefing No. 3, January. https:// ii The Southern African Development Community www.iata.org/en/iata-repository/publications/ (SADC) consists of 16 Southern African economic-reports/air-connectivity- countries: Angola, Botswana, Comoros, measuring-the-connections-that-drive- Democratic Republic of Congo, Eswatini, economic-growth/ Lesotho, Madagascar, Malawi, Mauritius, IATA.2019.“TheImportanceofAirTransporttoSouth Mozambique, Namibia, Seychelles, South Africa.” https://www.iata.org/contentassets/ Africa, Tanzania, Zambia, and Zimbabwe. a1f674a2687144d9ad5298d2d4e3f7bf/iata_ iii As noted in IATA (2021): “The IATA air south-africa_report.pdf. connectivity index measures the degree to IATA. 2021. Air Connectivity: Measuring the which air transport connections support Connections That Drive Economic Growth. a country’s economic development and https://www.iata.org/en/iata-repository/ productivity levels. It is designed primarily for publications/economic-reports/air- governments and policy makers to evaluate connectivity-measuring-the-connections-that- the role of air connectivity in supporting their drive-economic-growth/. country’s economic policy agenda.” ICAO (International Civil Aviation Organization). iv IATA’s research with InterVISTAS shows that a 2019. The World of Air Transport in 2019. 10 percent increase in air connectivity, relative https://www.icao.int/annual-report-2019/ to the size of a country’s GDP, boosts labor Pages/the-world-of-air-transport-in-2019. productivity by 0.07 percent. Earlier research aspx by IATA and Oxford Economics focused on the EU economies, establishing that a 10 Mhlanga, Oswald. 2017. “Factors Negatively percent increase in air connectivity adjusted Impacting on the Performance of State Airlines for economic size can increase long-run GDP in Southern Africa: A Case Study of Four State by 1.1 percent. 7 2. AIR TRANSPORT DEVELOPMENT IN THE SOUTHERN AFRICAN REGION v The Global Airport Connectivity Index (GACI) incorporating the importance of its connected was developed by Cheung, Wong, and Zhang neighbors), and regional importance. Each of (2020). As part of this Advisory Services and these five metrics would individually measure Analytics (ASA) by the World Bank, it has been a particular aspect of an airport’s connectivity; updated to analyze the connectivity impact together they are sufficient to cover most of Africa. It uses five connectivity measures identifying characteristics of an air transport to rank world airports between 2006 and network. They form the GACI for each airport 2019 based on actual passenger data from between 2006 and 2019, for a total of 3,737 the Official Airline Guide (OAG) database. The airports worldwide. The GACIs for all the African five measures are: degree, betweenness (an airports with scheduled flight connections are assumption that travellers would choose the extracted from this world GACI set, for a total shortest path when they travel from one point of 476 African airports. to another), closeness, eigenvector centrality vi Domestic market penetration is based on OAG (the importance of a node in the network by data from 2019. 8 NAVIGATING BEYOND COVID-19: AIRLINE RECOVERY AND REGULATORY REFORM OPPORTUNITIES IN SOUTHERN AFRICA 3. Impact of COVID-19 on Air Transport in the Southern African Region Key Findings and Recommendations Traffic and Connectivity Impact • The COVID-19 pandemic negatively The economic and financial forecasts for 2020, at impacted aviation in the Southern the end of 2019, before the COVID-19 pandemic African region, with financial positions had proliferated, showed slight green shoots for and connectivity suffering due to a 63.6 African aviation. Available Seat Kilometer (ASK) percent decline in air traffic in 2020 growth (supply) was expected to be 3.8 percent compared to 2019. year-on-year, with Revenue Passenger Kilometer (RPK) growth (demand) at 4.9 percent. It was a • The decrease in connectivity and travel positive sign that demand was outpacing supply. The restrictions also meant a reduced volume pandemic, however, reversed this trend and resulted of inbound international tourism to the in an unprecedented global air traffic contraction. It Southern African region. reduced commercial air passenger capacity by more than 60 percent and had a considerable effect on • The downturn exacerbated the losses yields, and load factors that reached an average of of state-owned airlines and increased 65.5 percent, a drop of over 20 percentage points, funding requirements for their when compared to 2019 results (IATA 2020). The governments. 2020 demand and capacity reduction generated a revenue funnel effect resulting in network shrinkage • Africa’s share of the hitherto (as of May that led to revenue decrease and severe liquidity 2022) confirmed (US$207 billion) or constraints. This situation ultimately forced airlines proposed (US$7.7 billion) government to reduce their size by liquidating excess capacity support to the air transport sector globally and personnel. is about US$4.35 billion or 2 percent which mirrors African governments’ In 2020, international travel in Africa declined by constrained fiscal space and their ability 70.5 percent in passenger numbers compared as well as willingness to rescue the sector. to 2019, while domestic travel went down by 63.16 percent.i Similarly, revenue accruing from • It is expected to take at least three years the international sector fell by US$11.20 billion to reach 2019 passenger volumes in and by US$2.34 billion for the domestic sector.ii the Southern African region, with 2025 Southern Africa saw a 63.6 percent decline in air showing similar capacity levels as 2019. traffic because of COVID-19 compared to 2019. According to the Board of Airline Representatives • The Southern African region needs a of South Africa (BARSA), in 2021, only 12 of the coordinated border policy, faster vaccine total of 32 foreign airlines that served South rollout, and serious attention to legacy Africa before the pandemic were still operating challenges (safety, restrictive markets, air services into South Africa as a result of COVID- unprofitability, and so on, and so forth) to 19-related restrictions. As of March 2022, only ensure faster recovery. 20 foreign airlines have returned to market, a 9 3. IMPACT OF COVID-19 ON THE SOUTHERN AFRICAN REGION 38 percent reduction in foreign-based airlines than the initial COVID-19 virus, resulted in more operating in South Africa.iii restrictions on South African travelers. Travel from South Africa to approximately 154 countries Airline capacity revamp was substantially (and from Namibia to 153 countries) was either different across the five regions of Africa during wholly prohibited or strictly limited to emergency the second half of 2020 as countries followed exemptions during the height of the pandemic uncoordinated policies on border closures (Daniel 2021). The later Omicron variant was and quarantine measures for international also identified in South Africa on November 24, passengers (figure 3.1). The Central/Western 2021, which triggered the imposition of new and African regions have shown sustained rebound, harsher travel restrictions in many parts of the while the Southern African region has remained world. By December 13, 2021, 90 countries had mostly laggard during the crisis, with some implemented travel bans to/from South Africa, green shoots in 2022. The North African region, which included the most important tourist source historically dependent on European leisure countries fully closing their borders. Ultimately, travelers—although initially struggling with the regional recovery was negatively impacted by rebound as international travel to/from Europe was restrictions imposed on Southern African countries largely depressed—has shown new momentum in due to Omicron, eroding incremental gains made recovery for 2022, as of the time of writing. Data through the year. In 2022, restrictions continue to for 2021 showed, however, that all regions are be lifted globally, which has supported Southern converged toward the same and rather flat trend. Africa’s uptick in travel. On June 14, 2022, Comair Limited was placed in provisional liquidation by The discovery of the Beta (SARS-CoV-2 501Y.V2) a South African High Court; this is expected to coronavirus variant in South Africa (in October negatively influence seats deployed back into the 2020), which is considered more transmissible system for the rest of the year (Smith 2022). Figure 3.1: Airline Capacity Evolution Across African Regions (Base = January 2019 = 100) Seats Seats 120 120 100 100 Inxeded Frequency 80 80 Indexed Frequency North Africa 60 60 Southern Af Central/Wes 40 40 Eastern Afric African Seat 20 20 0 0 2019-1 2019-2 2019-3 2019-4 2019-5 2019-6 2019-7 2019-8 2019-9 2019-10 2019-11 2019-12 2020-1 2020-2 2020-3 2020-4 2020-5 2020-6 2020-7 2020-8 2020-9 2020-10 2020-11 2020-12 2021-1 2021-2 2021-3 2021-4 2021-5 2021-6 2021-7 2021-8 2021-9 2021-10 2021-11 2021-12 2022-1 2022-2 2022-3 2022-4 2022-5 2019-1 2019-3 2019-5 2019-7 2019-9 2019-11 2020-1 2020-3 2020-5 2020-7 2020-9 2020-11 2021-1 2021-3 2021-5 2021-7 2021-9 2021-11 2022-1 2022-3 2022-5 Month Month Northern Africa Seats Southern Africa Seats Central/Western Africa Seats Eastern Africa Seats African Seats 10 NAVIGATING BEYOND COVID-19: AIRLINE RECOVERY AND REGULATORY REFORM OPPORTUNITIES IN SOUTHERN AFRICA Frequency Frequency 140 140 120 120 100 100 Indexed Frequency Indexed Frequency 80 80 North Afric Southern A 60 60 Central/W Eastern Afr 40 40 African Fre 20 20 0 0 2019-1 2019-2 2019-3 2019-4 2019-5 2019-6 2019-7 2019-8 2019-9 2019-10 2019-11 2019-12 2020-1 2020-2 2020-3 2020-4 2020-5 2020-6 2020-7 2020-8 2020-9 2020-10 2020-11 2020-12 2021-1 2021-2 2021-3 2021-4 2021-5 2021-6 2021-7 2021-8 2021-9 2021-10 2021-11 2021-12 2022-1 2022-2 2022-3 2022-4 2022-5 2019-1 2019-3 2019-5 2019-7 2019-9 2019-11 2020-1 2020-3 2020-5 2020-7 2020-9 2020-11 2021-1 2021-3 2021-5 2021-7 2021-9 2021-11 2022-1 2022-3 2022-5 Month Month Northern Africa Frequency Southern Africa Frequency Central/Western Africa Frequency Eastern Africa Frequency African Frequency Source: Original figure for this publication based on data from Official Airline Guide (OAG). For the Southern African region, which between JNB and Port Elizabeth (PLZ). Lanseria represents 21 percent of the continent’s traffic, International Airport—a secondary, privately the domestic market is clearly dominant. The owned airport—also forms part of the aviation region increased its market share from 66 percent catchment area of Johannesburg, where Comair before the pandemic to 77 percent in the last (Kulula), Mango Airlines, and FlySafair have all quarter of 2020. On the other end, intra-African had operations from Lanseria, linking the Golden and intercontinental traffic were reduced (AFRAA Triangle and other routes, although at a smaller 2021). Altogether, during 2020, the states of scale. Mango has not returned to operate from the Southern African region had 41.9 percent Lanseria due to court action initiated against it of 2019 capacity, totaling 13.8 million seats. In by the airport, which sought court enforcement terms of passengers transported during the first of a default settlement agreement of US$1.22 trimester of 2021, Botswana reported 26 percent million in 2021 (Nonyane 2021). FlySafair has of Q1 2020 levels, Namibia 40 percent, and South also been one of the largest airlines in South Africa 33 percent. The average load factor for the Africa, reaching as high as 30 percent of the pre- region during 2020 was 42 percent (OAG 2021). COVID-19 market share. Passenger flow across all airports and the regional air network experienced substantial decline in 2020 (figure 3.2). In South Africa, recent data show that both Comair and Mango Altogether, during 2020, the Airlines continue to serve the so-called Golden states of the Southern African Triangle—the link that connects Johannesburg, region had Cape Town, and Durban—routes plus some other routes. Comair operates routes linking 41.9% airports in George (GRJ) and East London (ELS) of 2019 capacity, totalling with Johannesburg’s JNB, whereas Mango Airlines serves routes between JNB and GRJ and 13.8 MILLION SEATS 11 3. IMPACT OF COVID-19 ON THE SOUTHERN AFRICAN REGION Figure 3.2: All Airports and Regional Networks Saw a Substantial Decline in Air Passenger Flows Source: Original figure for this publication based on OAG data. As opposed to the other main airlines in South IATA designator code since then and signed its Africa, Airlink experienced an increase in own interline agreements with six other carriers. passenger flows in 2020. It ended its 23-year- In January 2021, Airlink became the third- old franchise agreement with SAA in the early largest carrier within Africa by the number of part of 2020. It has been operating and issuing seats offered and the largest by number of flights tickets under its own 4Z code instead of SAA’s SA scheduled. This is due mainly to the decline of 12 NAVIGATING BEYOND COVID-19: AIRLINE RECOVERY AND REGULATORY REFORM OPPORTUNITIES IN SOUTHERN AFRICA SAA, which opened new markets. It is also related nonexistent during the COVID-19 outbreak of to Airlink’s long-term business model strategy May/June 2020. of leveraging regional aircraft—it has historically leaned toward lower-capacity variants—with By the end of 2020, the connectivity of the recent introductions of aircraft in the 100-seat Southern African network had partially range. This enables it to compete effectively on recovered, but the flows were noticeably routes served historically by narrow-bodies and smaller compared to the first two months of drive aggressive revenue management strategies. 2020. Overall, the COVID-19 pandemic has been a major disruptive and negative event for the In 2020, Africa’s air connectivity collapsed. It air transport industry in Africa. The industry’s went from 970 unique city pairs to only 100. recovery will be negatively impacted by the Nevertheless, air cargo grew by 1 percent bankruptcy and liquidation of unprofitable airlines. compared to 2019 as a result of Africa-Asia To improve Africa’s chance of reestablishing lost trade (IATA 2021). Figure 3.3 shows the evolution direct economic links, the temporary suspension of the 12 monthly “country networks” for 2020.iv of traffic right limitation to African carriers should For the first two months of 2020, the network was be envisaged. highly similar to the one derived for 2019. Starting in March 2020, initial changes were observed, Tourism Impact which mostly consist of flow reductions in the northern parts of Africa. Morocco and Tunisia, in Tourism plays an important role in the economy particular, reduced their intracontinental flights. of the region, contributing between 5.5 percent This is somewhat consistent with what has been (Eswatini) and 15.3 percent (Namibia) to the GDP, found in early research on other parts of the world, a total of US$25.99 billion in 2019. The tourism where the major flight restrictions in Europe took sector generated 1.74 million direct jobs in the place in the middle of March 2020 (Sun, Wandelt, Southern African region, with 1.46 million in South and Zhang 2021). Given the catchment area—in Africa alone. Tourism accounted for 15 percent of particular, relative proximity to Western Europe— the jobs in Namibia and 11.9 percent in Lesotho. The and network structure of North African countries, COVID-19 pandemic reduced the contribution of these observed impacts are logical. tourism to the GDP by half, as the region generated only US$13.260 billion and employment in the Several other African countries, including South sector was reduced by a third in 2020.v Africa, on the other hand, show a less significant reduction in connectivity and flow magnitude, Since 2006, the level of inbound tourists to indicating that in March 2020 Southern Africa South Africa has increased substantially due was still well connected. Starting in April 2020, to the liberalization of capacity limitations in almost all intra-African flights collapsed; a BASAs, which enabled foreign airlines to operate recovery gradually started in July/August 2020. more flights (figure 3.4). Although air traffic grew By the end of 2020, the connectivity of the African substantially, by end of 2019 SAA transported country network largely recovered, but the flows only 12 percent of the inbound tourists.vi In were smaller compared to the first two months comparison, the number of inbound tourists in of 2020. A similar impact was registered in the the neighboring countries did not increase mainly Southern African market, one of the essential due to the protection of their airlines against connectivity nodes in Africa, where connectivity foreign competition through capacity constraints dropped to the point of becoming almost in BASAs. 13 3. IMPACT OF COVID-19 ON THE SOUTHERN AFRICAN REGION Figure 3.3: Evolution of Air Transport Country Network, Monthly Flights in 2020 Source: Original figure for this publication based on data from Flightradar24, https://www.flightradar24.com. Note: The thickness of a link corresponds to the total number of flights between a pair of countries. Each subplot corresponds to the country network at a given month in 2020 and 2021. The figure shows that several countries along Africa’s coastline appear to act as bridges to connect African countries. These countries include South Africa, Ethiopia, Morocco, Kenya, and Côte d’Ivoire. 14 NAVIGATING BEYOND COVID-19: AIRLINE RECOVERY AND REGULATORY REFORM OPPORTUNITIES IN SOUTHERN AFRICA Figure 3.4: Number of Inbound International Tourists in the Southern African Region 16,000,000 15,121,000 15,004,000 14,530,000 15,000,000 14,318,000 14,975,000 14,797,000 14,000,000 13,069,000 13,952,000 13,000,000 12,097,000 12,000,000 11,303,000 11,000,000 10,000,000 9,729,000 9,208,000 9,000,000 8,509,000 9,532,000 8,000,000 7,518,000 7,000,000 6,026,000 5,908,000 6,640,000 6,815,000 6,000,000 5,170,000 6,550,000 4,684,000 5,898,000 6,001,000 5,000,000 5,186,000 4,000,000 2,344,000,00 3,000,000 1,485,000,00 1,727,000,00 1,642,000,00 1,712,000,00 1,830,000,00 765,000,00 1,039,000,00 1,451,000,00 1,592,000,00 1,684,000,00 1,965,000,00 1,660,000,00 1,775,000,00 2,000,000 656,000,00 940,000,00 1,306,000,00 1,000,000 636,000,00 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Botswana Namibia South Africa Lesotho Eswatini 220 Botswana 200 180 Eswatini +4,9% 160 Namibia 140 120 100 South 80 Africa 60 40 20 Lesotho 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Source: Original figures for this publication based on data from World Development Indicators at https://data.worldbank.org/indicator/ST.INT.ARVL. The decrease in connectivity also meant a Africa’s tourism source countries, especially reduced volume of inbound international since the identification and announcement of a tourism to South Africa, which in 2020 dropped new Beta and later Omicron variant of COVID-19 by 74.8 percent, similar to the 73 percent drop (which was first detected in South Africa) and in tourism generated to/from SADC countries the slow pace of vaccination rollout. Reports and the 74 percent drop in the top 10 African indicate that by April 2021, South Africa faced markets (figure 3.5).vii In May 2021, travel to and more travel restrictions than any other country from South Africa was banned by most of South in the world. 15 3. IMPACT OF COVID-19 ON THE SOUTHERN AFRICAN REGION Figure 3.5: Annual Inbound Tourists to South Africa from Main Source Market Areas 2,500,000 2,338,820 2,364,938 2,289,243 2,243,594 1,989,649 2,000,000 1,743,300 1,719,771 1,692,875 1,652,718 Number of Tourists 1,500,000 1,430,181 1,000,000 439,718 458,729 504,729 473,104 585,209 500,000 422,373 426,502 137,095 151,158 136,791 140,438 123,264 126,508 32,199 0 2015 Annual 2016 Annual 2017 Annual 2018 Annual 2019 Annual 2020 Annual Overseas Top 10 SADC Top 10 Other African Top 10 Major Source Markets Source: Lubbe and Vermooten 2021, 91. The market contraction due to the COVID-19 passenger flows declined 65.6 percent. As a crisis was relatively less severe in Africa. The result, intracontinental air passenger flows (2.84 continent gained in air connectivity against the million) exceeded intercontinental traffic (2.68 rest of the world based on rankings but not million) in 2020. This dynamic provides a strong necessarily due to new route development. tailwind for industry and policy makers to expedite Based on the Global Airport Connectivity Index regional integration efforts toward quicker recovery (GACI) discussed in the previous chapter: In and, ultimately, sustainable growth. 2021, the average ranking for the top 10 African airports was No. 162 in the world (versus No. Financial Impact 202 in 2019 and No. 181 in 2020), whereas the average ranking for the top 20 African airports Of the five dominant African carriers—Ethiopian was No. 278 (versus No. 298 in 2019 and No. Airlines, SAA, EgyptAir, Royal Air Maroc, and 278 in 2020). The top three African airports Kenya Airways—only three published positive average at 75, an improvement of 29 positions financial results during the 2018/19 fiscal year, (the same average was No. 104 in 2019 and with SAA and Kenya Airways reporting substantial No. 87 in 2020). While the pandemic hit losses and potential bankruptcy.viii Between 2015 intercontinental traffic hard, it impacted Africa’s and 2019, IATA reported accumulated losses of intracontinental traffic less so relative to other US$1.8 billion for all African carriers, that doubled parts of the world. with the addition of US$2 billion in losses in the 2020 fiscal year and an additional US$1.9 billion In Africa, intercontinental air passenger and expected for the 2021 fiscal year. The COVID-19- cargo flows generally dominate intracontinental related downturn exacerbated the losses incurred air traffic owing to the continent’s lack of by both SAA and Kenya Airways, which increased regional political and economic integration. But funding requirements for their governments. the pandemic has reversed this. For example, As shown later in this paper, the pandemic has in South Africa, because of COVID-19-related dealt a great blow to the already fragile finances restrictions in 2020, intercontinental flows of Air Namibia (liquidated), Air Botswana, Mango declined by 71 percent, while intracontinental Airlines, and SAX. 16 NAVIGATING BEYOND COVID-19: AIRLINE RECOVERY AND REGULATORY REFORM OPPORTUNITIES IN SOUTHERN AFRICA State Aid in Response to COVID-19 war. Although some of these restrictions are likely to remain in place in 2022, IATA expects international Globally, airlines have been receiving substantial traffic to reach 83 percent of 2019 volumes, government support to cope with the impact of with Africa lagging at a 76 percent recovery rate. the pandemic. This support adds up to US$211 Intercontinental connectivity is expected to be the billion (confirmed) and US$9.2 billion (tentative) traffic segment with the most prolonged recovery as of May 2022. Africa’s share is rather small— period—Africa and the Asia-Pacific are estimated US$4.9 billion (confirmed) and US$1.3 billion to recover with a one-year delay. (tentative), or 2.8 percent of the global total— which mirrors African governments’ constrained The forecasted air traffic recovery rates correlate fiscal space and their ability as well as willingness to the economic growth rate of a country. The to rescue the sector. Of the confirmed amount, South African economy is expected to recover US$2.94 billion (60 percent) represented airline from the impact of the pandemic at a slower rate bailouts through equity injection and US$1.9 than the rest of the region, with a 2.1 percent billion was provided as loans. The bulk of the growth in 2022, almost a third that of Botswana’s support has been focused on a few carriers, 5.9. percent. Botswana’s traffic recovery rate leaving out providers of infrastructure (airports, is expected to also outpace that of Namibia, air navigation services) and other segments of Lesotho, and Eswatini, which are forecasted to the aviation supply chain (service providers at grow their GDPs by 2.4 percent, 3 percent, and airports, airlines suppliers, and related industries). 1.8 percent in 2022, respectively. Sub-Saharan Africa is expected to have a 3.6 percent growth in This dynamic has raised concerns from the African 2022, closer to the world average of 4.4 percent aviation industry about a sector that may emerge than it did in 2021 (World Bank 2022). from the pandemic as significantly leveraged, posing risks regarding the ability to service debt— Reaching similar passenger volumes as in 2019 both interest and capital— obligations. Seventeen is expected to take at least three years in the African governments provided support to the airline Southern African region, with 2025 showing industry;ix the largest assistance worth R 26.9 billion similar capacity levels as 2019 (figure 3.6). (about US$1.89 billion) being provided by the South Significantly enhanced by South Africa’s domestic African government for the SAA Group.x None of market, which is expected to reach 70 percent the other four airlines studied published the exact recovery in 2021, the Southern African region is nature and value of financial support. Air Botswana expected to generate 19.7 million seats, of which projected a loss of US$15.6 million because of the 15.8 million will be from the domestic market. COVID-19 pandemic, which was expected to be This dynamic provides another evidential data funded by the state (Adamson 2020). point supporting a view around the importance of robust, domestic aviation systems—in that they Recovery Prospects will be the drivers of aviation recovery, together with regional connectivity. Border restrictions and closures, lockdowns, and quarantines in response to the COVID-19 pandemic resulted in most international airlines halting operations, especially intercontinental Sub-Saharan Africa is expected operations. The prospects of recovery of the to have a intercontinental market are rather bleak due to lasting consequences of the restrictions on 3.6% GROWTH international travel globally, elevated by the in 2022, closer to the world economic consequences of the Ukrainian-Russian average of 4.4%. 17 3. IMPACT OF COVID-19 ON THE SOUTHERN AFRICAN REGION Figure 3.6: Southern African Region Capacity operated and passenger throughput at all the Recovery Forecast airports managed by the Airports Company 40 of South Africa Ltd. (ACSA) until April 2022 35 in comparison to the same months for 2019 30 demonstrate that passenger volumes did not 25 recover to the same level as flights operated Millions 20 (figure 3.7). Apart from the lower demand and 15 10 flights operated, the calculated average loads 5 per flight have also reduced substantially as a 0 result of the lockdowns imposed in response to 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 the pandemic (figure 3.8). This is troublesome, Domestic International Total Region especially for international (intercontinental) Source: Original simulation for this publication based on ICAO recovery flights operated by aircraft with generally more rates and national GDP forecast. than 250 seats per flight (figure 3.9). The recent Domestic markets in the region are recovering low passenger loads on regional routes clearly faster, but there is a long way to go.xi In South demonstrate the need to operate smaller aircraft Africa, some of the local carriers with smaller on these routes, that is, “rightsizing,” in order aircraft, such as Airlink, which managed to to better align supply to demand, at fair pricing dissociate from the ailing SAA brand, have levels, supporting sustainable recovery. The entered main trunk domestic routes and restored recent stagnant and now low level of passenger connectivity to almost 60 destinations in the loads in the South African domestic market SADC region. implies that, in context to a market already consolidating, lagging load factors would For some intraregional routes, demand remains continue to materialize with the 180-seater depressed with low passenger load factors per narrow-body aircraft, generally operated by low- routes flown. The number of monthly flights cost carriers (LCCs) in South Africa. Figure 3.7: Total Percentage Decline in Passengers Carried and Flights (month on month of base year 2019) Percentage Decline in Passengers Carried & Flights (month on month of base year) 10% 10% 6% 4% 0% 0% -10% -10% -18% -22% -26% -30% -30% -29% -28% -30% -28% Percent Change -32% -33% Percentage Change -35% -36% -38% -36% -40% -38% -40% -41% -43% -44% -45% -43% -50% -50% -51% -51% -49% -48% -53% -54% -57% -55% -57% -63% -60% -63% -61% -70% -70% -66% -69% -70% -68% -72% -75% -81% -79% -85% -90% -90% -88% -89% -92% -93% -96% -97% -97% -99% -100% -110% -110% Jan. 2020 Feb. 2020 Mar. 2020 Apr. 2020 May. 2020 Jun. 2020 Jul. 2020 Aug. 2020 Sep. 2020 Oct. 2020 Nov. 2020 Dec. 2020 Jan. 2021 Feb. 2021 Mar. 2021 Apr. 2021 May. 2021 Jun. 2021 Jul. 2021 Aug. 2021 Sep. 2021 Oct. 2021 Nov. 2021 Dec. 2021 Jan. 2022 Feb. 2022 Mar. 2022 Apr. 2022 Pax Througput Flight Movements Pax Throughput Flight Movements Source: Original figure for this publication based on data from ACSA Passenger and Aircraft Flights accessed at https://www.airports.co.za/business/statistics/ aircraft-and-passenger. 18 NAVIGATING BEYOND COVID-19: AIRLINE RECOVERY AND REGULATORY REFORM OPPORTUNITIES IN SOUTHERN AFRICA Figure 3.8: Average Loads Carried per Flight at All Airports Company of South Africa Ltd. Airports Load Factor Evolution: ACSA Airports 80% 80% 75% 75% 72% 72% 72% 71% 69% 69% 70% 70% 68% 69% 69% 69% 68% 65% 65% 66% 60% 60% 57% 58% 57% 60% 54% 54% 55% 55% 57% 50% 50% 50% 45% 45% 39% 40% 40% 35% 35% 2015 2016 2017 2018 2019 2020 2021 2015 2016 2017 Domestic 2018 International Regional 2019 2020 2021 Domestic International Regional Source: Original figure for this publication based on data from ACSA Passenger and Aircraft Flights accessed at https://www.airports.co.za/business/statistics/ aircraft-and-passenger. Figure 3.9: Percentage Decline of Regional Flights and Regional Passenger Throughput at All Airports Company of South Africa Ltd. Airports Percentage Change in Passengers Carried by Region (month on month of base year) 25% 25% 5% Percentage decline of regional flights 5% and regional passenger throughout -15% -15% -35% -35% -55% -55% -75% -75% -95% -95% -115% -115% Jan. 2020 Feb. 2020 Mar. 2020 Apr. 2020 May. 2020 Jun. 2020 Jul. 2020 Aug. 2020 Sep. 2020 Oct. 2020 Nov. 2020 Dec. 2020 Jan. 2021 Feb. 2021 Mar. 2021 Apr. 2021 May. 2021 Jun. 2021 Jul. 2021 Aug. 2021 Sep. 2021 Oct. 2021 Nov. 2021 Dec. 2021 Jan. 2022 Feb. 2022 Mar. 2022 Apr. 2022 International Regional Domestic Source: Original figure for this publication based on data from ACSA Passenger and Aircraft Flights accessed at https://www.airports.co.za/business/statistics/ aircraft-and-passenger. While capacity and load factors describe supply Airlines dropping from 21 percent to 18 percent and demand, the substantially lower level of (prior to ceasing operations), while the South average passengers carried reflects the severe African airline FlySafair increased its share of financial pressure that airlines are under. For seat production from 22 percent to 35 percent the year 2020, airlines’ domestic seat capacity by maintaining operations.xii Airlink’s share of shares shifted, with SAA’s share dropping from seat capacity production rose from 1 percent to 6 21 percent in 2019 to 11 percent in 2020, Mango percent, and CemAir increased from 1 percent to 19 3. IMPACT OF COVID-19 ON THE SOUTHERN AFRICAN REGION 2 percent of seats produced in the South African had been in the process of capacity consolidation domestic market over the full years of 2019 and in the domestic market, ceding some of this 2020. Combined, SAA and Mango Airlines’ share to Mango Airlines and, to a lesser extent, of capacity dropped from 42 percent in 2019 to its franchise partners at the time—SAX and 29 percent in 2020. Comair’s two airline brands’ Airlink. Airlink increased its production of seat share of capacity dropped from 34 percent in 2019 capacity to 2 percent in 2020. The remaining to 28 percent in 2020. seat capacity was produced by foreign airlines, notably Emirates, Qatar Airways, British Airways, In 2020, FlySafair operated the largest network Ethiopian Airlines, KLM Royal Dutch Airlines, in the South African domestic air passenger Air Zimbabwe, Lufthansa German Airlines, Air market. It operated five dense routes from or to France, Kenya Airways, Turkish Airlines, TAAG Johannesburg, Cape Town, Durban, East London, Angola Airlines, Air Botswana, Virgin Atlantic and Port Elizabeth, showing its robustness despite Airways, and Air Namibia.xiii the impact of the pandemic. Mango Airlines, the other LCC, continued operations but its share of Taking a step back at this point to look at domestic seat capacity dropped from 21 percent capacity across the continent at a granular to 17 percent after the initial COVID-19 lockdown. level, with the average seats per departure However, it did not restructure itself for the lower metric, highlights this trend of consolidation level of demand, which was not helped by its pre- and the need to right-size airlines. Comparing COVID-19 unprofitability streak, even with its 2019 and 2021, the average seats per departure sizable market share in the South African domestic were constrained by 10 percent from 122 to 110 market. As a result, it experienced cash flow issues across all carriers, indicating COVID-19-induced and implemented voluntary business rescue. drying up of demand and a simultaneous need for airlines to adjust capacity. Although published Internal seat capacity produced by SAA in capacity and operated capacity vary at times, 2019 slightly increased from 20 percent to 21 regional and narrow-body capacity supported percent in 2020. Over the last few years, SAA gains in recovery in 2021 (figure 3.10). Figure 3.10: Average Seats Per Departure Across Africa (month on month, 2019 vs. 2021) 126 124 124 123 123 123 123 124 122 122 122 122 120 119 Average Seat per Departure 118 117 117 116 114 114 114 111 111 111 112 109 109 109 109 110 107 108 108 106 106 104 102 100 Jan. Feb. Mar. Apr. May. Jun. Jul. Aug. Sep. Oct. Nov. Dec. 2019 2021 Linear (2021) Source: Original figure for this publication based on OAG data. 20 NAVIGATING BEYOND COVID-19: AIRLINE RECOVERY AND REGULATORY REFORM OPPORTUNITIES IN SOUTHERN AFRICA Market demand for air passenger transport 1987 Helderberg air crash that resulted in the remains weak and loads carried are insufficient prohibition of South African-registered aircraft to achieve breakeven load factors; for the most from carrying cargo and passengers on the part, fares remain high yielding and extractive— passenger flight deck.xiv Since April 17, 2020, although there was slight flexibility during the South African airlines may apply for a temporary initial stages of recovery. These circumstances exemption to transport cargo in the passenger favor the “rightsizing” of the aviation industry cabin, including on installed seats, with adequate supporting lower-gauge aircraft, such as regional restraints. Aircraft are permitted to carry only and crossover aircraft. The operation of the same COVID-19-related medical and essential size (pre-COVID-19) aircraft