MOBILITY AND TRANSPORT CONNECTIVITY SERIES THE COVID-19 PANDEMIC AND AFRICAN AVIATION Policy Note – 2022 © 2022 The World Bank 1818 H Street NW, Washington DC 20433 Telephone: 202-473-1000; Internet: www.worldbank.org Some rights reserved This work is a product of the staff of The World Bank. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of the Executive Directors of The World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Rights and Permissions This work is available under the Creative Commons Attribution 3.0 IGO license (CC BY 3.0 IGO) http:// creativecommons.org/licenses/by/3.0/igo. 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THE COVID-19 PANDEMIC AND AFRICAN AVIATION POLICY NOTE  TABLE OF CONTENT ACRONYMS AND ABBREVIATIONS.................................................................................................. 1 ACKNOWLEDGMENTS...................................................................................................................... 2 EXECUTIVE SUMMARY..................................................................................................................... 4 Current Situation of the Transport Sector in Africa..................................................................................... 4 The Difficult Pre-Pandemic Context........................................................................................................... 5 Policy Options for Recovery and a Sustainable Aviation Sector in Africa .................................................. 6 1. INTRODUCTION.........................................................................................................................12 2. IMPACT OF THE COVID-19 PANDEMIC: A SHORT OVERVIEW .............................................................................................................16 2.1. Global Trends  ................................................................................................................................ 16 3. THE DIFFICULT PRE-PANDEMIC CONTEXT.............................................................................. 24 3.1. Demand-Side Challenges ............................................................................................................... 24 3.2. Supply-Side Challenges  ................................................................................................................. 35 3.3. Regulatory Challenges .................................................................................................................... 41 3.4. More Room for Africa to Grow  ...................................................................................................... 43 4. COVID-19-PROMPTED STATE AID AND POLICY RESPONSES.................................................. 48 4.1. Financial Aid So Far  ....................................................................................................................... 49 4.2. Implications of State Aid ................................................................................................................. 53 4.3. Economic Rationale for Subsidies and Bailouts .............................................................................. 56 4.4. A Framework for State Support for Airlines During the COVID-19 Crisis ....................................... 57 5. POLICY OPTIONS FOR RECOVERY AND SUSTAINABLE AVIATION IN AFRICA....................... 64 5.1. Airline Restructuring ....................................................................................................................... 65 5.2. Direct Bailout of Airlines ................................................................................................................. 65 5.3. Reduction of Taxes and Charges on Air Transport ......................................................................... 66 5.4. Support for National Carrier through Public Service Obligation (PSO) Programs .......................... 67 5.5. Liberalization of Market Entry (more fifth freedom among African carriers) ................................... 68 5.6. Removal of Restrictions on Ownership and Control to Facilitate the Development of Multinational African Carriers ............................................................................................................................... 68 5.7. Prior Actions for a Competitive and Safe Air Transport Sector ...................................................... 69 APPENDIX........................................................................................................................................81 A. Tax and Charges Burden in Africa................................................................................................... 81 B. ICAO Safety Oversight Audits ........................................................................................................ 82 C. Air Transport Portfolio of the World Bank Group: Summary........................................................... 82 ENDNOTES.......................................................................................................................................89 LIST OF TABLES Table ES.1 • Summary of Policy Options.................................................................................................... 9 Table 3.1 • Air Transport Demand in Africa Is Both Price and Income Inelastic....................................... 26 Table 3.2 • Restrictive BASAs Still Dominate African Skies...................................................................... 42 Table 5.1 • Summary Table of Policy Options......................................................................................... 69 Table C.1 Active Air Transport Portfolio across the World Bank Group................................................... 84  LIST OF FIGURES Figure 2.1 • Both Air Transport Capacity and Demand Remain Depressed Well into 2022.................... 17 Figure 2.2 • In 2020 Carriers Lost US$372 Billion in Revenue, Almost 50% of their Revenue in 2019.... 18 Figure 2.3 • Airline Region Operating Margin as a Percentage of Revenues: Bleeding Continues to 2021 and 2022 ........................................................................................... 19 Figure 2.4 • Seat Capacity Evaluation (Base = Jan 2019= 100)............................................................... 20 Figure 2.5 • Intercontinental Seat Capacity Schedules to/from Africa (Base = Jan 2020= 100).............. 21 Figure 3.1 • Distribution of Tax Burden.................................................................................................... 27 Figure 3.2 • Positive Correlation between Demand and Income (for year 2019)..................................... 29 Figure 3.3 • Linear Relationship between Passenger Demand (PAX) and GDP per Capita (1980-2019). 30 Figure 3.4 • Index Growth: Seat Capacity vs. GDP Growth (2010 = 100) for Africa ............................... 31 Figure 3.5 • Airline Seat Capacity Evolution in Africa.............................................................................. 32 Figure 3.6 • Dependence on Tourism Correlates with GDP Contraction, with Greater Vulnerabilities for High-Propensity-to-Fly Countries....................................................................... 33 Figure 3.7 • Top 10 African Airlines: State-Owned Airlines Dominate African Skies............................... 36 Figure 3.8 • Yield vs. Cost Graph............................................................................................................. 39 Figure 3.9 • Most African Airlines Have Seen Negative Operating Margins (OM) in the Last Decade.... 40 Figure 3.10 • African Airlines’ Balance Sheets Remain Highly Leveraged as Shown in Their Highly Cyclical Debt-to-EBITDA Ratios.................................................................................. 41 Figure 3.11 • Africa Exhibits Both Lowest Levels of Propensity to Fly and Lowest Number of Operating Airlines............................................................................................................................ 43 Figure 3.12 Evaluation of Propensity to Fly Between 1981 and 2019: Countries with Airlines Perform Better Than Those Without for the Same Income Level.................................................................. 44 Figure 4.1 • State Aid by Region............................................................................................................. 50 Figure 4.2 • Archetypes of Government Support for Aviation in Africa (US$, millions).......................... 51 Figure 4.3 • Top 10 African Airlines in 2019 and Government Aid Due to the COVID-19 Crisis............ 52 Figure 4.4 • Risk Profile of African Airlines............................................................................................. 53 Figure 4.5 • Decision Tree for Supporting an Air Carrier......................................................................... 58 Table 5.2 • Immediate Policy Actions for Air Travel Recovery................................................................. 71 Table 5.3 • Menu of Prior Actions for a Competitive and Safe Air Transport Sector – Short-to-Medium-Term Actions....................................................................................................... 72 Figure A.1 • Passenger Charges and Government Taxes Constitute the Biggest Portion of Overall Levies in Africa................................................................................................................................. 81 Figure B.1 • Effective Implementation Score of USOAP, by Geographical Region (excluding high-income countries)................................................................................................... 82 Figure C.1 • World Bank Group Air Transport Portfolio........................................................................... 83  1 MOBILITY AND TRANSPORT CONNECTIVITY SERIES ACRONYMS AND ABBREVIATIONS AFCAC African Civil Aviation Commission AfCFTA African Continental Free Trade Area AFRAA African Airlines Association AOC Air Operator’s Certificates APL Adaptable Program Loan AUC African Union Commission CAA Civil Aviation Authority BASA Bilateral Air Service Agreement CAGR Compound Annual Growth Rate CASK Cost per Available Seat Kilometer EBITDA Earnings before Interest, Taxes, Depreciation ECOWAS Economic Community of West African States GDP Gross Domestic Product IATA International Air Transport Association IBRD International Bank for Reconstruction and Development ICAO International Civil Aviation Organization IDA International Development Association IFC International Finance Corporation MIGA Multilateral Investment Guarantee Agency NCASP National Civil Aviation Security Plan NCASQCP National Civil Aviation Security Quality Control Plan PSO Public Service Obligation PTF Propensity to Fly SAATM Single African Air Transport Market SOE State Owned Enterprise RPK Revenue Passenger-Kilometers USOAP Universal Safety Oversight Audit WBG World Bank Group YD Yamoussoukro Decision  2 THE COVID-19 PANDEMIC AND AFRICAN AVIATION ACKNOWLEDGMENTS This report was prepared by a World Bank team led by Megersa Abate (Transport Economist, Task Team Leader), Charles Schlumberger (Lead Air Transport Specialist), Ruxandra Brutaru (Consultant), Andy Ricover (Consultant) and Theo Francois (Intern). The report greatly benefited from the following peer-reviewers: Daniel Saslavsky (Economist, ETIRI), Christopher J. De Serio (Senior Transport Specialist, IAET1), Jagoda Egeland (Advisor to the Secretary-General and Aviation Policy Lead, International Transport Forum at the OECD), Romain Ekoto (Chief Aviation Officer, African Development Bank Group), Mustapha Benmaamar (Lead Transport Specialist, IAWT3); Ziad Nakat (Senior Transport Specialist, IAET2). The team is grateful for the guidance provided by Binyam Reja (Practice Manager and Acting Global Director, Transport), Vivien Foster, (Chief Economist INF VP), Ibou Diouf (Practice Manager, IAWT3), Almud Weitz (Practice Manager, IAET1), Maria Marcela Silva (Practice Manager, IAET2), Aurelio Menendez (Practice Manager, IAWT4). The team appreciates the support provided by Emiye Deneke and Azeb Afework. The team also appreciates helpful comments and suggestion from Daniel Benitez and members of the Aviation Solution Area of the Bank. Ashish Sen edited the report. Part of this work is financially supported by the Public–Private Infrastructure Advisory Facility (PPIAF).  photo / Xinhua / Alamy Stock Photo 4 THE COVID-19 PANDEMIC AND AFRICAN AVIATION EXECUTIVE SUMMARY CURRENT SITUATION OF THE TRANSPORT SECTOR IN AFRICA The COVID-19 pandemic is posing an existential threat to the air transport sector globally, including in Africa. Due to sustained and significant loss of revenue coupled with the presence of several fixed and quasi-fixed inputs in this sector, the survival of carriers is questionable in the short term. This could lead to bankruptcies of important African-based airlines resulting in severe loss of connectivity, especially in the intra-African markets. If history is any guide, within the current regulatory environment that restricts market access and the ownership and control of airlines, it could be a long time before another airline fills the void left by a defunct airline in Africa. This challenge is further compounded by the difficulty of accessing capital and the high cost of (re)training and attracting the highly skilled labor typically needed to run a viable airline. The objective of this policy note is to explore policy and operational strategies to build back a safe and competitive air transport sector in the aftermath of the COVID-19 crisis in Africa. It focuses on four broad areas: it provides a short status update on the impact of the pandemic; reviews pre-COVID-19 sector challenges from the supply, demand, and regulatory sides; tracks and analyzes government financial support and bailouts to airlines in the aftermath of the crisis globally; and identifies and recommends operational and policy responses to mitigate the impact of the crisis and put the aviation sector on a sustainable development path. The pandemic put Africa into its first recession in 25 years in 2020. While Africa has weathered the pandemic relatively well (in terms of the number of confirmed cases and fatalities), it has been particularly hard on travel and tourism-dependent island states such as the Seychelles, Mauritius, and Cabo Verde as they face the double whammy of a decline in GDP and tourism receipts. Thirteen African countries, including Ethiopia, Kenya, and Egypt, ended 2020 with positive economic growth. The rest of the continent’s 41 countries, including South Africa and Nigeria, the two biggest economies, experienced contraction, -7 percent and -1.8 percent, respectively. Africa’s share of the hitherto (as of October 30, 2021) confirmed or proposed government support (approximately US$208 billion) to the air transport sector is about US$4 billion or 1.8 percent, which mirrors African countries’ constrained fiscal space and their ability as well as willingness to rescue the sector. Most of the support has been extended to airlines as a state budget subsidy (47 percent) and state equity injection (36 percent). State loans and guarantees, which have been the main types of support in other parts of the world, account for only 14 percent in Africa. This is not surprising given that the leading African airlines are all fully state-owned enterprises (SOEs). Like other regions, the observed pattern of state support in Africa is spread unevenly, not only in terms of geographic coverage but also across the aviation ecosystem itself. Executive Summary 5 MOBILITY AND TRANSPORT CONNECTIVITY SERIES 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 