by airlines under supplies during the pandemic for no more than current circumstances, even at lower frequencies, a month since receiving the exemption (SACAA is problematic due to seat spoilage and ultimately 2020). South African carriers cannot carry any inefficient management of supply and demand. other cargo on passenger decks in an effort to The Airlines Association of Southern Africa increase the revenue base of aircraft to augment (AASA) notes that the recovery in long-haul traffic low passenger loads and make larger aircraft to and from Southern Africa in particular will take financially viable, especially on regional routes, some time and depends heavily on the rollout as many airlines, including Ethiopian Airlines and of COVID-19 vaccinations across the region and Qatar Airways, did. It is observed that several especially in South Africa. stakeholders, including airlines, respective associations, and the South African government, Recovery prospects for the air cargo market have highlighted the importance of air cargo as are also rather bleak. This is in part due to the key to sustainable aviation.xv Box 3.1: Travel Bubbles and Vaccination* Throughout the COVID-19 pandemic, are still disconnected; particularly several attempts have been made to international flights are yet far from having form travel bubbles. Such bubbles, returned to pre-pandemic levels. however, often burst before they are implemented. For example, the travel There have been major flight bans bubble between Australia and New between South Africa and other countries Zealand was cancelled multiple times due during the COVID-19 crisis; similar to unexpected COVID-19 outbreaks, for travel restrictions are observed for other example, an outbreak in Australia’s Victoria African countries. On the other hand, the state during May-June 2020 and a more existence of a “travel bubble” between two recent one in Sydney. While there have (or more) countries is expected to have been talks in parts of Africa to form such significantly less flight bans between each bubbles, the pace of actual planning and other, compared with countries outside implementation has been slow compared the bubble. Within a bubble, countries with other parts of the world. This could be may even lift all flight bans and travel due to Africa’s overall better performance restrictions (for example, no quarantine in handling the pandemic (in terms of the required for foreign travellers upon arrival) number of confirmed cases and fatalities). in an effort to stimulate mobility, trade, Consequently, large parts of the continent and economic recovery. For a return of 21 3. IMPACT OF COVID-19 ON THE SOUTHERN AFRICAN REGION the air transportation system to normality, received at least one dose of the Africa or its subregion need to map out COVID-19 vaccine for each month plans such that the region can provide a between January and May 2021 is, as multilateral platform with several phases, expected, positively correlated with enabling countries that have more or the same month domestic air traffic in less contained the virus to be the first to terms of aircraft seats (figure B3.1.1). establish travel bubbles, with others to That is, a large share of domestic follow in subsequent phases. passengers is positively correlated with a high level of vaccinations. Consequently, A critical enabler for travel bubbles if a country has a higher vaccination is vaccination against COVID-19. Is rate, then its airlines would have a more vaccination a prerequisite for reviving favorable domestic environment to international air connectivity? To answer operate in. Looking just at South Africa, this question, it is instructive to look at figure B3.1.2 plots the lagged vaccination the degree of synchronization between rate in a month (x-axis) against the the vaccination rates and domestic air number of domestic aircraft seats in transport connectivity in Africa. The the following month (y-axis). Again, the vaccination data are collected for five two are positively correlated with each months in 2021 (January to May), and they other in this one-country case. These are the percentage share of a country’s observations suggest the importance of total population who have received at least the government’s policy of promoting one dose of the COVID-19 vaccine. vaccination in helping domestic air transportation and, more generally, in An increase in the percentage share reviving international air connectivity of the country’s total population who (including travel bubbles). Figure B3.1.1: Correlation between Figure B3.1.2: Correlation between Airline Seat Capacity Supply and Airline Seat Capacity Supply and Vaccination Rate Vaccination Rate in South Africa 12 138 136 R2= 0.79113 11.5 134 Ln(seats) 132 130 11 128 126 10.5 124 0 5 10 15 20 25 0 0.05 0.1 0.15 0.2 0.25 0.3 0.35 Vaccination Rate 95% CI Fitted values Sources: Vaccination data are from https://ourworldindata.org/covid-vaccinations, and the domestic air traffic data are based on OAG data. Note: Based on general least square (GLS) regression and using 1/(vaccination rate)^2 as weight. CI = Confidence interval. Most countries in Africa do not have consistent reporting data for vaccination. For the following analysis, only consistent data for Côte d’Ivoire, Egypt, Ethiopia, Kenya, Morocco, Niger, Nigeria, South Africa, Tunisia, and Zimbabwe are available and used. The analysis first considers Africa as a whole. That is, we pooled the data for the above 10 African countries for which consistent reporting data for vaccination are available. *The analysis in this box is based on a background technical paper (Zhang, forthcoming). 22 NAVIGATING BEYOND COVID-19: AIRLINE RECOVERY AND REGULATORY REFORM OPPORTUNITIES IN SOUTHERN AFRICA References 8, 2021. https://www.news24.com/citypress/ business/lanseria-wants-its-r187-million- Adamson, Kabelo. 2020. “Air Botswana Expects from-mango-20210808. a P240 Million Loss Due To COVID-19.” Voice, OAG (Official Airline Guide). 2021. Traffic and July 14, 2020. https://news.thevoicebw.com/ Schedules Data. June. air-botswana-expects-a-p240-million-loss- SACAA (South African Civil Aviation Authority). 2020. due-to-covid-19/. “Guidance for Transport of Cargo in the Aircraft AFRAA (African Airlines Association). 2021. AFRAA Passenger Cabin – (COVID 19 Medical and Air Transport Report 2020. May. https://afraa. Essential Supplies).” April 17, 2020. http://www. org/wp-content/uploads/2021/06/AFRAA- caa.co.za/Airworthiness%20Important%20 AIR-TRANSPORT-REPORT-Q1_-2021.pdf. Notices%20%20Documents/Guidance%20 Daniel, Luke. 2021. “South Africans Are Now for%20Transport%20of%20Cargo%20in%20 the Most Restricted Travellers in the World.” the%20Aircraft%20passenger%20Cabin%20 Business Insider South Africa, March 19, -%20COVID%2019.pdf. 2021. https://www.businessinsider.co.za/ Smith, Carin. 2022. “Comair Placed in Provisional south-africans-are-now-the-most-restricted- Liquidation by High Court.” Fin24, June 14, travellers-in-the-world-2021-3 2022. https://www.news24.com/fin24/ Globaldata Travel and Tourism. 2021. “Low-Cost companies/comair-placed-in-provisional- Airlines Will Lead Post-Covid-19 Recovery.” liquidation-by-high-court-20220614. Aerospace Technology, February 11, 2021. https:// Sun, Xiaoqian, Sebastian Wandelt, and Anming www.aerospace-technology.com/comment/low- Zhang. 2021. “On the Degree of Synchronization cost-airlines-post-covid-19-recovery/. between Air Transport Connectivity and IATA (International Air Transport Association). COVID-19 Cases at Worldwide Level.” 2020. Annual Review 2020. November. Transport Policy 105: 115–123. https://doi. h t t p s : // w w w . i a t a . o r g / c o n t e n t a s s e t s / org/10.1016/j.tranpol.2021.03.005. c81222d96c9a4e0bb4ff6ced0126f0bb/iata- Wandelt, Sebastian, and Xiaoqian Sun. annual-review-2020.pdf. 2015. “Evolution of the International Air IATA. 2021. Air Connectivity: Measuring the Transportation Country Network from 2002 Connections That Drive Economic Growth. to 2013.” Transportation Research Part https://www.iata.org/en/iata-repository/ E: Logistics and Transportation Review 82 publications/economic-reports/air- (October): 55–78. https://doi.org/10.1016/j. connectivity-measuring-the-connections- tre.2015.08.002. that-drive-economic-growth/. World Bank. 2022. Global Economic Prospects. Lubbe, Berendien, and Joachim Vermooten. January 2022. Washington, DC: The World 2021. “Final Report - The Impact of COVID- Bank. https://www.worldbank.org/en/ 19 on the Tourism-Transport Interface in publication/global-economic-prospects. South Africa.” University of Pretoria, March. Zhang, Anming. Forthcoming. COVID-19 and Air https://tkp.tourism.gov. za /Documents/ Transport: Analyzing Policy and Operational Final%20Research%20Report_Tourism%20 Responses for Quicker Economic Recovery in Transport%20Interface.pdf. Selected Southern Africa Countries. Sauder School Nonyane, Mduduzi. 2021. “Lanseria Wants Its of Business, University of British Columbia. R18.7 Million From Mango.” City Press, August 23 3. IMPACT OF COVID-19 ON THE SOUTHERN AFRICAN REGION Notes through their networks, alliances, and loyalty schemes. i Intercontinental flows dominated international vii Data from Stats SA. air traffic in South Africa: in 2019, 93 million viii South African Airways went under business intercontinental passengers versus 82 rescue process in 2020, with plans for million intracontinental passengers. As a restructuring. consequence of the COVID-19 pandemic, intercontinental flows declined 71 percent ix Angola, Burkina Faso, Cameroon, Cabo Verde, in 2020. This decline is higher than that for Egypt, Côte d’Ivoire, Kenya, Mauritius, Malawi, intracontinental passengers (65.6 percent). Morocco, Nigeria, Reunion, Rwanda, Senegal, Intracontinental air passenger flows (2.84 South Africa, Tanzania, and Tunisia. million) outnumbered intercontinental traffic x This is made up of: R 16.4 billion (awarded in (2.68 million) in 2020. the 2020 Budget Medium Term Expenditure ii Based on ICAO (International Civil Aviation Framework (MTEF); R 10.5 billion (provided Organization) updates on. Effects of Novel for in the 2020 Medium Term Budget Policy Coronavirus (COVID-19) on Civil Aviation: Statement (MTBPS), a total of R 26.9 billion as Economic Impact Analysis. June 22, 2021: required in SAA’s business rescue plan. Future https://www.icao.int/sustainability/Pages/ government commitment in 2022 is estimated Economic-Impacts-of-COVID-19.aspx at R 3.5 billion. iii Flight connections, March 2022, based on xi The long-run elasticity between economic OAG data. development and air transport demand varies between countries and shows that the iv The notion of country networks was presented coefficient of air freight services is less elastic in earlier research by Wandelt and Sun than that of air passenger demand; that is, air (2015), which performs a data aggregation passenger demand is more strongly affected step to better understand the inter-country by changes in economic development than in air transport system without showing the air freight volumes. For instance, if GDP per domestic flows explicitly. In such a country capita increases by 1 percent in South Africa, network, nodes represent individual countries passenger demand and air freight volume and links represent flights between any two will grow by 0.6 percent and 0.46 percent, airports between these two countries. The respectively. This seems to show that air number of flights on a link in the country freight is often driven by the value rather than network equals the sum of flights along all the weight of a commodity, and that air freight airport pairs between the pair of countries. transport is more often used for time-sensitive v See Economic Impact Reports at the World commodities than for airfare-sensitive Travel & Tourism Council’s (WTTC’s) website at products. https://wttc.org/Research/Economic-Impact. xii Globaldata Travel and Tourism (2021) suggests vi Since SAA ceased operations, all that as LCCs have curtailed costs well and can intercontinental flights have been conducted better address affordability concerns, they will by foreign airlines (see appendix A for list). lead the industry in post-COVID-19 recovery Most passenger journeys (60 to 70 percent) and help revitalize air travel demand. on intercontinental traffic originate in the xiii Qatar Airways increased its share production source markets, where foreign-based airlines of internal seat capacity from 4 percent in operating to South Africa generate support 24 NAVIGATING BEYOND COVID-19: AIRLINE RECOVERY AND REGULATORY REFORM OPPORTUNITIES IN SOUTHERN AFRICA 2019 to 8 percent in 2020; Ethiopian Airlines Mauritius, killing all 159 people on board. increased its share production of seat capacity xv The Department of Transport (South Africa) from 4 percent in 2019 to 5 percent in 2020; established the Aviation Policy Review KLM-Royal Dutch Airlines increased its share Committee in 2021 with the objective of driving production of seat capacity from 3 percent in policy and legislative reform in the aviation 2019 to 5 percent in 2020; and Air Zimbabwe sector, collaborating inter-governmentally increased its share production of seat capacity and with the private sector. This designated from 1 percent in 2019 to 4 percent in 2020 chairing entity is the Airports Company of (see table A.1 in appendix A for details of South Africa Ltd. Nine commissions (and market share of foreign airlines). subsequent workstreams) exist, of which air xiv On November 28, 1987, the aircraft operating freight is one, where its importance has been flight SA295, a Boeing 747 Combi named recognized as well as the fact that there is no Helderberg, experienced a catastrophic in- government-specific framework on air freight flight fire in the cargo area, broke up in mid- that guides the development, enhancement, air, and crashed into the Indian Ocean east of and promotion of air freight in South Africa. 25 4. AIRLINE INDUSTRY’S EVOLUTION AND PREFERRED BUSINESS MODELS 4. Airline Industry’s Evolution and Preferred Business Models Key Findings and Recommendations to fully liquidate the airline—and severely hampering connectivity with increased • State-owned carriers in the Southern airfares, albeit within a relatively small African region have seen similar domestic market. evolutionary trajectories in many respects, mostly in the maturity/decline phase, • To enhance connectivity and the livelihood of where structural flaws—compounded by smaller carriers in ineffective markets, cross- COVID-19 dynamics—are creating further border investments and the elimination of vulnerabilities. non-conducive traffic restrictions would be required. Increased, mutually beneficial • In South Africa, three state-owned carriers airline partnerships across business models existed within a competitive air transport should be encouraged for aviation to market, accounting in 2019 for 42 percent progress sustainably. of the market share, which fell to 29 percent in 2020, as private airlines capitalized on • State interference, inadequate governance, SAA’s struggles. and lack of management focus on profitability objectives generated inefficient • Neither Air Namibia nor Air Botswana and loss-making companies. To improve operated in a market that assured results, qualified executive management reaching breakeven load factors or (across the four areas of financial, provided sufficient domestic traffic for commercial, operational, and strategic the equipment operated. Air Namibia’s management), a defined and measurable bankruptcy is proving to be expensive with set of objectives, and ringfencing of airlines an increasing deficit—required by the state from political interference are required. In 2019, 238 airlines operated in Africa of In terms of overall 2019 production, African airlines which 97 were IATA-registered African carriers registered an annual growth of 4.2 percent for that transported slightly more than 100 million ASK, outpacing the global average of 3.5 percent. passengers, 26.4 percent of total traffic.i Of However, the RPK of African carriers grew by only these only 14 airlines carried more than 500,000 3.7 percent compared to 4.2 percent worldwide, passengers per year, while 11 transported more highlighting the market overcapacity and significant than a million. South Africa was the only Southern downward pressure on the passenger yield that African country with airlines—SAA, FlySafair, dropped by 3 percent. The Southern African region Mango Airlines, and Comair—carrying more than registered an annual growth of only 2.85 percent as one million passengers. The productivity level of SAA continued to decrease capacity by 3.17 percent the African airlines, although slightly improving, and Westair Aviation dropped annual production by was still insufficient to cover costs. As such, in 17 percent; the 10-year compound annual growth 2019, African airlines generated a US$2.13 loss rate (CAGR) of the Southern African region’s ASKs for every passenger carried.ii were only 3.5 percent. 26 NAVIGATING BEYOND COVID-19: AIRLINE RECOVERY AND REGULATORY REFORM OPPORTUNITIES IN SOUTHERN AFRICA The level of inefficiency is also reflected in the domestic capacity within the Namibian market. load factor gap. African airlines closed 2019 at a record high load factor of 71.7 percent, 11 Prominence of State-Owned Airlines percentage points lower than the world average but five points above the global breakeven average Much like the rest of Africa, the Southern African of 65.9 percent. In 2019, the average load factor region is characterized by the dominance of of Southern African airlines was of 73.6 percent, troubled state-owned airlines. Paradoxically, lifted by the high load factors published by the the region is also home to few of the profitable LCCs FlySafair (84.4 percent), Mango Airlines privately owned airlines on the continent—in (82.8 percent), and Comair-Kulula (77.2 percent). South Africa, Namibia, and Zambia, among Airlink (66.3 percent), SAA (72.4 percent), and others. At the end of 2019, five state-owned Air Botswana (60 percent) were among the carriers in South Africa, Botswana, and Namibia lower performers.iii The risk of excess capacity accounted for 43 percent of capacity share of at inadequate fares to cover costs implies that these domestic markets (down to 29 percent in the outdated full-service carrier model cannot 2020) and 80 percent of regional international remain competitive if no steps are taken to adjust seat capacity (down to 73 percent in 2020). These to current market conditions. state-owned airlines are owned directly by their governments, lacking a level of independence that In terms of intraregional connectivity, the main could guarantee healthy governance regarding carriers were SAA with 500,000 seats, followed ownership and control, as well as separation of by Airlink, Air Namibia, Air Botswana, and duties between shareholders (governments), FlyWestair. Fifty-four airlines (eight scheduled) boards, and management. These dynamics serviced the market in South Africa during 2019, ultimately impact professional management of compared to only 11 (two scheduled) in Namibia these entities. Instead, these airlines suffer from and seven (one scheduled) in Botswana. Lesotho political interference, inflated costs (not linked to and Eswatini benefited from air links provided by revenue drivers in many cases), and insufficient Airlink, further supported by the through sales demand for their size of aircraft or operating of “SA” coded capacity, provided by the SAA scope and scale. Key management positions are franchise agreement. Prior to SAA’s business often occupied and/or influenced by individuals rescue, flights to Lesotho and Eswatini were from the ruling political parties. As instruments marketed under SAA’s “SA” IATA designator code of political favoritism, the carriers serve as labor and contracts of carriage (tickets) and operated shelters and transportation services at prices by Airlink with a codeshare mechanism. Since below production costs. As a consequence, most SAA’s business rescue, these two routes are airlines suffer from poor management and the currently marketed and operated by Airlink resulting low profitability or high losses and low under its own designator code and contracts levels of service, as well as, in some situations, of carriage. All other regional markets were reduced dispatch reliability, On-Time Departure operated by at least two carriers, which has (OTD) performance, and operational safety.iv been a long-standing market feature in the South African regional market. Following the cessation Generally, African state-owned airlines of Air Namibia and SAA’s operations, the have for decades experienced an unhealthy Namibia-South Africa market has been the most financial situation with low liquidity, years affected and offers opportunities for the other of unprofitability, and insolvency. High carriers to cover the routes. Airlink has used this indebtedness and limitations on state-owned opportunity to develop as the major independent airlines’ access to private financing without state regional carrier on existing route authorities, with guarantees resulted in profound fiscal costs. new scheduled incumbent FlyWestAir taking up Their unviable operations are funded by bank 27 4. AIRLINE INDUSTRY’S EVOLUTION AND PREFERRED BUSINESS MODELS loans, supported by state guarantees, which 2,000 annual flight hours, meaning five to five and commit states’ national treasuries for repayment. a half hours of daily flight time. Under the current What follows presents a quick recap of recent conditions (as well as seen during 2019 capacity airline performance in Botswana, Namibia, output), Air Botswana lacks sufficient demand for Eswatini, and South Africa. There is no state- this type of aircraft. Maintaining an ATR-only fleet owned carrier in Lesotho, and since 1999, Airlink would improve aircraft and crew utilization and has, in partnership with the Eswatini government, eliminate the direct and indirect costs of having provided scheduled air service to and from South another type of aircraft in the fleet. Africa,v although this changed in April 2022 (Government of the Kingdom of Eswatini and Air Botswana’s air network development is Airlink 2022). constrained by sparse demand and thin routes which are direct consequences of Botswana’s Botswana population distribution and geographic size. The airline operated 6,423 frequencies, being Botswana’s state-owned carrier, Air Botswana, connected with four daily flights to Johannesburg, operates two small turboprop aircraft and one sporadic flights to Zambia and Zimbabwe, a daily crossover jet aircraft on a network centered flight to Francistown and Kasane, and twice daily around Gaborone, the country’s capital. In 2019, to Maun.vi The three domestic cities served— the airline transported 253,417 passengers, had Francistown, Maun, and Kasane—represent 454 employees, and registered net losses of flights of one hour and 10 minutes, one and a US$4.2 million. It had a 46 percent market share half hours, and two hours, respectively, ranging of the international air transport market, closely between 421 kilometers and 932 kilometers. followed by SAA with 37 percent and Ethiopian Considering the conditions of the local roads, Airlines with 8 percent. The main international from Gaborone it takes more than eight hours connections were Johannesburg and Cape Town, to reach Francistown and 15 hours to Kasane, representing 32 percent of its deployed capacity the northernmost town in Botswana, making air of 432,039 seats in 2019. The airline operates travel the only reliable source of transport for four international (regional) destinations and travelers and in emergency situations. three domestic routes. The domestic market represents 51 percent of the seats, and 85 The latest census from 2022 shows Botswana percent of the capacity has been deployed with has a total population of 2.35 million inhabitants, ATR 42/72 aircraft. of which 231,592 live in Gaborone, followed by 98,961 in Francistown. The cities of Maun and One positive aspect about the airline is the Kasane have populations of 65,693 and 9,000, suitability of its fleet to the market size, as the respectively, a limited number of people to sustain ATR 42/72 is one of the lowest cost aircraft profitable air links. Air Botswana’s domestic to operate, offering a small number of seats, traffic flows are mainly capital centric, 17 percent between 42 and 78 per aircraft. The airline owns of Francistown and 98 percent of Kasane traffic, its ATR fleet and dry leases one Embraer E170 to while 36 percent of Maun traffic continues be used primarily to Cape Town, with little need to toward South Africa. The airline has only one be used elsewhere to recoup its operating costs. codeshare partner, Qatar Airways, on the route to In terms of operational performance of the leased Johannesburg and connecting passengers to its aircraft, the OAG database shows 35 frequencies domestic network. were flown during 2019 to Cape Town, and scheduled twice a week currently, building 416 As reflected in IATA’s World Air Transport flight hours per year for the jet aircraft. To operate Statistics (WATS) 2020, Air Botswana reported profitably, the E170 would require a minimum of a load factor of 60 percent and a very high yield 28 NAVIGATING BEYOND COVID-19: AIRLINE RECOVERY AND REGULATORY REFORM OPPORTUNITIES IN SOUTHERN AFRICA of US$0.25, almost double the yields published per flight, a small population, and limited aircraft by competitive African carriers.vii Such a high range, Air Botswana has a difficult path toward yield is an indication that the airlines charges profitability by scaling-up its operation. To gain high fares, a consequence of the limited number scale, the airline needs to have deep commercial of passengers available to cover the cost of a cooperation with a more established African flight, but it remained unprofitable. To reduce airline that has a strong regional market. losses, the load factor gap must be bridged, reaching a minimum of 70 percent. A deep dive Air Botswana incurred losses for a considerable into the additional operating expenses of the period before measures imposed by airline is also needed to plan a shift from a full- governments in response to the pandemic, service carrier (FSC) to a hybrid service operator. even after deducting government grants, Most importantly, the airlines should consider as published in a report by Botswana’s concentrating on domestic services with the aim auditor general. Between 2014 and 2018, the of achieving the lowest possible costs (to drive government of Botswana supported Air Botswana low fares and support the economy) and reliable with more than US$25 million in grants (table operations. Additionally, Air Botswana should 4.1 and figure 4.1). The auditor general reported increase partnerships with carriers operating that Air Botswana’s ability to continue as a going into Gaborone, as it has done with Qatar concern was dependent on the government’s airways, especially with regional carriers, such continued financial support as the airline’s losses as Airlink, CemAir, and larger network carriers, were expected to persist into the foreseeable such as Ethiopian Airlines. As with typical airline future. The auditor general’s report also indicated partnerships, opportunities exist to align Air that Air Botswana had not complied with all the Botswana’s flight schedules to the bank structures financial provisions of the Air Botswana Act of of partnered airlines, particularly on the regional 1988 (Chapter 74:07), which require the airline’s front, from Johannesburg’s JNB. With a limited revenues be sufficient to produce a reasonable network of seven routes averaging 40 passengers rate of return. Table 4.1: Air Botswana’s Losses and Government Grants Received Fiscal Year ending March Annual Loss before Grant Government Grant Net Loss in Pula Millions 2012 - 47,1 2013 - 75,8 2014 163,4 63,4 - 100,0 2015 184,2 19,4 - 164,8 2016 148,5 62,4 - 86,1 2017 113,4 101.0 - 12,4 2018 83,7 41,6 - 42,1 Source: Report by Botswana’s auditor general on the accounts of the Botswanan government for the years ending March 31, 2013; March 31, 2014; March 31, 2015; March 31, 2016; March 31, 2017; March 31, 2018; and March 31, 2019. 29 4. AIRLINE INDUSTRY’S EVOLUTION AND PREFERRED BUSINESS MODELS Figure 4.1: Air Botswana’s Losses and Government Grants Received 130,0 101,0 80,0 63,4 62,4 41,6 30,0 19,4 Pula (millions) -20,0 -12,4 -70,0 -47,1 -42,1 -75,8 -86,1 -83,7 -120,0 -100,0 -113,4 -170,0 -148,5 -163,4 -164,8 -184,2 -220,0 2012 2013 2014 2015 2016 2017 2018 Annual Loss before Grant Government Grant Net Loss in Pula, Millions Source: Report by Botswana’s auditor general on the accounts of the Botswanan government for the years ending March 31, 2013; March 31, 2014; March 31, 2015; March 31, 2016; March 31, 2017; March 31, 2018; and March 31, 2019. Like all airlines in the region and globally, the response to the pandemic on March 28, 2020. The pandemic has had a significant negative impact end of operations came after an announcement on Air Botswana. After an 85 percent drop in by the Namibian government that the country’s traffic in 2020, the airline was able to recover economy could no longer afford to perpetually 40 percent of its 2019 traffic in 2021. By the provide financial support to Air Namibia at the end of April 2022, it had recovered 60 percent expense of supporting economic growth and of its pre-pandemic traffic. While the airline was critical social services for pandemic recovery. supported with US$9 million during the crisis, Air Namibia’s losses were not disclosed, but on it is currently cash-flow negative. It continues February 10, 2021, Namibia’s finance minister said to fly by renegotiating and deferring payments. that Air Namibia had been making losses since its Air Botswana is following a three-year strategic inception, and it required substantial amounts of recovery plan (2021–24), focusing on diversifying money to bail it out of its current intractable debt its revenue streams and being more cargo driven. situation (Shiimi 2021, 1). Going forward, an objective and fundamental assessment of Air Botswana’s viability based on It is estimated that in the 2011–20 period, the realistic assumptions is necessary. Achievement Namibian government supported Air Namibia of minimum scale of activity will be problematic with N$5.4 billion (US$365 million before under the current conditions. Ultimately, the liquidation costs) in total subsidies, an additional Botswanan government will have to consider its tranche of US$65 million being budgeted spending priorities against the funding required to for 2021, but unallocated (table 4.2).viii On fulfill Air Botswana’s strategic purpose or mandate, December 24, 2019, the Namibian government which may be provided by new entrants or other issued a N$578 million loan guarantee to allow airlines within a competitive market context. Air Namibia to clear its debts to the ACSA thereby avoiding the suspension of flights to and from Namibia South African airports and allowing the airline to continue operations in the first quarter of 2020 Air Namibia, a fully state-owned carrier, ceased (CH-Aviation 2020b). The financial hardship faced operating on February 11, 2021, almost a year by Air Namibia during 2019 and 2020 ultimately after Namibia went into complete lockdown in resulted in the airline’s inability to repay €18 million 30 NAVIGATING BEYOND COVID-19: AIRLINE RECOVERY AND REGULATORY REFORM OPPORTUNITIES IN SOUTHERN AFRICA in international debts, which led to its insolvency 200 long-haul and A319 regional operations and liquidation. and a staggering amount of accumulated debt (despite regular subsidies) because of Table 4.2: Annual Subsidies to Air Namibia unsustainable losses.ix Debt is expected to be settled at a cost to taxpayers of US$375 million. Time Amount Transferred to Among the prominent liabilities, the airline Period Air Namibia (N$ Millions) accumulated US$47.7 million in debt to the Namibia Airports Company, and US$154 million 2011 1,600 to Castlelake Leasing, as a consequence of an 2014-15 472.2 early termination fee. The remaining amount is 2015-16 579.8 assumed to be additional debt owed to suppliers (CH-Aviation 2021). 2016-17 722.4 2017-18 629.6 With a population of 2.48 million inhabitants, Namibia is one of the smallest countries in 2018-19 740 the African continent. It has a GDP per capita 2019-20 budgeted 676 of approximately US$4,150 (2018, current 2020-21 allocated 984.6 budgeted US$), three times higher than the average sub- Saharan countries. In 2019, Namibia handled Sources: Ngatjiheue, Shihepo, and Immanuel 2021; IPPR 2018, 12; and IPPR slightly more than 1.2 million passengers and 2020, 4. ranked 27th among the African markets in terms Air Namibia operated eight international routes of passenger traffic. The country operates nine and five domestic ones and employed 733 airports. Eight of the nine are owned by Namibia people. It operated as a monopoly until June Airports Company. Of these, the most important is 2019 when a private airline, FlyWestair, now called Windhoek’s WDH which in 2018 handled 809,442 FlyNamibia, launched domestic scheduled air passengers. In terms of overall market share, Air services with one regional jet aircraft. A historically Namibia held 44 percent market share in 2019 struggling airline following an FSC business model, followed by SAA with 16.2 percent and FlyWestair without transparent financial disclosure, Air with 15 percent. Other carriers with market share Namibia had been operating a mixed fleet of 12 are Qatar Airways (5.2 percent), British Airways aircraft, comprising narrow-body and wide-body (5 percent), Ethiopian Airlines (4.55 percent), and aircraft, and transported 554,000 passengers KLM (3 percent). in 2019, maintaining a 44 percent market share versus 15 percent market share of FlyWestair. Namibia was connected to 16 international cities. Beyond the intra-African network that was serviced The most significant African hub was Johannesburg by four Airbus A319 and four Embraer ERJ135 with 50 weekly frequencies in 2019. Other hubs aircraft, with Luanda being the most profitable, are Doha (five weekly frequencies), Addis Ababa Air Namibia operated two Airbus A330-200s on (four weekly frequencies), and Lagos (five weekly intercontinental flights to Frankfurt, an operation frequencies). International traffic represented that represented 80 percent of the airline’s loss, more than 80 percent of overall traffic in Namibia, mostly due to low load factors and the high leasing and only 20 percent of passengers are Namibians. cost of the aircraft, that amounted to US$1.1 Foreign visitors are primarily Europeans, of which million each, a lease that has been guaranteed by 46 percent are German, and Africans, of which the state (Mare 2020). 88 percent are South African and Angolan. Most tourists arrived by land (71.6 percent) and only Public sources state that the fall of Air 27.6 percent by air. Of the domestic traffic, 65 Namibia was the result of loss-making A330- percent traveled between Windhoek and Walvis 31 4. AIRLINE INDUSTRY’S EVOLUTION AND PREFERRED BUSINESS MODELS Bay airports. Namibia had a high seat per capita expected. This includes Lufthansa’s subsidiary, compared to other countries in Africa, similar to Eurowings Discover, xi which launched flights from neighboring South Africa and Botswana. Cargo Frankfurt to Windhoek onward to Victoria Falls in handled by WDH was approximately 4,000 ton per Zimbabwe, on which it has not been granted fifth year, much lower than most of its African peers. The freedom rights. only freighter operation was offered by SAA with a Boeing B737F weekly operation. Other cargo was Air Namibia’s Operational Challenges transported in the belly of commercial aircraft. Air Namibia was stuck in a rut regarding Namibian GDP and GDP per capita have been loss-making operations on both regional and growing over the past 15 years, providing international routes over a long period of time. economic conditions that stimulate the demand A deadly combination of negative operational for air travel. Since 2009, international trade indicators of (1) too low average load factors and has not been developing alongside the economy, (2) too low average utilization of equipment (per with imports growing at a slow pace and exports day) made it unprofitable, stunted its growth, and shrinking at an annual average rate of 2.8 percent. eventually led to its downfall. The number of visitor arrivals has been consistently growing since 2010 at an average CAGR of 7.1 The most important airline management percent per year, reaching 1.4 million peak in 2015, decision—which aircraft size to fly—was not with South Africans and Germans representing 44 revised. Operating a too large aircraft for demand percent of the tourists arriving by air. The growth implies that there is simply too little revenue strategy of Namibia’s Ministry of Environment and generated to cover the cost of lifting and lowering Tourism targeted 1.5 million to 2 million visitors the excessive aircraft structure (which is not by 2020 and an annual growth of 7 percent until utilized), resulting in wasted or unrecoverable costs. 2030, plans that were scaled down as a result of The solutions are normally found in restructuring the pandemic. operating margins, by a combination of: Although Air Namibia ceased to exist, the air • Operating smaller aircraft, preferably at higher travel demand has been met by existing carriers, frequencies, which is favored by passengers both international and domestic. Some of the (often demonstrated as “S-Curve effect,” largest airline groups (Air France-KLM, Qatar which is common in transport economics);xii Airways, Lufthansa Group) were operating at WDH, increasing the level of connectivity offered to • Deployment of idle time to other routes customers traveling from/to Namibia. FlyWestair, or sharing aircraft capacity in block space, renamed FlyNamibia in late 2021, launched interline, or codeshare flights in which overall regional services to South Africa, and Airlink capacity of participating airlines is balanced launched services from South Africa to Namibia, to demand levels to avoid idle time (and a becoming the largest carrier on the market, with lack of cost recovery); 51.6 percent of all passengers carried during 2021.x It is expected that FlyWestair will be • Revenue management to improve average able to ensure domestic connectivity during the fares. However, turnaround plans, solely based recovery period. At the end of 2021, FlyNamibia/ on revenue improvement generally do not Westair was operating to seven destinations, materialize. This is due to the fear of losing market carrying 101,195 passengers, of which 63 percent share, especially true for dominant airlines. That were on the domestic service. International said, revenue management strategies are often airlines connect Windhoek with important source neglected in turnaround strategies, which are countries, although recovery rates are slower than required for sustainable profitability. 32 NAVIGATING BEYOND COVID-19: AIRLINE RECOVERY AND REGULATORY REFORM OPPORTUNITIES IN SOUTHERN AFRICA A shift toward smaller equipment (aircraft) is to “point of sale” strength, which is a common normally difficult for a state airline to accept, feature globally in several aviation markets. One as operating smaller equipment is seen (from airline normally has a stronger ability to generate the outside) as slipping backward. Dominant traffic in its home market, as the demand resides state-owned airlines (especially used to previous there due to a larger aviation market, stronger/ monopoly situations) tend to plan their capacity more distribution channels (for example, loyalty for peak demand. However, that implies that non- program), and higher network scope coming from peak flights will make losses due to inadequate the domestic network and frequency of flights. In demand. As there are normally more non- this case, with Germany as a source market, more peak flights than peak flights, the aggregate of network options (both international and regional) loss-making flights will overshadow the fewer were provided by the South African market for the profitable flights. In a competitive market, the South Africa-Namibia market. alternative is to scale down seat capacity and spill peak demand to non-peak flights (or to Capacity decisions should always take the competitors) to deal with the imbalance between airline’s ability to generate traffic into account. supply and demand. That said, it must be noted As a result, the directional traffic flow and that Air Namibia was making active efforts to pricing differentials in generating markets consolidate and right-size its fleet, as it already have to be considered. In competition between had Embraer ERJ 135s and had renegotiated its Air Namibia, Lufthansa, based in the European Airbus A330 lease conditions in 2020, as part of a Union’s (EU’s) larger passenger-generating source larger turnaround effort. market with a very large loyalty scheme, would be able to generate more traffic at higher prices than Air Namibia competed with much larger Airbus Air Namibia on the Frankfurt-Windhoek route. A319 aircraft against Airlink’s much smaller Also, Lufthansa would arguably have increased ERJ135s, notwithstanding the fact that Air operational efficiencies compared to Air Namibia Namibia operated the same size of aircraft as due to its ability to fully deploy aircraft resources Airlink on other routes. By pricing its services network-wide and across its two hubs, thereby below its cost, Air Namibia did not, however, mitigating idle time (underutilization). Air gain sufficient revenue due to Airlink’s matching Namibia’s situation could have been improved of Air Namibia’s pricing and greater scope of the by a capacity share agreement on equipment or Voyager loyalty scheme, under the SAA franchise. smaller aircraft, commensurate with Air Namibia’s As a result, Air Namibia’s yield remained too low ability to generate traffic at reasonable prices, if to generate enough revenue to cover its higher sufficient utilization could be achieved. direct operating cost and underutilization—that is, inefficient use of the larger aircraft and the ability The way Air Namibia was disposed of led to of Airlink to offer competing (matching) fares. significant costs. The state will still have to fund This situation was exacerbated by government a US$375 million gap with no asset or operation subsidies of operational costs, which enabled the thereafter. This has a negative, knock-on effect unviable situation to continue. This resulted in a on other members of the aviation ecosystem, predatory pricing investigation by the Namibian including the Namibia Airports Company and Competition Commission on Air Namibia’s smaller businesses. Although the future of air commercial behavior. The final court proceedings transport ownership by the Namibian government were interrupted by Air Namibia’s liquidation. is unclear, the country continues its economic development plan, the Harambee Prosperity Plan There is usually an imbalance in passenger II (2021, building off the first version covering an generating ability of the two home markets on earlier period) and the National Transport Policy over-border (international) routes. This refers (2016), both highlighting the role of transport and 33 4. AIRLINE INDUSTRY’S EVOLUTION AND PREFERRED BUSINESS MODELS desire that Namibia becomes the transportation in Eswatini, giving travelers to and from Eswatini and logistics hub of the SADC.xiii greater choice. The intention is to promote healthy competitive air transport services in this market Eswatini in order to promote and develop trade, tourism, and other economic opportunities. That said, In Eswatini, the government partnered with overcapacity should be balanced with market a private sector airline (Airlink) based in a stimulation and further network development neighboring country (South Africa) to operate that is commercially viable. air services under Eswatini Airlink’s name. This had been a long-standing relationship since South Africa 1999 and was supported under the franchise agreement by SAA. Eswatini Airlink was a Market structure corporatized partnership—its shareholding was split into 50 percent plus one share (Eswatini) and In South Africa, three state-owned carriers 50 percent minus one share (Airlink). The board existed within a competitive air transport was controlled by the Government of Eswatini for market, accounting in 2019 for 50 percent of the strategic and statutory decisions. The majority market share, which fell to 10 percent in 2021 must be Eswatini-owned, and the business was (figure 4.2). These include: SAA, an integrated operated from Eswatini. The general manager full-service network carrier (FSNC) that operated reports and responds to the board, but the on long-haul routes, domestic routes—although operational, commercial, and financial aspects in a multiyear domestic consolidation, and African of the day-to-day functions were contracted to regional routes with wide-body and narrow-body Airlink in a technical support agreement. Eswatini aircraft until it temporarily ceased operations in Airlink dry leased aircraft from Airlink, and it had September 2020 and recommenced a year later; a separate aircraft maintenance and backup SAX, which operated smaller turboprop aircraft support contract with Airlink. As a result, Eswatini and regional jets under a franchise agreement Airlink enjoyed cost advantages of the incremental with SAA until April 28, 2020, when it ceased costing associated with the route and not the total operations and was subsequently placed under fixed costs as would be the case had the operation Provisional Liquidation that is still ongoing; been a stand-alone airline, burdened with the Mango Airlines, an LCC fully owned by SAA which under-recovery of costs related to otherwise operated primarily on domestic routes within inadequate utilization of the aircraft and other South Africa (and previously, a single regional administrative functions. Eswatini Airlink was the route) until it was grounded on April 28, 2021, due only airline with government shareholding that to nonpayment of outstanding debt and placed has seen a degree of success in the region. in business rescue by court order on August 10, 2021, with an effective date of July 28, 2021. Twenty-three years after the cessation of its service, the government of Eswatini announced There are also six privately owned, scheduled, the revival of the national carrier in 2022. airlines: Kulula.com (an LCC with a market share Unsurprisingly, this led to the mutual dissolution of 19 percent in 2019 and 18 percent in 2020); of the long-standing joint venture partnership FlySafair (an LCC with a market share of 22 percent between the government and Airlink. Airlink in 2019 and 35 percent in 2020); Lift Airline stopped operations to Eswatini on June 1, 2022. (a new start-up LCC brand, operated by Global Further, from this date Airlink and Eswatini’s new Aviation—a charter and aircraft leasing company national carrier, Eswatini Air, will respectively that became a scheduled carrier in December provide scheduled air services between JNB 2020); British Airways Comair (a regional FSNC and King Mswati III International Airport (SHO) with a market share of 16 percent in 2019 and 10 34 NAVIGATING BEYOND COVID-19: AIRLINE RECOVERY AND REGULATORY REFORM OPPORTUNITIES IN SOUTHERN AFRICA percent 2020), operating narrow-body aircraft as secondary, regional routes, and leased aircraft to well as two regional airlines; Airlink, which operates other African airlines.xiv In December 2018, the turboprop aircraft, regional jets, and crossover South African Civil Aviation Authority (SACAA) aircraft on domestic and African regional routes; banned CemAir and grounded its fleet. In April and CemAir, which operates turboprop aircraft, 2019, South Africa’s high court ruled that decision regional jets, and crossover aircraft. Privately illegal and flights progressively resumed in owned CemAir, established in 2005, served some November 2019 (Charlier and Dobruszkes 2020). Figure 4.2: Private Airlines Increased Their Market Share to 90 Percent in 2021 100% 5% 15% 4% SOE: 10% 90% 2% 1% 80% SOE: 50% 22% 26% 70% 60% Private: 90% 42% 23% 50% 40% 24% Private: 50% 25% 30% 1% 20% 9% 10% FlySafair Mango South African Airways Comair 0% 2019 2021 Airlink Cemair Global Aviation Operations Source: Original figure for this publication based on OAG data. The inner and outer rings represent market shares in 2019 and 2021, respectively. In 2019, the South African capacity production only 38.7 percent of seats on the international consisted of 31.6 million seats in the domestic network. The South African domestic aviation market (which was reduced to 9.7 million in market has typically had healthy load factors. 2020) and 9.1 million seats for international However, overcapacity has been a challenge in flights (which was reduced to 3.2 million in recent years. 2020). Major global and African carriers provided about 88 percent of the international seats (see Financial performance table A.1 in appendix A). The domiciled carriers operating international flights were SAA, which The LCCs, state-owned Mango Airlines and generated 29 percent of the capacity in 2019 (21 the two private airlines, reported net profits percent in 2020); Airlink, 0.5 percent in 2019 (1.5 during the pre-COVID-19 periods, ranging from percent in 2020); Mango Airlines, 0.4 percent in Mango Airlines’ US$3.1 million (2015–17) to 2019; and CemAir 0.2 percent in 2020. Recovery Comair’s US$23.1 million (2019) to FlySafair’s rate expectation was not met in 2021, with only US$73.5 million (2019). Mango Airlines’ financial 50 percent of 2019 capacity being deployed. performance lacks clarity, as it was reported The domestic market saw a more rapid recovery under SAA’s consolidated format, and the latest reaching 56.3 percent of 2019 seats, while the court documents show that even the LCC arm was international market recovered only 34.5 percent. generating losses although it had a load factor The South African market output was significantly of more than 82 percent in 2016. The entry of affected by SAA’s flight suspension, as during its FlySafair into an already crowded market and short operation in 2021 the new SAA offered only the lack of dispatch reliability of the Boeing 737 1.58 percent of capacity scheduled in 2019, with aircraft severely affected the airline’s position on 35 4. AIRLINE INDUSTRY’S EVOLUTION AND PREFERRED BUSINESS MODELS the market. Appendix B depicts Mango Airlines SAA filed for voluntary business rescue on as a loss-making carrier upon the exponential December 5, 2019, before South Africa’s growth of its fleet in 2016–17, going from four to COVID-19 lockdown on March 27, 2020. In 15 aircraft. January 2020, it suspended several routes to reduce its financial challenges. A request SAX and Airlink (a private sector airline) both for further emergency financing due to the operated SAA franchise agreements prior to pandemic was denied in April 2020. The South SAA’s business rescue. They used SAA’s “SA” IATA African government announced that it would stop designator code and contract of carriage (tickets) additional funding for the airline. However, all debt in which less dense (non-trunk) domestic routes remains guaranteed and earmarked within the were initially served by the two airlines. Based on national fiscus. SAA ceased operations on May 2, fleet structure across the two airlines, SAX initially 2020, after 86 years of operations. However, SAA’s operated the denser domestic routes with its subsidiary, Mango Airlines, continued to operate Bombardier (now de Havilland) CRJ fleet and Airlink after the lockdown was lifted until its cashflows the thin secondary and tertiary routes, due to its were exhausted from April through June 2021. long-standing fleet selection of smaller regional SAA recommenced operations in October 2021, aircraft. Both SAX and Airlink expanded into as travel restrictions eased. In parallel the regional routes, employing similar strategies as the airline group’s shareholder representative, the domestic market. For example, Airlink developed Department of Public Enterprises, continued the an extensive network across Mozambique’s sale and purchase transaction with the private secondary and tertiary routes, while SAX operated equity led by Takatso Consortium. to denser routes, including Lubumbashi and Gaborone. These were generally symbiotic with The bulk of SAA’s recent financial difficulties the codeshare owner’s network—SAA. However, arose in the period 2012 to 2019, before the there were instances when cannibalization across COVID-19 lockdown. SAA operated profitably the code occurred (2015 to 2016) on high-yielding, in 2009, 2010, and 2011—although its contested routes such as Johannesburg-Gaborone balance sheet was still struggling—following a and Johannesburg-Bloemfontein. fundamental restructuring in 2007 and 2008. From 2012, a multiyear period of substantial Under the same competitive conditions losses started, which is still the case. Once the and business focus, Airlink was financially extent of annual losses became apparent from successful while SAX reversed from a profitable 2012 onward, various unsuccessful long-term history. SAX became financially distressed, and turnaround strategies were attempted. In the is in preliminary liquidation because of overhead process, initiatives to drive long-term efficiencies escalation, losses of commercial focus, and large- in SAA’s scale and scope of operations were scale misappropriation, as identified by auditor- implemented, with mixed levels of success. general reports (South Africa) and recently in the These included the continued free-sale Judicial Commission of Inquiry into Allegations codeshare with Emirates on the Johannesburg- of State Capture, Corruption and Fraud in the Dubai route; pursuit of a multilayered and Public Sector including Organs of State (the State extensive cooperation with Etihad Airways; Capture Commission). Since 2008, the South disposal of associate subsidiaries, for example, African government has provided R 1.66 billion South African Travel Centre; and rationalization (US$142.7 million) in financial aid to SAX, the and consolidation of the domestic network to airline having accumulated net losses worth R its subsidiary Mango Airlines, and franchisees 1.71 billion (US$120 million) since 2012. at the time, SAX and Airlink.xv Just before the 36 NAVIGATING BEYOND COVID-19: AIRLINE RECOVERY AND REGULATORY REFORM OPPORTUNITIES IN SOUTHERN AFRICA pandemic hit, SAA and Air Mauritius received billion (US$2.78 billion) (since 2007, figure 4.3) market regulatory approval for a joint venture on the (South African Airways Group 2019),xvi while Johannesburg-Mauritius route (although the private being a recipient of R 90.8 billion (more than sector was mostly against this) and for a deep US$6 billion) in financial aid since 1999 (table commercial agreement. Other strategic initiative 4.3). The 2018–19 fiscal year was closed for the changes were assessed, however not pursued—for airline with operating losses of US$214 million example, a joint venture with Emirates, and disposal and US$302 million in net result. SAA incurred of subsidiaries, such as South African Airways losses since 2012 that ranged between US$362 Technical and Mango Airlines. million and US$396 million per year. Despite all its restructuring programs, the airline had a fiscal Over the last few years, SAA was not regarded burden of US$1.08 billion on the pre-pandemic as a going concern and was fully dependent 2020 national budget, approximately 1.08 on government assistance to finance its percent of GDP (National Treasury of the Republic operations. It accumulated losses of R 33.7 of South Africa 2020). Figure 4.3: South African Airways’ Losses Between 2007 and 2020 1,000 649 323 500 7 0 (500) (32) (1,000) (883) (1,500) (1,291) (1,292) Rand (millions) (1,492) (2,000) (2,500) (3,000) (2,677) (3,500) (4,000) (4,500) (5,000) -5,045 (5,500) (5,619) (5,431) -5,417 -5,500 (6,000) 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Sources: SAA audited annual reports on March 31, 2007; March 31, 2008; March 31, 2009; March 31, 2010; March 31, 2011; March 31, 2012; March 31, 2013; March 31, 2014; March 31, 2015; March 31, 2016; March 31, 2017; and March 31, 2018; draft annual financial statements for March 31, 2019; and Mahlaka 2020. Table 4.3: Financial Assistance to South African Airways Since 1999 (R, thousands) Cash Transfers Guarantees Total State Aid Provided Provided to South African Airways under 14,634 - 14,634 Transnet control (1999 to 2007) Provided to South African Airways under 57,104 19,114 76,218 government control Total state aid provided to 71,738 19,114 90,852 South African Airways Source: Vermooten 2021. 37 4. AIRLINE INDUSTRY’S EVOLUTION AND PREFERRED BUSINESS MODELS SAA’s financial results reflect inadequate FlySafair, CemAir, and TAAG Angola. governance, poor management, expensive wide-body operation with aging aircraft for Typical of a highly unionized public airlines, the routes flown (including a large fleet of SAA had a large staff base of 7,893 employees, A340s), and mishandling of debt obligations, spending US$283 million annually on salaries. all directly linked to poor governance.xvii For The airline’s 2019 productivity level was low much of the last decade, the cost structure and when compared to other African carriers, having funding model generated by the airline and its 532 passengers per employee, compared to shareholder was flawed. The network structure 1,116 in Kenya Airways or 1,650 in Ethiopian was rational, however, fleet composition and the Airlines. While SAA’s cost per employee was cost structure of the company was a barrier to similar to Kenya Airways’, it was 42 percent growth. The decision-making processes between higher than Ethiopian Airlines’. In terms of management, board, and shareholder were highly ASK per employee, SAA ranked lowest among inadequate, reflecting a pervasive culture of poor its African peers, with 2.6 million/ASK versus governance. Furthermore, the airline averaged 3.6 million for Kenya Airways and 8 million for (in 2019) a 72.4 percent load factor, indicating Ethiopian Airlines. that the capacity was significantly above market demand, pressuring average fares and yields South African Airways 2.0 downward. SAX and Airlink operated most of the secondary routes through the aforementioned Although insolvent and with obligations toward strategic alliance with SAA. They used turboprop its creditors worth US$1.1 billion, the South and regional jets (mostly Bombardier and African government approved, once more, the Embraer) to fit with shorter runways and thin rescue of SAA. The June 2020 business rescue traffic on those routes. Their respective fleets plan on which creditors voted required R 26.9 showed SAA’s livery that included elements of billion (US$1.8 billion) in government funding. the South African flag, providing a soft impression This was to be provided with R 16.4 billion (US$1.1 that SAA operated the routes.xviii billion) for government-guaranteed creditors to be paid over three years and R 10.5 billion Another significant challenge for the airline is the (US$702.8 million) as a special appropriation.xix geographical location of its JNB hub. It requires expensive long-haul African and intercontinental To lessen the fiscal burden on the weakened flights, making the final product requiring national budget, the South African government connection via JNB less competitive in both price partnered with a private consortium, Takatso and travel time when compared to Eastern and Consortium, comprising Harith Capital Partners North African-based carriers on most of its routes. and Global Aviation. Under this public-private To deploy a successful future model, the airline partnership (PPP), the consortium would have would need to leverage the very large national a 51 percent stake in SAA, while the remaining market. This opportunity, however, is becoming 49 percent stays with the government (Republic increasingly limited as the new Airlink continues of South Africa’s Ministry of Public Enterprises to expand its domestic network over the (former) 2021). A due diligence process is underway to franchisee Airlink and subsidiary SAX networks. evaluate Takatso’s ability to pay its participation of Airlink also entered the main domestic trunk R 3 billion (US$200 million), the viability of SAA’s routes and expanded toward African destinations relaunch business model, and a joint assessment due to licensing constraints on other South African on the future of its subsidiaries.xx On August 25, airlines. Additionally, during the pandemic several 2021, SAA announced the commencement of African airlines have increased capacity to/from domestic and regional operations with five Airbus South Africa, including Ethiopian Airlines, ASKY, A320 family aircraft. 38 NAVIGATING BEYOND COVID-19: AIRLINE RECOVERY AND REGULATORY REFORM OPPORTUNITIES IN SOUTHERN AFRICA More recently, the amount required for SAA’s would be sourced from a Strategic Equity September 2021 relaunch was increased from Partner (SEP) [of which only R 3 billion (US$200 R 10.5 billion (US$702.8 million) to R 19.3 million) has been committed]. However, R 2.7 billion (US$1.3 billion) [announced by the South billion (US$180 million) of the R 10.5 billion African Department of Public Enterprises (DPE) (US$702.8 million) earmarked for SAA was on June 2, 2021] for which the government subsequently allocated to SAA’s subsidiaries. would provide R 14 billion (US$937 million) [an SAA is, therefore, already short of funding for its additional R 3.5 billion (US$235 million)], and envisaged September 2020 business plan by the remainder of R 5.3 billion (US$355 million) US$570 million as shown in table 4.4. Table 4.4: Funding for South African Airways 2.0 Funds Funds Shortage Required Available of Funding The future additional government portion R 14 billion (US$937 million) R 10.5 billion (US$702.8 million) R 3.5 billion (US$235 million) of South African Airways’ September 20 business plan Shortage in expectation from SEP R 5.3 billion (US$355 million) R 3 billion (US$200 million) R 2.3 billion (US$154 million) Allocation to subsidiaries R 10.5 billion (US$702.8 million) R 7.8 billion (US$522 million) R 2.7 billion (US$181 million) The extent of underfunding of South African Airways’ September 2020 Amended R 8.5 billion (US$570 million) Business Plan Source: Original table for this publication based on Department of Public Enterprises, Presentation to Portfolio Committee on Public Enterprises, SAA Group Status Update, Slide 6, June 2, 2021, National Treasury Republic of South Africa, Budget Review 2021, 95, www.treasury.gov.za. South Africa’s National Treasury reported in its approval of this transaction by various regulatory 2022 Budget Review that: “The Department of bodies. The public will be updated on further Public Enterprises aims to finalize the partial sale developments in this regard” (Williams 2022). of SAA to an identified SEP in early 2022. The carrier commenced scheduled flights in September General Considerations 2021, in line with plans for a conservative reentry into the domestic and regional markets. It intends A critical and distinct economic feature of the to introduce long-haul routes in the second half of African air transport market is the sparse air 2022” (National Treasury of the Republic of South traffic demand. As a result, sufficient aircraft Africa 2022, 95). utilization, scale, and network economies cannot be achieved in many parts of the continent. This is On February 25, 2022, a cabinet statement the main reason behind the failure of Air Namibia confirmed that it “was informed that further and the underperformance of Air Botswana. In progress had been made in the disposal of 51% most African countries outside South Africa, traffic of shares in the SAA to the Takatso Consortium, demand and disposable income (the propensity the preferred Strategic Equity Partner for the of pay) are so low that pricing stimulation to SAA” and that a sale and purchase process has generate more traffic volumes of demand is been concluded and signed by the Department ineffective. Domestic markets are essential of Public Enterprises and Takatso Consortium. for an airline’s sustainability and one of the key The Cabinet stated that the “next step involves the pillars of development in most business models. 39 4. AIRLINE INDUSTRY’S EVOLUTION AND PREFERRED BUSINESS MODELS Large domestic traffic is an enabler to develop a The proportion of publicly owned airlines as network capable of producing higher yields. a percentage of market share varies among Southern African countries, with 100 percent Neither Air Namibia nor Air Botswana operated of the domestic market relying on an SOE in in a market that assured reaching breakeven load Botswana, 74.5 percent (in 2019) in Namibia, factors or provided sufficient domestic traffic. and 41.2 percent in South Africa in 2019. Therefore, they cannot achieve critical mass and Nevertheless, when balancing the weight of the operate below the minimum economic scale for airlines in the African aviation sector, except for the size and scope of the activities operated, as South Africa, this aligns with the continental their markets are too small to generate sufficient situation where the purely state-owned airlines revenue to cover their operating and airline transported 69 percent of passengers and infrastructure costs. generated 77 percent of employment.xxiii In Africa, the productivity level of employees was The home bases and domestic markets of African of 742 passengers per employee, 34.5 percent state-owned airlines are generally protected less than the world average, indicating a against market access by non-domestic airlines significantly higher employment ratio, typical of by prohibiting the right to operate domestic the less efficient state-owned airlines (AFRAA services (so-called cabotage rights) and/or by 2020). Furthermore, government interference strictly limiting FDI into domestic airlines.xxi and non-commercial government mandates for Except for Mozambique, Angola, and Tanzania, state-owned airlines do not make profitability where full local subsidiaries of foreign airlines a priority. may compete against national carriers, no reform of access to domestic markets has occurred or The ownership structure of the airlines in the is envisaged. To enhance connectivity and the Southern African region has mainly relied livelihood of smaller carriers in ineffective markets, on public funding. The exceptions are South cross-border investments and the elimination of Africa-based private airlines which provided any traffic restrictions would be required. profitable service in many instances. However, airlines such as Velvet Sky, Nationwide Airlines, Limited for international operation by BASAs 1Time Airline, and Fly Blue Crane were all and without a minimal domestic network unprofitable. Comair, a long-standing profitable opportunity, most of the African carriers are private airline that showed signs of decline from unable to cover costs as utilization of their assets 2018, was in business rescue for two years and remains insufficient. The high structural cost level, has currently ceased operations until it receives worsened by high infrastructure charges, is the main funding (Comair Limited 2022). Providing the culprit behind the high average regional net fares of private sector with a fully equitable platform to US$60 per flight plus taxes and yields that exceed grow and compete, using their traffic rights to all the US$0.20 threshold, making African domestic existing BASAs, could greatly support the aviation travel unaffordable, which dampens demand.xxii ecosystem and ensure connectivity. 40 NAVIGATING BEYOND COVID-19: AIRLINE RECOVERY AND REGULATORY REFORM OPPORTUNITIES IN SOUTHERN AFRICA References Government of the Kingdom of Eswatini and Airlink on the Discontinuation of Operations AFRAA (African Airlines Association). 2020. of Eswatini Airlink.” Joint Media Statement, AFRAA Annual Report — 2020. https:// April 21, 2022. https://www.flyairlink.com/ www.afraa.org/downloads/afraa-annual- news-discontinuation-of-operations-of- report-2020/. eswatini-airlink. Charlier, Jacques, and Frédéric Dobruszkes. 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Swap Deal Goes Nene’s Way.” Yahoo News, c h - a v i a t i o n .c o m / p o r t a l / n e w s / 9 1 6 2 2 - December 22, 2015. Link. namibian-president-advocates-for-air- Mahlaka, Ray. 2020. “SAA reveals lockdown namibia-liquidation financial loss.” Daily Maverick, July 19, 2020. CH-Aviation. 2021. “Air Namibia Liquidated, Gov’t https://www.dailymaverick.co.za/article/2020- Negotiates Debt with Lessors.” March 30, 07-19-saa-reveals-lockdown-financial-loss/ 2021. https://www.ch-aviation.com/portal/ Mare, Hilary. 2020. “Cabinet Committee news/101984-air-namibia-liquidated-govt- Ignores Air Namibia’s Profitability Plan.” negotiates-debt-with-lessors. Confidente Namibia, July 2, 2020. http:// Comair Limited. 2022. “Comair Suspends Flights confidentenamibia.com/cabinet-committee- Pending Receipt of Funding.” May 31, 2022. ignores-air-namibias-profitability-plan. https://www.comair.co. za /media-room/ National Treasury of the Republic of South Africa. comair-suspends-flights-pending-receipt-of- 2020. Budget Review 2020. February 26. funding. Pretoria, South Africa: National Treasury. Government of the Kingdom of Eswatini and http://www.treasury.gov.za /documents/ Airlink. 2022. “Joint Media Statement by the national%20budget/2020/review/fullbr.pdf. 41 4. AIRLINE INDUSTRY’S EVOLUTION AND PREFERRED BUSINESS MODELS National Treasury of the Republic of South Africa. 2022. Budget Review 2022. http://www. Williams, Phumla. 2022. “Statement on the treasury.gov.za/documents/national%20 Cabinet Meeting of Wednesday, 23 February budget/2022/review/FullBR.pdf. 2022.” https://tdpelmedia.com/statement- Ngatjiheue, Charmaine, Timo Shihepo, and on-the-cabinet-meeting-of-wednesday-23- Shinovene Immanuel. 2021. “The End – february-2022 Air Namibia Sshutdown to Cost Billions.” Notes Namibian, February 12, 2021. https://www. i OAG (2019) data. namibian.com.na/208654/archive-read/The- end--Air-Namibia-shutdown-to-cost-billions. ii See 2020 World Air Transport Statistics at IATA’s website at https://www.iata.org/en/publications/ Republic of South Africa’s Ministry of Public store/world-air-transport-statistics/. Enterprises. 