ecosystem (service providers at airports, airlines suppliers, etc.).1 For the most part, governments’ objective in all regions, and their supporting instruments, have focused mainly on saving airlines with the immediate aim of preserving the sector and essential/lifeline connectivity. Of the different government support measures, nationalization and recapitalization through state equity injection will most likely increase the direct role of the government in the aviation sector for the foreseeable future. The possibility of swapping debt for equity may also result in a more prolonged government presence in the airlines’ corporate structure. However, increasing state ownership could have counterproductive implications for the industry. THE DIFFICULT PRE-PANDEMIC CONTEXT The air transport sector in Africa faced multipronged challenges, including those related to economic regulation, profitability, safety, security, and sustainable financing of critical infrastructure, even before the crisis induced by the COVID-19 pandemic. Despite representing 15 percent of the world’s population (1.2 billion inhabitants), Africa accounts for only about 2 percent of global air transport demand with the lowest level of propensity to travel. The continent is characterized by vast distances and, in general, has neither good road nor rail systems. While these challenges are less amenable to policy levers, they are opportunities for a thriving air transport market as long distances, lack of modal alternatives, large populations, etc., are the very reasons for the existence of air transport in the first place. The acknowledgment of these conditions or physical disadvantages should be a strong basis for tackling non-physical/regulatory as well as demand and supply-side challenges that have long bedeviled air transport development in Africa. In 2019, 97 African-based airlines were active, providing the fewest seat capacity with the smallest fleets in the world. Ten airlines accounted for 80 percent of seat capacity, not necessarily because of the growth in airline consolidation globally, but due to the low level of air transport development in this vast continent of 54 countries. The top four airlines are 100 percent state owned, and four in the top 10 are based in one country: South Africa.2 In 2019, seat capacity grew by 4.3 percent and the market was shared by airlines outside the region, which accounted for 40 percent of all seats and a whopping 70 percent of the intercontinental seats. Africa’s historical dependence on European-based airlines and its proximity to the rapidly growing Gulf region airlines have contributed to this lopsided reliance on foreign-based airlines. Running an airline involves significant financial costs, which are exorbitant in Africa due to its high operating cost and credit-constrained environment. Airline operators had to confront significant infrastructure fees, charges, and taxes as well as above average fuel and ticket distribution costs, among others. Similarly, constrained access to credit, high indebtedness, and restricted market access have bogged down an efficient and profitable supply of air transport services in the continent. As a result, pre-COVID-19, many African airlines were already facing insolvency due to sustained unprofitability and debt burden. They were in serious need of debt restructuring with the Executive Summary 6 THE COVID-19 PANDEMIC AND AFRICAN AVIATION aim of rightsizing their overall debt burden to a sustainable level commensurate with their market size and cash generation potential. Air transport demand is also shown to be income inelastic in Africa, ranging from 0.07 to 0.6. This is in contrast to industry studies that indicate income elasticity is greater than one or that air travel demand increases at a faster pace than income. This low income elasticity could be a solace during the current crisis as air transport demand will shrink at a slower pace than the decline in GDP. However, as this is a global pandemic and the fact that 55 percent to 60 percent of air transport demand in Africa is intercontinental, the full recovery of Africa’s air transport market will very much depend on the pace and extent of economic recovery of major economies in Europe and Asia for the most part, and the world in general. Liberalization efforts are on a temporary hiatus as countries operate in emergency mode. Pre- COVID-19, liberalization efforts were gathering momentum under the Single African Air Transport Market (SAATM) initiative to create a single unified internal market. The SAATM is intended as an instrument for quicker implementation of the Yamoussoukro Decision (YD), which in principle opened up the intra-African market in 44 countries since 2002 but did not result in actual market openness. As a flagship project under the African Union Commission’s (AUC’s) Agenda 2063, the SAATM has garnered the acceptance of 33 countries. But only a few of these countries have taken concrete implementation measures through the revision of bilateral air service agreements (BASAs), which remain the ultimate legal instrument for international operations. POLICY OPTIONS FOR RECOVERY AND A SUSTAINABLE AVIATION SECTOR IN AFRICA Considering the unique challenges of the African aviation sector as well as the various state support given in response to the crisis induced by the COVID-19 pandemic so far globally, policy options for sustainable recovery of the sector in Africa include: 1. Airline restructuring: For many African countries with state-owned airlines, the current crisis presents a unique opportunity to make hard, but necessary, decisions that were difficult to make during normal times. Decisions involving deep restructuring of ailing airlines, changes in their business models, fleet rationalization, closure of unprofitable or unviable routes, among others, could become implementable in the short term when an airline is on the verge of total collapse. Three major improvement opportunities should be considered for African airlines: (i) network restructuring and optimization of operating resources, (ii) labor retrenchment and implementation of digitalized systems to improve productivity, and (iii) debt restructuring (e.g. through securitization of floating debt and debt swaps) and increased accessibility to more sophisticated forms of financing. Considering that the majority of African airlines were loss making prior to the pandemic, the rescue measures should favor restructuring and promote regional mergers or partnerships. Realistic restructuring plans could be supported by additional measures, such as state Executive Summary 7 MOBILITY AND TRANSPORT CONNECTIVITY SERIES guarantees or state loans at preferential rates. Such facilities should be meant for debt reorganization and attraction of commercial loans. 2. Direct bailout to airlines: In many developed countries, such as the United States and most European countries, airlines have received direct cash injections either in the form of equity injections or loans. In some countries, the loans have been secured as convertible bonds, opening the possibility of further equity involvement by the state. Most African countries do not have the fiscal capability to support their national airlines during the current crisis. Bailouts in the form of equity injections or loans may be prohibitive for their economies given other priorities. This leaves external financing as the last resort. The current situation is so dire that whether airlines will be capable of returning loans, or can even afford the debt service, remains an open question with no clear answer. As such, proper due diligence of the company should be carried out before any financial aid is offered to assess its financial viability prior to the crisis as well as its performance during the pandemic, if applicable. This should be coupled with credible business plan with a monitoring mechanism and a scenario analysis on how the company can be successful in the future if given aid. Countries should opt for capital injections for a limited term with the aim of limiting unemployment growth (and its fiscal burden on the national budget) by approving a furlough wage subsidy scheme and ensuring critical connectivity for the country. Additional measures to minimize airlines’ cash spending should include tax deferrals, access to foreign currency at an affordable rate to enable the payment of hard currency obligations, and ease of bankruptcy/insolvency procedures to allow for reorganization of the airlines’ activities. 3. Reduction of taxes and charges on air transport: In many African countries, service providers/operators continue to impose prohibitive duties on air travel. Fees and charges for the use of infrastructure, including taxes, are also particularly high despite the low quality of airport services. Inefficiencies and low volumes contribute to the relatively high level of charges. By finding other channels through which the same tax revenue could be raised, governments can incentivize more people to travel. There is also room to reduce fees and charges commensurate with the level of service provided. The stimulatory powers of these policies, however, could be minimal because air travel demand is price inelastic in Africa, especially for intra-African and intercontinental travel. While charges on passengers are passed through to travelers, charges on airlines may be transferred or absorbed by the airfare, depending on market competitiveness. Since yields in Africa are relatively high and travelers are proven to be price inelastic, it is not certain whether the reduction of fees and charges might have an associated impact on demand. Complementary policies, therefore, are needed to ensure that lower taxes and charges translate into lower fares for the traveling public. Similarly, policy makers should consider alternative strategies for airports and air navigation service providers to recoup lost income in consultation with all stakeholders, users, and development partners Executive Summary 8 THE COVID-19 PANDEMIC AND AFRICAN AVIATION who could provide stopgap funding conditional on enacting policies in line with the International Civil Aviation Organization’s (ICAO’s) policies on user charges and taxation. 4. Support for national carriers through Public Service Obligation (PSO) programs: The desire to save airlines vis-à-vis saving domestic connectivity can be adopted in tandem through PSO programs. For those countries that have national flag carriers, either state or privately owned, the PSO programs could provide an organizing framework for state aid while ensuring connectivity on essential domestic routes. This is particularly relevant for big countries or archipelagos with remote communities with no direct commercial air links and no viable alternative surface-based modes of transportation. Due to the current regulatory environment, PSO programs are mainly applicable in a domestic market, particularly on unserved/underserved routes that are not commercially viable. The implementation of such programs may serve at least three main objectives: (i) it provides a formal framework under which eligible communities will be connected; (ii) it defines and circumscribes the level of subsidy from the government, defining specific objectives, identifying the precise beneficiaries, and determining the financial sources; and (iii) it may provide relevant financial support to the local national airline through a predetermined and limited budget. In essence, through a PSO program, some countries may ensure domestic connectivity while backing the national airline financially at the same time. As a side benefit these steps will ultimately ensure the formalization of the level of service mandate state-owned airlines undertake which are often implicit. 5. Liberalization of market entry (more fifth freedom among African carriers): Full liberalization of African skies should remain a policy objective even during the current crisis. There is compelling evidence that liberalization leads to more competition and in turn to lower fares and higher frequencies, which ultimately stimulates demand. It also allows new carriers to enter the market and existing carriers to better respond to demand. While it is expected that some countries might be reluctant to allow more competition so as not to erode market share for their ailing airlines, others, especially those without local carriers, should follow a liberal approach by welcoming airlines to provide regional connectivity through full implementation of the YD. The entry and expansion of private sector airlines following the demise of state-owned airlines in South Africa and Namibia demonstrates that the connectivity previously provided by state-owned airlines can be provided by the private sector and foreign airlines without the need for subsidies. This implies that state-owned carriers are not indispensable. In fact, it demonstrates that once market demand has been established and market entry is possible, new suppliers (airlines) will enter the market. Similarly, all (or most) of the economic benefits previously ascribed to the state-owned airline are not lost upon the demise of that airline. Such benefits are merely provided by the substitute replacement airlines that enter the market upon the demise of a state-owned airline. Executive Summary 9 MOBILITY AND TRANSPORT CONNECTIVITY SERIES 6. Removal of restrictions on ownership and control to facilitate the development of multinational African carriers: The current crisis presents an opportunity to expand cross-border investment with the aim of creating multinational African airlines through subsidiaries and joint ventures in other countries. Such measures would enable cross- border partnerships and the generation of traffic density effect necessary to reduce unitary costs and build a self-sustaining business model that attracts private capital. In addition to providing an immediate lifeline for struggling airlines, cross-border collaborations provide realistic options for developing a robust African airline that could compete with airlines outside the region. The model of multinational airlines has proven to be the right solution in Latin America and Southeast Asia. All these models are based on the interconnection of their domestic networks, consolidating traffic at various hubs, creating a route system that enables connectivity through competitive airfares. In both continents, Avianca, LATAM, and Air Asia succeeded in integrating air transport under one single airline, less nationalistic and profit-oriented private operators. This could be a good solution for the current African skies, which are dominated by SOEs. TABLE ES.1 • Summary of Policy Options POLICY OPTION EVALUATION SCOPE (TERM) Airline Should be combined with immediate assistance until it can be 1 Mid/long restructuring implemented Quickest but requires financial resources. It should be combined with a 2 Direct bailout Short solution for the long term Reducing charges Has strong fiscal implications or involves airport operators, making its 3 Mid and taxes implementation difficult 4 PSO programs Require financial resources from the government, take time to implement Mid Involving other parties, it may take time. Some airlines may benefit from 5 Liberalization Mid it, for others this might accelerate their downfall Multinational Will require immediate assistance until such an option can be 6 Mid/long African carriers implemented Using the preceding six policy options as an overarching guide, this note presents specific policy actions to address the challenges posed by the pandemic as well as the African air transport sector’s legacy problems. The actions are divided into two steps: 1. Immediate policy actions for air travel: The three main immediate policy directions for a faster recovery of air travel are: facilitation of market access for airlines, establishment of a common travel and cross-border control for tourism restart, and provision of direct financial aid. 2. Short-to-medium term actions for a competitive and safe air transport sector: TThe menu of short- to medium-term policy actions cover both domestic and international regulatory and operational areas which can be supported by development finance institutions using Executive Summary 10 THE COVID-19 PANDEMIC AND AFRICAN AVIATION instruments such as a Development Policy Financing (DPF).3 While the policy actions are not equally applicable/relevant for all countries, they can be adapted depending on the participating country or group of countries (in case a regional DPF is considered). The specific actions are organized under 11 policy, regulatory, and operational reforms areas: „ Creation of a competitive international air transport market „ Facilitation of foreign direct investment and airline partnerships „ Provision of essential/lifeline connectivity „ Improvement of capacity for oversight of safety and security standards „ Sector governance (builds on previous World Bank operations, including DPFs) „ Liberalization of ground services „ Creation of common policy for aviation charges, taxes, and fees „ Decarbonization of air transport „ Modernization of air navigation service providers „ Promotion of digitalization in the air transport sector „ Restructuring state-owned carriers and routes REFERENCE IATA (International Air Transport Association). 