2021. “Minister Gordhan Announces Preferred Strategic Equity Partner iii See 2020 World Air Transport Statistics at IATA’s for SAA SOC Ltd.” Media Statement, June website at https://www.iata.org/en/publications/ 11, 2021. https://dpe.gov.za/wp-content/ store/world-air-transport-statistics/. uploads/2021/06/Media-Statement-DPE- iv As per Chambers (2018), in 2018, the entire fleet Takatso - Consor tium-and-SA Afinal-11- of SA Express (a state-owned regional affiliate June-2021.pdf. of South African Airways) was grounded due to Shiimi, Ipumbu. 2021. “Government’s Position safety concerns. on the Plan to Liquidate Air Namibia.” Media v As per CH-Aviation 2020a: “Airlink said that Statement, February 10, 2021. Minister under the revised terms of its partnership with of Finance, Republic of Namibia. https:// SAA, effective June 11, 2020, it will resume mof.gov.na /documents /35641/90651/ operating flights under its own ‘4Z’ flight code.” Minister%27s+statement+- Air+Namibia+Liquidation-Feb-11-2021. vi Seat capacity for the African market is based on pdf/4fba5d98-9b22-786d-bbdb- OAG (2019) data. 89533ecb64d3. vii ALG’s analysis of typical economy class fares South African Airways Group. 2019. “Group for routes shorter than 2,000 kilometers and Company Annual Financial Statements states that European airlines yield between for the Year Ended 31 March 2019.” https:// US$0.02/km and US$0.08/km compared to static.pmg .org . za /200515Draft _2019_ Latin American airlines that yield US$0.06/km S A A _ f i n a n c i a l s _ - _ 0 6 _ and US$0.11/km and intra-African airlines that December_20191815961.1.pdf. yield US$0.08/km and US$0.17/km. Ssamula, B. 2009. “Sustainable Business Models viii CH-Aviation (2021) claims that Air Namibia cost for the State-Owned African Airlines.” Paper taxpayers US$602 million over the past decade. presented at the 28th Annual Southern African ix The root cause of the airline’s financial distress Transport Conference (SATC) 2009, Pretoria, relates to the high cost of operating (A330 South Africa, July 6–9, 2009, 1–13. and A319) aircraft, which was simply too large Vermooten, Joachim. 2021. Presentation to the (and heavy) for the insufficient underlying Standing Committee on Appropriations demand for Air Namibia’s air services for some time before the reduced demand caused by - the Draft Special Appropriation Bill, B5 2021, COVID-19. Following Air Namibia’s demise, slide 9, South African Parliament, May 28. Lufthansa maintained Namibia’s connections 42 NAVIGATING BEYOND COVID-19: AIRLINE RECOVERY AND REGULATORY REFORM OPPORTUNITIES IN SOUTHERN AFRICA with Germany, and its subsidiary, Eurowings years, including network expansion through Discover, launched three weekly flights from deeper commercial relationships with regional Frankfurt Airport (FRA) to Victoria Falls Airport airlines such as Africa World Airlines in Ghana (VFA) via a stop at Hosea Kutako International whose West Africa network provided feed to Airport (WDH) in Windhoek. Unlike Air SAA’s JNB-ACC-IAD services. Namibia’s inability to deploy the A330 on xvi See appendix B, table B.1. for longer listing of other routes, Lufthansa can deploy its aircraft SAA bottom-line losses. on other routes to generate higher utilization of equipment. xvii A wide-body aircraft swap was implemented between the purchase of 10 Airbus A320s for x FlyWestair, a private Namibian charter operator, the lease of five Airbus 330s. There was widely entered the scheduled market in 2018 and reported conflict between management, replaced the national airline in the domestic the board of directors, and the shareholder market. In 2019, FlyWestair, now renamed representative (Le Cordeur 2015). FlyNamibia, offered 44 percent of the domestic seats. It has recently expanded its fleet to xviii Created in 1994, SA Express is fully more than 30 aircraft and operates cargo and controlled by the South African government. aircraft, crew, maintenance and insurance Thus, in contrast to Mango Airlines, it was (ACMI) services and charter services. It also not a subsidiary of South African Airways. leased aircraft to Air Namibia, which gave the SA Airlink was created in 1992 and was 97 airline a chance to expand to profitable routes, percent owned by private shareholders, with before its collapse. the remaining 3 percent owned by SAA. Both SA Express and SA Airlink were a consequence xi Based on OAG traffic data, during 2021, of South Africa’s aviation liberalization policy Lufthansa transported 7,470 passengers and introduced in 1991. Eurowings only 7,268. xix A general point to be communicated in the xii The S-Curve is the phenomenon by which case of SAA and its funding model is that the airlines that achieve a frequency-share South African National Treasury provided SAA advantage attain disproportionately high with government guarantees for going concern market shares. The emergence of LCCs have support. SAA further used the going concern challenged its presence, but the phenomenon support to seek debt with financial institutions is particularly pronounced in markets with two as its shareholder. However, the government legacy carriers (IATA 2006). chose to settle through liquidity injections to xiii State-owned entities are required to table settle the debt when it becomes due instead an Integrated Strategic Business Plan to of providing immediate equity support. As Parliament of the Republic of Namibia via the a result, SAA was in no position to settle the Shareholder Representative – the Department debt when it came due, and the South African of Public Enterprises. government would be settling the debt as it became due. As the debt is settled, the xiv As an aside, there are a plethora of charter guarantees issued are extinguished. airlines in South Africa that operate a range of flight frequencies. These semi-scheduled xx The business rescue plan included a provision charter services serve as an interesting model for South African Airways’ restart of US$200 of operation. The creation of the Lift Airline million. This is being used in the run-up to the brand was operationalized by this model equity transaction with Takatso Consortium. through Global Aviation in December 2020. xxi FDI and local ownership restrictions on airlines xv Some green shoots also occurred over the starve airlines of a sufficient capital base to 43 4. AIRLINE INDUSTRY’S EVOLUTION AND PREFERRED BUSINESS MODELS fund investment requirements of market com/StatutesActpdf/1988Actpdf/AIR%20 opportunities. National security motivations B OTS W A N A % 2 0 AC T, % 2 0 4 % 2 0 O F % 2 0 are based on the idea that local owners are 1988.pdf. more likely to consider the national interest xxii Direct operating and service costs in Africa or serve local stakeholder interests than are higher than in other parts of the world, foreign owners do (Ssamula 2009, 10). South including fuel, ground handling, finance, staff Africa requires (75 percent) local ownership training, maintenance of aircraft, computer and control for domestic airlines, limiting FDI equipment, and telecommunications (Ssamula to 25 percent, which is unsuitable to make 2009, 8). capitalization possible. Foreign ownership in Botswana is still not acceptable, however, xxiii Analysis based on IATA registered airlines the entrance into the scheduled service of based on 2019 published data. MackAir, a fully private Botswanan air operator, xxiv IATA feasibility study for a common policy in represents a step forward; Air Botswana Act, aviation charges, taxes, and fees for ECOWAS 1988, No. 4 of 1988, https://botswanalaws. states, 2018. 44 NAVIGATING BEYOND COVID-19: AIRLINE RECOVERY AND REGULATORY REFORM OPPORTUNITIES IN SOUTHERN AFRICA 5. Options for Restructuring State-Owned Airlines Key Findings and Recommendations Airlines’ Business Models and Economic Efficiency • The current environment presents an absolute need to restructure state- During the past two decades, liberalization owned airlines and push toward the forced airlines to close the gap between two implementation of cabotage and/or fifth main business models: the “network carrier” freedom rights within the Southern Africa or FSC and the LCC. While the FSCs focus on region. Governments must ensure that a diverse and integrated portfolio, wide route corporate structures and funding models, networks, and alliance memberships, the LCCs governance, and future-fit business deliver a model based on low fares, unbundled strategies are embedded in their airline. services, single aircraft type, shorter operations at higher frequencies, and, in many cases, • The move to hybridity of business models, operations at secondary airports. As price regional cooperation, and rightsizing of competition affected all airlines, the smaller businesses should be strategically agile. network carriers have especially been forced to reinvent themselves to survive and adopted cost- • Market growth and leadership through cutting and commercial practices traditionally continually delivering on the brand used by LCCs, generating the “hybrid airlines” promise; network growth regionally/ model (figure 5.1). LCCs also upscaled their internationally; and competitive, service offerings moving toward the hybrid diversified subsidiaries should be a focus. model. This opened up the traditional “no frills” model, which are now referred to as ultra-low- • Clearly articulated, long-term strategies, cost carriers (ULCCs), of which FlySafair is a visions, and missions should be good example. implemented. • A key element of success would be that the value proposition yields value—a healthy financial position, returns are The smaller network carriers reinvested for value creation, and the have been forced to public good of air transport is accessible to citizens. REINVENT THEMSELVES in order to survive. 45 5. OPTIONS FOR RESTRUCTURING STATE-OWNED AIRLINES Figure 5.1: Airline Business Models by Passenger Segments High Full Service Carriers (FSC) Hybrid Business and Corporate traffic Carriers High Value Leisure Cask Schedule and Connectivity Low Cost Price Sensitive are more important than price Carriers (LCC) Leisure and Corporate traffic Highly desired by Ultra Low Cost frequent flyer rather Price Sensitive Willing to pay more for (ULCC) than occasional traffic additional services Price Sensitive Leisure and Migrant workers Value connectivity to a Low Point-to-point service Point-to-point service certain extent Low Services & Passenger Benefits High Source: Original figure for this publication. Note: CASK stands for Cost per Available Seat Kilometer. The figure shows the relationship between service and passenger benefits and CASK, and also the most suitable type of service per passenger category. It can be observed that for developing markets, with price sensitive customers and mostly point-to- point service, ULCCs and LCCs are most suitable, as they can stimulate demand. Contrary to this, most Southern African markets are characterized by small full-service carriers, with high CASK and below break-even load factors, as they are unaffordable for most travelers hence cannot stimulate demand and remain trapped in a vicious circle of cost-price-demand. The hybridization of airline services can Aircraft manufacturers are considering the fleet tackle the two ends of the problem: costs and commonality aspects as a key selling point. revenues. One of the pillars of this business model relies on simplifying the product offering As depicted in table 5.1, the airline’s reservation by using a single type of aircraft or maximum two and distribution system represents another types. It is known in the industry that having a important part of the cost, as these two single aircraft type maximizes the use of human elements can reach 8 percent (or above) of the and technological resources. Pilots cannot fly two total operating costs in the case of the FSCs, while aircraft types simultaneously,i and the optimal LCCs manage to keep these costs 3 to 4 percent of use of pilots ranges between 750 to 800 annual the total by using less sophisticated technological flight hours per pilot, something that cannot be solutions that are deemed sufficient for the achieved when there are only very few aircraft of service and passenger category they service. the same type in the fleet, as the rest time and general flight operation regulations limits the Hybrid airlines have learned to unbundle the efficient use. Aircraft mechanics cannot use more product to a good extent, and many exhibit than two licenses simultaneously, having a similar family fares that are based on travel needs and effect on costs, although lower. In the same way, start from a basic “seat only” product to a full the investment made in spares and technological business class suite. Grouping services under support is linked to the individual aircraft different fares and enabling passengers to add type, resulting in additional costs. This is why the choice of required service provides for a good successful hybrid airline business models strive source of upselling and increased revenues. to use a single aircraft family type, something Additionally, implementing commission-based highly recommended for the studied market. sales, and other marketing products, can further 46 NAVIGATING BEYOND COVID-19: AIRLINE RECOVERY AND REGULATORY REFORM OPPORTUNITIES IN SOUTHERN AFRICA increase the revenue streams. African carriers in order to break this vicious situation. Despite lag behind the global trend, with Middle Eastern this situation, producing a shift towards a hybrid and African carriers generating a mere 9 percent airline business model can yield benefits to of revenues from ancillary services versus Asia Southern African carriers, but have been fully and South Pacific airlines at 38 percent, or in the embraced elsewhere on the globe. Americas 27 percent, and Europe and Russia and 26 percent (Sorensen 2020). The ranking of the 81 African airlines benefitted to a very limited extent IATA carriers that disclosed their financial reports, from the technological and business approach showed Kenya Airways with 7.3 percent of revenues implemented by successful airlines across the coming from ancillary services (US$17.67 revenues globe. They position themselves on the upper end per passenger) and Air Mauritius at 5.3 percent of of the business model scale, therefore offering revenues (US$18.50 revenues per passenger), in full-service and passenger benefits at a relatively the range of revenues per passenger earned by high cost (worsened by the higher than regular Lufthansa (US$18.07) or Air France (US$19.55), operating costs charged on the African continent).ii but below Emirates (US$34.29). While the lack of liberalization of most markets and high infrastructure costs limit the implementation The infrastructure charges in Africa remain of low-cost and ultra-low-cost models, the hybrid high, and are fully passed on to passengers, as airline business model would enable small and airlines only collect charges to pay onwards. mid-size African airlines to gain a higher rate of Governments are required to rethink strategies efficiency and reduce the level of fixed costs. Table 5.1 Airline Business Models and Their Value Propositions FULL-SERVICE HYBRID LOW-COST CARRIERS (FSCs) AIRLINES CARRIERS (LCCs) STRATEGIC Differentiation & Market Cost ADVANTAGE Volume Leadership Leadership Leadership NETWORK • Interregional and • Regional, small carriers that • Regional network structured International networks built have maintained the economy on point-to-point operation, around one or two hubs, of scale offered by a hub multiple bases, secondary focus on high-frequency system while implementing market operators operations and economy cost reducing operational of density practices from LCCs • Built on partnerships and • Targets both point-to-point • Push toward newer aircraft interconnectivity, relies and connecting passengers, types with improved fuel strongly on free-flow seat places focus on regional consumption and low allocation and joint ventures demand and the main maintenance costs in the with other airlines objective is market presence first six years and affordability PRICING & FARES • A complex fare structure, • Follows a simplified fare • Offers a simplified pricing dynamic or fixed, structure mixed with a la methodology, with limited associated with a diversity carte service offering and numbers of fares and of distribution channels. ancillary revenue. Maintains a ticketless solution. Offers to a small degree premium class and service Completely de-structured, ancillary services but most offering but focuses on with strong focus on a la services are embedded in addressing price-sensitive carte service offering and the fare. The main focus customers alike ancillary products that can 47 5. OPTIONS FOR RESTRUCTURING STATE-OWNED AIRLINES FULL-SERVICE HYBRID LOW-COST CARRIERS (FSCs) AIRLINES CARRIERS (LCCs) STRATEGIC Differentiation & Market Cost ADVANTAGE Volume Leadership Leadership Leadership is on connectivity and • Differentiates based on comprise almost half of international fare alignment target markets and different the airline’s earnings per with partner airlines. passenger segments passenger boarded • Aligns fares with partner network carriers but also uses aggressive direct sales techniques to attract low- cost passenger segments DISTRIBUTION • Uses mostly global • Mixes global distribution • Uses only direct sales distribution systems and to systems with direct sales, services and does not rely some extent direct channels although focus is being on third-party distribution (websites/call centers) placed on direct channels systems • Uses traditional reservation • Uses hybrid distribution • Uses specific LCC systems systems that can cater systems that focus on that focus on simplified, to the level of complexity airline-specific modules ticketless service, offering and rely heavily on travel that can also integrate integration with hotels, car management companies with Global Distribution rental, and touristic services Systems (GDSs), has lower to increase revenues • Handles a very large volume distribution cost targets of commercial agreements OPERATION • Diverse fleet covering all • Simplified fleet, of one • Single aircraft fleet, focused necessities from feeder or two aircraft types in on high-density single flights to wide-body aircraft operation, minimized cabin, small kitchens and premium cabin, and high- “cheaper” aircraft interiors • Almost half of the fleet is density economy with owned, increasing the debt no-frills service • Mostly leased fleet to limit levels and asset base the level of indebtedness • Push toward flexibility, and provide flexibility in increased level of aircraft times of crisis leases, and sales leaseback to ensure liquidity • Push toward higher levels of availability liquidity Source: Original table for this publication. South African region cabotage rights and airline only. This option would limit the level of beyond fifth freedom rights should be allowed penetration of the market of LCCs, which would for international operation to foster demand not be ideal, but better than the current situation. growth and access of low-cost and regional carriers to the smaller markets. As some As the densest routes from Namibia, Botswana, airlines could fear the loss of their competitive Lesotho, and Eswatini link these nations’ position, this could be mitigated by operating in capitals to the Johannesburg hub (and lately a codeshare agreement where the incumbent, to Cape Town), a common strategy focusing on loss-making carrier would remain a marketing maximizing the service from a hub-based airline 48 NAVIGATING BEYOND COVID-19: AIRLINE RECOVERY AND REGULATORY REFORM OPPORTUNITIES IN SOUTHERN AFRICA should be explored. It would, for example, be results, having left Air Seychelles in considerable economically viable for an airline based in JNB to debt, with Etihad Airways leaving the partnership operate a morning flight to WDH, and from there as of 2021. A similar situation can be seen in a return flight to Angola, to return in the evening Kenya when after the successful privatization of to its base in South Africa. In this manner, it could Kenya Airways, economic and geopolitical unrest offer daily connections to the hub, and on different coupled with ambitious fleet development plans days connect WDH to high-demand destinations. (2011 to 2013) resulted in large amounts of Extending a limited capacity out of a network debt and losses. With the aim of rescuing Kenya would yield positive results both for the airline Airways, as a minority shareholder the state and the country. Implementing branded fares and issued guarantees and provided lending facilities upselling pricing methods would bring additional in amounts that have grown into a liability of revenues, on average US$15 per passenger, a a magnitude beyond saving, paving the way feature foreseen in the new SAA business plan. to renationalization. Private airlines are better managed and more reactive to restructuring in Allowing private airlines to operate within times of crisis than those with SOE participation, an integrated domestic area comprising of as shown in the current crisis and enabling the the states under review (allowing cabotage private sector to undertake the airline operation is operations to airlines licensed in their territories) proving less costly for most countries. South Africa will naturally eliminate cash support from the has a proven track record of successful private state budget.iii The newly invested role of the state carriers, and the sector should be encouraged to should consist of ensuring a legislative framework develop profitably. Being sidetracked by another and creating responsible governmental agencies unprofitable SAA project during the COVID-19 to control the implementation of the national pandemic when most routes are consolidated aviation policies. and airlines are investing in strengthening existing partnerships could have a long-lasting negative Furthermore, the state should act as a facilitator, effect and eliminate Johannesburg from the top ensuring that the aviation infrastructure is 10 connecting hubs in Africa. at required standards, that the airlines are being charged a competitive range of fees and The governance of state-owned airlines, charges, and that a percentage of staff employed or lack of thereof, had a large impact on a represents nationals of the respective countries carrier’s profitability across the globe. The allowing for cabotage flights. Such benefits existing research does not show a conclusive could be obtained by extending the regional result for the benefits or drawbacks of state aviation policy to other subsectors. States could ownership in airline companies, and differences agree on offsetting projects by which specific were seen across regions. However, adequate maintenance, catering, training, air navigation, corporate governance practices have been safety, and other services could be supplied observed to reduce the over politicization, stiff from the country’s resources and create a pool of bureaucracy, and excessive volumes of staff services in the Southern African region that would in state-owned airlines. Furthermore, airlines consider aviation as a whole and not look only at with solid governance have a more balanced specific air services. approach toward hedging, de-risked decisions, behaved in a more agile manner, and are PPPs are available across the globe, with SEPs more prone to reduce fleet size and human having invested in SOEs. Some showed better resources to control costs. Research performed results than others. When looking at the African in the Chinese market by Chen, Chen, and spectrum, the Air Seychelles-Etihad Airways Wei (2017) found that the non-state-owned partnership of eight years did not yield positive airlines dominated and outperformed state- 49 5. OPTIONS FOR RESTRUCTURING STATE-OWNED AIRLINES owned companies, while Duppati, Scrimgeour, health-related cargo goods. However, only a few and Stevenson (2016) observed that the managed to remain self-sustainable, while the government holding in the Asia-Pacific region majority seek state and shareholder support. In had a positive effect on the airlines. While the the Southern African region, two state-owned quest for the optimal airline ownership structure groups, Air Namibia and SAA Group, failed to is ongoing, the mentioned studies conclude readjust fundamentally because they entered that the establishment of corporate governance the COVID-19 crisis with a poor financial position practice shifts the dynamic of the companies and unsustainable business models. These new that become more prone to adopt performance realities brought by the pandemic should become management methods with visible results in catalysts for business model enhancements and the financial performance of the airlines. substantial restructuring of unprofitable routes and excess personnel, fleet, and debt. The common denominator amongst successful corporate governance in SOE airlines relies on the Namibia existence of comprehensive governance policy and accountability mechanisms, established at With the liquidation of Air Namibia, the statutory the national level. Ensuring clear requirements protection monopoly on international and over the management structure; transparency domestic routes was eliminated, allowing for the of all processes, including procurement and initiation of scheduled services by FlyNamibia personnel performance management; and the (previously called FlyWestair), the incumbent reporting of financial achievements are key. Namibian private sector airline. To limit the draining None of the airlines analyzed provided the of Namibian resources, the Namibian government required level of transparency and availability approved the liquidation of its airline. However, of the financial reports, audit results, or any further steps need to be taken to enable private governance-related documents. sector airlines—both local and non-Namibian—to invest in the aviation sector, facilitating sufficient Airline Restructuring Options capitalization of domestic airlines, effective demand management, and long-term scalability. Experts agree that the pandemic will not only have a long-lasting economic effect but Given the pre-pandemic market structure, with that it will also change the shape of travel, as a low level of demand in the range of 1 million digitalization will replace to a large extent the passengers predominantly connecting to South need for corporate travel. With business travel Africa’s economic points, allowing South African representing more than 60 percent of passenger and Namibian airlines to operate cabotage revenues, airlines are rethinking their business services to/from Namibia globally would models to remain competitive in the COVID-19 maximize Namibia’s potential to reestablish aftermath.iv Across the world, airlines have been connectivity on routes that make financial sense. the most severely impacted stakeholders in the To maintain domestic connectivity, a PSO for those supply chain, losing more than two-thirds of their routes where no operation is feasible, but necessary revenues. Most African airlines had cash available from an economic and security perspective can be to support operations only for two to three months evaluated and publicly tendered. while state-owned airlines SAA, Mango Airlines, Air Namibia, and Air Botswana were not profitable Botswana and cash-depleted even before the pandemic. Some managed to reduce their operating Botswana, with a higher GDP per capita than expenses by renegotiating lease terms, reducing many countries in Africa and a small regional staff, or redirecting capacity for the transport of airline, suffers losses due to the lack of scale, 50 NAVIGATING BEYOND COVID-19: AIRLINE RECOVERY AND REGULATORY REFORM OPPORTUNITIES IN SOUTHERN AFRICA small domestic market, and insufficient flights, as of 2022, although it recognizes that utilization of its assets. In 2019, only 19,304 these were the routes that generated the greatest passengers traveled between Namibia and losses and registered pre-pandemic load factors Botswana, a number that is too low to make Air of only 70 percent. Botswana a potential contender for increasing its presence in Namibia. Also, the operation The new SAA would relaunch flights from of Namibia’s network to Angola (82,000 Johannesburg to Cape Town, Accra, Kinshasa, passengers), Ethiopia (60,000), or Zimbabwe Harare, and Lusaka, competing with regional (25,000) with the ATR fleet is not feasible due to carriers on some previously less competed the stage lengths of the flights, and due to heat routes, including Airlink, CemAir, Proflight and high airport elevations. Zambia, and RwandAir. The non-competed destinations of Kinshasa and Accra, while Throughout the last decade, the government profitable due to the lower breakeven load of Botswana has been searching for an factor, were suboptimal pre-pandemic with equity partner from the industry to shape load factors of 57 percent and 69 percent, the performance of Air Botswana, the latest respectively. However, there is reliance on the contender being private jet company AirShare high percentage of business class passengers Ltd. that offered to purchase 70 percent of the (20 percent) that were traveling pre-pandemic airline. While there is no evident relationship but will take a longer time to return fully to those between the two types of services, a regional levels. On the nearby routes, with competition carrier being the ideal partner to benefit from and currently low demand, Airlink, with smaller the network scale and spread of unitary costs, Embraer regional jets, will have a competitive a private majority investor would reduce the advantage as it will be able to adapt capacity SOE’s dependence on state grants and foster based on load factors to reduce costs. the development of a cost-savvy environment, ringfencing the airline from political influence. The main concern of potentially excessive capacity is that it could trigger the need for state South Africa financial aid to keep SAA operating. Although post disposal of 51 percent shareholding, The pace and shape of market recovery will this risk is significantly mitigated. SAA’s determine South Africa’s state-owned airlines’ network scope has been challenged due to its restructuring options and success. The recovery poor financial position. The airline currently is expected to last another two years. As of now, lacks network scope in comparison to Airlink’s there is more capacity available than required growing network of 13 countries and 45 in the country. British Airways and Kulula.com destinations from JNB. While Airlink has (Comair) recommenced operations in September expedited the development of partnerships with 2021. The new SAA has also announced the all major international airlines, SAA remains launch of domestic and regional operations with the airline with the most expansive partnership its five-aircraft fleet. Its low-cost subsidiary, network in the country. Furthermore, there are Mango Airlines, is aiming to restart with an eight- public concerns that SAA will not be able to aircraft operation, being in direct competition with raise the start-up capital required, and that the Lift Airline, an LCC owned by the private equity relaunching of routes will require a minimum partners of the new SAA company. This is contrary of six months of capital investment before to the new SAA business plan, where Mango they could yield results, maintaining the airline Airlines’ division would disappear and remain at a loss. It is, therefore, imperative that the as a sub-brand fare category. The business plan due diligence process between the Takatso supports the continuation of the intercontinental Consortium-preferred SEP and the government 51 5. OPTIONS FOR RESTRUCTURING STATE-OWNED AIRLINES of South Africa determines the approach and therefore, should ensure that the state-owned content of the capital-raising efforts of the airlines are not initiating operation on routes future investor without recourse to state aid for where there is overcapacity, which would result avoidable operational inefficiencies. in an unnecessary spending of public resources. Additional factors play against the new SAA SAA has prepared an ambitious but risky business plan, such as its image that has business plan to reenter the market, been seriously damaged, especially among considering the reestablishment of loss- high-paying corporate travelers, and the larger making long-haul flights as of the second aircraft size that will limit its capability to match and third years of operation. SAA has R 2 Airlink’s high-frequency/business travel-friendly billion (US$136 million) at its disposal and schedule. Relying on the regional airline’s launched a new service before conclusion network should be evaluated as a way to feed of an SEP agreement that would provide R passengers into the new hub system. Without 3 billion (US$204 million) of funding for the such a partnership, there is a high probability joint venture. that the relaunch of SAA will result in a high level of losses and low load factors. The initiation of long-haul flights under any economic environment should happen only Overcapacity can do more damage than good. with the support of a profitable domestic and Under the current constrained markets, airlines regional network. As such, the viability of the that have reported profits in the past (FlySafair, new SAA should be assessed prior to further Comair, and Airlink) can easily become unprofitable expansion or recapitalization. The business plan and insolvent, resulting in value destruction in the fails to present a segregated approach (maintain sector and overreliance on SOEs that have proven an intra-African network until conditions are incapable of offering a sustainable solution in met) and a mitigation plan in the event of a the past. Economic regulators and shareholders, prolonged COVID-19 crisis. 52 NAVIGATING BEYOND COVID-19: AIRLINE RECOVERY AND REGULATORY REFORM OPPORTUNITIES IN SOUTHERN AFRICA References Notes i Unless part of the same family of aircraft, with Chen, Su-Jane, Ming-Hsiang Chen, and Hsu- common cockpit, such as the Airbus family Ling Wei. 2017. “Financial Performance of aircraft. But flying Airbus and Boeing, or of Chinese Airlines: Does State Ownership Embraer at the same time is not permitted. Matter?” Journal of Hospitality and Tourism ii IATA feasibility study for a common policy in Management 33 (December): 1–10. https:// aviation charges, taxes, and fees for ECOWAS doi.org/10.1016/j.jhtm.2017.08.001. states, 2018. Duppati, Geeta, Frank Scrimgeour, and Rikkie iii In order to maintain domestic and regional Stevenson. 2016. “Corporate Governance in connectivity, and to drive down fares, the Airline Industry-Evidence from the Asia- countries can consider granting interim Pacific Region.” Corporate Ownership & Control traffic rights (including fifth, seventh, and 13 (2): 329–335. https://doi.org/10.22495/ eighth freedoms) to all airlines willing to cocv13i2cLp2. operate specific routes that have been Higgins-Dunn, Noah. 2020. “Bill Gates Says More interrupted or where competition levels are Than 50% of Business Travel Will Disappear in too low. Post-Coronavirus World.” CNBC, November 18, iv See Lufthansa’s Sleeper Row as an affordable 2020. https://www.cnbc.com/2020/11/17/ alternative to Business Class, consisting of coronavirus-bill-gates-says-more-than- three economy seats as a lie-flat bed setup 50percent-of-business-travel-will-disappear- with comfortable pillows, blankets, and long-term.html. mattress, as offered in Business Class. Sorensen, Jay. 2020. The 2020 CarTrawler Yearbook of Ancillary Revenue. Edited by Eric Lucas. IdeaWorksCompany. https://ideaworkscompany. com/wp-content/uploads/2020/09/2020- Ancillary-Revenue-Yearbook-1.pdf. 53 6. REGULATORY CHALLENGES AND REFORM OPPORTUNITIES 6. Regulatory Challenges and Reform Opportunities Key Findings and Recommendations inbound tourists from significant tourism source markets. • While there has been an easing of market regulation, critical regulatory hurdles remain • State assistance to airlines needs to in the five countries, and the broader SADC be based on investor principles and region, to make the air transport sector truly competitively neutral so that state financial competitive. Domestic airlines are regulated, support does not distort competition and often subsisting as state-owned services tilt the playing field against other firms in that do not consider commercial interests the aviation industry. The operation and but, instead, maintain a system of domestic subsidy of air services through a state- travel that is economically unsustainable. owned airline is costly and diverts funding from other government projects, which • Paradoxically, the region is also home may have a greater need in the post- to some of the most profitable privately pandemic recovery phase. owned airlines on the continent, such as in South Africa, Namibia, and Zambia, • Safety standards in the five countries among others. This shows the possibilities are rather heterogeneous. With average if governments stopped running airlines Effective Implementation (EI) scores and created a conducive environment for below 50 percent, Lesotho and Eswatini lag the private sector to participate and thrive. far behind in terms of compliance with the International Civil Aviation Organization’s • Limited fifth freedom traffic rights for (ICAO’s) Universal Safety Oversight Audit foreign carriers are preventing network Programme (USOAP). As states with few development and diminishing consumer operators and light activity, both may welfare. Encouraging foreign airlines to benefit from pooling expert resources with enter and compete is essential for tourism other countries in the region and support development, especially the generation of from development partners. Market Regulation emergency mode because of the pandemic. Pre- COVID-19, liberalization efforts were gathering The five case countries have made relatively momentum under the SAATM initiative to better progress toward the full implementation foster a single unified interregional market. The of air transport market liberalization as SAATM is intended as an instrument for quicker per the YD in the SADC region (figure 6.1). implementation of the YD, which in principle With implementation scores of more than 60 opened the intra-African market in 44 countries percent, Botswana and South Africa are the since 2002 but did not result in actual market second and third most open countries in the openness. As a flagship project under the region. Liberalization efforts are, however, on African Union Commission’s (AUC’s) Agenda a temporary hiatus as countries operate in 2063, the SAATM has garnered the acceptance 54 NAVIGATING BEYOND COVID-19: AIRLINE RECOVERY AND REGULATORY REFORM OPPORTUNITIES IN SOUTHERN AFRICA of 35 countries. However, only a few of these Service Agreements (BASAs), which remain countries have taken concrete implementation the ultimate legal instrument for international measures through the revision of Bilateral Air market access rights. Figure 6.1. Share of Yamoussoukro Decision-Compliant Bilateral Air Service Agreements across the Southern African Development Community Members Mozambique Botswana South Africa Eswatini Namibia Comoros Lesotho Zimbabwe Democratic Republic of the Congo Zambia Madagascar Tanzania Malawi Angola Mauritius Seychelles 0% 10% 20% 30% 40% 50% 60% 70% 80% YD Compliant BASAs as a % of Total BASAs Source: Original figure for this publication based on AUC (2021). Note: The bar graphs depict the percentage share of YD-compliant BASAs for each country based on a survey of the level of market openness that exists in each BASA with other African countries. South Africa flourish to the point of amassing more than 60 percent of the domestic market by 2019. The By deregulating its domestic market in 1990 market dynamics spurred by deregulation pushed and progressively liberalizing its international SAA to transfer part of its operations to regional market in subsequent years, South Africa has affiliates (SAX and Airlink) and to a launch a low- created a conducive regulatory platform for a cost subsidiary (Mango Airlines) with which SAA competitive air transport market.i SAA operated competed on main domestic trunk routes. as a monopoly on the main trunk routes within the domestic market from 1934 until 1990. In 1993, South Africa’s international air The market was then deregulated by abolishing transport market was liberalized. Certain statutory protection through a new aviation restrictive elements (barriers) of BASAs were policy and legislation that allowed private removed, which enabled foreign airlines to sector airlines to enter the market. Deregulation increase capacity. National interest became a introduced market competition which had two fundamental principle of the Airlift Strategy of distinct features (Charlier and Dobruszkes 2020). 2006 to determine the negotiating mandates First, Comair increased its positioning through for BASAs to ensure greater alignment with a franchise agreement with British Airways, government policies and strategies, particularly providing alternatives to SAA’s full-service with the tourism growth strategy (Accelerated and offerings. The presence of a foreign airline in Shared Growth Initiative for South Africa; AsgiSA). a domestic market was a novelty.ii Second, it Foreign designated airlines obtained much more allowed several low-cost airlines to emerge and capacity (flight frequency) frameworks, which 55 6. REGULATORY CHALLENGES AND REFORM OPPORTUNITIES stimulated inbound tourism substantially from reciprocity requirements for fifth freedom rights 2005 to 2014, after which the growth leveled off and the nationality requirements of foreign eligible as a result of internal regulatory and administrative airlines effectively prevent full implementation policy issues, especially visas. SAA claimed that it of the YD. The country needs to ensure all incurred losses on its intercontinental operations existing (and future) BASAs comply fully with the over a very long period, which reduced the provisions of the YD (especially Articles 2, 3, 4, 5, market attractiveness of such intercontinental and 6) and fully implement the SAATM’s concrete air services. By the end of 2019, only 12 percent measures to reap the full benefits of a liberalized of inbound tourists were carried by SAA. Major and competitive market (AUC 2021). international airlines ensured the country’s connectivity to important source markets. South Africa limits FDI in its domestic airlines to 25 percent (75 percent of voting rights are held by Since SAA ceased operations on May 2, 2020, all residents of South Africa) for domestic services, intercontinental flights have been conducted by but 49 percent for international air services foreign airlines. Most passenger journeys (60 to (substantial voting rights are held by residents 70 percent) on intercontinental traffic originates in of South Africa) together with some other the foreign source markets, where foreign-based assurances. Furthermore, the aircraft to be used airlines operating to South Africa generate support must be a South African registered aircraft, unless through their networks, alliances, and loyalty the International Air Service Licensing Council schemes. One-stop flights through intermediate exempts the applicant from this requirement, and Gulf airports have become an essential element be operated by South African licensed personnel. of traffic generation. Although not subsidized The government can also exempt the applicant before the pandemic, many of these airlines have from the 75 percent ownership requirement, obtained state financial aid to continue operations. but this has not been done so far in South Africa. BASAs are relatively liberal based on high-capacity The YD allows all “eligible airlines” established (frequency) frameworks, which make provisions and licensed in any YD state to be designated by for multi-designation of airlines. any YD state on any route. South Africa usually requires airlines designated by other states to be South Africa has not yet accepted the European substantially owned and controlled by citizens of horizontal agreement to replace BASAs with that state. South Africa also requires that majority individual European states. Although it has been ownership and effective control of SAA must be legally possible for private sector airlines from vested in South African nationals.iv South Africa to enter intercontinental routes since 2006, no airline has applied for such rights due Namibia to the higher risk perceptions of start-up losses and the prospect of competing with SAA and large Air Namibia had a statutory monopoly on foreign airlines.iii However, most South African scheduled air services in the Namibian domestic domestic airlines have concluded codeshare market from 1987 until November 16, 1998, agreements with foreign airlines operating in when its statutory protection was removed South Africa. from legislation. Air Namibia’s monopoly only ended upon a scheduled service issued to a As a SAATM signatory state, South Africa has private airline, FlyWestair, on June 12, 2019, by fairly liberalized its BASAs in Africa (table C.2). the National Transport Commission of Namibia In recent years, its domiciled airlines, including for the domestic and African subregion. Following private airlines, have increased their presence Air Namibia’s liquidation, FlyWestair launched on regional routes depending on the flexibility of scheduled air services on most domestic routes the BASA partner state. However, South Africa’s and regional services to South Africa, while Airlink 56 NAVIGATING BEYOND COVID-19: AIRLINE RECOVERY AND REGULATORY REFORM OPPORTUNITIES IN SOUTHERN AFRICA launched services from South Africa to Namibia. Prospects for Further Regional and Namibia is pursuing a strategy of BASAs Intercontinental Market Openness with African and non-African countries that promotes fifth freedom rights, facilitating the Further liberalize the African market development of routes that connect the country to new destinations. Namibia is one of the Overall, the five Southern African states have most liberalized countries in Africa, and the shown only moderate compliance with the full level of BASA liberalization with other African implementation of the YD through SAATM which countries can enable sector growth and the makes further market openness key for traffic deployment of foreign capacity. That said, recovery (AUC 2021). To progress toward the a full implementation of the YD in Namibia, realization of the SAATM agreement, the countries especially with regard to airline designation would need to define a national aviation policy provisions, has not yet been achieved. and create a common regulatory framework that would allow for foreign carriers to operate in their Botswana domestic and regional markets. A unified set of rules for the region should reflect a clear prioritization of Air Botswana (established in 1982) had a statutory aviation by the governments and the elimination monopoly, as per the Air Botswana Act of 1988, to of protectionist instruments that are currently operate air services to/from and within the country. limiting the maximization of growth. Namibia The Air Botswana (Transition) Act of 2003 changed and South Africa have a favorable environment this, and with recent participation of private airlines for the successful implementation of SAATM, such as Mack Air in scheduled international services while Botswana, Eswatini, and Lesotho need the market has witnessed more players. Botswana improvements to their regulatory instruments to has a level of YD compliance of 65 percent, the facilitate its enactment. The visa openness among highest in the Southern African region. However, these countries is high, with citizens being able the government can further lift the remaining policy to travel between 30 and 90 days on a visa-free restrictions allowing for other regional airlines to regime. When looking at an African perspective, operate in the market (AUC 2021). Although it however, South Africa ranks only 32nd out of 54 failed in the past, new negotiations with private countries on visa openness regimes, making it air operators from South Africa could enable harder to attract continental tourism. Air Botswana’s recapitalization and improve the country’s connectivity. At the time of writing, large parts of the continent are still disconnected as a consequence of The Botswanan government is currently working disruptions caused by the pandemic. International on the rationalization of major SOEs, which flights, in particular, are far from having returned includes Air Botswana. Over the past decade, to normalcy. For a return of the air transportation the Botswanan government has been searching system to normalcy, Africa or its subregion needs for an equity partner from the industry to shape to map out plans such that the region can provide a Air Botswana’s performance. With promulgation multilateral platform with several phases, enabling of the airline transition legislation in 2022, there countries that have more or less contained the is a new momentum to implement a privatization coronavirus that causes COVID-19 to be the first plan, but there appears to be limited preparatory to establish travel bubbles, with others to follow work to put the airline on the market. This calls in subsequent phases. Several ways to construct for a thorough due diligence to assess the airline’s optimal travel bubbles have been proposed and viability and worth, including corporatization discussed in the available literature (Sun, Wandelt, strategies that might result in its restructuring. and Zhang 2021). 57 6. REGULATORY CHALLENGES AND REFORM OPPORTUNITIES Although incipient, some findings show a their goals so as to create a business environment positive impact of liberalization, especially in the local aviation industry that is characterized in Namibia and Botswana where passenger by the existence of an integrated aviation policy volumes have increased. For SAATM to work framework, promoting commercial success of the fully, countries would have to allow unlimited local industry and by extension industry players. fifth freedom rights that would permit airlines Although not explicitly legislated in all cases, to develop a minimal network and generate practically different levels of this exist, including in passenger density at their hub.v This would New Zealand, Australia, the United States, Chile, result in cost reduction due to increased Ethiopia, Qatar, Turkey, and the United Arab utilization of resources. Within the context of Emirates. This approach strategically mitigates limited post-COVID-19 operations, fifth freedom the well-known structural challenges within rights would enable access to high-volume seat the African aviation environment, calling for a capacity that could sustain lower prices than on coordinated approach to aviation support across dedicated point-to-point flights.vi The scheduled the entire aviation value chain. In the current air transport markets of African states should be market context, this is to ensure acceptable levels liberalized as a matter of policy to allow entry to of safety, security, and efficiency and maintain African airlines under the AfCFTA to create an jobs while ensuring public confidence in air travel. internal aviation market instead of piecemeal The recovery of the aviation sector is also vital to liberalization via BASAs. tourism and economic recovery and will depend on the mobilization of proper policy tools and The COVID-19 disruption should represent a coordinated action by national governments with catalyst for change, and this should not only be the support of international institutions. looked at from an airline perspective, but also from a regional perspective, as greater benefits Increase participation by non-African airlines can be obtained by liberalizing the market and enabling the operation of profitable airlines from Further liberalization of the intercontinental South Africa in the smaller-demand neighboring market involves a delicate balancing act countries. The Eswatini Airlink solution yielded between the desire to jump-start the tourism positive results for more than two decades. A and travel sector vis-à-vis the protection of similar solution would enable the operation of market erosion for home-based carriers and domestic Namibian and Botswanan markets and airports in the region. For example, apart from their regional traffic, with the adequate aircraft the direct impact on tourism to South Africa, size, without requiring further capital investment. COVID-19-prompted travel measures taken by South Africa’s tourism source countries imply that Regarding the Southern African market, the South Africa’s role as a gateway hub for connecting establishment of a competitively neutral national intercontinental traffic to its neighboring countries aviation policy and transparent governance has declined and will further reduce in the future.ix practices like the EU Aviation Law that prohibits As a result, regional traffic between South Africa, state aid and fosters the development of a Namibia, and Botswana, as part of international competitive market should become a priority.vii journeys from major source markets, is rerouted Similar policies should align Southern African states through other intermediate airports, bypassing in reaching the common goal of air transport and routes between South Africa and other African economic growth, with the “Whole of State” (WoS) countries, like the Cape Town-Windhoek, Cape aviation policy framework approach.viii The WoS Town-Walvis Bay, Johannesburg-Windhoek, and is a holistic and coordinated approach to aviation Johannesburg-Walvis Bay routes. This will reduce development driven by a national government. It such connecting traffic for airlines like Comair seeks to mobilize the organs of state and synergize (British Airways), Airlink, and FlyWestair. 58 NAVIGATING BEYOND COVID-19: AIRLINE RECOVERY AND REGULATORY REFORM OPPORTUNITIES IN SOUTHERN AFRICA not be wasted. Such an arrangement would also From a strictly economic perspective, onward stimulate traffic to and from Namibia. flight sectors by airlines like Qatar Airways (between Johannesburg and Gaborone) and Furthermore, full cabotage could yield positive Ethiopian Airlines (between Victoria Falls and results on some of the long-haul operations, Gaborone) without traffic rights implies that like to/from Windhoek to Frankfurt, if operated substantial seat capacity on the flights operated from Johannesburg with a stop in Namibia. SAA is lost (wasted) for the local economies. Seats would need the additional passengers to increase on such sectors may not be sold as the traffic its 70 percent load factor, while Namibia would rights are withheld to protect local airlines under have direct access to the international tourism the assumption that the local airline should be market on which it depends economically. Multi- protected, or that its rights to third and fourth designation of airlines on over-border routes freedom traffic are more important than, for would increase the size of border (international) example, onward fifth freedom traffic rights, or flights. This would stimulate market development that such traffic belongs to the local airlines. for both Namibia and Botswana. Should such rights be granted to say Qatar Airways or Ethiopian Airlines, as mentioned, passengers The encouragement to foreign airlines to between the onward segment may prefer flying on enter and compete is essential for tourism a larger aircraft with more amenities than would development, especially in the generation of be found on locally based smaller aircraft. More inbound tourists from significant tourism source competition would be created due to the additional markets. Such airlines have an advantage of seat capacity, reducing prices and stimulating market access (through the advantage of network regional demand. While such a liberal provision scope or loyalty schemes). Due to their large of traffic rights to all airlines is unrealistic, it can network scope, foreign airlines would only incur be first granted to all local African operators to incremental route costs rather than the full cost provide feeder traffic on smaller-gauged aircraft, of limited operations with underutilized aircraft just as envisaged in the YD. which is typical of local airlines. This requires a market access approach that encourages more A more open traffic right arrangement presents an capacity (frequencies) for foreign airlines (to opportunity for local airlines to cooperate with the promote tourism) and less protection of a state- large international airlines through block space owned carrier against competition from such or codeshare agreements or even joint ventures, foreign airlines. instead of opposing the possible diversion of domestic or regional traffic that would not have Tourism development is cheaper as no subsidies been generated if the international airline does are usually necessary for foreign airlines. This is not operate such a connection. A recent example demonstrated by the increase in tourist arrivals is Eurowings Discover (the Lufthansa subsidiary), in South Africa following the adoption of its which operates three weekly flights from Frankfurt Airlift Strategy in 2006; the large development Airport (FRA) to Victoria Falls Airport (VFA) via a of inbound tourists at CPT in Cape Town, since stop at WDH in Windhoek. However, fifth freedom SAA stopped intercontinental operations from traffic rights on the Namibia-Zimbabwe (WDH- Cape Town; a foreign airline, Lufthansa, providing VFA) sector to pick up revenue passengers in inbound tourists from Germany to Namibia Namibia and carry them on to Zimbabwe, and vice (instead of Air Namibia’s loss-making Frankfurt versa, was not granted. This offers an opportunity route); as well as the example of Airlink operating for a Namibian airline to cooperate with Lufthansa between South Africa and Lesotho at its own risk, on an interline, codeshare, block space, or joint within the African regional context. A notable venture basis to ensure that seats produced will example of total reliance on foreign airlines at 59 6. REGULATORY CHALLENGES AND REFORM OPPORTUNITIES Cape Town due to the Air Access Programme (frequencies) remains problematic for private demonstrated tourism development without a sector airlines, especially since SAA’s grounding state-owned carrier to develop tourism.x and as a result of the licensing council members’ terms having expired without the appointment of Encourage more private sector participation their successors. This inhibited local carriers from entering the market, while these destinations The entry and expansion of private sector airlines have been operated only by the signatory foreign following the demise of state-owned airlines carriers. To ensure the development of the in South Africa and Namibia demonstrates sector, the government should consider enlarging that the connectivity previously provided by the accessibility of other carriers to the intra- state-owned airlines can be replaced by the African routes should the reformed SAA indicate private sector and foreign airlines without any losses. The delay on route allocation remains a subsidies. This implies that state-owned carriers serious hurdle to reestablishing networks and are not indispensable. In fact, it demonstrates that connectivity to meet pent-up travel demand. once market demand has been established and Unless quick actions are taken to redistribute market entry is possible, new suppliers (airlines) unused traffic rights, South Africa’s regional hub will enter the market. Similarly, all (or most) of status will erode further as travelers find other the economic benefits previously ascribed to the ways to travel to/from the country and subregion. state-owned airline are not lost upon the demise of that airline. Such benefits are merely provided Studies show that one of the success factors by the replacement airlines that enter the market of LCCs, beyond high utilization of assets and upon the demise of a state-owned airline. load factors, is the private ownership nature of business. LCCs are the segment of airlines that It seems that entry into scheduled air transport are recovering the fastest (Wizz Air in Europe is building on existing leasing, non-scheduled, back to pre-pandemic capacity profitably) and charter, or maintenance operations has been a under a common law could be used as catalysts more successful approach. Within South Africa for the recovery of the sector in South Africa and Namibia, investors in industries close to or and the region. A recovery would contribute to associated with the scheduled airline business the improvement of overall demand, bringing (mostly maintenance, non-scheduled, or charter trust back to travelers, and indirectly benefit the operators) have branched out into scheduled regional and international airlines that would see narrow-body airline business and launched new a boost in demand. The states should not create scheduled airlines. This implies using their existing LCCs and refrain for restarting failed ones but operations and knowledge as a springboard and instead focus on creating the proper regulatory a step up in the size of the equipment and the framework for existing successful airlines and the assumption of the additional financial risk of sector to prosper. operating to a fixed schedule. As a result, their entry into scheduled operations is an incremental Another option to encourage private sector step from their existing operations (although there participation includes offering targeted is a difference like the actual businesses).xi competitive subsidies to any player for PSO routes. For example, the United States’ Essential Within the African region, South African private Air Service (EAS) program and Europe’s imposition airlines and SAA’s frequencies increased on of PSO air services are nationally funded and most BASA routes, and some private sector intended to increase access to remote areas. A airlines gained market access, depending on the PSO requires assessing routes’ viability in the attitude of the other BASA state. However, route presence of indirect air transport alternatives at authority and the allocation of BASA traffic rights nearby airports. Where such routes cannot be 60 NAVIGATING BEYOND COVID-19: AIRLINE RECOVERY AND REGULATORY REFORM OPPORTUNITIES IN SOUTHERN AFRICA operated on a commercial basis or no airlines are competition and tilt the playing field for other willing to operate (even a small level of services firms in the aviation industry. The operation and on a commercial basis), and the routes serve subsidy of air services through a state-owned airline remote locations as a vital social and economic is costly and diverts funding from other government lifeline, such routes can be operated on tendered projects which may have a greater need in the grants which will underwrite the losses of the post-pandemic recovery phase. Recent history carrier. Airlines’ choice to operate any given route demonstrates that subsidized airlines do not want is decided by an open-tender process to ensure reform or turnaround. As a result, the state should competition for the routes. Therefore, such routes allow the exit of state-owned airlines to enable should not automatically be routes that a state- private sector entry into the markets. Where state owned carrier will operate for strategic purposes. financial aid is granted, a “balancing test” between However, specific branding could be offered as the beneficial effects of the aid against its adverse part of the tender process.xii impact on trading conditions and the maintenance of undistorted competition (and the assurance that Apply competition rules broadly the aid is proportionate) needs to be considered.xiii Other steps may have to be taken to create room State assistance to airlines needs to be for non-receiving private sector airlines and to competitively neutral so that it does not distort ensure a competitive market for consumers. Box 6.1. Reversal of Fortune: Onslaught of Low-Cost Carriers in the South African Domestic Market Over the last two decades, the South Altogether, the low-cost carriers (LCCs) African domestic market’s capacity (Mango Airlines, FlySafari, and Kulula. supply has doubled, while average com) have reached a dominant position in domestic fares have halved with South Africa accounting for more than 60 substantial welfare gains to travelers. percent share in 2019. The dominance of The market development, however, LCCs and “smaller” airlines has continued did not benefit all airlines in the same in 2020 and 2021. Together with LIFT manner. South African Airways’ market Airline, a new LCC entrant amidst the share has decreased dramatically, pandemic, these carriers now account although this was slightly balanced by for 86.6 percent share. At the same time, the development of its regional affiliates, the overall market share of the traditional such as Airlink and SA Express, and its airlines has dropped from 81.7 percent in low-cost subsidiary, Mango Airlines. 2019 to 13.4 percent in 2020. In contrast, while the seats volume of British Airways/Comair has grown by a factor of 2.4, its slice of the total market share grew from 12.2 percent to 15.8 Mango Airlines, FlySafari and percent. Charlier and Dobruskes (2020) Kulula, together with LIFT now note that this is in line with the relative account for demise of flag carriers often observed in domestic markets that are large enough to accommodate a second domestic 86.6% SHARE full-service network carrier (FSNC). 61 6. REGULATORY CHALLENGES AND REFORM OPPORTUNITIES Figure B6.1.1: Market Share by Airlines Figure B6.1.2: Market Share by Business Model 100% 100% 90% 80% 70% 80% 60% 50% 40% 60% 30% 20% 40% 10% 0% 1999 2004 2009 2014 2019 2020 2021 20% SAA (main) SAA (regional affiliates) British Airways Other traditional airlines 0% Mango Kulula FlySafair 1999 2004 2009 2014 2019 2020 2021 Cemair Lift Airlink Traditional Airlines LLCs Figure B6.1.3: Average Air Fare by Airlines 150 Average Fare (US$) 100 50 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Year Cemair Kulula Mango SA Airlink SA Express Safair South African Airways Source: Original figures for this publication based on Charlier and Dobruskes (2020) and OAG data. Note: Data are for the month of January for each year. State-owned airlines may compete with private drive private sector competitors from the market sector airlines within a competitive air transport through below-cost pricing, which will result in a market, but there are risks that discriminatory return to a state-subsidized monopoly, the loss of state financial assistance to a state-owned airline a competitive market with negative consequences may lessen competition within or act as a barrier to consumers. to entry to an air transport market. In both cases, the benefits associated with competition will be The risk of maintaining a competitive market (if lost to consumers, resulting in a tight oligopoly a level playing field is not assured or where there or monopoly if left unchecked. If entry barriers is excessive funding of state-owned airlines) is are large enough, state financial assistance could usually evident where: 62 NAVIGATING BEYOND COVID-19: AIRLINE RECOVERY AND REGULATORY REFORM OPPORTUNITIES IN SOUTHERN AFRICA • There is excessive scope of operations (or rest of other regions in Africa, steps have to be growth) not supported by the demand for the taken to mitigate any impact of state financial airline (to maintain a specific arbitrary market aid on the maintenance or expansion of the share, dominance, or where the focus is on competitiveness in the market.xiv This includes output or noncommercial objectives, which measures beyond those necessary for the timely distort market forces). return to viability to neutralize the distortions of competition created by the state aid (for example, • The state-owned airline’s losses are due cancellation of scheduled routes; the surrender to excessive flight and seat production at of slots; and reduction of the fleet, capacity, and inadequate fares and customer support to network) to provide opportunities for private cover the cost of production sector airlines (see highlights from competition cases from the region in appendix D). • There is discriminatory funding of state- owned airlines to cover operational losses, Improve safety regulation and standards which enables below-cost pricing that will drive private sector airlines from the market Ultimately, the benefits of a liberalized and competitive air transport sector are ensured Fair and free competition can be distorted not only when countries comply with international by the abusive behavior of dominant companies safety standards, as safety remains the but also by government interventions, such as number one priority for the industry. The subsidies and state financial aid. This is why level of safety standards in the five countries is effective safeguards are needed to prevent individual rather heterogeneous. Lesotho and Eswatini lag governments from giving domestic companies far behind in terms of compliance with ICAO’s undue advantages over competitors. These USOAP. Namibia falls short of the 60 percent EI measures to ensure a level playing field (also referred mark on three of the eight audit categories (figure to as competitive neutrality measures) could be 6.1).xv South Africa’s compliance, on the other contained in government policies, legislation, hand, is well above the global average across regulations, or enforceable assurances concerning: all categories. Botswana meets the minimum EI score for all except aerodromes where there is a • The equal treatment of airlines (market need to update its airport infrastructure.xvi participants) • The role of government and state-owned airlines and their mandates (to operate on a commercial basis) Fair and free competition can • The interests of users (who are exposed be distored by government financially) interventions sucha s While the Southern African region has seen a SUBSIDIES AND FINANCIAL AID greater involvement of competition authorities in the air transport sector compared to the 63 6. REGULATORY CHALLENGES AND REFORM OPPORTUNITIES Figure 6.2: Lesotho and Eswatini Lag Far Behind on Compliance with the International Civil Aviation Organization’s Universal Safety Oversight Audit Programme 100 90 80 70 Percentage of compliance 60 50 40 30 20 10 0 Legislation Organisation Licensing Operations Airworthiness Accident Air Navigation Aerodromes Investigation Services Global Average Botswana Lesotho Namibia Eswatini South Africa Minimum El Target Source: Original figure for this publication based on ICAO’s Universal Safety Oversight Audit Programme. States with few operators and light activity, of scale is paramount. While the SADC Aviation especially Eswatini and Lesotho,xvii may Safety Organization (SASO) exists, it lacks strong benefit from pooling expert resources with political will and support to provide much needed other countries in the region. As advocated by oversight functions among small operators/ ICAO, there is a need for the industry to grow charters/private aircraft operators in the region. to critical mass levels in all facets, including Strengthening such regional institutions would infrastructure development and maintenance, relieve the pressure on training investment efficient and effective air traffic management, and the ongoing maintenance of compensation aviation safety, and adequate human resources. necessary to retain experienced personnel. In order to optimize resources, grouping equally Development partners could support such minded states to pool their resources into activities through regional bodies or through regional institutions to benefit from economies bilateral engagements. 