2021a. “Losses Reduce but Challenges Continue - Cumulative $201 Billion Losses for 2020-2022.” Press Release No. 64, October 4. https://www.iata.org/en/pressroom/2021-releases/2021-10-04-01/. Executive Summary 1 11 MOBILITY AND TRANSPORT CONNECTIVITY SERIES photo / jacoblund / iStockPhoto  12 THE COVID-19 PANDEMIC AND AFRICAN AVIATION 1. INTRODUCTION Apart from its obvious impact on health and mortality, the COVID-19 pandemic has resulted in an unprecedented downturn in air transport activity globally, negatively affecting economies and livelihoods that are dependent on travel. Measures taken to control the spread of the disease have caused major disruptions in economic activity that will probably be followed by a long recovery period. Aviation was hit particularly hard, with an estimated 60 percent decrease in global passenger demand in 2020, which is the largest decline since World War II (ICAO 2021a). While passenger demand (measured in revenue passenger-kilometers; RPK) is expected to stand at 40 percent of 2019 levels for 2021, rising to 61 percent in 2022, robust demand for air cargo is expected to continue with 2021 demand at 7.9 percent above 2019 levels, growing to 13.2 percent above 2019 levels for 2022 (IATA 2021a). Several countries saw their air transport activity decrease by more than 90 percent at the height of the pandemic, a number of them closing their borders altogether. As a result, the airline industry lost US$137.7 billion in 2020 and net industry losses are expected to be US$51.8 billion and US$11.6 billion in 2021 and 2022, respectively (IATA 2021a). Airports lost 64.2 percent of passenger traffic and 65 percent, or more than US$111.8 billion, in airport revenue in 2020 compared to business as usual (ACI 2020). The revenue loss for air navigation service providers is equally sobering, reaching as high as US$13 billion globally, or 61 percent of their 2019 income (ICAO 2021b). On top of the direct economic repercussions for the industry, the pandemic has decimated air connectivity and the wider economic benefits it generates. Aviation has been vital to the global economy both by easing direct connections between cities—enabling the flow of goods, people, capital, technology, and ideas—and by decreasing air transport costs. COVID-19 has caused a significant loss in city-pair connectivity. According to industry estimates, the number of unique/ direct city-pairs in 2020 was 33 percent lower than 2019 levels, a decline for the first time since the 2008 global financial crisis. There is also a risk that the number of unique city-pair connections will not fully recover, which would undo some of the gains of recent years (IATA 2020a). The issues for developing countries will be even greater because their aviation sectors have long been facing multipronged challenges, including those related to profitability, safety, security, and sustainable financing of critical infrastructure, that predate the current crisis. As more and more carriers—many of them state owned—face bankruptcy, state bailouts will put further pressure on already stretched public finances. Many countries, as a result, are facing existential uncertainty in their air transport sector and key travel-dependent industries. In much of the developing world, the pandemic poses a serious threat by slowing down gains already made to make the air transport sector competitive and safe. For example, in Africa, the  13 MOBILITY AND TRANSPORT CONNECTIVITY SERIES pandemic has put the brakes on recent progress on the implementation of the Yamoussoukro Decision (YD) through the Single African Air Transport Market (SAATM), and the African Continental Free Trade Area (AfCFTA), as well as the protocol on the free movement of persons and removal of visa restrictions.4 This calls for a strategic approach to support countries and the entire aviation value chain to ensure acceptable levels of safety, security, and efficiency and maintain jobs while ensuring public confidence in air travel. The objective of this policy note is to explore policy and operational strategies to build back a safe and competitive air transport sector in the aftermath of the COVID-19 crisis in Africa. It focuses on four broad areas: it provides a short status update on the impact of the pandemic; reviews pre- COVID-19 sector challenges from the supply, demand, and regulatory sides; tracks and analyzes government financial support and bailouts to airlines in the aftermath of the crisis globally; and identifies and recommends operational and policy responses to mitigate the impact of the crisis and put the aviation sector on a sustainable development path. REFERENCE ACI (Airports Council International). 2020. “ACI World publishes year-end COVID-19 economic impact analysis.” News Release, December 8, https://aci.aero/news/2020/12/08/aci-world-publishes-year-end-covid-19-economic-impact- analysis/#:~:text=The%20airport%20industry%20was%20expected,%2DCOVID%2D19%20forecast). IATA (International Air Transport Association). 2020a. Economic Performance of the Airline Industry. IATA Economics Report, November 24. https://www.iata.org/en/iata-repository/publications/economic-reports/airline-industry-economic-performance- --november-2020---report/. IATA. 2021a. “Losses Reduce but Challenges Continue - Cumulative $201 Billion Losses for 2020-2022.” Press Release No. 64, October 4. https://www.iata.org/en/pressroom/2021-releases/2021-10-04-01/. ICAO (International Civil Aviation Organization). 2021a. Effects of Novel Coronavirus (COVID-19) on Civil Aviation: Economic Impact Analysis. June 22. Montreal, Canada: Economic Development — Air Transport Bureau. https://www.icao.int/sustainability/ Documents/COVID-19/ICAO_Coronavirus_Econ_Impact.pdf. ICAO. 2021b. “Navigation Charge Losses by FIR Regions & States.” Last update January 8, 2021. https://data.icao.int/ coVID-19/ansp.htm. World Bank Group. 2020. The African Continental Free Trade Area: Economic and Distributional Effects. Washington, DC: World Bank Group. https://openknowledge.worldbank.org/bitstream/handle/10986/34139/9781464815591.pdf.  14 THE COVID-19 PANDEMIC AND AFRICAN AVIATION photo / Jean Bizimana / Alamy Stock Photo  2 15 MOBILITY AND TRANSPORT CONNECTIVITY SERIES photo / Novikov Aleksey / Shutterstock  16 THE COVID-19 PANDEMIC AND AFRICAN AVIATION 2. IMPACT OF THE COVID-19 PANDEMIC: A SHORT OVERVIEW KEY FINDINGS AND MESSAGES ✔ While there has been a sustained recovery from the trough of May 2020, total air transport seat capacity remains substantially lower than pre-crisis levels. ✔ Industry estimates show that Europe and North America will fare better in 2022 because of a faster roll out of vaccines, relaxation of quarantine requirements and travel bans. ✔ Africa, on the other hand, will only recover 55 percent of its pre-crisis capacity and 58 percent of its demand in 2022, making it the worst performing region and continuing African airlines’ unprofitability streak since 2016. ✔ But performance varies regionally. Capacity in the Western African region has recovered back to its 2019 level, making it the leading region in the continent. Similarly, the Northern and Eastern African regions have shown sustained rebound, while the Southern African region has remained the laggard during the crisis. ✔ Although Africa accounts for a mere 2 percent of the global air cargo demand, African airlines’ cargo demand increased by 30.6 percent in April 2021 compared to the same month in 2019, the strongest of all regions and the fourth consecutive month of growth at or above 25 percent compared to 2019. ✔ As many African airlines continue to struggle to make a sustained recovery, non-African airlines appear to be capitalizing on the vacuum left in the intercontinental market. 2.1. GLOBAL TRENDS 2.1.1. Traffic impact The COVID-19 pandemic has suppressed air transport demand from three sides. First, travel restrictions in the form of quarantines and lockdowns across countries have made air travel highly uncertain. Second, behavioral factors, including a fear of the virus and shift in work habits, have impacted travel demand. And third, the economic recession caused by the pandemic has limited people’s ability to travel due to mass unemployment and lower levels of disposable income. Impact of the COVID-19 Pandemic: A Short Overview 17 MOBILITY AND TRANSPORT CONNECTIVITY SERIES While there has been a sustained recovery from the trough of a year ago, total air transport seat capacity remains substantially lower than pre-crisis levels (Figure 2.1). Compared with 2019, global capacity is still 50 percent lower in 2021 and is expected to be only two-third (33.1 percent) in 2022. Europe and North America will fare better in 2022 as a result of a faster roll out of vaccines, relaxation of quarantine requirements and travel bans. Africa, on the other hand, will only recover 55 percent of its pre-crisis capacity and 58 percent of its demand, making it the worst performing region. FIGURE 2.1 • Both Air Transport Capacity and Demand Remain Depressed Well into 2022 a. Capacity (ASK) North America Europe Asia-Pacific Middle East Latin America Africa Global 0.0 -10.0 -20.0 -30.0 % -40.0 -50.0 -60.0 -70.0 2020 2021F 2022F b. Demand (RPK) North America Europe Asia-Pacific Middle East Latin America Africa Global 0.0 -10.0 -20.0 -30.0 % -40.0 -50.0 -60.0 -70.0 -80.0 2020 2021F 2022F Source: Authors based on IATA (2021a). Impact of the COVID-19 Pandemic: A Short Overview 18 THE COVID-19 PANDEMIC AND AFRICAN AVIATION 2.1.2. Financial impact The extended travel restrictions and quarantines have affected demand for air travel that resulted in unrealized revenue of US$372 billion and passenger volumes of 1.8 billion in 2020 (Figure 2.3, panel a). All regions will improve their collective financial performance compared to 2020. The strongest performing region is North America which is expected to see a $5.5 billion loss in 2021 transform to a $9.9 billion profit in 2022. All other regions will see reduced losses in 2022 compared to 2021, including Africa which has been incurring losses since 2016 (Figure 2.3, panel b). FIGURE 2.2 • In 2020 Carriers Lost US$372 Billion in Revenue, Almost 50% of their Revenue in 2019 a. Revenue Loss - Carriers Africa LAC Middle East North America Europe Asia/Pacific Total 0 -10.4 -21.4 -28.1 -50 -100 -82.7 -107.6 -122.3 -150 US$ Billion -200 -250 -300 -350 -372.5 -400 b. Net Profit, US$ Billion 30 20 10 0 US$ Billion 2016 2017 2018 2019 2020 2021 2022F -10 -20 -30 -40 -50 North America Europe Asia-Pacific Middle East Latin America Africa Source: Authors based on ICAO 2021b and IATA 2021a. Impact of the COVID-19 Pandemic: A Short Overview 19 MOBILITY AND TRANSPORT CONNECTIVITY SERIES The decrease in demand severely affected airlines across the globe. Although 2021 losses are shrinking when compared to 2020, the regional recovery rates are varied, being affected by the pace of vaccination rollouts as well as by the size of the domestic market where airlines operate (Figure 2.4). North America is expected to be the best performer in terms of diminishing operating losses as the vaccination rollout is advanced and domestic traffic has rebounded. Europe, on the other hand, is still lagging and operating margins are expected to reach -18 percent. As new virus variants emerge the recovery rate remains uncertain. FIGURE 2.3 • Airline Region Operating Margin as a Percentage of Revenues: Bleeding Continues to 2021 and 2022 EBIT margin, % revenues 2019 2020 2021F 2022F 15 10 5 0 -5 % Revenue -10 -15 -20 -25 -30 -35 -40 Africa L. America Asia-Pacific Middle East Europe N. America Global Source: Authors based on IATA 2021a. 2.1.3. African Trends The overall airline capacity loss in Africa since March 2020 was approximately 80 percent within the first four weeks, almost equally across the different African regions. Demand in Southern Africa continued to decrease in the following weeks to levels over 90 percent below January 2020. While the region experienced some recuperation since June 2020, particularly Eastern and Central Africa, Southern African markets did not show any sign of recovery until September. Impact of the COVID-19 Pandemic: A Short Overview 20 THE COVID-19 PANDEMIC AND AFRICAN AVIATION Airline capacity revamp was substantially different across the five regions of Africa during the second half of 2020 as countries followed uncoordinated policies on border closures and quarantine measures for international passengers (Figure 2.5). Capacity in the Western African region has recovered back to its 2019 level, making it the leading region in the continent. Similarly, the Northern and Eastern African regions have shown sustained rebound, while the Southern African region has remained the laggard during the crisis. FIGURE 2.4 • Seat Capacity Evaluation (Base = Jan 2019= 100) 140 120 100 Indexed Seats 80 60 40 20 0 0 1 2 0 1 2 0 -1 -2 -3 -4 -5 -6 -7 -8 -9 -1 -2 -3 -4 -5 -6 -7 -8 -9 -1 -2 -3 -4 -5 -6 -7 -8 -9 -1 -1 -1 -1 -1 -1 -1 19 19 19 19 19 19 19 19 19 20 20 20 20 20 20 20 20 20 21 21 21 21 21 21 21 21 21 19 19 19 20 20 20 21 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 Month North African Southern African Western Africa East African Central African Africa Source: Authors based on data from OAG. As many African airlines continue to struggle to make a sustained recovery, non-African airlines appear to be capitalizing on the vacuum left in the intercontinental market (Figure 2.6). In 2020, however, non-African airlines produced only 41 percent of total seat capacity, a 30 percent reduction from 2019. The latest data from OAG show that Emirates, the sixth-largest airline in African skies, although offering only 39 percent seating capacity, maintained access to as many destinations as during the pre-pandemic period. Qatar Airways, which continued its service to the African continent throughout the pandemic, is scheduled to provide 53 percent more capacity by December 2021 compared to January 2020. Similarly, Lufthansa and Air France are offering 10 percent more seats, taking full advantage of their market leadership roles in the Southern African and Central and Western African regions, respectively. While Turkish Airlines has almost recovered its capacity offering, none of the African-based airlines have fully recovered their pre-pandemic intercontinental capacity. Impact of the COVID-19 Pandemic: A Short Overview 21 MOBILITY AND TRANSPORT CONNECTIVITY SERIES FIGURE 2.5 • Intercontinental Seat Capacity Schedules to/from Africa (Base = Jan 2020= 100) 180 160 140 120 100 80 60 40 20 0 0 0 1 1 20 21 0 0 1 1 0 1 20 21 0 1 20 21 20 21 0 1 20 21 r-2 -2 r-2 -2 -2 -2 -2 -2 -2 -2 -2 -2 l-2 l-2 g- g- b- b- n- n- p- p- n- n- ct ct ov ar ar ov ay ay ec ec Ap Ap Ju Ju Au Au Fe Fe Ju Ju Ja Ja Se Se O O M M M M N N D D Egyptair Emirates Ethiopian Airlines Air France Royal Air Maroc Saudi Arabian Airlines Air Algerie Turkish Airlines Qatar Airways Lufthansa British Airways Source: Authors based on OAG 2021. Although Africa accounts for a mere 2 percent of the global air cargo demand, measured in cargo tonne-kilometers (CTKs), African airlines’ cargo demand increased 30.6 percent in April 2021 compared to the same month in 2019, the strongest of all regions and the fourth consecutive month of growth at or above 25 percent compared to 2019 (IATA 2021b). Robust expansion on the Asia-Africa trade lanes contributed to the strong growth. The growth is fueled by few airlines, including Ethiopian Airlines which has doubled its cargo capacity by adding new cargo destinations in South America, China, and Europe to accommodate air freight demand. Ethiopian Airlines has been deploying both its freighters and passenger fleet. Similarly, Kenyan Airways used its wide- bodied passenger carriers to bolster its cargo shipments, converting four of its wide-bodied aircraft into cargo freight airplanes. Privately owned carriers, Astral Aviation and Airlink Cargo, have also stepped up their services to meet the growing demand. In terms of cargo volumes, Nairobi’s Jomo Kenyatta International Airport was top, handling more than 330,000 tonnes of freight in 2020. Cairo International Airport was second with 280,000 tonnes (AFRAA 2021). Impact of the COVID-19 Pandemic: A Short Overview 22 THE COVID-19 PANDEMIC AND AFRICAN AVIATION REFERENCE AFRAA (African Airlines Association). 