64 NAVIGATING BEYOND COVID-19: AIRLINE RECOVERY AND REGULATORY REFORM OPPORTUNITIES IN SOUTHERN AFRICA References not granted exclusively to an airline or state. Cabotage is usually granted only where the AUC (African Union Commission). 2021. domestic air network is underdeveloped or on Continental Study on the Benefits of the a route where domestic entry is insufficient, or SAATM and Communication Strategy for competition is lacking within an internal market SAATM Advocacy. Final Study Report. https:// or in particular circumstances. For example, www.saatmbenefits.org/saatm/wp-content/ South Africa granted cabotage rights to u p l o a d s / b s k- p d f - m a n a g e r / 2 0 2 1 / 0 8 / Sabena Airlines and BOAC to operate domestic Continental_Study.pdf. air services during World War II, when South African Airways was converted to military use Capobianco, Antonio, and Hans Christiansen. and no aircraft could be acquired for civilian air 2011. “Competitive Neutrality and State- services. Cabotage is currently excluded from Owned Enterprises: Challenges and Policy the African liberalization agenda. Yet, a fully Options.” OECD Corporate Governance integrated domestic market was necessary Working Papers, No. 1. www.oecd.org/daf/ for the substantial development of aviation corporateaffairs/wp. within the European context, including the free Charlier, Jacques, and Frédéric Dobruszkes. movement of persons and capital investment 2020. “Between External Forces and (within EU member states). Internal Factors: The Geography of Domestic iii Long-haul services by private sector airlines Airline Services in South Africa.” Journal of were tried before, including Trek Airways/ Transport Geography 87: 102795. https://doi. Luxavia (to Luxembourg and Munich, 1953 org/10.1016/j.jtrangeo.2020.102795. to 1994) and Nationwide Airline (to Gatwick Sun, Xiaoqian, Sebastian Wandelt, and Airport London, 1995 to 2008). Anming Zhang. 2022. “Travel Bubbles iv Foreign ownership of airlines is restricted to 25 in Air Transportation: Myth or Reality?” percent of voting shares in the United States Aerospace 9 (1): 38. https://doi.org/10.3390/ and Canada. The European Union (EU), on the aerospace9010038. other hand, allows foreign ownership of up to 49 percent shareholding for non-EU-based airlines Notes but has no restrictions for airlines licensed in i See appendix C for an overview of the regulatory EU member states, which may be established environment in case countries. and have market access anywhere in the EU. Only Brazil, Australia, and Mozambique allow ii Charlier and Dobruszkes (2020) note that this foreign companies to set up local subsidiaries is a phenomenon almost absent in Europe, to operate domestic air services. where large traditional airlines penetrate third markets by buying shares in “flag airlines,” but v Fifth freedom rights would allow another not in their own name. For instance, Lufthansa country’s airline to pick passengers and drop owns Austrian Airlines, Brussels Airlines, and them in another country than its own. The fifth Swiss International Air Lines, in contrast with freedom flights are attractive to passengers as European low-cost airlines. This contrasts with they are usually cheaper than flights dedicated other African countries where the flag airline of to the sector (priced on an incremental basis); the former colonizer is usually still very active, offer loyalty scheme credits on an airline with but only on the international market. The rights a more extensive network; typically use wide- to operate domestic services may be granted body long-haul aircraft, even though dedicated to foreign airlines, as long as such rights are services on the second flight sector usually 65 6. REGULATORY CHALLENGES AND REFORM OPPORTUNITIES use a smaller aircraft; and offer an opportunity x Additionally, a multi-stakeholder approach to to sample the service offerings of airlines tourism development is being implemented, typically not accessible in the second sector. including agencies such as South African vi A workable solution could be facilitation of Tourism (the national tourism promotion cooperation between a foreign airline (to agency), the Airlines Association of Southern operate on the route) and the local airline (to Africa, and the Tourism Business Council of market and sell the air services) on a block space South Africa (a private sector, member-based or codeshare basis. However, such cooperation organization supporting tourism businesses). would require local aeronautical authorities to These entities—both private and public accept the safety and operational standards, sector—have repeatedly called for increased which would not be under their “control.” liberalization for foreign airlines operating to and from South Africa, positioning the overall vii Regulation (EC) No. 1008/2008 of the European benefit to the tourism economy. In this period Parliament and of the Council removed all of COVID-19, these agencies were crucial in remaining commercial restrictions for European lobbying for tourism interests as the South airlines operating within the EU, thus setting up African government promulgated regulations the “European Single Aviation Market.” under the provisions of the Disaster viii A Whole of State Aviation (WoS) approach Management Act (Act 57 of 2002, Tourism presupposes that the aviation industry is Business Council of South Africa, Tourism deemed to be central and, therefore, strategic Business Council of South Africa’s Response for the purpose of enabling the success of to the Lifting of the National State of Disaster, other (public or private) entities that pursue April 4, 2022. https://tbcsa.travel/state-of- a commercial and/or developmental agenda disaster-lifting/). and are highly dependent on a reliable and xi Some examples of such approaches to expand economical airlift service to facilitate the from their existing businesses include: broader socioeconomic success of a country. 1Time Airline (2004 to 2012) was founded ix Examples of international flights that bypass by an aviation holding company, Afrisource South Africa are: flights to Windhoek in Holdings, which owned Aeronexus, which Namibia (Hosea Kutako International provided aircraft maintenance services; Airport); Qatar Airways via Qatar; Condor FlySafair (launched in 2014) founded by (seasonal) or Lufthansa via Frankfurt; KLM Safair, a South African maintenance and via Luanda in Angola; and African-based aircraft leasing company wholly owned by ASL airlines like Ethiopian Airlines via Addis Ababa; Aviation Group Ltd. based in Dublin, Ireland; TAAG Angola Airlines via Luanda; Mack Air, Lift Airline (launched in 2019), a joint venture Botswana’s first private airlines, operates between local aircraft leasing company Global between Maun (in Botswana) and Windhoek; Airways, former Kulula.com CEO Gidon Novick, flights to Botswana, where Qatar Airways and former Uber executive Jonathan Ayache; operates from Doha via Johannesburg to the FlyWestair (launched in 2019) a division of Sir Seretse Khama International Airport (GBE) Westair Aviation, aircraft maintenance, charter, at Gaborone. Ethiopian Airlines also operates leasing, cargo and Specialized Aviation Services from Addis Ababa via Victoria Falls to GBE. Namibian company. A greenfield entry to the These services will affect Air Botswana’s traffic scheduled airlines business, which is not based on services to Cape Town and Johannesburg. on the expansion of another aviation-related 66 NAVIGATING BEYOND COVID-19: AIRLINE RECOVERY AND REGULATORY REFORM OPPORTUNITIES IN SOUTHERN AFRICA activity, has generally not been successful in xvi Botswana has made important improvements South Africa, even with executives with prior in its safety oversight capabilities as well as business experience as shown in the demise in its implementation of the Single African Air of Fly Blue Crane (2015 to 2017), Velvet Sky Transport Market (SAATM) initiative. While the (2010 to 2012), and Skywise (2013 to 2015). country has modernized its airports in recent years through a big capex program from the xii Several governments in the Southern African government, given the low volume of traffic in region instruct developmental mandate the country the airports make big operational agendas in the airlines that they own, losses. The air navigation services, however, although many times this is in direct conflict are profitable and partly cross subsidize with commercial rational. The approach the Civil Aviation Authority of Botswana’s mentioned herein provides a strategic (CAAB’s) other functions. The International subsidy framework via PSOs, achieving Civil Aviation Organization (ICAO) will be developmental agenda objectives, however conducting an audit in June 2022 to assess providing all capable entities an opportunity the country’s safety oversight capabilities. to fulfil this need. Based on an initial assessment of ICAO’s xiii As argued in a 2021 EU Ryanair judgment. regional office, the CAAB was confident that it xiv The enabling legal framework is usually will reach 75 percent compliance, 10 percent regulated by the government’s department more than the global average of 65 percent. of transport or aeronautical authorities, as There is, however, a strong need for capacity the case may be. Despite its role as regulator, development to resolve the acute shortage of a government may restrict competition by technical inspectors. granting SOEs benefits not offered to private xvii For Lesotho, the last safety audit of ICAO, firms, as they have a vested interest in ensuring which was carried out in 2010, as well as that state-owned firms succeed (conflict of observations by ICAO in 2016 revealed interest). In this way, governments may create significant shortcomings in terms of oversight an uneven playing field (Capobianco and of the aviation sector. One of the issues is the Christiansen 2011, 19). lack of separation between the airport/ATC xv The EI score is a measure of a state’s safety operator and the regulator. A safety audit is oversight capability and an indication of a state’s still pending. A security audit is scheduled for degree of compliance with ICAO provisions. the summer of 2022. 67 7. SUMMARY OF POLICY RECOMMENDATIONS 7. Summary of Policy Recommendations This policy paper has explored salient airline travel and cross-border control for tourism restart, restructuring and regulatory reform challenges and provision of direct financial aid. The menu of and opportunities in the Southern African region short- to medium-term policy responses span the to distil operational and policy-relevant insights following eight strategic directions: for a sustainable recovery. Prior to the COVID-19 pandemic crisis, the air transport sector in Africa • Development of industrial policy for air faced multipronged challenges, including those transport related to economic regulation, profitability, safety, security, and sustainable financing of • Promotion of private sector solutions critical infrastructure. While the pandemic has exacerbated these challenges, it also presents • Liberalization of market access opportunities to tackle some of them. • Liberalization of foreign ownership and This chapter summarizes the main policy control responses to the crisis and to the legacy problems of the air transport sector in the region by phasing • Provision of essential/lifeline connectivity them in two steps: (1) immediate policy actions for air travel recovery (table 7.1), and (2) a menu • Restructuring of state-owned carriers and routes of short- to medium-term actions for a competitive and safe air transport sector (table 7.2). The three • Facilitation of market consolidation main immediate policy directions for a faster recovery of air travel are: facilitation of market • Improvement of safety standards and access for airlines, establishment of a common oversight capacity. Table 7.1: Immediate Policy Actions for Air Travel Recovery Policy Recommendations South Namibia Botswana Eswatini Lesotho Africa 1. Facilitate market access for airlines 1.1. Constitute South African licensing council and No longer reallocate unused route authorities to ensure applicablei continuation of air connectivity 1.2. Grant temporary traffic rights to non-scheduled Applicable Applicable Applicable Applicable Applicable traffic including the fifth and seventh freedom traffic rights to facilitate both passenger and all airfreight (cargo) flights 1.3. Lift, on a temporary basis, all restrictions on air Applicable Applicable Applicable Applicable Applicable cargo operations 1.4. Promote and enable airline cooperative Applicable agreements (relax restrictions on foreign direct 68 NAVIGATING BEYOND COVID-19: AIRLINE RECOVERY AND REGULATORY REFORM OPPORTUNITIES IN SOUTHERN AFRICA Policy Recommendations South Namibia Botswana Eswatini Lesotho Africa investment, seasonal wet-lease agreements, codeshare, block space, joint venture airline arrangements) between regional or international airlines (subject to Competition Authority exemptions) for domestic and regional flights 1.5. Grant interim traffic rights to all airlines willing Applicable Applicable Applicable to operate specific routes that have been interrupted or where competition levels are too low in order to maintain regional connectivity and drive down pricing, including the fifth and seventh freedom rights to international airlines 2. Establish common travel and cross-border control for tourism restart 21. Have a concerted approach to restarting tourism Applicable Applicable Applicable Applicable Applicable through coordinated initiatives and policies. There needs to be: • clarity on rules (after sufficient industry • consultation before implementation) • coordination between sector regulatory bodies • and COVID-19 regulators on implementation 2.2. Establish “Air Travel Bubble” arrangements to Applicable Applicable Applicable facilitate reopening, equalization of infection risk between origins and destinations 2.3. Ensure fast roll out of vaccines and prioritize Applicable Applicable travel-related personnel 2.4. Coordinate vaccination passport policies with Applicable Applicable Applicable Applicable Applicable other African states 3. Provide financial aid 3.1. Any COVID-19 state financial aid needs to be Applicable Applicable Applicable Applicable nondiscriminatory, not only to state-owned airlines, and conditional on recipients accepting to renounce predatory practices (price dumping, capacity acquisition, and so on, and so forth). Such support could be qualified by a PSO an SOE may shoulder. 3.2. The following measures could be adopted so Applicable Applicable Applicable Applicable Applicable African airlines can recover from the COVID-19 cash flow problems: • Provide funds and facilitate the provision of • funds (grants, loans, loan guarantees, equity), and • Defer or waive payments of debt, charges, or • taxes, allocating a portion of COVID-19 relief • packages to airlines. Source: Original table for this publication. 69 7. SUMMARY OF POLICY RECOMMENDATIONS Table 7.2: Menu of Policy Responses for a Competitive and Safe Air Transport Sector—Short- to Medium-Term Actions Strategic Policy Response Objective Applicable Country/Airline Direction Development of Refocus the government’s role on To achieve competitive neutrality and avoid All industrial policy creating an enabling regulatory conflicts of interest between regulatory and for air transport environment instead of operating ownership roles of the state. state-owned airlines To create predictability and clarity of rules Provide access to hard currency on a regional basis (increased cooperation for payment of international and coordination between Civil Aviation obligations (lessors, manufacturers, Authorities (CAAs). spares, operational costs abroad, and so on, and so forth). To limit distortionary effect of state aid and incentive schemes to state-owned airlines. To guarantee asset recovery for foreign aircraft owners (signatories to the Cape Town Convention), as well recovery of debt accumulated by the incumbent carriers toward international business partners. To refocus the government’s efforts to funding needs of other programs and areas where the private sector does not develop. To ensure and fast track repatriation of airline services, sales funds across African jurisdictions. Promotion of Deregulate domestic air To benefit from more carriers within Mainly for Namibia and Botswana. private sector transport markets competitive air transport markets. Although domestic demand is low in solutions Eswatini and Lesotho, such steps can be Strengthen role of To ensure equal and fair conditions to enter taken to facilitate entrepreneurial Competition Authority the air transport market and its supply chain. air services. To provide legal certainty for all investors Once market demand has been established (including for the private sector) in the air and market entry is possible, new suppliers transport market and its supply chain. (airlines) will enter the market. To limit undue protection of government- All (or most) of the economic benefits owned corporations that would affect fair previously ascribed to the state-owned competition and/or distort the market airline remain and are provided by the replacement airline(s) that enters the market To enable an effective Competition Authority upon the demise of a state-owned airline. that is sufficiently empowered to enforce market discipline and antitrust laws. Privatize state-owned carriers To obtain alternative sources of funding South Africa and Botswana from the private sector and reduce burden on the fiscus. Privatization is beneficial only if it is preceded by appropriate restructuring of the sector and is done in a regulatory To improve transparency, efficiency, environment which fosters competition. and profitability. Good option if profitable track record exists 70 NAVIGATING BEYOND COVID-19: AIRLINE RECOVERY AND REGULATORY REFORM OPPORTUNITIES IN SOUTHERN AFRICA Strategic Policy Response Objective Applicable Country/Airline Direction or a “greenfields” project Success hinges on: • Mobilization of “genuine” private capital • Presence of a robust and knowledgeable airline management and bankable business plan • Transparency of the privatization method and process • Credibility of the supervising body and advisors • Adherence to a clear privatization timetable. Seek airline Strategic Equity To gain access to capital and operational All countries Partners (SEPs) ii capabilities. Good option for states with smaller To benefit from exclusive services economies and inadequate scale of traffic procurement and commercial partnership for a dedicated airline. While they require from SEP. an exclusive supplier agreement, SEPs bring proven business plan and execution capabilities. Eswatini Airlink is a good example of a strategic cross-border public-private partnership to consider. Share Issue Privatizations (SIP) To raise capital. Good option if profitable track record exists To benefit from financial market discipline and accountability. Liberalization of Encourage foreign airlines to enter To develop air connectivity. All countries. Implemented in Lesotho as market access and compete there is no state-owned carrier. Airlink in To stimulate inbound tourists without the South Africa provides air connections. need to subsidize a state-owned airline. Allow multi-designation of airlines To increase the size of border Namibia, Botswana, Eswatini, and Lesotho on over-border routes (international) flights. Grant more rights (fifth and seventh To stimulate air travel and tourism by adding All freedoms) to foreign airlinesiii tagged flights onto existing destinations. To reduce prices and increase volumes through competitive forces on local airlines. To provide regional connectivity without the need to subsidize a state-owned airline. Facilitate cooperative agreementsiv To avoid wasted capacity. All between local airlines and foreign carriers To increase the supply of flights to/from It requires cooperation of civil aviation neighboring and other countries during authorities for acceptance of personnel profitable periods. licenses and exemption of local registration of aircraft. 71 7. SUMMARY OF POLICY RECOMMENDATIONS Strategic Policy Response Objective Applicable Country/Airline Direction To increase economies of scope and density, In South Africa franchise, codeshares and schedule coordination of “perceived” block space agreements between a domestic seamlessness, and brand and and foreign airline require regulatory and marketing advantages. Competition Commission approval. This is important and should be done in a timely manner to speed up recovery. Allow consecutive cabotage To increase local flights. All (eighth freedom) To promote competition, reduce prices, and increase service quality. Provide change of gauge and To increase local flights. All standalone cabotage (ninth freedom) To promote competition, reduce prices, and Applicable where: increase service quality. • Local air services are insufficient or are too expensive to stimulate demand, especially where domestic competition is lacking or within an internal market of a regional grouping of states, which may be difficult • In small states with insufficient home market, where an incumbent carrier would be unprofitable due to lack of scalability. Liberalization Facilitate creation of local To increase local flights and competition. All of foreign subsidiaries of foreign airlines ownership and To attract foreign capital and expertise. control Lift maximum foreign ownership limits To promote profit-oriented and adequately capitalized airlines. Provision of Offer targeted competitive To enable efficient air services to outlying All essential/lifeline subsidies to any player for PSO and underserved areas where air connectivity connectivity routes via open tender systems cannot develop on a pure commercial basis. Before tendering of routes via PSOs, all commercially/financially viable service Develop and harmonize regional To promote a strong internal market in the offerings should be exhausted. For this cross-border PSO routes subregion and improve social cohesion and to happen, appropriate deregulation and people-to-people contact. liberalization of traffic rights and foreign Benchmark PSO policies in the ownership should first take place. If there region to other regions, such as is still no interest from the private sector, the European Union, to create then tendering routes with PSOs can be the relevant regulatory and institutional second-best option. arrangements Restructuring Provide funding based on a fully To facilitate the exit of the least South Africa, Botswana, and Namibia. of state-owned time-bound and costed project plan efficient firms. Given eSwatini’s recent resuscitation of carriers and the national carrier, all of these can also be routes Establish the minimum economic To refocus the government’s role and applicable to the Kingdom. scale of activities as part of upfront promote resource reallocation to more funded restructuring plan and important basic needs and support of release funding upon successful displaced workers. (SA Express and Air Namibia liquidated). 72 NAVIGATING BEYOND COVID-19: AIRLINE RECOVERY AND REGULATORY REFORM OPPORTUNITIES IN SOUTHERN AFRICA Strategic Policy Response Objective Applicable Country/Airline Direction completion of specific stages To stop wastage of public money by breaking Applicable to Mango Airlines, SAA, the circle of subsides to loss-making airlines. and Air Botswana Oversee the suitability of aircraft type and capacity to maximize To restore profitability and funding connectivity and profitability attractiveness. Limit the amounts and the purpose To enable a more favorable aircraft financing (“strings attached” as in the EU) environment.. for which funds can be used by recapitalization Discipline state-owned airlines to operate within funding ceilings and to reduce scope of operations and dispose of assets should there be a shortfall Encourage leasing instead of purchasing of aircraft to minimize debt exposure, and provide more flexibility in case of early termination of contracts Implement associated scale down of activities and the sale of non- core assets Abandon the strategy of annual grants and regular bailouts by restructuring, privatizing, and disposing of, winding up, or liquidating the state-owned carriers Develop a timebound suitable plan and the upfront funding of the suitable alternative, including a social plan for staff Mandate the publication of audited financial statements and build in additional accountability mechanisms and disclosures through regular reporting to legislative oversight committees. Facilitation Facilitate merger with another To reduce market overlaps through All countries of market local carrier consolidation. consolidation To obtain operational synergies and Success depends on no political interference reduction of costs. in operations, and competition authorities’ ability and mandate to effectively discipline market conduct. Facilitate merger with another To benefit from economies of scale and scope. All countries regional carrier 73 7. SUMMARY OF POLICY RECOMMENDATIONS Strategic Policy Response Objective Applicable Country/Airline Direction Success depends on no political interference in operations, and competition authorities’ ability and mandate to effectively discipline market conduct. Franchise (outsource) the national To create rapid brand awareness and market Lesotho, Namibia, Botswana, and South flag carrier branding development. Africa. Given eSwatini’s recent resuscitation of the national carrier, all of these can also To gain access to market segment for a be applicable to the Kingdom. particular type of aircraft. To increase network scope. To gain access to systems, supplies, and employee training quality control of a well- run airline. Improvement of Establish the list and scoping of To address safety and operational issues at States with few operators and light activity, safety standards safety and capacity-critical works airports currently in operation. especially Eswatini and Lesotho which and oversight that need to be implemented have very low Effective Implementation (EI) capacity scores based on ICAO’s audit Execute the safety and capacity- To relieve the pressure on training critical works identified investment and the ongoing maintenance Development partners could support such of compensation necessary to retain activities through regional bodies or through Pool experts and resources into experienced personnel. bilateral engagements regional institutions—for example, by merging CAAs at a regional To increase the critical mass levels in Safety cooperation can fit in with regional level—for recruitment, training, all facets: internal domestic air transport market on retention of suitably qualified • infrastructure development and market access together with Air Travel inspectors, certification, and maintenance Bubble arrangements. surveillance services by a regional • efficient and effective air traffic core of inspectors management • aviation safety Require equal-minded states to • adequate human resources pool their resources into regional institutions instead of national agencies only to benefit from economies of scale Form collaborative ventures and common air traffic and navigation services, including the upper airspace control centers (at subregions), subregional safety oversight operations Harmonize air law and code of air navigation regulations 74 NAVIGATING BEYOND COVID-19: AIRLINE RECOVERY AND REGULATORY REFORM OPPORTUNITIES IN SOUTHERN AFRICA Notes iii Examples where fifth freedom rights on i Route authority and the allocation of BASA onward flights could include: Qatar Airways traffic rights (frequencies) remained on the Johannesburg to Gaborone flight problematic, especially since South African sector, Ethiopian Airlines on the Victoria Falls Airways’ grounding and the backlog of route to Gaborone sector, Lufthansa subsidiary applications due to the expiration of the Eurowings Discover on the Windhoek to Victoria licensing council members’ terms between Falls Airport (VFA) sector, KLM on the Luanda to March 31, 2021, until its recent reconstitution Windhoek sector, and Ethiopian Airlines on the with new appointments on March 10, 2022. Victoria Falls to Gaborone sector. ii The objectives and expected benefits from an iv These include wet lease, codeshare, interline, airline’s SEPs apply also to a non-airline’s SEPs. block space, and so on, and so forth. 75 APPENDIX - APPENDIX A: FOREIGN AIRLINES' MARKET SHARES Appendix Appendix A: Airlines’ Market Shares Table A.1: Airlines’ Market Share in 2020 Seat capacity Airlines that produced more than 2% of international seat Airlines that produced 1% of international seat capacity capacity in 2020 in 2020 2019 2020 2019 2020 South African Airways 29% 21% RwandAir 1% 1% Emirates 11% 10% Air Mauritius 2% 1% Malawian Airlines 1% 1% Qatar Airways 4% 8% Fastjet Zimbabwe 1% 1% British Airways 9% 8% Singapore Airlines 1% 1% Ethiopian Airlines 4% 5% Cathay Pacific Airways 1% 1% KLM-Royal Dutch Airlines 3% 5% Qantas Airways 1% 1% Air Zimbabwe 1% 4% SWISS 1% 1% LAM-Linhas Aereas De Moda 1% 1% Lufthansa German Airlines 3% 3% Delta Air Lines 1% 1% Air France 2% 3% LATAM Airlines Group 1% 1% Kenya Airways 3% 3% Etihad Airways 1% 1% Turkish Airlines 3% 2% Congo Airways 0% 1% TAAG Angola Airlines 2% 2% ASKY Airlines 0% 1% Westair Aviation 0% 1% Air Botswana 2% 2% Egyptair 1% 1% Virgin Atlantic Airways 2% 2% Saudi Arabian Airlines 1% 1% Air Namibia 2% 2% Edelweiss Air 0% 1% South African Airlink 0% 2% 100% 100% 100% 100% Source: Original table for this publication based on OAG data. 76 NAVIGATING BEYOND COVID-19: AIRLINE RECOVERY AND REGULATORY REFORM OPPORTUNITIES IN SOUTHERN AFRICA Appendix B: Details of the Financial Performance of South African Airways Group Airlines Figure B.1: Mango Airlines’ Profits and Losses from 2007 to 2021 (R, Thousands) 150,000 79,700 10,911 13,793 306 39,099 40,264 38,010 50,000 15 -50,000 -956 -37,504 -150,000 -64,214 -93,452 Rand (thousands) -250,000 -231,346 -350,000 -450,000 -550,000 -650,000 -750,000 -725,592 -850,000 -813,163 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Source: Mango Airlines Business Rescue Income Statement by Year, Annexure to Founding Affidavit of Zazi Molobane Nsibanyoni-Mugambi, president Mango Cabin Crew Association (SACCA) in case No: 21/35958 High Court of South Africa Gauteng Local Division, Johannesburg, July 24, 2021. Figure B.2: Mango Airlines’ Operating Results 3,500,000,000 3,338,188,112 2,933,530,596 3,000,000,000 2,585,629,531 2,500,000,000 2,000,000,000 1,500,000,000 Rand 1,000,000,000 627,576,638 500,000,000 79,699,902 0 -500,000,000 -231,346,362 -1,000,000,000 -725,591,591 -813,162,750 2018 2019 2020 2021 Total Income P69 Profits P69 Operating Profit Fixed Cos Calc Source: Mango Airlines Business Rescue Income Statement by Year, Annexure to Founding Affidavit of Zazi Molobane Nsibanyoni-Mugambi, president Mango Cabin Crew Association (SACCA) in case No: 21/35958 High Court of South Africa Gauteng Local Division, Johannesburg July 24, 2021. Factors involved in Mango Airlines’ demise include: which affected the On-Time Departure (OTD) performance of Mango Airlines, Kulula.com, • An expansion from four to 14 aircraft and and British Airways. increased cost base over a prolonged period • Much like SA Express (SAX) and South African during which there was almost no growth Airways (SAA), Mango Airlines ran out of cash. in passengers carried in the South African Regular payments to staff stopped without domestic market with FlySafair also expanding any reorganization or restructuring, and most • Poor dispatch reliability from SAA Technical, creditors (suppliers) were left unpaid. 77 APPENDIX - APPENDIX B: DETAILS OF THE FINANCIAL PERFORMANCE OF SOUTH AFRICAN AIRWAYS GROUP AIRLINES Table B.1. Listing of SAA Bottom-Line Losses (Rand, billions) Financial Last Restated Net Net Bottom-Line Difference Due to Year End Bottom-Line Profit Profit Reported Retroactive Reported for the Year for the Year Restatements 2001 757 -998 1,755 2002 2,144 553 1,591 2003 -5,967 -5,977 10 2004 -8,620 -8,620 - 2005 691 923 -232 2006 65 65 - 2007 -883 -883 - 2008 -1,291 -1,291 - 2009 7 7 - 2010 -2,279 323 -2,602 2011 646 649 -3 2012 -1,449 -32 -1,417 2013 -1,292 -1,292 - 2014 -2,677 -2,677 - 2015 -6,122 -5,619 -503 2016 -1,614 -1,492 -122 2017 -5,317 -5,431 114 2018 -5,417 -5,424 7 2019** -5,045 -5,045 - 2020** -5,500 -5,500 - Total losses -49,163 -47,761 -1,402 Losses since 2007 -38,233 -33,707 -4,526 Losses since 2012 -34,433 -32,512 -1,921 Source: South African Airways Group’s annual financial statements accessed at South African Airways Group (2019). Note: Latest reported (retroactively restated) in comparison to the numbers first published in annual report (financial statements) as a particular year’s losses. A recurring practice has been the restatement of control were R 33.7 billion to R 38.2 billion. past years’ losses, which enabled better results to be presented for a current year to than if accounting Reference policies remained consistent. SAA’s losses and restated losses are listed in table B.1. The aggregate South African Airways Group. 