2021. Annual Report 2021. https://afraa.org/wp-content/uploads/2021/11/Annual- Report_2021-final.pdf. IATA (International Air Transport Association). 2021a. “Losses Reduce but Challenges Continue - Cumulative $201 Billion Losses for 2020-2022.” Press Release No. 64, October 4. https://www.iata.org/en/pressroom/2021-releases/2021-10-04-01/. IATA. 2021b. “Air Cargo Up 12% in April Compared to Pre-COVID Levels.” Press Release No. 37, June 8. https://www.iata. org/en/pressroom/pr/2021-06-08-01/. ICAO (International Civil Aviation Organization). 2021b. “Navigation Charge Losses by FIR Regions & States.” Last update January 8, 2021. https://data.icao.int/coVID-19/ansp.htm. Impact of the COVID-19 Pandemic: A Short Overview 3 23 MOBILITY AND TRANSPORT CONNECTIVITY SERIES photo / Mila Supinskaya / AdobeStock Impact of the COVID-19 Pandemic: A Short Overview 24 THE COVID-19 PANDEMIC AND AFRICAN AVIATION 3. THE DIFFICULT PRE-PANDEMIC CONTEXT KEY FINDINGS AND MESSAGES ✔ This section explores salient supply- and demand-side challenges of air transport services in Africa based on a selective review of both industry and academic studies to distil operational and policy-relevant insights. ✔ Pre-pandemic, Africa’s air transport sector faced multiple challenges, including those related to economic regulation, profitability, safety, security, and sustainable financing of critical infrastructure. ✔ While there has been an easing of market regulation, critical regulatory hurdles remain in Africa to making the air transport sector truly competitive. ✔ Domestic airlines are regulated, often subsisting as state-owned services that do not consider commercial interests but, instead, maintain a system of domestic travel that is economically unsustainable. Inadequate governance and lack of management focus on profitability objectives generated inefficient and loss-making companies. ✔ Higher income levels have not led to an increase in the propensity to travel, indicating that underlying sectoral problems and investment gaps between countries will continue to determine the overall trajectory of air travel. The only positive note for Africa is that there is plenty of room for its markets to grow. ✔ To enhance connectivity and the livelihood of smaller carriers in ineffective markets, cross-border investments and the elimination of any traffic restrictions would be required. ✔ Going back to the “old normal” post-COVID-19, while a great recovery for many regions, will not cut it for Africa. What is needed is a new trajectory to bring these markets to a “new normal,” a step above where they were in 2019. 3.1. DEMAND-SIDE CHALLENGES Similar to all modes of transport, the demand for air transport is a derived demand from the desire of users—i.e., passengers and shippers—to access services and markets at a distant location. At a macro level, air transport demand is largely determined by growth in aggregate economic activity, geography, visa regimes, and economic and social ties between locations. The main empirically documented demand predictors include income levels (for leisure travelers this is largely at source markets), fare, quality of service (e.g., frequency and timing of flights), and availability of alternative modes. The Difficult Pre-Pandemic Context 25 MOBILITY AND TRANSPORT CONNECTIVITY SERIES The African region exhibits unique geographic and economic factors that have been detrimental to air transport development on the continent. What follows highlights these factors with a particular emphasis on their contribution to the underdevelopment of Africa’s domestic markets and potential role in demand recovery in the post-COVID-19 period. 3.1.1. Geographic factors Africa’s large geographic size (20.3 percent of land area of earth), ragged terrain, and uneven population distribution, where 90 percent of the population is concentrated in less than 21 percent of the land surface, have resulted in sparse demand. As a result, despite being home to more than 1.2 billion people (i.e., 15 percent of the world’s population) and having 47 cities with populations of more than one million, Africa accounts for just over 2 percent of the world’s air transport demand. Sparse demand and thin routes have put Africa at the bottom of load factor rankings at 71.7 percent in 2019, almost 11 percentage points lower than the world’s average of 82.2 percent (IATA 2020b). While these geographic challenges are less amenable to policy levers, they are opportunities for a thriving air transport market as long distances, underdevelopment of modal alternatives, big population, etc., are the very reasons for the existence of air transport in the first place. Acknowledgment of these conditions and/or physical disadvantages can also be a strong basis for tackling non-physical policy challenges which have long bedeviled air transport development in Africa. 3.1.2. Economic factors The cost of air travel (airfare) and income levels at source markets are the two principal economic variables that determine air travel demand. While they have qualitatively universal effects on demand in all regions, the responsiveness of demand to price and income changes is materially different in the African market. The low economic development of most countries in the continent weakens the purchasing power for most markets. At the same time, restricted access for air service providers to most routes results in the highest yields (revenue on a per passenger-kilometer basis) in the world. Price factors To ramp-up traffic recovery, many have called for the stimulation of air travel demand through lower charges and taxes with the ultimate goal of lowering fares.5 However, the stimulation of air travel demand in Africa through lower fares and charges depends on two interlaced factors: the responsiveness of demand to price changes (own-price elasticity of demand) and the relative burden of charges and taxes on passengers vis-à-vis airlines and their share in airfares. Charges and taxes on passengers are fully passed through and reflected in the total cost of travel or fare. While the charges on airlines are normally absorbed by the carriers, the pass-through rate of these charges to fares depends on the market structure and price sensitivity of demand. The relationship between price and air transport demand is assessed via (own-) price elasticity. In most parts of the world, passenger air transport is mostly shown to be price elastic (Table 3.1). In Africa, studies suggest that demand is price inelastic (less than one), limiting the extent to which lower fares can be used to stimulate demand during recovery. This is mainly due to the fact that airlines in Africa cater to captive passengers (mostly high-income and government-sponsored The Difficult Pre-Pandemic Context 26 THE COVID-19 PANDEMIC AND AFRICAN AVIATION travelers) and cargo shippers in a context where there are neither good road nor rail alternatives.6 The average yield in Africa can reach between 50 percent and 100 percent higher than comparable routes in other regions. This makes air travel unaffordable for most of the continent’s population, and as such marginal reductions in fare have little power to attract more passengers. Consequently, demand for air travel remains restricted to a relatively small market. TABLE 3.1 • Air Transport Demand in Africa Is Both Price and Income Inelastic EXPLANATORY ESTIMATES REGION SOURCE VARIABLE -1.5 Global average excluding Africa Brons et al. 2002 -0.5 Africa Button et al. 2019 Fare/Price -0.8 and -0.9 SSA for short and long hauls, respectively InterVISTAS 2007 -0.7 East African Community Abate and Kincaid 2018 0.47 to 0.6 Kenya, Nigeria, South Africa Tolcha, Bråthen, and Holmgren 2020 0.07 East Africa Abate and Kincaid 2018 Income 2.11 Asia-Pacific Zhang and Graham 2020 >1 Global InterVISTAS 2007 Source: Authors’ summary. Understanding the relative distribution of charges and taxes borne by passengers and airlines as well as their share in airfares across flight segments is instrumental in designing an effective pricing policy for demand stimulation and recovery. On average, the portion of charges and taxes borne by passengers is the highest in Africa, reaching as high as 82 percent in the Central African region (Figure 3.1, panel A). The reverse holds for airlines, except in North Africa—they face the lowest burden while operating in African skies. The tax burden, therefore, disproportionally falls on passengers. Looking at the share of charges and taxes in airfare across flight segments in the Economic Community of West African States (ECOWAS) region (Figure 3.1, panel B), regional flights face the highest share which equals 36 percent of fare, on average, followed by 21 percent and 10 percent of fare for international long-haul flights and national (domestic) flights, respectively. While the average regional round-trip airfare is 1.63 times more expensive than domestic fares, passengers must pay almost 10 times more (US$175) in charges and taxes for a regional flight than a domestic one (US$18). Similarly, passengers on international long-haul flights pay US$207 in charges and taxes. The Difficult Pre-Pandemic Context 27 MOBILITY AND TRANSPORT CONNECTIVITY SERIES FIGURE 3.1 • Distribution of Tax Burden A. Passengers bear most of the charges and taxes burden ECOWAS Central Africa Americas East Africa Europe South Africa Asia North Africa 0 20 40 60 80 100 % Borne-by-Airlines Either (Security) Borne-by-Passengers B. Share of PAX Charges (C) & Government Taxes (T) in Ticket Price is highest for regional flights- ECOWAS region $1200 40% 36% 35% $1000 30% $800 25% $600 21% 20% 15% $400 10% 10% $200 5% $0 0% National Regional International C&T Base Fare Ticket Price C&T Share Source: Authors’ based on PPIAF The Difficult Pre-Pandemic Context 28 THE COVID-19 PANDEMIC AND AFRICAN AVIATION Note: Airlines bear charges and fees levied to recover the capital and operating expenses of infrastructure and service provisions, while passenger charges and government taxes are borne by passengers. Security charges could either fall on passengers or airlines depending on jurisdiction. The base fare is mainly determined by the cost structure of airlines, regulation, and the competitive landscape. Clearly, there is room to stimulate demand by lowering taxes which fall disproportionately on passengers. While reduction or elimination of passenger charges and taxes can be legislated fairly quickly,7 decision makers need to consider the following critical questions to ascertain the overall welfare implications of such policy: „ Considering that demand is less responsive to price signals in Africa, will there be an appreciable boost in demand as a result of lower taxes and fees? Put differently, what is the level of demand suppression as result of high charges and taxes? „ Can airlines mark up their fares for their captive users in the wake of charges and tax reduction? „ Is it possible to raise comparable tax revenue from elsewhere in the economy by broadening the tax base? In other words, can the same tax be collected from different economic activities without affecting air transport demand? „ Has the COVID-19 crisis and the decline in travel demand created an opportunity to eliminate sticky charges and taxes? „ Which complimentary policies should be considered to lower the base fare of airlines? Note: that the type of business model, labor and fuel costs, regulation, and level of competition all determine the level of base fare. Any policy related to fees and charges or taxes will surely have fiscal implications. First, governments generally tend to be reluctant to reduce taxes since it has important fiscal implications. Air travel in Africa is still reserved for a minority of the population and the notion of taxing the wealthier may continue to be an appealing proposition in economies where there are limited opportunities to levy alternative taxes and broaden the tax base. Second, price elasticity in Africa is rather low and tax reductions are not expected to generate significant boost in demand.8 Despite the uncertainty around their demand stimulation effect and fiscal implications, it is high time that African countries work toward a common policy on aviation charges and taxes. Current policies and practices contradict the International Civil Aviation Organization’s (ICAO’s) principles (Doc 9082) with respect to avoidance of discrimination among users. Accordingly, countries will need to set up policies on airport fees and charges that ensure nondiscrimination and are uniform among all users, including foreign and national airlines alike. Compliance with this principle is a precursor to ensuring a level playing field, attracting private sector participation, and ensuring sustainable financing for the sector. The Difficult Pre-Pandemic Context 29 MOBILITY AND TRANSPORT CONNECTIVITY SERIES Income factors Correlation between air transport demand and income is well established. In the last decade, air transport demand grew at roughly double the rate of the global GDP. In Africa, while the positive correlation between GDP growth and air transport holds for most countries (Figure 3.2), its strength varies between countries depending on the scale and accessibility of air transport. It exhibits strong correlation in Kenya, Ethiopia, and South Africa, main continental hubs with big domestic airlines, whereas it is relatively weak in Senegal, Angola, and Nigeria, which rely on foreign carriers for connectivity (Figure 3.3). FIGURE 3.2 • Positive Correlation between Demand and Income (for year 2019) Mauritius 1.00 Ethiopia Egypt Botswana Cape Verde Zambia Morocco Tanzania Kenya Uganda Rwanda Namibia Congo D R 0.80 South Africa Mozambique Togo Zimbabwe Côte d'Ivoire Seychelles Tunisia correlation coefficient Nigeria Congo SierraMauritania Leone Ghana 0.60 Gabon Angola Madagascar Sudan 0.00 Algeria Equatorial Guinea 0.40 Senegal Burkina Faso Cameroon Benin 0.20 Malawi Libya Niger 0 5 10 15 20 25 30 35 40 Ranking Source: Authors’ elaboration based on data from Tolcha, Bråthen, and Holmgren 2020 and World Development Indictor (WDI) data- base. The Difficult Pre-Pandemic Context 30 THE COVID-19 PANDEMIC AND AFRICAN AVIATION FIGURE 3.3 • Linear Relationship between Passenger Demand (PAX) and GDP per Capita (1980-2019) Ethiopia (R−squared = 0.89) Kenya (R−squared = 0.89) South Africa (R−squared = 0.77) 15 8 25 Number of Passengers (millions) Number of Passengers (millions) Number of Passengers (millions) 20 6 10 15 4 10 5 2 5 0 0 0 0 200 400 600 800 1000 0 500 1000 1500 0 200 2000 4000 6000 8000 GDP per cpaita (US$) GDP per cpaita (US$) GDP per cpaita (US$) Nigeria (R−squared = 0.60) Angola (R−squared = 0.37) Senegal (R−squared = 0.30) 8 1.5 .6 Number of Passengers (millions) Number of Passengers (millions) Number of Passengers (millions) 6 1 .4 4 .5 .2 2 0 0 0 0 1000 2000 0 300 0 2000 4000 0 600 500 1000 1500 GDP per cpaita (US$) GDP per cpaita (US$) GDP per cpaita (US$) Source: Authors’ elaboration based on data from Tolcha, Bråthen, and Holmgren 2020 and WDI. Seen from the perspective of supply, in the last decade total seat capacity has grown at a roughly similar pace to GDP (in real terms) by a compound annual growth rate (CAGR) of 3.6 percent (Figure 3.4). The pace of capacity growth in Africa differs regionally and by market segment (Figure 3.5, panels A and B). Recent increase in seat capacity is largely driven by growth in intercontinental and intra-African routes and fast-paced growth in the Eastern African region. Domestic capacity has trailed economic growth throughout the last decade. This is unusual, particularly for developing economies, as typically air traffic grows at 1.5x to 2.5x economic growth (InterVISTAS 2007). This relatively low growth of traffic suggests that other factors are impeding traffic growth in Africa— regulation, limited competition, high taxes, inadequate infrastructure, etc. That said, it is important to note that linear relationships between income and air transport (demand or capacity) may not guarantee the existence of a causal relationship. The Difficult Pre-Pandemic Context 31 MOBILITY AND TRANSPORT CONNECTIVITY SERIES FIGURE 3.4 • Index Growth: Seat Capacity vs. GDP Growth (2010 = 100) for Africa Index Growth: Seat Capacity vs. GDP Growth (2010 = 100) 150 140 GDP 2010-2019 CAGR: 3.1% 130 GDP Domestic Seat 120 Intra-Africa Seat Intercontinental Seat Total Seat 110 Seat Total 019 100 2010-2 .6% R : 3 CAG 90 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Source: Authors based on OAG. The Difficult Pre-Pandemic Context 32 THE COVID-19 PANDEMIC AND AFRICAN AVIATION FIGURE 3.5 • Airline Seat Capacity Evolution in Africa A. Total Seat Capacity 250 232.2 2… 210.7 193.1 197.4 Scheduled Seats (in millions) 200 181.7 186.4 174.8 177.1 121.7 127.5 150 114.1 100 105.3 105.8 92.3 92.7 97.2 111.3 100 40.3 41.6 43.6 56.2 33.5 34.8 37.5 37.1 36.1 38.6 50 20.2 48.9 49.5 46.9 49.1 51.6 53 56.2 58.7 61 34.8 0 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Domestic Seats IntraAfrica Seats InterContinental Seats Total Seats B. Indexed Capacity Growth by Region 200 180 160 140 Indexed Growth 120 GDP Constant Dollar Total Seats 100 Africa : North Africa Africa : Southern Africa Africa : Central/Western Africa 80 Africa : Eastern Africa 60 40 20 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Source: Authors based on data from OAG. The pandemic has put Africa into its first recession in 25 years (World Bank 2020). It has been particularly hard on travel- and tourism-dependent island states such as the Seychelles, Mauritius, and Cabo Verde as they face the double whammy of a decline in GDP and tourism receipts (Figure 3.6). Interestingly, 13 African countries, including Ethiopia, Kenya, and Egypt, ended with positive economic growth in 2020. The rest of the continent’s 41 countries, including South Africa and Nigeria, the two biggest economies, experienced contraction, -7 percent and -1.8 percent, respectively. The Difficult Pre-Pandemic Context 33 MOBILITY AND TRANSPORT CONNECTIVITY SERIES FIGURE 3.6 • Dependence on Tourism Correlates with GDP Contraction, with Greater Vulnerabilities for High-Propensity-to-Fly Countries 5 0 GDP Growth 2020 (%) −5 Cabo Verde −10 Seychelles Mauritius −15 0 10 20 30 40 Tourism receipts 2018, % GDP Sources: Authors based on MacDonald, Piazza and Sher (2020); World Bank (2020). Note: Bubble size proportional to propensity to fly (total passenger per capita). In light of the ongoing global economic contraction due to the pandemic and decline in air transport demand, understanding the existence, magnitude, and direction of causation between air transport demand and income is fundamental. This is often done in the context of the study of income elasticity. Industry studies often indicate that income elasticity is greater than one, which suggests that air travel demand increases at a faster pace than income. In Africa, it ranges from 0.07 to 0.6, suggesting that a 1 percent increase in GDP results in a less than proportional (< 1 percent) increase in the demand for passenger air travel (Table 3.1). This low income elasticity of Africa could be a solace during this crisis as air transport demand will shrink at a slower pace than the decline in GDP.9 However, as this is a global pandemic and the fact that 55 percent to 60 percent of air transport demand in Africa is intercontinental, the full recovery of Africa’s air transport market will very much depend on the pace and extent of economic recovery of major economies in Europe and Asia as well as the border policies of these countries toward African travelers. The Difficult Pre-Pandemic Context 34 THE COVID-19 PANDEMIC AND AFRICAN AVIATION 3.1.3. Underdeveloped domestic markets The demand-side challenges reviewed above have ultimately led to the underdevelopment of Africa’s domestic markets. The domestic markets, often more protected from foreign carriers, can provide the necessary strength to develop a strong carrier. While there are examples of airlines that thrived without domestic markets due to geographic limitations, having a big home market, for the most part, is essential for an airline’s sustainability. It is one of the key pillars of development in most business models as the existence of domestic traffic is a critical enabler of developing a network that can produce higher yields. Airlines charge a fare premium in markets that originate in their domestic country since it is a captive market. By restricting market access, origin and destination traffic provides higher yields to airlines. This premium brings about substantial fare differences between identical domestic and foreign-originating trips and, importantly, emerges independently of the level of competition on the market, origin airport, and demand characteristics. The African domestic capacity represented 26.4 percent of the continent’s total market of 61 million seats in 2019.10 This represents 47 seats for every 1,000 inhabitants. Domestic passengers generated 1 percent of the total revenue passenger-kilometers (RPK). This pales in comparison to the European domestic routes that represented 215 seats per 1,000 inhabitants and generated 9.3 percent of total RPK.11 The Latin American and the Caribbean market generated 6.6 percent of the total domestic RPK, having also a relatively low percentage, however, significantly higher than African carriers. The domestic market penetration is led by the Asia-Pacific region that produced 42.6 percent of the RPK, followed by North America with 39.6 percent. Of the 39 IATA Operational Safety Audit (IOSA)-registered airlines in Africa, only seven operate extensive domestic networks: Air Algérie leading with 32 domestic operations, followed by Royal Air Maroc and Ethiopian Airlines with 26 and 20 destinations, respectively, and 13 airlines operate on markets that comprise between five and nine domestic destinations. The most important African market in terms of seats is South Africa with the domestic market representing 70 percent of all market capacity, followed by Nigeria with 69 percent. Limited in the international markets by a restricted environment and without a substantial domestic network, many African carriers are unable to cover costs as the utilization of the assets is insufficient. This high structural cost level, worsened by high infrastructure charges, is the main culprit behind the high average net fares that make African domestic travel almost unaffordable, at an average net fare of US$60 per flight plus airport charges and taxes. Another limiting development factor for the airlines based in countries with a poor level of safety oversight is the inability to reach codeshare partnerships with international airlines operating to the country. Not having IOSA approval, or having the country blacklisted, will hinder the possibility of attracting transfer passengers from international operations. The Difficult Pre-Pandemic Context 35 MOBILITY AND TRANSPORT CONNECTIVITY SERIES 3.2. SUPPLY-SIDE CHALLENGES 3.2.1. Safety underperformance Of the 97 African airlines active in 2019, only 48 were on IATA’s registry with 39 having successfully passed an IOSA audit and 53 backlisted by the European Union (EU) due to safety concerns. Of the 53 blacklisted airlines, eight are national carriers. The EU blacklisted all carriers certified by the civil aviation authorities of 14 African states, almost a quarter of the continent. Such a high level of blacklisted carriers raises serious concerns about the safety of operations, resulting in physical limitations of attracting investments or leasing opportunities for the fleet, raising even further the impossibility of gaining operational efficiency.12 While the majority of global airlines are driven by financial performance and market growth, with a handful of exceptions, African carriers are in “survival” mode. There is often a direct correlation between civil aviation’s oversight quality, measured through ICAO’s Universal Safety Oversight Audit (USOAP), and the performance of the resident airlines. Africa is dominated by countries with only one air carrier, which makes the civil aviation authority and other regulatory bodies dependent on revenue generated by a single carrier, offering in exchange poor oversight (see Figure A.2 in the Appendix for the latest USOAP scores). It should be noted that 26 of the 54 African countries meet or exceed ICAO’s 60 percent implementation of recommended standards threshold, a steady progress over the last decade. The experience and knowledge gained by these African civil aviation authorities should be exported to the noncompliant nations as it would facilitate the transfer of knowledge and enable a better appreciation of the regional constraints, thus generating effective collaboration among nations. There are continental efforts with the scope of offering generalized continental oversight. More work is, however, needed to bring the continent’s safety level up to ICAO’s recommended standards. 3.2.2. Prominence of a few state-owned airlines At the end of 2019, 16 African states had no airline, 34 had only one airline, and four countries more than one international airline. South Africa was leading the countries with 11 carriers, of which five are IATA registered, followed by Kenya (10), Egypt (eight), Nigeria (six), and Tanzania (six). About 80 percent of the entire capacity in the continent was concentrated in 10 airlines. This is not necessarily because of the growth in airline consolidation globally, but mostly due to the low level of air transport development in the continent. The top four airlines are 100 percent state owned, and four in the top 10 are based in one country: South Africa (Figure 3.7). The Difficult Pre-Pandemic Context 36 THE COVID-19 PANDEMIC AND AFRICAN AVIATION FIGURE 3.7 • Top 10 African Airlines: State-Owned Airlines Dominate African Skies Source: Authors based on data from Casey 2019. Of the 48 IATA airlines in Africa, 38 percent are fully state owned. However, when considering their markets, the state-owned carriers account for 69 percent of the passengers and 77 percent of the employees. The fully or partially state owned account for 99 percent of passengers and 81 percent of fleet, operated 81 percent of international and 94 percent of intra-African routes.13 The productivity level of employees was of 742 passengers per employee, 34.5 percent less than the world average, indicating a significantly higher employment ratio, typical for the less efficient state- owned companies (AFRAA 2020). In a great majority of cases, the airlines are operated directly by the government, lacking a level of independence that could guarantee professional management. Instead, the airlines suffer from political interference. Key management positions are occupied by individuals from the ruling political coalition.14 As instruments of political favoritism, the carriers serve as labor shelters and transportation services at prices below production costs. As a consequence, most airlines suffer from poor management and the resulting low profitability and low levels of service and, in some extreme situations, reduced operational safety. African airlines have for decades experienced an unhealthy financial situation with low liquidity and years of unprofitability. High indebtedness and limitations of state-owned airlines to access private financing resulted in profound fiscal costs. The Difficult Pre-Pandemic Context 37 MOBILITY AND TRANSPORT CONNECTIVITY SERIES 3.2.3. Dominance of extra-regional carriers in intercontinental connectivity In 2019, the share of airlines outside the region accounted for 65.4 percent of intercontinental seats and 40 percent of all seats, with Western and Central Africa having the strongest position of non-African airlines at 87 percent of market share in each market. Among international airlines, Emirates, Air France, and Saudia, followed by British Airways and Turkish Airlines, were among the most active. Several reasons explain the dominance of extra-regional carriers. Firstly, the deficient management of the African carriers creates a vacuum for external airlines to enter the market and provide a business model consisting of good connectivity and convenience. Secondly, the restricted access to markets crafted by governments to protect their home carriers has resulted in above normal yields. These high yields have been a motivation for foreign airlines to operate as many routes as possible, with appealing profitability. Precisely because of their reliability and good service, extra-regional airlines have been at a competitive advantage against African carriers, particularly on the less price-sensitive business traffic segment. The limited interlink arrangements by African carriers with respect to trips beyond their first destination outside the continent are one additional element discouraging their use. Finally, Africa’s historical dependence on European-based airlines and its proximity to the mega hubs in the Gulf region have contributed to this lopsided reliance on foreign-based airlines. 