2019. “Group and losses since SAA’s incorporation as a separate Company Annual Financial Statements for the company (under Transnet Control) (until 2006) were Year Ended 31 March 2019.” https://static.pmg. R 10.9 billion to R 14 billion. SAA’s aggregate losses org.za/200515Draft_2019_SAA_financials_-_06_ since the South African government exercised direct December_20191815961.1.pdf. 78 NAVIGATING BEYOND COVID-19: AIRLINE RECOVERY AND REGULATORY REFORM OPPORTUNITIES IN SOUTHERN AFRICA Appendix C: Regulatory and Institutional Landscape Table C.1. Regulatory and Institutional Landscape Country Market Entry Foreign National Institutional Arrangement/Unbundled for Private Ownership and Transport Economic Regulator/Vertical Integration Sector Control Limit Policy Botswana Possible. Confusion Not published None/draft/ The Civil Aviation Authority of Botswana (CAAB) is remains as to Air adopted a vertically integrated entity which conducts airport Botswana founding services and air navigation service act, which appears provision as well as economic and technical to give statutory regulatory mandates. monopoly to the airline. Eswatini Provided for in Airlink had 40% and Not published Eswatini Civil Aviation Authority the Civil Aviation the government 60% Authority Act, 2009. in Eswatini Airlink Lesotho Possible Not published Not published Civil Aviation Department Namibia Deregulated Not published Ministry of Transport for economic regulation, CAA since 1998 for technical regulation of safety, security, and air navigation services South Africa Deregulated For domestic Eight institutions are responsible for different since 1993 operation up to 25% aspects of the civil aviation administration and (75% of voting rights regulation in the country: are held by residents 1. The Department of Transport (DOT) of South Africa) for 2. The South African Civil Aviation Authority domestic services, (SACAA) but for international 3. Airports Company of South Africa Ltd. (ACSA) air services to 49% 4. Air Traffic and Navigation Services (ATNS) (substantial voting 5. The Competition Commission of South Africa rights are held by 6. Air Services Licensing Council (ASLC) residents of 7. International Air Services Council (IASC) South Africa) 8. The Regulating Committee of South Africa Source: Original table for this publication. 79 APPENDIX - APPENDIX C: REGULATORY AND INSTITUTIONAL LANDSCAPE Table C.2. Liberalization Status of BASAs in Southern African Custom Union Countries Region Partner Botswana Eswatini Namibia* South Africa SACU Botswana Liberalized Liberalized Eswatini Liberalized Liberalized Lesotho Liberalized Namibia Liberalized Liberalized Liberalized South Africa Liberalized - Rest of Africa Angola Liberalized Restrictive Partially liberalized Madagascar Liberalized Partially liberalized Mauritius Partially liberalized Mozambique Liberalized Restrictive Liberalized Ethiopia Liberalized Liberalized Liberalized Dem. Rep. of Congo Partially liberalized Kenya Liberalized Restrictive Liberalized Nigeria Liberalized Liberalized Liberalized Zambia Liberalized Liberalized Zimbabwe Liberalized Liberalized Partially liberalized Egypt Liberalized Liberalized Liberalized Rwanda Liberalized Liberal Benin Restrictive Liberalized Cameroon Restrictive Liberalized Congo Restrictive Liberalized Non-African Brazil Liberalized Liberalized Partially liberalized France Restrictive Partially liberalized Germany Restrictive Restrictive Partially liberalized India Liberalized Restrictive Partially liberalized Netherlands Liberalized Restrictive Partially liberalized Qatar Liberalized Liberalized Partially liberalized Turkey Liberalized Restrictive Partially liberalized United Arab Emirates Liberalized Liberalized Partially liberalized United Kingdom Liberalized Restrictive Partially liberalized United States Liberalized Restrictive Partially liberalized Source: AUC 2021 and Abate et al. 2022. Note: These BASAs were defined as restrictive, partially liberal, or fully liberal (open skies) based on the following characteristics: (1) The relative openness of provisions pertaining to capacity (frequency and aircraft size). A BASA was categorized as “liberal” if there was no government interference in the choice of departure frequency and aircraft size; it was defined as “restrictive” otherwise. (2) Fare regulation: A BASA was defined as “liberal” if the fare charged by airlines can be invalidated by the disapproval of both bilateral partners and/or if approval of fares by either country’s aeronautical authorities was not mandatory; it was defined as “restrictive” otherwise. (3) Fifth freedom rights: A BASA was defined as “liberal” if it allows fifth freedom rights to all intermediate and beyond points in Africa; it was defined as “restrictive” otherwise. Based on the three categorizations, the regulatory regime of a BASA was classified as “fully liberalized” if it attains liberal status in two or more categories; “partially liberalized” if it attains one liberal status; and “restricted” otherwise. *Namibian BASA liberalization evaluation is based only on fifth freedom traffic right provisions. 80 NAVIGATING BEYOND COVID-19: AIRLINE RECOVERY AND REGULATORY REFORM OPPORTUNITIES IN SOUTHERN AFRICA References worldbank.org/handle/10986/37038. AUC (African Union Commission). 2021. Abate, Megersa, Charles Schlumberger, Ruxandra Continental Study on the Benefits of the Brutaru, Andy Ricover, and Theo Francois. SAATM and Communication Strategy for 2022. “The COVID-19 Pandemic and African SAATM Advocacy. Final Study Report. https:// Aviation.” Mobility and Transport Connectivity www.saatmbenefits.org/saatm/wp-content/ (MTC) Series, Policy Note, World Bank, u p l o a d s / b s k- p d f - m a n a g e r / 2 0 2 1 / 0 8 / Washington, DC. https://openknowledge. Continental_Study.pdf. 81 APPENDIX - APPENDIX D: HIGHLIGHTS FROM COMPETITION COMMISSION CASES Appendix D: Highlights from Competition Commission Cases Highlights from Competition Commission cases after deregulation in 1992 and concluded that involving airlines in the Southern African region the government encouraged deregulation of the domestic air transport market and has created Compared to the rest of Africa, the Southern the necessary mechanisms to allow competition African region has received relatively better in the market. It also encouraged an operator oversight from competition authorities to ensure to enter the market and to make a substantial discipline in the air transport market. While this investment in the processes. SAA attempted has not fixed deep structural problems, such to comply with the guidelines as laid down in as the dominance of state-owned airlines and the addendum but found that it did not operate prevalence of distortive government bailouts, completely autonomously nor on a commercial which continue to prevent the emergence of a basis. It incurred losses on its domestic operation truly competitive environment, there are several but did not act soon enough to remedy the competition commission cases involving airlines situation. In its endeavors to fill unutilized to examine. A few of them are presented below: capacity, it allowed yields per passenger to drift below levels where it or its competitors can 1) SOUTH AFRICA operate profitably. In so far as this action does not allow its competitors to compete profitably, it can South African Airways (SAA) has been the subject be regarded as anticompetitive. of numerous complaints to the Competition Commission, covering abuse of dominance, cartel Upon the delivery of its new but smaller aircraft, behavior as well as being the focus of concerns SAA did not decrease its seating capacity but around state-aid distorting competition in the increased the number of flights. These additional airline industry (CompCom and OECD 2018, 7). flights are scheduled in close proximity to that Many competition complaints have been lodged of Flitestar. On account of the excess capacity against SAA. These include allegations of: that SAA has this can also be regarded as anti- competitive behavior. • Abuse of dominance (including agreements, between 1999 and 2004, with travel The Competition Board also found that “SAA’s agents under which the agents received pricing policy since Flitestar’s entry into commissions on an incremental basis and the market and failure to diminish capacity instituting an exclusionary reward scheme commensurate with the Government’s policy for employees of travel agents, both of which objectives and the practical business dictates of affected competitors); the situation has appreciably affected Flitestar’s • Cartel behavior; and profitability and viability. This has had the effect • Concerns around the possible anti- of restricting Flitestar’s entry into the market and competitive effects of the assistance SAA concomitantly restricting effective competition receives from the government (Healey 2018). between the two airlines. The same holds true mutatis mutandis in respect of Comair. One a) SAA’s response to new entry following initial may accordingly conclude that in certain crucial domestic deregulation: SAA vs. Flitestar respects SAA’s behaviour constitutes a restrictive practice warranting appropriate remedial action.” The Competition Board investigated the domestic The Competition Board recommended that air transport services in South Africa immediately “temporary interventionist measures to be taken 82 NAVIGATING BEYOND COVID-19: AIRLINE RECOVERY AND REGULATORY REFORM OPPORTUNITIES IN SOUTHERN AFRICA to remedy imbalances in the marketplace. As far codeshare agreement and a commercial as the general public is concerned, these measures cooperation agreement on the primary routes may have negative effects (increased fares) in the located between Germany and South Africa short term. The Board, however, is of the opinion for five years as it satisfied the maintenance or that the best interests of the general public over promotion of exports objective (ACF 2021, 24). the longer term will be served by these temporary • An exemption of SAA’s membership of the measures.” These measures related to an increase Star Alliance (which included information in fares and reduction of SAA’s capacity to certain exchange, including airfares and discounts, levels when competition in the domestic market routes and flying schedule coordination began (Competition Board 1992). with other alliance members; cooperation in marketing, sales, and distribution of joint b) Alliances/exemptions products, including joint bids for government and corporate contracts; and participation • The commission exempted the SAA/Qantas in reciprocal frequent flyer programs) was codeshare agreement (to coordinate its found to contribute toward the maintenance commercial passenger airline activities with and/or promotion of exports (ACF 2021, 24). Qantas in respect of the direct routes between • On December 18, 2018, SAA and Air South Africa and Australia to maintain or Mauritius Ltd. (‘MK) filed a joint application promote exports) on six occasions (2000, for an exemption for the establishment of 2002, 2005, 2007 2010, and 2012) (ACF a commercial agreement in the form of a 2021, 23). codeshare and joint venture (JV) agreement, • A request for exemption by Etihad Airways to give rise to certain synergies and PJSC (“Etihad”) and Alitalia Società Aerea efficiencies, including expanding networks, Italiana S.p.A. (the old “Alitalia”) to enter creating efficiencies, and increasing into a commercial Cooperation Agreement, consumer benefits on the route between and related documents that relate to routes Johannesburg’s OR Tambo International between South Africa and Italy was denied Airport (JNB) and Sir Seewoosagur because it would constitute prohibited Ramgoolam International Airport (MRU) in practices of price-fixing and market allocation Mauritius, and other routes between South in contravention of sections 4(1)(b)(i) and Africa and Mauritius; coordination on revenue (ii) of Chapter 2 of the Competition Act (ACF management and schedules; a revenue/ 2021, 24). cost-sharing arrangement; synchronization • The commission granted SAA and Etihad of passenger and cargo capacity, including an exemption of the free-sale codeshare joint decisions in terms of scheduling; and agreement (and commercial cooperation the gauge of aircraft needed to satisfy the agreement for a range of practices, including demand for passenger and cargo services joint pricing and schedule coordination) on (ACF 2021, 24, 25). the main trunk route for five years on the basis of maintenance or promotion of exports c) Collusion and cartels [objectives contained in sub-section 10(3) (b) (i) of the act], but an exemption of the free- • The commission discovered that SAA had sale codeshare agreement on the secondary entered into several other airline agreements routes was not granted as it was seen as being (preexisting agreements) for which no in contravention of the act (ACF 2021, 24). exemption had been sought. The commission • A conditional exemption was granted to found that Lufthansa and SAA had meetings Germany’s Air Berlin PLC & Co. Luftverkehrs and communications relating to price KG (“Airberlin”) and Etihad for a free-sale changes and fare harmonization on flights 83 APPENDIX - APPENDIX D: HIGHLIGHTS FROM COMPETITION COMMISSION CASES which they both operated between Cape of section 4(1)(b)(ii) of the Competition Act. Town/Johannesburg and Frankfurt. In 2006, The matter is before the tribunal (ACF 2021, the Competition Tribunal imposed sanctions 25; CompCom 2018, 43, 46). and concluded settlement agreements (Mncube 2014, 25). d) Abuse of dominant positions • The commission found that local representatives of SAA, Singapore Airlines, • Nationwide lodged a complaint against SAA Malaysian Airlines, and Cathay Pacific (in in October 2000 with the commission, which the so-called Far East Complaint) formed concluded that SAA abused its dominance by a cartel to fix airfare rates or prices (on concluding agreements with travel agencies both economy and business class on resulting in the exclusion of competitors, flights between South Africa and Far East contriving section 8(d)(i) of the act which Asia) in South Africa on several occasions prohibits inducement. SAA was fined an during 2004, 2005, and ending February administrative penalty of approximately 2006. A complaint was initiated in January US$6.1 million (CompCom and OECD 2018, 2008 against SAA, Singapore Airlines, and 7) (2010 US$/ZAR exchange rate of 7.3324). Malaysian Airlines, whilst Cathay Pacific • In July 2005, the tribunal found that SAA received immunity for its role in the conduct contravened the Competition Act because as per the commission’s corporate leniency it had engaged in prohibited practices in policy. Singapore Airlines and SAA settled the the period from October 1999 to May 2001 case and paid administrative penalties for (SAA I). The tribunal found that the travel their participation in the cartel. SAA settled agent commission payment scheme (a this together with the international air cargo retroactive or “back to Rand one” structure) surcharges cartel case (ACF 2021, 25). implemented by SAA during this period was • In July 2010, the commission referred the anticompetitive. The tribunal imposed an so-called Air Cargo Complaint, relating to the administrative fine of R 45 million on SAA fixing of fuel surcharges and cargo rates in (ACF 2021, 25). international airline freight services by SAA • Comair lodged a further complaint with Cargo, British Airways, Air France-KLM, Alitalia the commission about similar agreements Cargo, Cargolux, Singapore Airlines, Martinair, which remained in place beyond 2001 (the and Lufthansa [these are all members of post-2001 agreements in October 2003). the International Air Transport Association The complaint was referred by the p25 (IATA)], to the tribunal for adjudication (ACF Commission to the tribunal for adjudication 2021, 25). in October 2004. Shortly after the SAA I • On September 28, 2016, the commission matter, SAA’s agreements were changed by initiated a complaint against South African the elimination of the retroactive design of Airlink (Pty) Ltd. (“SA Airlink”), South African the incentive contracts, applicable from April Express Airways SOC Ltd. t/a SA Express (“SA 2005, agreed to in a settlement agreement Express”), and South African Airways SOC with the commission. The tribunal confirmed Ltd. (“SAA”) relating to an agreement and/ the settlement agreement in December 2006. or concerted practice to allocate flight routes SAA agreed to pay an administrative fine of R between SA Airlink and SA Express, facilitated 15 million. The settlement agreement did not by SAA through its booking system code. The contain an admission of liability by SAA for the commission found that the respondents met period between May 2001 and March 2005 regularly and discussed flight routes, which (ACF 2021, 25; CompCom and OECD 2018, 7). would be divided between SA Express and SA • Comair and Nationwide continued the Airlink, which is regarded to be a contravention case before the tribunal as a finding of 84 NAVIGATING BEYOND COVID-19: AIRLINE RECOVERY AND REGULATORY REFORM OPPORTUNITIES IN SOUTHERN AFRICA contravention is a prerequisite for the separate complaints by customers) based on institution of an action in the high court for the fact that at that time, Airlink was the only damages. In February 2010, the tribunal airline that operated on the Johannesburg- found that SAA had abused its dominant Mthatha (JNB-UTT-JNB) route, and therefore position during the period between May had a monopoly over the route where Airlink 2001 and March 2005 (Mncube 2014, 25; charged exorbitant prices to passengers. The CompCom and OECD 2018, 7). matters were investigated as excessive pricing • On February 12, 2018, the commission in terms of section 8(a) and predatory pricing referred an excessive pricing case against in terms of section 8(d)(iv) or 8(c) (ACF 2021, SA Airlink to the tribunal (as a result of three 25; CompCom 2018, 18, 32; Ngwema 2018a). Table D.1: Competition Policy Cases in South Africa Nationwide v. SAA Comair v. SAA Period of abuse/conduct Commenced in April 1999 to May 31, 2001 June 1, 2001, to March 31, 2005, when its incentive schemes expired. Anticompetitive Later SAA agreements from conduct’s “lingering effect” continued for an June 1, 2001, untilMarch 31, 2005 extra year until July 2006. (From 2001 to 2006.) Date of administrative Tribunal—July 2005 CompCom—December 2006 penalty/tribunal decision Tribunal—February 2010 Competition Appeal Court (CAC)—April 2011 Amount of administrative penalty R 45 million R 15 million (which includes other cartel and collusion matters) Percentage of administrative penalty 2.25% to SAA’s affected turnover Date of judgment August 8, 2016 February 16, 2017 Amount of damages awarded R 104.625 million plus interest at 10.25% as Total of R 1.15 billion. (Damages claim of from the date of judgment until payment R 554.2 million and R 595.8 million) Interest at a rate of 15.5% and costs for damages until February 2017 Sources: Mncube 2014; Lewis 2017; and Federico 2013. e) Merger control Ltd. (NdizaSafair). The commission prohibited the merger on February 22, 2018, on the grounds that On November 28, 2017, SA Airlink and Safair the merger would lead to a substantial lessening of Operations lodged notice of an intermediate competition and significant competition concerns merger for Airlink to acquire the entire issued in terms of both unilateral and coordinated effects. share capital of Safair for a maximum value of R The merger was later abandoned before the 150,000,000 including the shares held in Safair by hearing dates before the tribunal (ACF 2021, 25; Safair Investment Trust (SIT) and NdizaSafair (Pty) Ngwema 2018b). 85 APPENDIX - APPENDIX D: HIGHLIGHTS FROM COMPETITION COMMISSION CASES Challenges when investigating SOEs 2) NAMIBIA The South African Competition Commission stated that it faced two general challenges when a) Predatory pricing investigating SOEs: South African Airlink (Pty) Ltd. v. Air Namibia (Pty) • The SOEs are often repeat offenders. The Ltd. (case number: 2016july0007comp) notice repeated transgressions by SAA, despite heavy of action to be taken under section 38 of the penalties, suggest that financial penalties Competition Act, 2003 [section 41, rule 18(1)], are likely not a strong enough deterrent for Namibian Government Gazette, No. 7090, Notice SOEs who are supported by the fiscus and 530, 2019. thus somewhat insulated from market-based fiscal discipline. Structural remedies may be The Competition Commission found that Air more effective, like the vertical separation Namibia’s pricing conduct was abusive and that removed Telkom’s ability and incentive to predatory in nature as envisaged in terms of section leverage its upstream monopoly into related 26(1) and/or section 26(1) read with section markets and stimulated competition. 26(2)(a) of the Competition Act but indicated its • The current South African legal framework does willingness to engage with Air Namibia to settle not allow investigations by the Competition to avoid proceedings in terms of section 38 of the Commission into regulators of SOEs, despite Competition Act (NACC 2019, 6). complaints of anti-competitive actions and often substantial inefficiencies arising from On October 25, 2016, SA Airlink lodged a complaint such conduct. This means that competition with the Namibian Competition Commission is not always the primarily motivating factor (NACC), which decided to continue the investigation and that potential private sector rivals do not against Air Namibia. The commission resolved to always compete on a level playing field. proceed with the investigation despite Airlink’s withdrawal of its complaint on February 20, 2018 The vertical integration of South African SOEs (into (NACC 2019, 6). other parts of the relevant value chain) creates incentives for the SOEs to extend their market Following the investigation and consideration dominance into the more competitive levels of the of all representations, including the written value chain, often through anti-competitive means. representations made in terms of section 36 and the matters raised at the conference held in Overall, absent a government-backed competitive accordance with section 37 of the Competition neutrality framework initiative, the Competition Act, the NACC has decided to institute Commission can only investigate complaints after proceedings in court against Air Namibia (NACC the activity has occurred. The development and 2019, 6). acceptance of competitive neutrality principles across government and greater consideration of On or about September 21, 2018, the NACC the benefits of competition in markets where SOEs gave notice of its proposed decision following its are dominant may diminish distortions arising investigation of the matter, and on December 31, from state ownership and should thus remain an 2019, the commission published notice of action important area of competition advocacy going to be taken under section 38 of the Competition forward (CompCom and OECD 2018, 10). Act, 2003 in Case Number: 2016JULY0007COMP 86 NAVIGATING BEYOND COVID-19: AIRLINE RECOVERY AND REGULATORY REFORM OPPORTUNITIES IN SOUTHERN AFRICA in the Government Gazette No. 530 of 2019 to The NACC was not persuaded by Air Namibia’s apply for a court order to: claims. The commission’s investigation found that: • Declare that Air Namibia contravened section • Air Namibia was pricing below its costs; 26(1) and or section 26(1) read with section • Prior to the entry of SA Airlink into the route, 26(2)(a) of the Competition Act; there was a correlation between the increases • Restrain Air Namibia from engaging in the in Air Namibia’s costs and the increases in conduct in question (interdicting Air Namibia prices charged by Air Namibia. However, from abusing its dominance by participating following SA Airlink’s entry into the market Air or engaging in any predatory pricing conduct Namibia’s costs appeared to bear no relation that infringes on the Competition Act); to its costs. • Seek an appropriate pecuniary penalty • Before SA Airlink’s entry, Air Namibia’s against Air Namibia in terms of sections 53(1) average fares increased on a Year-on-Year (a) and 53(2) of the Competition Act, taking (YOY) basis. However, following SA Airlink’s into account the factors stated in section entry, Air Namibia’s average fares declined 53(3) of the Competition Act; on a YOY basis. Air Namibia, therefore, seems • An order for Air Namibia to pay the costs of to be engaged in profit-sacrifice. Contrary the proceedings; and to the arguments advanced by Air Namibia, • Grant any other relief as may be appropriate there has been no misclassification of costs (NACC 2019, 6). by the commission. International precedence and Air Namibia’s own internal policies and The nature of the conduct was that Air Namibia, practices indicate that the disputed costs are being dominant on the route in terms of both relevant for conducting a price-cost test and aircraft capacity and the number of passengers should, therefore, be included. flown, abused its dominance through profit • There is no objective justification for the sacrifice by pricing at a per flight and at a per conduct that should serve to exclude Air passenger level below its costs on both an average Namibia from liability for having contravened avoidable cost (AAC) and average variable cost the Namibia Competition Act. (AVC) criteria, since the entry of SA Airlink on the • Air Namibia’s below-cost pricing cannot route in October 2014 (NACC 2019, 7). be regarded as promotional pricing. It is furthermore inconceivable that pricing below Air Namibia denied engaging in the conduct on the cost for a period of six years (since 2014) can in basis that it did not engage in profit sacrifice and any way be construed as a promotional strategy. did not price below its costs; that the reduction • Air Namibia’s pricing is instead indicative of its prices after SA Airlink’s entry was a normal of an entity that is unjustifiably interested competitive response and part of its promotional in undercutting the prices of its rivals (SA strategy; and the commission misclassified Air Airlink). Competition jurisprudence is clear Namibia’s aircraft-related costs (disputed costs), that a dominant entity such as Air Namibia which Air Namibia regarded as fixed costs, which has the duty to charge in a manner that is sought to exclude such costs for purposes of reflective of its costs. Pricing below costs by conducting a price-cost assessment. Accordingly, a dominant entity is regarded as predatory Air Namibia claimed that its operations on the route in nature. Air Namibia’s lack of incentive to are profitable if the aforementioned disputed costs generate profits, admittedly as a result of are excluded from the price-cost assessment; subsidies, increases its likelihood of engaging recoupment is a requirement to sustain a charge of in predatory pricing. predatory pricing (NACC 2019, 7). • Even though recoupment is a requirement to sustain a charge of predatory pricing in 87 APPENDIX - APPENDIX D: HIGHLIGHTS FROM COMPETITION COMMISSION CASES some jurisdictions, no similar requirement conduct, including predatory pricing. exists in Namibia in terms of the Namibia Namibian courts have affirmed the view Competition Act. that section 26 of the Competition Act • Air Namibia’s conduct is averse to competition must be interpreted to apply on a per even in the absence of recoupment. That se, by object or presumptive, basis with Air Namibia’s pricing is below its costs is the consequence that the commission abusive regardless of whether there has been is not required to allege and prove that any recoupment or even an exit of any rival the conduct had an anti-competitive airlines from the route. Air Namibia’s conduct, effect in order to be unlawful. Therefore, in particular the artificially deflated airline the moment a dominant undertaking ticket prices, resulted in consumers moving engages in anti-competitive conduct such resources/capital from other more efficiently as predatory pricing, there is no need to produced products or services. In addition, show anti-competitive effects in order for Air Namibia’s conduct has stifled innovation liability for a contravention of the act to and decreased consumer choice that may arise. have arisen from increased competition that • In any event, as demonstrated above, was hampered by Air Namibia’s sustained even though proof of anti-competitive abusive pricing conduct. Furthermore, there effect is not a requirement in terms of is a need to protect consumers from inflated the act, Air Namibia’s conduct has been or excessive prices that would result from shown to be anti-competitive on both a an attempt to recover profits lost during per se and effects basis (NACC 2019, 9). predation. Air Namibia also constrained the ability of its rivals to enter or adequately 3) BOTSWANA expand on the route. • Air Namibia’s receipt of government In terms of the Botswana Competition Act, subsidies makes recoupment an even less competition regulation does not apply to an relevant consideration since the expectation enterprise operating on the basis of a statutory of subsidies to fund the significant operating monopoly (CCA and OECD 2018, 4). This includes Air costs of Air Namibia isolates the airline Botswana. The Botswana Competition Act provides from the impact of its predatory conduct those statutory monopolies are totally immune from and enables it to continue operating based the application of competition law. The intention is on decreasing average fares (yields) to that a government/state-owned monopoly should unprofitable levels and continue operating never be subject to competition regulation because with losses irrespective of demand or its it provides key public utility services and acts in competitors. Subsidies, therefore, enable the public interest. However, this would have to be the continued loss-making operations to be reassessed where markets are opened to competition sustained, which otherwise would not be in order to enhance consumer welfare (CCA and possible in a commercial enterprise, reliant OECD 2018, 4, 5). Competition law is applicable on the normal financial discipline of the to SOEs provided: they are market participants, markets (NACC 2019, 7,8). meet the threshold for definition of enterprise, and • Predation is a per se prohibition. operate in the market open for competition by other • An abuse of dominance is inherently enterprises. Competition regulation can be enhanced harmful to competition. Hence, the if the absolute immunity conferred on enterprises express plain wording of section 26 of operating on the basis of statutory monopoly can be the Competition Act prohibits abusive lifted (CCA and OECD 2018, 5). 88 NAVIGATING BEYOND COVID-19: AIRLINE RECOVERY AND REGULATORY REFORM OPPORTUNITIES IN SOUTHERN AFRICA 4) COMMON COMPETITION CONCERNS IN AFRICA airport, loyalty rebates, and other exclusionary strategies (ACF 2021). A recent study by the African Competition Forum d. Price wars, during periods of lower demand (ACF 2021) identified the following common or new entry based on excess capacity on competition issues arising in most African a route. Some price wars may also reflect markets and across many routes: predatory behavior by the incumbent in response to sustained entry or to sustain or a. Regulatory barriers to entry and expansion, gain market share. especially on inter-country routes (regulated e. Horizontal alliances, cartels and horizontal by BASA arrangements, which limit the cooperative alliances, and code-sharing number of airlines that may compete on those (usually motivated on improved connectivity routes; the frequency, type of service, and the and improved consumer experience). These associated rights of airlines on those routes, arrangements can include the exchange like fifth freedoms to take passengers onward of information on airfares and discounts, to third countries or domestic routes (eighth routes, and flying schedule coordination with freedom, consecutive cabotage) and ninth other members of the alliance; cooperation freedom (stand-alone, grand, cabotage). in marketing, sales, and distribution of joint b. Ongoing state support for national airlines in products, including joint bids for government a competitive (liberalized) environment, by and corporate contracts; and participation means of subsidies or financial bailouts, which in reciprocal frequent flyer programs. These may distort competition with other airlines arrangements have the potential to benefit as well as preferential airport fees/access to consumers, but may also be used to limit or airport slots or support on competitive routes exclude competition. in support of state objectives. f. Actual cartel behavior, which includes route c. Dominant national airlines: a national airline division, airfare coordination, and coordination (which previously operated a monopoly on certain charges like fuel surcharges. position) remains dominant upon introduction g. There may be different outcomes to of competition (liberalization). Such state- enforcement action behavior with regard owned airlines abuse their market position to conduct on over-border routes, subject to retain or gain market share in competition to more than one competition authority to newer, leaner business models such as as a result of differences in legal regimes, low-cost airlines, funded by state financial power to investigate SOEs, and the basis for support or historic advantages such as loyalty assessment. Even where there is a common schemes, international route rights and key enforcement outcome, remedial action may hub operators at the primary international diverge between jurisdictions. 89 APPENDIX - APPENDIX D: HIGHLIGHTS FROM COMPETITION COMMISSION CASES References Healey, D. 2018. Competition Law and State- Owned Enterprises, DAF/COMP/GF (2018)11, Enforcement, Directorate for Financial and ACF (African Competition Forum). 2021. ACF Enterprise Affairs Competition Committee, Cross-Country Study on Airlines. https://www. Global Forum on Competition, November compcom.co.za/wp-content/uploads/2021/10/ 2018 (Presentation for Session V at the 17th ACF-CROSS-COUNTRY-STUDY-ON-AIRLINES_ Global Forum on Competition), November 29– amend-12.pdf. 30, 2018. CCA (Competition and Consumer Authority Lewis, K.E. 2017. “Public Versus Private of Botswana). 2018. Global Forum on Enforcement of South African Competition Competition, Competition Law and State- Law.” Submitted in fulfilment of the Owned Enterprises, Contribution from requirements for the degree LLM Mercantile Botswana - Submitted by Botswana under Law, in the Faculty of Law, University of Session V of the Global Forum on Competition, Pretoria, October 2017. November 30, 2018, from oe.cd/csoes. Mncube, L. 2014. “Competition Concerns in CompCom (Competition Commission of South the South African Airline Industry.” Aviation Africa). 2018. Annual Report 2017-18: Industry Growth and Safety Conference, Competition Regulation for a Growing and November 4, 2014. Inclusive Economy. https://www.compcom. co.za/wp-content/uploads/2019/10/annual- NACC (Namibia Competition Commission). 2019. report-2017-2018.pdf. South African Airlink (Pty) Ltd v. Air Namibia (Pty) Ltd (case number: 2016july0007comp) CompCom and OECD (South Africa Competition notice of action to be taken under section Commission and Organisation for Economic 38 Competition Act, 2003 [section 41, rule Co-operation and Development). 2018. 18(1)], Namibian Government Gazette, No. Directorate for financial and enterprise affairs, 7090, Windhoek, December 31, 2019, Notice competition committee, Competition Law and 530 – 2019. State-Owned Enterprises - Contribution from South Africa, Global forum on competition, Ngwema, Sipho. 