3.2.4. High cost base Airlines provide perishable service using an asset-intensive business model. Their cost structure is characterized by fixed costs in the operation and maintenance of expensive inputs such as aircraft. They employ a highly skilled and expensive workforce and pay for most of their operating expenses, such as fuel and spare parts, in hard currencies, which are often in short supply in Africa. These factors have made it very hard for many African countries to have a financially viable airline industry. A typical airline’s cost structure is split across fixed costs (aircraft financing, insurance, etc.), operating costs (labor, fuel, ticket distribution, etc.), and taxes, fees, and charges. African carriers face more than average costs across all these segments leading to higher fares and unprofitability. Fuel, airlines’ largest cost, is often distributed by cartel-like entities that squeeze cash out of foreign airlines. Moreover, fuel needs to be transported over long distances as a quarter of countries on the continent are landlocked—a problem exacerbated by poor infrastructure. Looking at the continent’s fleet composition and utilization, Button et al. (2019) and Heinz and O’Connell (2013) note the following: „ African carriers have some of the oldest fleets in the world with 80 percent of all aircraft registering over an age of 10 years or older. This, in turn, triggers higher associated maintenance costs, increased fuel consumption, poor reliability, and increased downtime. „ The fleet sizes of most African carriers lack sufficient scale to negotiate favorable rates with fuel suppliers, while the practice of fuel hedging is not widely common leaving African airlines exposed to volatile price fluctuations. The Difficult Pre-Pandemic Context 38 THE COVID-19 PANDEMIC AND AFRICAN AVIATION „ Aircraft utilization rates in Africa remain among the lowest in the world with rates averaging just 6.9 hours per day compared to Europe with 9.9—this is attributable to poor scheduling, night flying restrictions, extended downtime of aging aircraft, and a shortage of flight and maintenance personnel. „ African airlines also operate to the highest number of destinations per aircraft when compared with other carriers across the world. This is a reflection of poor aircraft usage with too many destinations being served by too few aircraft based on the need of state-owned airlines to be present in more markets than their fleet sizes can accommodate, often as a matter of “market presence” coupled with national pride. Operating costs are also very high in Africa as the cost of the infrastructure (such as airports and air navigation service providers) is higher than in the rest of the world. Traditionally, in most African countries, under the assumption that air transport is for the rich, every component of the industry has been levied with heavy charges and taxes to support public spending. The sector also lacks aviation policies that safeguard it from service providers that abuse their dominance through unreasonable fees and charges. This comes on top of great inefficiencies and poor levels of service. Similarly, ticket distribution problems raise fares by up to 7 percent as low internet coverage and credit card penetration rates force airlines to incentivize travel agents. Last but not least, the expensive and highly skilled human capital needed to run a safe and profitable airline has made it really hard for many African countries to start and sustain a viable airline. The combination of high fixed and operating costs makes Africa the most expensive market in which to operate an airline. The Cost per Available Seat Kilometer (CASK), a standard industry benchmarking metric, can reach 35 percent higher than comparable full-service airlines in other regions, or up to 120 percent above low-cost airlines’ average (Figure 3.8). Unsurprisingly, the flying public faces the brunt of this high-cost base fare (measured in cents/kilometers, i.e., yield) in the intra-African market, which is the highest among comparable routes in other regions. The yield curve does vary significantly within Africa, where the Central and West African regions remain very expensive. FIGURE 3.8 • Yield vs. Cost Graph 14 .5 12 .4 CASK (US cents/ASK) 10 Yield (USD/km) .3 8 EA 6 .2 WA CA NA 4 SA LCC .1 FP−Fit EA FSC FP−Fit WA 2 African Airlines FP−Fit CA FP−Fit NA Lfit LCC FP−Fit SA Lfit FSC 0 0 0 1000 2000 3000 4000 5000 6000 7000 8000 1000 2000 3000 4000 5000 6000 Distance (km) Trip Length (km) Source: Authors based on data from Abate, Christidis, and Purwanto 2020 and AfDB 2019. Note: EA = East Africa; WA = West Africa; CA = Central Africa; NA = North Africa; SA = Southern Africa; Lfit = Linear Fit; FP-Fit = Fractional Polynomial Fit. The Difficult Pre-Pandemic Context 39 MOBILITY AND TRANSPORT CONNECTIVITY SERIES Given its historically high cost base and sparse demand, the African market would likely experience a much higher revenue-cost disparity during the COVID-19 pandemic. In the face of curtailed demand, airlines’ operating revenue and cost have declined at different paces leaving a gaping hole in their balance sheet. IATA (2020c) estimates that while passenger revenues declined more than 80 percent in Q2 2020, at the nadir of the crisis, compared to the same period in the previous year, airlines were only able to reduce operating costs by 48 percent. This is partly due to fixed and semi-fixed costs of the industry which can reach as high as 50 percent of overall costs. For Africa, bridging this gap requires not only adjusting airlines’ cost base in line with shrunken revenues, but urgent reduction of infrastructure user fees and charges, fueling, and ticket distribution costs can be achieved by: „ Fostering a regional approach for the purchase and distribution of fuel to benefit from scale, while cracking down on malpractice and/or vendors with monopolistic powers (either private or SOEs); „ Expanding the training of aviation professionals with joint efforts in the continent and incentivizing highly skilled professionals to stay in Africa; „ Embracing airline digital transformation to expand direct air ticket sales and cut distribution costs; and „ Providing incentives for fleet renewal by rewarding the adoption of newer, more fuel efficient, and safe aircraft. 3.2.5. Profitability, debt, and solvency challenges Pre-COVID-19, African airlines were already in an unhealthy financial situation with low liquidity, years of unprofitability (Figure 3.9), limitations for SOE airlines to access private financing, and high indebtedness, all of which seriously limited their access to credit. An airline’s cash flow or earnings before interest, taxes, depreciation, and amortization (EBITDA) serves as a measure for investors and airline managers to assess its ability to deal with its debt obligations. On average, according to IATA (2018), global debt to EBIDTA levels were reported at 3.9:1 in the 2010s, during which period the industry had its best financial performance in recent decades. African airlines’ ratios have been very cyclical and remained well above the industry average, showing that they were already under heavy financial pressure. The COVID-19 crisis would continue this trend with the need for airlines to make high debt service payments to their lenders and/or high lease payments to their lessors. A typical African airline had only two to three months’ worth of cash on hand, compared to the industry average of three to six months, to cover expenses. Although airlines are typically highly leveraged even during normal times due to their capital-intensive nature, African airlines have always been in their own league of high indebtedness leaving them with little scope for further investment. All of this led them to face higher financing costs and perpetually impaired their access to credit. The Difficult Pre-Pandemic Context 40 THE COVID-19 PANDEMIC AND AFRICAN AVIATION FIGURE 3.9 • Most African Airlines Have Seen Negative Operating Margins (OM) in the Last Decade 10.0% 5.0% 0.0% an s s ir oc ir s s es G M ay A iu tA le A i ar A op SA LA pr rit s irw el yp TA ni M -5.0% ch Ex hi au Tu A Eg Et ir ey M SA lA ya irS ir en ya A A -10.0% K Ro OM -15.0% -20.0% -25.0% -30.0% -35.0% Source: Authors based on respective airlines’ annual reports. Note: Depending on data availability, the average operating margins are calculated for each airline over the 2008–18 period. Regardless of the instruments chosen to finance airline operations, a higher debt-to-EBITDA ratio implies that an airline operator is heavily leveraged and signals a warning that it might face difficulties in paying off its debts. A debt-to-EBITDA ratio in the realm of 2:1 is used in the industry as a rule of thumb for investment-grade company (Figure 3.10). Other than North America, airlines in other parts of the world remained well above this rule-of-thumb figure revealing the element of risk which is always associated with the industry. The high ratio for African airlines in particular shows that operators in the continent are less likely to re-structure the debt burden in favorable terms and take on the additional debt required to grow their business. As a result of the current pandemic, many governments around the world have provided loans and loan guarantees as a lifeline to support their struggling airlines. But the support has ballooned industry debts by up to 28 percent reaching US$500 billion (IATA 2020d). For the African region, which took on only 2 percent of this sum, while it will not see a significant increase in indebtedness, the projected revenue shortfall means that debt-to-EBIDTA ratios will reach higher levels putting operators in the region in the vicious circle of low liquidity, profitability, and credit impairment. The Difficult Pre-Pandemic Context 41 MOBILITY AND TRANSPORT CONNECTIVITY SERIES FIGURE 3.10 • African Airlines’ Balance Sheets Remain Highly Leveraged as Shown in Their Highly Cyclical Debt-to-EBITDA Ratios 32 30 28 26 24 22 Debt/EBITDA Ratio 20 18 16 14 12 10 8 6 4 2 2 2 2 2 2 2 2 2 2 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 Latin America Middle East Asia Pacific Industry Average Europe North America Africa Investment Grade Source: Authors based on annual reports of African airlines and IATA 2019. 3.3. REGULATORY CHALLENGES Traditionally, countries all over the world adopted a protectionist attitude toward their own national airlines particularly when these were fully state owned. This same protectionism dissuaded private initiatives limiting the establishment of privately owned airlines with local or foreign capital. As a result, many countries lost opportunities to develop new airlines, even when there was a significant latent air transport demand waiting for a private operator. The African air transport market is bedeviled by domestic and international regulatory challenges which have limited competition. On the domestic front, many countries still put market entry barriers by limiting seat capacity/frequency or route licenses when issuing air operator’s certificates (AOCs) to potential private sector operators. State-owned and in some cases vertically integrated monopolies, inadvertently or otherwise, continue to limit the emergence of a competitive domestic airline market. Incumbent state-owned airlines have often received undue protection from more efficient competitors regardless of their operating and financial performance. Financially supported and market protected, there is little incentive for many African airlines to improve their business models. The Difficult Pre-Pandemic Context 42 THE COVID-19 PANDEMIC AND AFRICAN AVIATION Protectionist tendencies are apparent in how many African countries opt to regulate their international air transport market. Despite the existence of continental liberalization initiatives such as the Yamoussoukro Decision (YD) and its recent implementation vehicle, the Single African Air Transport Market (SAATM), bilateral air services agreements (BASAs) are still relevant. Most BASAs between countries inside Africa are subject to limitations in terms of points of entry, overall capacity, and traffic rights provisions (Table 3.2). TABLE 3.2 • Restrictive BASAs Still Dominate African Skies BURUNDI KENYA RWANDA TANZANIA UGANDA Burundi Liberalized15 Restrictive Restrictive Restrictive Kenya Liberalized Restrictive Restrictive Liberalized Rwanda Restrictive Restrictive Restrictive Restrictive Tanzania Restrictive Restrictive Restrictive Restrictive Uganda Restrictive Liberalized Restrictive Restrictive Angola Restrictive Restrictive Restrictive Restrictive Restrictive Congo, Dem. Rep. Restrictive Restrictive Restrictive Restrictive Restrictive Egypt Restrictive Restrictive Restrictive Restrictive Restrictive Eritrea Restrictive Liberalized Restrictive Restrictive Restrictive Ethiopia Restrictive Liberalized Liberalized Liberalized Liberalized Morocco Restrictive Restrictive Restrictive Restrictive Restrictive Nigeria Restrictive Restrictive Liberalized Restrictive Liberalized Sudan Restrictive Liberalized Liberalized Restrictive Restrictive Somalia Restrictive Restrictive Restrictive Restrictive Restrictive South Africa Restrictive Restrictive Liberalized Restrictive Restrictive Zambia Restrictive Restrictive Restrictive Restrictive Restrictive Source: Abate and Kincaid 2018. Prior to the COVID-19 pandemic, liberalization efforts were gathering momentum under the SAATM initiative to create a single unified internal market. The SAATM is intended as an instrument for quicker implementation of the YD, which in principle opened up the intra-African market in 44 countries since 2002 but did not result in actual market openness.16 As a flagship project under the African Union Commission’s (AUC’s) Agenda 2063, the SAATM has garnered the acceptance of 33 countries. As of today, only 11 countries17 have fully adopted the SAATM, however, their size and aviation sector are too small to make the results visible. Only a few of these countries have fully implemented SAATM Concrete Measures through the revision of BASAs, which remain The Difficult Pre-Pandemic Context 43 MOBILITY AND TRANSPORT CONNECTIVITY SERIES the ultimate legal instrument for international operations.18 For SAATM to work, countries would have to agree to fifth freedom rights that would permit airlines to develop a minimal network and generate passenger density at their hub, resulting in important cost reductions due to increased utilization of resources.19 Among the regulatory challenges within African countries is the restriction of cross-border investments beyond a minority stake. This prevents the few efficient operators within the continent from expanding their operations into other countries by opening new bases as seventh freedom operations. With the option to expand operations into other countries, airlines might be able to achieve a larger scale of operations from which they could extract economies, including the development of a brand name. But most importantly, it would develop a continental network increasing integration while strengthening the continental hubs. Local networks could be an interesting proposition for extra- continental airlines to incentivize airline cooperation agreements, or they could serve to build up sufficient traffic to compete with the non-African airlines in their transcontinental routes. 3.4. MORE ROOM FOR AFRICA TO GROW Travelers in Africa fly less than residents of many other countries, which means there is huge potential for more air travel (Figure 3.11). At 0.55 trips per capita on average, the continent’s propensity to fly (PTF) is the lowest in the world. To put this in perspective, it is 2.8 times lower than in the South Asia region, which has the second lowest PTF, and 11.6 times lower than in North America, the region with the highest average. Much of this is explained by the low per capita income of the region and the low number of airlines operating in the region. FIGURE 3.11 • Africa Exhibits Both Lowest Levels of Propensity to Fly and Lowest Number of Operating Airlines EAP ECA LAC MENA NAM 2 SA SSA Propensity to Fly 0 Airlines 50 100 −2 150 −4 $0 $25,000 $50,000 $75,000 $100,00 Per Capita GDP Source: Authors based on data from WDI and OAG for the year 2019. Note: East Asia Pacific (EAP), Europe and Central Asia (ECA), Latin America and Caribbean (LAC), Middle East and North Africa (MENA), South Asia (SA), Sub-Sharan Africa (SSA) The Difficult Pre-Pandemic Context 44 THE COVID-19 PANDEMIC AND AFRICAN AVIATION It is interesting to note how the temporal difference of PTF for select African countries in the 1981-2019 period varies with the level of income (Figure 3.12). While there is an overall upward movement for each country as income grows, it varies quite a lot between countries. In the last three decades, Kenya and Ethiopia have outperformed Nigeria and Senegal, while Angola, which has seen steady growth in per capita GDP, is yet to see a commensurate boost in air travel even at much higher income levels. South Africa has had the highest level of PTF throughout the sample period both due to its level of income and much higher flow of tourism. Higher income levels are not a guarantee for an increase in PTF, indicating that underlying sectoral problems, connectivity, and investment gaps between countries will continue to determine the overall trajectory of air travel. The only positive note for Africa and others at the bottom is that there is plenty of room for their markets to grow. Going back to the “old normal” post-COVID-19, while a great recovery for many regions, will not cut it for those at the bottom. What is needed is a new trajectory to bring these markets to a “new normal,” a step above where they were in 2019. FIGURE 3.12 Evaluation of Propensity to Fly Between 1981 and 2019: Countries with Airlines Perform Better Than Those Without for the Same Income Level Tourism.Millions. −1 2.5 5.0 7.5 Propensity to Fly 10.0 −2 Country Angola Ethiopia Kenya Nigeria Senegal −3 South Africa $0 $2,000 $4,000 $6,000 $8,000 Per Capita GDP Source: Authors based on WDI. The Difficult Pre-Pandemic Context 45 MOBILITY AND TRANSPORT CONNECTIVITY SERIES REFERENCE Abate, Megersa, and Ian Kincaid. 2018. “Effects of Air Transport Market Liberalisation in the East African Community (EAC).” Journal of Transport Economics and Policy 52 (4): 427–445. Abate, Megersa, Panayotis Christidis, and Alloysius Joko Purwanto. 2020. “Government support to airlines in the aftermath of the COVID-19 pandemic.”  Journal of Air Transport Management  89 (October), 101931. https://doi.org/10.1016/j. jairtraman.2020.101931. ACI (Airports Council International). 2020. “ACI World publishes year-end COVID-19 economic impact analysis.” News Release, December 8, https://aci.aero/news/2020/12/08/aci-world-publishes-year-end-covid-19-economic-impact- analysis/#:~:text=The%20airport%20industry%20was%20expected,%2DCOVID%2D19%20forecast). AFRAA (African Airlines Association). 2020. Annual Report 2020. https://afraa.org/wp-content/uploads/2020/11/Annual- Report_2020_web.pdf. African Development Bank (AfDB). 2019. “Liberalization of Air Transport in Africa: 2019’s Status and Way Forward.” Infrastructure and Urban Development Department. Button, Kenneth, Gianmaria Martini, Davide Scotti, and Nicola Volta. 2019. “Airline regulation and common markets in Sub-Saharan Africa.” Transportation Research Part E: Logistics and Transportation Review 129 (September): 81–91. DOI: 10.1016/j.tre.2019.07.007. Brons, Martijn, Eric Pels, Peter Nijkamp, and Piet Rietveld. 2002. “Price elasticities of demand for passenger air travel: a meta-analysis.” Journal of Air Transport Management 8 (3): 165–175. https://doi.org/10.1016/S0969-6997(01)00050-3. Casey, David. 2019. “These are the top ten largest African carriers.” Routesonline, November 28. https://www.routesonline. com/news/29/breaking-news/287576/these-are-the-top-ten-largest-african-carriers-/. Eurostat. 2021. Air Transport Statistics. https://ec.europa.eu/eurostat/statistics-explained/index.php?title=Air_transport_statistics Heinz, Stephen, and John Frankie O’Connell. 2013. “Air transport in Africa: Toward sustainable business models for African airlines.” Journal of Transport Geography 31: 72–83. DOI:10.1016/j.jtrangeo.2013.05.004. IATA. 2019. Economic Performance of the Airline Industry. IATA Economics Report, December 11. www.iata.org/economics 2019 End-year report. 1Economic Performance of the Airline Industry. IATA. 2020b. “Slower but Steady Growth in 2019.” Press Release No. 5, February 6. https://www.iata.org/en/pressroom/ pr/2020-02-06-01/. IATA. 2020c. “IATA Economics’ Chart of the Week: Downsizing costs will be a priority in the era of curtailed demand.” October 23. https://www.iata.org/en/iata-repository/publications/economic-reports/downsizing-costs-will-be-a-priority-in- the-era-of-curtailed-demand/. 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The Difficult Pre-Pandemic Context 46 THE COVID-19 PANDEMIC AND AFRICAN AVIATION Tolcha, Tassem Dufera, Svein Bråthen, and Johan Holmgren. 2020. “Air transport demand and economic development in sub-Saharan Africa: Direction of causality.” Journal of Transport Geography 86 (June), 102771. https://doi.org/10.1016/j. jtrangeo.2020.102771. World Bank. 2020. “World Bank Confirms Economic Downturn in Sub-Saharan Africa, Outlines Key Polices Needed for Recovery.” Press Release, October 8. https://www.worldbank.org/en/news/press-release/2020/10/08/world-bank-confirms- economic-downturn-in-sub-saharan-africa-outlines-key-polices-needed-for-recovery Zhang, Fangni, and Daniel J. Graham. 2020. “Air transport and economic growth: a review of the impact mechanism and causal relationships.” Transport Reviews 40 (4): 1–23. https://doi.org/10.1080/01441647.2020.1738587. The Difficult Pre-Pandemic Context 4 47 MOBILITY AND TRANSPORT CONNECTIVITY SERIES photo / Arne Hoel / World Bank The Difficult Pre-Pandemic Context 48 THE COVID-19 PANDEMIC AND AFRICAN AVIATION 4. COVID-19-PROMPTED STATE AID AND POLICY RESPONSES KEY FINDINGS AND MESSAGES ✔ As of October 2021, governments have confirmed or executed US$201 billion in airline support measures globally, with outlook for an additional US$6.93 billion in the near term. ✔ The African continent has seen the second lowest in terms of support received by airlines from their governments. This support is estimated at US$4 billion, of which 58.6 percent are bailouts through equity injection, 3.3 percent state guarantees, and 14 percent loans. ✔ There is insufficient evidence to verify whether the capital injections are accompanied by strict restructuring decisions or an additional set of requirements that would push airlines toward self-sustainability and, ultimately, profitability. ✔ Capital injection, while reducing the immediate effects of loss of activity, is not a viable solution for the long term due to (1) the lack of predictability of the duration of the pandemic and (2) shrinkage of the fiscal space due to other competing needs. ✔ The growing presence of government in the aviation industry, because of COVID-19- prompted state support to the sector, has implications in at least two important areas. First, the growing government ownership has resurrected the perennial debate on government versus private ownership of airlines and its implication for efficiency and competition. Second, there is a growing concern that countries might retreat from the liberalization and deregulation policies of the last three decades, risking important progress made toward levelling the playing field. ✔ State assistance to airlines needs to be based on investor principles and competitively neutral so that state financial support does not distort competition and tilt the playing field against other firms in the aviation industry. The operation and subsidy of air services through a state-owned airline is costly and diverts funding from other government projects, which may have a greater need in the post-pandemic recovery phase. COVID-19-Prompted State Aid and Policy Responses 49 MOBILITY AND TRANSPORT CONNECTIVITY SERIES This section assesses government support to the air transport sector following the outbreak of the COVID-19 pandemic from four angles. First, it provides a short overview of the various types of state aid that have been provided worldwide and how country-specific parameters influenced the choice of measures. Second, it analyzes the implications of state aid on two dimensions relevant to air transport policy: competition and liberalization, and airline ownership and control. Third, it explores the economic rationale that shapes governments’ willingness to support airlines through subsidies and bailouts. Finally, it provides a framework that helps the decision process of a government that is considering state aid to its airline industry. 4.1. FINANCIAL AID SO FAR During the COVID-19 crisis, governments have intervened in an attempt to prevent the collapse of national economies, with financial packages targeting small and medium enterprises, as well as strategic national companies. For example, the European Union (EU) approved a rescue package worth €2.1 trillion, of which €34.3 billion, approximately 1.6 percent, went to the airline sector (public and private) under different forms of financial support. In 2019, the aviation sector contributed €300 billion to the EU’s economy, representing 2.1 percent of the European GDP, and supported 5 million jobs.20 The rescue package, therefore, is far below the economic benefits produced in normal travel conditions. Furthermore, the aviation sector is characterized by highly trained employees, with recurrent training requirements, and aircraft that need ongoing maintenance to preserve airworthiness and, therefore, value. The collapse of the industry would result in the need for far more resources and time to rebuild than the cost of providing assistance now. The loss of global air connectivity would have severe consequences, which would result in setbacks for all sectors. The EU provided member states with legislative support to ensure that “public intervention in the transport sector is designed to avoid undue distortions of competition during and after the crisis and to preserve efficient transport ecosystem” (European Commission 2021). A large array of assistance was employed depending on the individual situation of the airlines. This assistance primarily consisted of loans or state-guaranteed loans, equity injections, tax payment deferrals, flight subsidies, grants, and nationalization. While there is no known framework for airline bailouts, the objective of the support should focus on preserving the employment of “skilled” personnel, aircraft airworthiness, and safety oversight. In the aftermath of the COVID-19 pandemic, we will see greater state ownership in airlines, which, in turn, will require an evolved level of governance and well-defined safeguards to limit government interventions in the company management, a necessary guarantee to at least maintain the achieved pre-COVID-19 levels of efficiency and profitability. Since the start of the COVID-19 crisis, about 86 countries or supranational entities have so far granted some kind of support to their airline sector (Ishka Global 2021). A quarter of those airlines received direct equity injections, another quarter received state loan guarantees, and another quarter obtained state loans. Other forms of support include full nationalization, payroll support, and tax waivers. COVID-19-Prompted State Aid and Policy Responses 50 THE COVID-19 PANDEMIC AND AFRICAN AVIATION Ishka Global estimates that by October 2021 governments will have confirmed or executed US$201 billion in airline support measures globally, with outlook for an additional US$6.93 billion in the near term. Of these amounts, US$52.9 billion represents direct financial aid via grants and other channels. The African continent has been the second lowest in terms of support received by airlines from their governments. Eighteen African governments provided support to their airline industries since the start of the pandemic. This support is estimated at US$4 billion, of which 58.6 percent are bailouts through equity injection, 3.3 percent state guarantees, and 14 percent loans.21 As of mid-October 2021, the overall state aid received by African airlines was no more than US$4.003 billion, compared with US$42.176 billion, US$52.119 billion, and US$93.424 billion for Asia-Pacific, Europe, and North America, respectively (Figure 4.1 and Figure 4.2). FIGURE 4.1 • State Aid by Region Source: Authors based on data from Ishka Global COVID-19-Prompted State Aid and Policy Responses 51 MOBILITY AND TRANSPORT CONNECTIVITY SERIES FIGURE 4.2 • Archetypes of Government Support for Aviation in Africa (US$, millions) Angola 700 South Africa 650 Morocco 249 375 Egypt 447.39 Mauritius 225 Tanzania Wage Subsidy 194 Grants/Other Debt Cape Verde 119.89 Equity Kenya 101 Senegal 74.6 Reunion 61.32 10.8 Morocco 51 Senegal 45 1.9 Cameroon 28.8 Rwanda 25 Ivory Coast 24.1 Tunisia 20.5 Nigeria 10.5 Burkina Faso 6 0 100 200 300 400 500 600 700 800 Source: Authors based on data from Ishka Global. Airlines also received tax and fee/charges waivers totaling US$ 2.37 billion since the pandemic hit. Most of this relief came earlier in the pandemic. However, the International Air Transport Association (IATA) has reported that infrastructure and service costs have increased by US$ 2.3 billion in 2021, essentially wiping out the wavier. Notable developments in Africa include a 35 percent increase in 2021 by the Ethiopian air navigation service provider and 38 percent increase in 2022 by the Airports Company South Africa (ACSA). The majority of African states have opted to bail out their incumbent airlines by recapitalization. There is insufficient evidence to verify whether the capital injections are accompanied by strict restructuring decisions or an additional set of requirements that would push airlines toward self- sustainability and, ultimately, profitability. Capital injection, while reducing the immediate effects of loss of activity, is not a viable solution for the long term due to (1) the lack of predictability of the duration of the pandemic and (2) shrinkage of the fiscal space due to other competing needs. LOOKING AT the distribution of government aid across the top 10 African airlines in 2019, all the non-regional airlines in this list received government support worth a combined total of US$19.6 billion compared to US$1.6 billion for African-based airlines. Seen in terms of government support as a percentage of airline revenue, Morocco, Egypt, and South Africa have provided comparable support to their respective airlines (Figure 4.3). Ethiopia and Algeria, however, are completely missing in action, while Kenya’s proposed US$70 million support for Kenya Airways is a mere 5.1 percent of the airline’s revenue last year.22 COVID-19-Prompted State Aid and Policy Responses 52 THE COVID-19 PANDEMIC AND AFRICAN AVIATION FIGURE 4.3 • Top 10 African Airlines in 2019 and Government Aid Due to the COVID-19 Crisis 25 50 44.1 45 20 40 Gov Aid/Rev. (%) Seats (Millions) 35 31.6 15 30 25 21.4 10 20 15 12.8 11.2 5 10 8.1 5.1 5.3 5 0 0 0 0 Ethiopian Egyptair Royal Air South Air Algérie Emirates Air France Kenya Saudia British Airlines Maroc African Airways Airways Airways Seat (millions) Government Aid/2019 Revenue (%) Source: Authors based on data from Ishka Global, OAG and Abate, Christidis, and Purwanto 2020. Note: Seat capacity includes operated to/from/within Africa. Government aid is based on total COVID-19-related financial support for airlines in each airline’s country relative to their 2019 ticket revenue. The resulting situation in Africa is that a sector that was suffering from a lack of profitability and inefficiency before the COVID-19 pandemic has not been properly supported since the start of the crisis. As most of the airlines in Africa are state owned, budgetary contributions through the crisis may have gone unrecorded as state aid. In any case, there is no specific evidence that the airlines have received any additional specific provision through 2020. That said, few prodigal airlines continue to be backed despite their high financial risk profile (Figure 4.4). COVID-19-Prompted State Aid and Policy Responses 53 MOBILITY AND TRANSPORT CONNECTIVITY SERIES FIGURE 4.4 • Risk Profile of African Airlines Kenya Airways Air Algerie High Rwandair Air Seychelles Air Botswana Financial Risk Profile South African Airlines Tunisair Air Madagascar TAAG Angola Airlines Air Tanzania TACV Cabo Verde LAM Mozambique Camair-co Moderate Air Côte d’Ivoire Arik Air Air Austral Air Burkina Congo Airways Air Mauritius Air Peace Royal Air Maroc Africa World Airlines Egyptair ASKY Low Ethiopian Airlines High–explicit support avaialble Moderate– support available but Low – no known explicit limited or deemed insufficient support avaialble Government/ Shareholder Support Source: Authors based on Ishka Global data from June 2021. For the most part, the governments’ objective, and their supporting instruments, focused mainly on saving airlines with the immediate aim of preserving the industry and essential/lifeline connectivity. Of the different government support measures, nationalization and recapitalization through state equity injection will most likely increase the direct role of the government in the aviation industry for the foreseeable future. The possibility of swapping debt for equity may also result in a more prolonged government presence in the airlines’ corporate structure. However, increasing state ownership could have counterproductive implications for the industry. 