2018a. “SA Airlink to Be DAF/COMP/GF/WD(2018)53, November 20, Prosecuted for Abuse of Dominance.” 2018, from oe.cd/csoes. Media Release, February 14, 2018. https://www.compcom.co.za/wp-content/ Competition Board. 1992. “Investigation into uploads/2018/01/Airlink-Final.pdf. the Domestic Air Transport Services in South Africa After Deregulation.” Ngwema, Sipho. 2018b. “SA Airlink and Safair Merger Abandoned.” Media Statement, Federico, Giulio. 2013. “SAA II: Abuse of November 7, 2018. https://www.compcom. Dominance in the South African Skies.” co. za /wp - content/uploads/2019/03/ Journal of Competition Law and Economics. S A - A I R L I N K- A N D - S A F A I R - M E R G E R - January 31, 2013. http://dx.doi.org/10.2139/ ABANDONED.pdf. ssrn.2119495. 90 NAVIGATING BEYOND COVID-19: AIRLINE RECOVERY AND REGULATORY REFORM OPPORTUNITIES IN SOUTHERN AFRICA Appendix E: Country Profiles SOUTH AFRICA owned by Global Aviation, a member of the private sector consortium in the process of purchasing SAA. The pace and shape of market recovery will determine This is contrary to the new SAA business plan, where South Africa’s state-owned airlines’ restructuring Mango Airlines’ division would disappear and remain options and successes. The recovery is expected as a sub-brand fare category. The business plan to last another two years. As of now, there is more supports the continuation of the intercontinental capacity available than required by demand in the flights, as of 2022, although it recognizes that country. British Airways and Kulula.com (Comair) these were the routes that generated the greatest recommenced operations in September 2021 and losses and registered pre-pandemic load factors liquidated in June 2022. The new SAA has also of only 70 percent. The viability of the new SAA launched domestic and regional operations with a should be assessed prior to further expansion or fleet of six aircraft. SAA’s low-cost subsidiary, Mango recapitalization. The business plan fails to present Airlines (currently in Business Rescue), is aiming to a segregated approach (maintain an intra-African restart with an eight-aircraft operation, being in direct network until conditions are met) and a mitigation competition with Lift Airline, a low-cost carrier (LCC) plan in the event of a prolonged COVID-19 crisis. Theme Key Indicator Data Economy1 GDP Growth (Year-on-Year, YOY ) -6.4% Latest annual population; recent growth 59,308,690; 1.3% GDP Per Capita (2020) $ 5 655,90 Tourism Dependency - International Tourism Receipts (% total exports) 2.9% international Tourism Arrivals: Absolute Value (2019) and CAGR 2015-2019 3,886,600; 1.18% Current consumer price Inflation (annual %, 2021) 4.6% Forecast Consumer Price Inflation (annual %, 2022) 5.5% Air Transport Total Passengers in market (2019) 21 498 628 Market Share of Domestic Passengers (%) 69% Total Seats in market (2019) 31 206 693 Share of Domestic Passengers (%) 71% Propensity to Travel (Trips/capita)2 0,728 Global Air Connectivity Rank in 2019 (Best Ranked airport JNB) 39 SOE Prominence in Market = SOE Domestic Capacity, 2019: Share of State-Owned Airlines in the Domestic Market (Capacity Share) 50%; 2021-10%; ¹ All macroeconomic indicators are from the World Bank Development Indicators. Forecast inflation data is from the IMF’s April 2022 Global Forecast ² NACO: Aviation in Africa, Propensity to Fly 2019. Link: https://www.naco.nl/news-and-insights/insights/aviation-in-Africa 91 APPENDIX - APPENDIX E: COUNTRY PROFILES Theme Key Indicator Data Safety Compliance (International Civil Aviation Organization [ICAO] Universal 91% Safety Oversight Audit Programme [USOAP] score) No. Airlines with Air Operators Certificate (AOC) ±10 No. Local Airlines Operating International market 4. This has recently reduced due to Comair’s liquidation. No. of IOSA certified airlines 5 No. airlines with AOC for International Operations 5 Covid-19 Impact Traffic Impact - Decline in Passengers Number in 2021(%) vs 2019 -58% on Air Transport Market Financial Impact - Profitability status of key SOEs, with latest available data SAA Group ZAR -5 500 0000 (FY2020) State aid in response to COVID-19- Financial aid provided: loans, guarantees, bonds None on record, specifically issued etc. related to Covid-19. All amount earmarked are for existing liabilities guaranteed by the Sovereign. Air Transport Recovery Prospects - Level of recovery with base of 2019 month or 100,21% annualized (?) Viability of Is there an appetite for privatization (semi/full)? Appetite for majority private Options to ownership of SOE airlines Restructure Do joint venture (JV’s) exist in the market? Yes Are there other types of strategic cooperation within market? E.g., Interlines, Yes codeshares, alliances etc. Business Model Evolution - Leading business model within market low-cost carrier (LCC) Regulatory Southern African Customs Union --> Liberalized/Restricted Liberalized Landscape YD Compliant BASAs as a % of Total BASAs 60,80% Has participation increased by non-African airlines? Green- Yes Is there ability/appetite to encourage more private sector participation Green- Yes Is there ability/appetite to apply competition rules broadly Green- Yes Market entry for private sector Deregulated since 1993 92 NAVIGATING BEYOND COVID-19: AIRLINE RECOVERY AND REGULATORY REFORM OPPORTUNITIES IN SOUTHERN AFRICA Key Policy Recommendations Strategic Direction Policy Response (Short-to Medium Term Actions) Development of industrial policy for • Refocus the government’s role on creating an enabling regulatory air transport environment instead of operating state-owned airlines • Provide access to hard currency for payment of international obligations (lessors, manufacturers, spares, operational costs abroad, and so on, and so forth Promotion of private sector solutions • Deregulated since 1993 Liberalization of market access • Grant more rights (fifth and seventh freedoms) to foreign airlines Liberalization of foreign ownership • Facilitate creation of local subsidiaries of foreign airlines and control • Lift maximum foreign ownership limits. Provision of essential/lifeline • Offer targeted competitive subsidies to any player for PSO connectivity routes via open tender systems • Develop and harmonize regional cross-border PSO routes • Benchmark PSO policies in the region to other regions, such as the European Union, to create relevant regulatory and institutional arrangements. Restructuring of state-owned carriers • Provide funding based on a fully time-bound and costed and routes project plan • Establish the minimum economic scale of activities as part of upfront funded restructuring plan and release funding upon successful completion of specific stages • Oversee the suitability of aircraft type and capacity to maximize connectivity and profitability • Limit the amounts and the purpose (“strings attached” as in the EU) for which funds can be used by recapitalization • Discipline state-owned airlines to operate within funding ceilings and to reduce scope of operations and dispose of assets should there be a shortfall • Encourage leasing instead of purchasing of aircraft to minimize debt exposure, and provide more flexibility in case of early termination of contracts • Implement associated scale down of activities and the sale of non-core assets • Abandon the strategy of annual grants and regular bailouts by restructuring, privatizing, and disposing of, winding up, or liquidating the state-owned carriers 93 APPENDIX - APPENDIX E: COUNTRY PROFILES Key Policy Recommendations Strategic Direction Policy Response (Short-to Medium Term Actions) • Develop a timebound suitable plan and the upfront funding of the suitable alternative, including a social plan for staff Facilitation of market consolidation • Several facets are already in progress Improvement of safety standards and • No matters arising oversight capacity BOTSWANA would reduce the SOE’s dependence on state grants and foster the development of a cost- An objective and fundamental assessment savvy environment, ringfencing the airline from of Air Botswana’s viability based on realistic political influence. With promulgation of the assumptions is necessary. Throughout the last airline transition legislation in 2022, there is new decade, the government of Botswana has been momentum to implement a privatization plan, but searching for an equity partner from the industry there appears to be limited preparatory work to to shape the performance of Air Botswana. A put Air Botswana on the market. This calls for a regional carrier would be the ideal partner to thorough due diligence on the airline to assess benefit from the network scale and spread of its viability and worth, including corporatization unit costs. Similarly, a private majority investor strategies that might result in its restructuring. Theme Key Indicator Data Economy GDP Growth (Year-on-Year, YOY) -8.5% Latest annual population; recent growth 2,351,625; 2.1% GDP Per Capita (2020) $ 6 404,90 Tourism Dependency - International Tourism Receipts (% total exports) 4.6% International Tourism Arrivals: Absolute Value (2018) 1, 830,000 Current consumer price Inflation (annual %, 2021) 7.2% Forecast Consumer Price Inflation (annual %, 2022) 8.9% Air Transport Total Passengers in market (2019) 903,000 Market Share of Domestic Passengers (%) 42% Total Seats in market (2019) Share of Domestic Passengers (%) Propensity to Travel (Trips/capita)3 0,384 ³ NACO: Aviation in Africa, Propensity to Fly 2019. Link: https://www.naco.nl/news-and-insights/insights/aviation-in-Africa 94 NAVIGATING BEYOND COVID-19: AIRLINE RECOVERY AND REGULATORY REFORM OPPORTUNITIES IN SOUTHERN AFRICA Theme Key Indicator Data Global Air Connectivity Rank in 2019 (Best Ranked airport GBE) 165 SOE Prominence in Market = SOE Domestic Capacity, 2019: Share of State-Owned Airlines in the Domestic Market (Capacity Share) 100%; 2021-100%; Safety Compliance (International Civil Aviation Organization [ICAO] Universal 67% Safety Oversight Audit Programme [USOAP] score) No. Airlines with Air Operators Certificate (AOC) 1 Theme Key Indicator Data No. Local airlines operating international market 1 No. of IOSA certified airlines 0 No. airlines with AOC for International Operations 1 Covid-19 Impact Traffic Impact - Decline in Passengers Number in 2021(%) vs 2019 -58% on Air Transport Market Financial Impact - Profitability status of key SOEs, with latest Pula -42.1M (FY 2018), excluding the available data Government grant this was -83.7M State aid in response to COVID-19- Financial aid provided: loans, The Government advised in stakeholder guarantees, bonds issued etc. interviews that they provided a liquidation injection of US$9 million Air Transport Recovery Prospects - Level of recovery with base of 103,24% 2019 month or annualized (?) Viability of Is there an appetite for privatization (semi/full)? There is an appetite for majority private Options to ownership of SOE airlines, as per Restructure engagements with Government Do joint venture (JV’s) exist in the market? No Are there other types of strategic cooperation within market? E.g., Yes Interlines, codeshares, alliances etc. Business Model Evolution - Leading business model within market Regional carrier Regulatory Southern African Customs Union --> Liberalized/Restricted Partially Liberalized Landscape YD Compliant BASAs as a % of Total BASAs 64,70% Has participation increased by non-African airlines? Orange – not through direct capacity but via codeshare networks Is there ability/appetite to encourage more private sector Green – Yes. participation 95 APPENDIX - APPENDIX E: COUNTRY PROFILES Theme Key Indicator Data Is there ability/appetite to apply competition rules broadly Red – the market is still monopolistic Market entry for private sector Statutory Monopoly- but with recent market entry by private airlines Key Policy Recommendations Strategic Direction Policy Response (Short-to Medium Term Actions) Development of industrial policy for • Refocus the government’s role on creating an enabling regulatory air transport environment instead of operating state-owned airlines • Provide access to hard currency for payment of international obligations (lessors, manufacturers, spares, operational costs abroad, and so on, and so forth Promotion of private sector solutions • Deregulate domestic air transport markets • Strengthen role of Competition Authority. Liberalization of market access • Encourage foreign airlines to enter and compete • Allow multi-designation of airlines on over-border routes • Grant more rights (fifth and seventh freedoms) to foreign airlines • Facilitate cooperative agreements between local airlines and foreign carriers • Allow consecutive cabotage (eighth freedom) • Provide change of gauge and standalone cabotage (ninth freedom) Liberalization of foreign ownership • Facilitate creation of local subsidiaries of foreign airlines and control • Lift maximum foreign ownership limits. Provision of essential/lifeline • Offer targeted competitive subsidies to any player for PSO routes connectivity via open tender systems • Develop and harmonize regional cross-border PSO routes • Benchmark PSO policies in the region to other regions, such as the European Union, to create relevant regulatory and institutional arrangements. Restructuring of state-owned carriers • Provide funding based on a fully time-bound and costed project plan and routes • Establish the minimum economic scale of activities as part of upfront funded restructuring plan and release funding upon successful completion of specific stages • Oversee the suitability of aircraft type and capacity to maximize connectivity and profitability 96 NAVIGATING BEYOND COVID-19: AIRLINE RECOVERY AND REGULATORY REFORM OPPORTUNITIES IN SOUTHERN AFRICA Key Policy Recommendations Strategic Direction Policy Response (Short-to Medium Term Actions) • Limit the amounts and the purpose (“strings attached” as in the EU) for which funds can be used by recapitalization • Discipline state-owned airlines to operate within funding ceilings and to reduce scope of operations and dispose of assets should there be a shortfall • Encourage leasing instead of purchasing of aircraft to minimize debt exposure, and provide more flexibility in case of early termination of contracts • Implement associated scale down of activities and the sale of non-core assets • Abandon the strategy of annual grants and regular bailouts by restructuring, privatizing, and disposing of, winding up, or liquidating the state-owned carriers • Develop a timebound suitable plan and the upfront funding of the suitable alternative, including a social plan for staff Facilitation of market consolidation • Facilitate merger with another local carrier • Facilitate merger with another regional carrier • Franchise (outsource) the national flag carrier branding Improvement of safety standards and • No matters arising oversight capacity ESWATINI on June 1, 2022. Further, from this date Airlink and Eswatini’s new national carrier, Eswatini Air, In Eswatini, the government partnered with will respectively provide scheduled air services a private sector airline (Airlink) based in a between JNB and King Mswati III International neighboring country (South Africa) to operate Airport (SHO) in Eswatini, giving travelers to and air services under Eswatini Airlink’s name. After from Eswatini greater choice. The intention is 23 years of this JV, the government of Eswatini to promote healthy competitive air transport announced the revival of the national carrier services in this market in order to promote and in 2022. Unsurprisingly, this led to the mutual develop trade, tourism, and other economic dissolution of the long-standing joint venture opportunities. That said, overcapacity should be partnership between the government and balanced with market stimulation and further Airlink. Airlink stopped operations to Eswatini network development that is commercially viable. 97 APPENDIX - APPENDIX E: COUNTRY PROFILES Theme Key Indicator Data Economy GDP Growth (Year-on-Year, YOY) -1.9% Latest annual population; recent growth 1,160,164; 1% GDP Per Capita (2020) $ 3 424,30 Tourism Dependency - International Tourism Receipts (% total exports) 0.4% International Tourism Arrivals: Absolute Value (2019) and CAGR 2015-2019 345 300, -0.48% Current consumer price Inflation (annual %, 2021) 2.6% Forecast Consumer Price Inflation (annual %, 2022) 4.8% Air Transport Total Passengers in market (2019) 53000 Market Share of Domestic Passengers (%) 0% Total Seats in market (2019) Share of Domestic Passengers (%) 0% Propensity to Travel (Trips/capita) 0,048 Global Air Connectivity Rank in 2019 200 SOE Prominence in Market = SOE Domestic Capacity, 2019: Share of State-Owned Airlines in the Domestic Market (Capacity Share) 100%; 2021-100%; Safety Compliance (International Civil Aviation Organization [ICAO] Universal 43% Safety Oversight Audit Programme [USOAP] score) No. Airlines with Air Operators Certificate (AOC) 1 No. Local Airlines Operating International market 1 No. of IOSA certified Airlines 0 No. Airlines with AOC for International Operations 1 Covid-19 Impact Traffic Impact - Decline in Passengers Number in 2021(%) vs 2019 -58% on Air Transport Market Financial Impact - Profitability status of key SOEs, with latest available data Not available State Aid in Response to Covid - Financial aid provided: loans, guarantees, bonds Not available issued etc. Air Transport Recovery Prospects - Level of recovery in 2025 with base of 2019 102,90% Viability of Is there an appetite for privatization (semi/full)? No observed appetite for Options to majority private ownership of Restructure SOE airlines 98 NAVIGATING BEYOND COVID-19: AIRLINE RECOVERY AND REGULATORY REFORM OPPORTUNITIES IN SOUTHERN AFRICA Theme Key Indicator Data Do joint venture (JV’s) exist in the market? No Are there other types of strategic cooperation within market? E.g., Interlines, Yes codeshares, alliances etc. Business Model Evolution - Leading business model within market Regional carrier Regulatory Southern African Customs Union --> Liberalized/Restricted Partially Liberalized Landscape YD Compliant BASAs as a % of Total BASAs 46,70% Has participation increased by non-African airlines? Red Is there ability/appetite to encourage more private sector participation Red – the long-standing private sector JV was dissolved in June 2022, in favor of the resuscitated national carrier Is there ability/appetite to apply competition rules broadly Orange Market entry for private sector Provided for in the Civil Aviation Authority Act, 2009 Key Policy Recommendations Strategic Direction Policy Response (Short-to Medium Term Actions) Development of industrial policy for • Refocus the government’s role on creating an enabling regulatory air transport environment instead of operating state-owned airlines • Provide access to hard currency for payment of international obligations (lessors, manufacturers, spares, operational costs abroad, and so on, and so forth Promotion of private sector solutions • Deregulate domestic air transport markets • Strengthen role of Competition Authority • Seek airline Strategic Equity Partners (SEPs) Liberalization of market access • Encourage foreign airlines to enter and compete • Allow multi-designation of airlines on over-border routes • Grant more rights (fifth and seventh freedoms) to foreign airlines • Facilitate cooperative agreements between local airlines and foreign carriers • Allow consecutive cabotage (eighth freedom) • Provide change of gauge and standalone cabotage (ninth freedom) 99 APPENDIX - APPENDIX E: COUNTRY PROFILES Key Policy Recommendations Strategic Direction Policy Response (Short-to Medium Term Actions) Liberalization of foreign ownership • Facilitate creation of local subsidiaries of foreign airlines and control • Lift maximum foreign ownership limits. Provision of essential/lifeline • Offer targeted competitive subsidies to any player for PSO routes connectivity via open tender systems • Develop and harmonize regional cross-border PSO routes • Benchmark PSO policies in the region to other regions, such as the European Union, to create relevant regulatory and institutional arrangements. Restructuring of state-owned carriers • Provide funding based on a fully time-bound and costed project plan and routes • Establish the minimum economic scale of activities as part of upfront funded restructuring plan and release funding upon successful completion of specific stages • Develop a timebound suitable plan and the upfront funding of the suitable alternative, including a social plan for staff Facilitation of market consolidation • Facilitate merger with another local carrier • Facilitate merger with another regional carrier • Franchise (outsource) the national flag carrier branding Improvement of safety standards and • Establish the list and scoping of safety and capacity-critical oversight capacity works that need to be implemented • Execute the safety and capacity-critical works identified • Pool experts and resources into regional institutions—for example, by merging CAAs at a regional level—for recruitment, training, retention of suitably qualified inspectors, certification, and surveillance services by a regional core of inspectors • Require equal-minded states to pool their resources into regional institutions instead of national agencies only to benefit from economies of scale • Form collaborative ventures and common air traffic and navigation services, including the upper airspace control centers (at subregions), subregional safety oversight operations • Harmonize air law and code of air navigation regulations 100 NAVIGATING BEYOND COVID-19: AIRLINE RECOVERY AND REGULATORY REFORM OPPORTUNITIES IN SOUTHERN AFRICA LESOTHO passengers pre-COVID in 2019. There is no notable general aviation activity or domestic Lesotho has very light air transport activities traffic for tourists. Regulatory Oversight is poor. and is reliant on connectivity from South Africa. The last safety audit of ICAO, which was carried Immediate interventions are around safety and out in 2010, as well as observations by ICAO regulation, as a precursor to a thriving air transport in 2016 revealed significant shortcomings in ecosystem, in the long-term. The Air Transport terms of oversight of the aviation sector. One Sector of Lesotho is small. The only route flown of the issues is the lack of separation between by an airline is Maseru – Johannesburg with the airport/ATC operator and the regulator. A about 44,000 passengers a year estimated for safety audit is still pending, a security audit is 2022 on this route. The is down from 56,000 scheduled for summer of 2022. Theme Key Indicator Data Economy GDP Growth (Year-on-Year, YOY) -9.6% Latest annual population (2020); recent growth 2,142,252; 0.8% GDP Per Capita (2020) $ 875,40 Tourism Dependency - International Tourism Receipts (% total exports) 10.2% International Tourism Arrivals: Absolute Value (2019) and CAGR 2015-2019 1 142 000; 1.09% Current consumer price Inflation (annual %, 2021) 6% Forecast Consumer Price Inflation (annual %, 2022) 6% Air Transport Total Passengers in market (2019) 56000 Market Share of Domestic Passengers (%) 0% Total Seats in market (2019) Share of Domestic Passengers (%) 0% Propensity to Travel (Trips/capita) 0,025 Global Air Connectivity Rank in 2019 (Best Ranked airport JNB) 201 SOE Prominence in Market = n/a Share of State-Owned Airlines in the Domestic Market (Capacity Share) Safety Compliance (International Civil Aviation Organization [ICAO] Universal 25% Safety Oversight Audit Programme [USOAP] score) No. Airlines with Air Operators Certificate (AOC) 0 No. Local Airlines Operating International market 0 No. of IOSA certified Airlines 0 No. Airlines with AOC for International Operations 0 101 APPENDIX - APPENDIX E: COUNTRY PROFILES Theme Key Indicator Data Covid-19 Impact Traffic Impact - Decline in Passengers Number in 2021(%) vs 2019 -58% on Air Transport Market Financial Impact - Profitability status of key SOEs, with latest available data Not applicable State Aid in Response to Covid -Financial aid provided: loans, guarantees, bonds Not applicable issued etc. Air Transport Recovery Prospects - Level of recovery in 2025 with base of 2019 102,90% Viability of Is there an appetite for privatization (semi/full)? No observed appetite for Options to majority private ownership of Restructure SOE airlines Do joint venture (JV’s) exist in the market? No Are there other types of strategic cooperation within market? E.g., Interlines, Yes codeshares, alliances etc. Business Model Evolution - Leading business model within market Regional carrier Regulatory Southern African Customs Union --> Liberalized/Restricted Partially liberalized Landscape YD Compliant BASAs as a % of Total BASAs 33,30% Has participation increased by non-African airlines? Red – no developed air transport system exists Is there ability/appetite to encourage more private sector participation Green – Airlink provides connectivity Is there ability/appetite to apply competition rules broadly Unable to determine Market entry for private sector Deemed possible Key Policy Recommendations Strategic Direction Policy Response (Short-to Medium Term Actions) Development of industrial policy for • Refocus the government’s role on creating an enabling regulatory air transport environment instead of operating state-owned airlines • Provide access to hard currency for payment of international obligations (lessors, manufacturers, spares, operational costs abroad, and so on, and so forth Promotion of private sector solutions • Steps can be taken to facilitate entrepreneurial air services. Once market demand has been established and market entry is possible, new suppliers (airlines) will enter the market. Liberalization of market access • Encourage foreign airlines to enter and compete • Allow multi-designation of airlines on over-border routes 102 NAVIGATING BEYOND COVID-19: AIRLINE RECOVERY AND REGULATORY REFORM OPPORTUNITIES IN SOUTHERN AFRICA Key Policy Recommendations Strategic Direction Policy Response (Short-to Medium Term Actions) • Grant more rights (fifth and seventh freedoms) to foreign airlines • Facilitate cooperative agreements between local airlines and foreign carriers • Allow consecutive cabotage (eighth freedom) • Provide change of gauge and standalone cabotage (ninth freedom) Liberalization of foreign ownership • Facilitate creation of local subsidiaries of foreign airlines and control • Lift maximum foreign ownership limits. Provision of essential/lifeline • Offer targeted competitive subsidies to any player for PSO routes connectivity via open tender systems • Develop and harmonize regional cross-border PSO routes • Benchmark PSO policies in the region to other regions, such as the European Union, to create relevant regulatory and institutional arrangements. Restructuring of state-owned carriers • Provide funding based on a fully time-bound and costed project plan and routes • Establish the minimum economic scale of activities as part of upfront funded restructuring plan and release funding upon successful completion of specific stages • Develop a timebound suitable plan and the upfront funding of the suitable alternative, including a social plan for staff Facilitation of market consolidation • Facilitate merger with another local carrier • Facilitate merger with another regional carrier • Franchise (outsource) the national flag carrier branding Improvement of safety standards and • Establish the list and scoping of safety and capacity-critical oversight capacity works that need to be implemented • Execute the safety and capacity-critical works identified • Pool experts and resources into regional institutions—for example, by merging CAAs at a regional level—for recruitment, training, retention of suitably qualified inspectors, certification, and surveillance services by a regional core of inspectors • Require equal-minded states to pool their resources into regional institutions instead of national agencies only to benefit from economies of scale 103 APPENDIX - APPENDIX E: COUNTRY PROFILES Key Policy Recommendations Strategic Direction Policy Response (Short-to Medium Term Actions) • Form collaborative ventures and common air traffic and navigation services, including the upper airspace control centers (at subregions), subregional safety oversight operations • Harmonize air law and code of air navigation regulations NAMIBIA Because of the low level of pre-pandemic demand, predominantly connecting to South Further steps need to be taken to enable a Africa’s economic points, allowing South African non-Namibian airline foreign direct investment and Namibian airlines to operate cabotage (FDI) to adequality cover demand and facilitate services to/from Namibia to the world would sufficient capitalization of domestic airlines. maximize the country’s potential to re-establish With the liquidation of Air Namibia, the connectivity on routes that make financial sense. statutory protection monopoly on international To maintain domestic connectivity, a public and domestic routes was eliminated allowing service obligation (PSO) for those routes where for the initiation of scheduled services by no operation is feasible, but necessary from FlyNamibia (previously named FlyWestair), an economic and security perspective, can be the incumbent Namibian private sector airline. evaluated and publicly tendered. Theme Key Indicator Data Economy GDP Growth (Year-on-Year, YOY) -8.5% Latest annual population (2020); recent growth 2,540,916;1.8% GDP Per Capita (2020) $ 4 179,30 Tourism Dependency - International Tourism Receipts (% total exports) 4.4% International Tourism Arrivals: Absolute Value (2020) and CAGR 2015-2019 187 100; 2.10% Current consumer price Inflation (annual %, 2021) 3.6% Forecast Consumer Price Inflation (annual %, 2022) 6% Air Transport Total Passengers in market (2019) 1237000 Market Share of Domestic Passengers (%) 23% Total Seats in market (2019) Share of Domestic Passengers (%) Propensity to Travel (Trips/capita) 0,487 Global Air Connectivity Rank in 2019 (Best Ranked airport JNB) 109 104 NAVIGATING BEYOND COVID-19: AIRLINE RECOVERY AND REGULATORY REFORM OPPORTUNITIES IN SOUTHERN AFRICA Theme Key Indicator Data SOE Prominence in Market = 2019: 43.73%; 2021: 0% (liquidated Air Share of State-Owned Airlines in the Domestic Market (Capacity Share) Namibia) Safety Compliance (International Civil Aviation Organization [ICAO] 25% Universal Safety Oversight Audit Programme [USOAP] score) No. Airlines with Air Operators Certificate (AOC) 0 No. Local Airlines Operating International market 0 No. of IOSA certified Airlines 0 No. Airlines with AOC for International Operations 0 Covid-19 Impact Traffic Impact - Decline in Passengers Number in 2021(%) vs 2019 -58% on Air Transport Market Financial Impact - Profitability status of key SOEs, with latest available data -N$1.28B (FY 2020/2021 Budgeted Loss) State Aid in Response to Covid -Financial aid provided: loans, N$ 984.6 (FY 2020/21 budgeted) guarantees, bonds issued etc. Air Transport Recovery Prospects - Level of recovery in 2025 with base 102,34% of 2019 Viability of Is there an appetite for privatization (semi/full)? Policy position is unclear Options to Restructure Do joint venture (JV’s) exist in the market? No Are there other types of strategic cooperation within market? E.g., No Interlines, codeshares, alliances etc. Business Model Evolution - Leading business model within market Regional carrier Regulatory Southern African Customs Union --> Liberalized/Restricted Liberalized Landscape YD Compliant BASAs as a % of Total BASAs 41,20% Has participation increased by non-African airlines? Green – there has been longstanding openness to this, given the country links with Germany. Is there ability/appetite to encourage more private sector participation Green – given the liquidation of Air Namibia and fulfilment of some of this capacity by the private sector Is there ability/appetite to apply competition rules broadly Orange– this is a longstanding deregulated market, however there is scope to strengthen the Competition Authority Market entry for private sector Deregulated since 1998 105 APPENDIX - APPENDIX E: COUNTRY PROFILES Key Policy Recommendations Strategic Direction Policy Response (Short-to Medium Term Actions) Development of industrial policy for • Refocus the government’s role on creating an enabling regulatory air transport environment instead of operating state-owned airlines • Provide access to hard currency for payment of international obligations (lessors, manufacturers, spares, operational costs abroad, and so on, and so forth Promotion of private sector solutions • Deregulate domestic air transport markets • Strengthen role of Competition Authority • Seek airline Strategic Equity Partners (SEPs) Liberalization of market access • Encourage foreign airlines to enter and compete • Allow multi-designation of airlines on over-border routes • Grant more rights (fifth and seventh freedoms) to foreign airlines • Facilitate cooperative agreements between local airlines and foreign carriers • Allow consecutive cabotage (eighth freedom) • Provide change of gauge and standalone cabotage (ninth freedom) Liberalization of foreign ownership • Facilitate creation of local subsidiaries of foreign airlines and control • Lift maximum foreign ownership limits. Provision of essential/lifeline • Offer targeted competitive subsidies to any player for PSO routes connectivity via open tender systems • Develop and harmonize regional cross-border PSO routes • Benchmark PSO policies in the region to other regions, such as the European Union, to create relevant regulatory and institutional arrangements. Restructuring of state-owned carriers • Provide funding based on a fully time-bound and costed project plan and routes • Establish the minimum economic scale of activities as part of upfront funded restructuring plan and release funding upon successful completion of specific stages • Oversee the suitability of aircraft type and capacity to maximize connectivity and profitability • Limit the amounts and the purpose (“strings attached” as in the EU) for which funds can be used by recapitalization • Discipline state-owned airlines to operate within funding ceilings and to reduce scope of operations and dispose of assets should there be a shortfall 106 NAVIGATING BEYOND COVID-19: AIRLINE RECOVERY AND REGULATORY REFORM OPPORTUNITIES IN SOUTHERN AFRICA Key Policy Recommendations Strategic Direction Policy Response (Short-to Medium Term Actions) • Encourage leasing instead of purchasing of aircraft to minimize debt exposure, and provide more flexibility in case of early termination of contracts • Implement associated scale down of activities and the sale of non-core assets • Abandon the strategy of annual grants and regular bailouts by restructuring, privatizing, and disposing of, winding up, or liquidating the state-owned carriers • Develop a timebound suitable plan and the upfront funding of the suitable alternative, including a social plan for staff Facilitation of market consolidation • Facilitate merger with another local carrier • Facilitate merger with another regional carrier • Franchise (outsource) the national flag carrier branding Improvement of safety standards and • No matters arising oversight capacity 107 108 NAVIGATING BEYOND COVID-19: AIRLINE RECOVERY AND REGULATORY REFORM OPPORTUNITIES IN SOUTHERN AFRICA