4.2. IMPLICATIONS OF STATE AID23 The growing presence of government in the aviation industry, as a result of COVID-19-prompted state support to the sector, has implications in at least two important areas. First, the growing government ownership has resurrected the perennial debate on government versus private ownership of airlines and its implication for efficiency and competition. Second, there is a growing concern that countries might retreat from the liberalization and deregulation policies of the last three decades risking important progress made toward levelling the playing field. What follows is a recap of the literature and recent developments on these two areas to draw key policy lessons. COVID-19-Prompted State Aid and Policy Responses 54 THE COVID-19 PANDEMIC AND AFRICAN AVIATION 4.2.1. Liberalization slowdown Liberalization efforts are on a temporary hiatus as countries operate in emergency mode. The immediate focus should rightly be on a safe restart of aviation by building back already established connections under existing market access conditions. Precautions, however, need to be taken so as not to revert to old habits of protectionism. As governments are called on as the last resort to support the sector and increase their share in airline ownership, vigilance is needed not to distort the post-COVID-19 playing field by tilting the balance toward the ever-present protectionist sentiments in Africa. A bias in favor of national operators was already evident even in supposedly open aviation markets such as in the United States (Morrison and de Wit 2019). Additional government support to the sector will probably accentuate these imbalances in the post-pandemic period. In fact, policy makers should step up intra-African liberalization initiatives by expanding market openness to domestic markets (cabotage) and flexible operations in foreign markets through liberal provisions of seventh, eighth, and ninth freedoms. Creating a strong and open intra-African market is crucial because it gives airlines a bigger internal market on which to build a network. The effort to open up internal markets should continue to allow the introduction of new competitors and innovative business models. Post-COVID-19, market openness is the best policy option to boost connectivity levels and make travel affordable and accessible for more people than ever before. The global airline industry has traditionally been a prime example of the so-called national champion rationale, whereby large domestic operations—helped by closed domestic markets—provide national firms with economies of scale.24 These economies, in turn, enable firms to earn large shares and profits in international markets. The world airline industry does appear to promote the rationale that consolidating domestic markets is the way to enhance international competitiveness. That large domestic airlines perform better in international markets has been empirically supported (Clougherty and Zhang 2009). In developing countries, however, where thin domestic routes are commonplace, the validity of this theory is yet to be proven. In fact, the success of Gulf-based airlines, Singapore Airlines, and KLM, etc., is not based on large domestic market but on a long- haul international market operated under liberal arrangements. Then again, running a successful airline is still a function of scale, which implies that stronger collaboration and a more favorable regulatory environment are needed between countries to create regional/continental champions. 4.2.2. Airline ownership structure: ownership control, privatization, and public ownership Government bailouts and/or financial support for the airline industry in response to the COVID-19 crisis have made the topic of airline ownership structure as relevant as ever at least from two important perspectives. First, to help cash-strapped airlines during the crisis there is a call to liberalize ownership and control clauses in air services agreements that put a ceiling on foreign ownership (Charlton 2020; Poole 2020). Second, there is a growing concern that the expansion of COVID-19-Prompted State Aid and Policy Responses 55 MOBILITY AND TRANSPORT CONNECTIVITY SERIES government capital in the sector may crowd out private capital to the extent that it may endanger or even reverse the privatization the industry has seen in recent decades (Helm 2020). In Africa, where most airlines continue to be fully government-owned, the fear of policy reversal on privatization is of lesser concern. Provided that there is a good regulatory environment that ensures competition, however, the relaxation of foreign ownership and control rules as well as greater openness for private ownership of airlines can bring short-to-medium-term remedies. International air transport activities are governed by rules that limit foreign ownership and control of airlines by limiting cross-border mergers and acquisitions.25 Most countries, including liberalized regions such as the EU, have a maximum ownership limit of 49 percent for a foreign national entity to be issued an AOC. The United States, while it pursues a liberal open skies policy on so-called hard rights such as fifth freedom, frequency and/or capacity provision, and airline designation, permits a maximum of 25 percent foreign ownership for airlines to be incorporated in its territory. Given that much of the international air transport system is operated based on principles of reciprocity under bilateral air service agreements (BASAs), it has proven difficult for countries to unilaterally pursue a liberal policy on foreign ownership. This has left the industry to its own devices and resulted in innovative ownership and partnership models. In recent years, several airlines have used equity partnerships by creating strategic partnerships to tap into fast-growing foreign markets. For their part, partnering countries and airlines gained from the boost in connectivity—a feat they could not have otherwise achieved due to their smaller market size or lack of operational and financial capabilities to run an airline. Similarly, for countries with a small state-owned airline, the favored approach to privatization has been to seek a strategic investor to buy a partial stake in the airline, which usually needs active support and restructuring. A good example is that of Ethiopian Airlines, which in recent years has bought minority stakes in several African airlines, including ASKY Airlines, Air Malawi, and Tchadia Airlines. Recently, Egyptair has also jumped on the bandwagon by announcing a strategic partnership with a yet to be launched carrier in Ghana. In September 2021, Kenyan Airways and South African Airways signed a cooperation agreement with a long-term plan for a pan-African airline group.26 While strategic partnerships have their limits when an airline has fundamental problems that are difficult to solve regardless of the size of capital injection, they have offered a workaround for the industry to move capital and talent between countries. Hub-and-spoke networks and equity investing have been extensively used by major carriers in the EU and the United States to expand air transport services to thin markets and to circumvent the regulatory restrictions on ownership and control of airlines present in BASAs. However, the successful replication of this model in Africa depends crucially on the continuation of the favorable regulatory landscape. In Africa, restructuring of the sector is needed to make the most of the opportunities ownership and control rule changes or privatization would offer. In many countries, restructuring implies some degree of unbundling of activities horizontally or vertically. Horizontal unbundling involves breaking a monopoly into smaller units which provide similar activities, e.g., by creating independent airports across regions. Doing so creates a competitive business environment in overlapping segments.27 Vertical unbundling, on the other hand, involves breaking a monopoly into different stages of production, e.g., by separating airport services and air navigation services or airlines from airports. COVID-19-Prompted State Aid and Policy Responses 56 THE COVID-19 PANDEMIC AND AFRICAN AVIATION The latter is especially important as there are signs in Africa of consolidating the two services under a conglomerate in the shape of Ethiopian Airlines or Gulf-based airlines. The continuation of cross-border ownership through the relaxation of ownership rules can be instrumental in the post-COVID-19 period to ensure connectivity and survival of airlines. The success of such policies in Africa critically depends on the presence of a favorable regulatory landscape that promotes competition and rewards sustained productivity and profitability. Policy makers should weigh all options before making an ownership change decision that has long-term implications. Experience shows that in many developing countries with fiscal concerns, the need to transfer a business to private operators is often so pressing that there is little time to work out a proper regulatory framework that would protect the users, e.g., designing of access pricing regimes in the case of airports and removal of market entry barriers for domestic and foreign airlines (Estache 2001). This ultimately leads to harmful rents to users. The air transport industry has always been dominated by a strong government presence. Although the last three decades have seen increased flows of private capital into the industry, governments continue to play a critical role in shaping market outcomes, either in the form of direct ownership of national carriers or through the allocation of traffic rights and airline designation in air services agreements. The regulation of essential air connectivity under Public Service Obligations (PSOs) and the provision of critical infrastructure (e.g., airports) and services (e.g., air navigation) continue to be under the purview of the government in most parts of the world. Given the pervasive role of the state in the air transport sector, the main debate has not been about choosing between privatization or government control. Rather, countries, for the most part, have always sought to strike a good regulatory balance that attracts private capital, fosters competition, and addresses connectivity needs.28 During the COVID-19 crisis, governments intervened in an attempt to prevent the collapse of national economies, with financial packages targeting small and medium enterprises, as well as strategic national companies. Chief among these strategic sectors is aviation, which has amassed more than US$200 billion in state support so far. State support is still being sought with the presumption that the loss of air connectivity would have severe consequences for all sectors of the economy. While it is too early to do a proper cost benefit analysis of state support as the crisis continues to rage, it is worthwhile to recap the economic rationale for airline bailouts. 4.3. ECONOMIC RATIONALE FOR SUBSIDIES AND BAILOUTS The air transport industry has certain characteristics, such as the presence of externalities, public goods,29 and natural monopolies, which make it prone to market failures and, in turn, necessitate government intervention.30 In analyzing governments’ decisions to offer financial support to airlines in the wake of the COVID-19 pandemic, it is important to ask whether the pandemic has created a market failure that was not there before or exacerbated an existing one. It is also important to assess whether the financial health of the airlines serves some other social goal whose value exceeds the cost of the financial support given. Box 4.1 presents market failures that are often invoked to justify government regulation, support, or subsidies, during normal times as well as major shocks. COVID-19-Prompted State Aid and Policy Responses 57 MOBILITY AND TRANSPORT CONNECTIVITY SERIES The foregoing justifications for state support for airlines has inadvertently or otherwise made the government an enabler of the “too big to fail” firms in many countries at the cost of competition. Besides, the need for support and the actual support provided by governments to airlines varies significantly in each country. Abate, Christidis, and Purwanto (2020) show that state support is primarily given to, at best, a handful of national operators in each country, which were already enjoying preferential treatment compared to the competition. The historical, political, geographic, and operational reasons that in the past led to the formation of national and regional oligopolies in aviation have resulted in path dependency. The players participating in the oligopolistic market have become “too big to fail” and government intervention is considered unavoidable. Government support as a reaction to the pandemic will most probably reinforce the role of “national champions” and allow them to gain a higher market share to the detriment of smaller players who cannot attract as much private or public financing. Consequently, the competition landscape—and its impact on fares and supply for travel services—would suffer a distortion. Going forward, while there will be cases where state support for airlines may be economically efficient, it should be guided by firmly established principles. 4.4. A FRAMEWORK FOR STATE SUPPORT FOR AIRLINES DURING THE COVID-19 CRISIS Due to the vast differences in the forms of airline ownership and the varying degrees of state participation in the sector, bailout requests and public support should be considered on a case- by-case basis. In addition to differences in the legal contexts between countries, factors such as the size and maturity of domestic markets, presence of market entry and exit barriers, and level of private sector participation would determine the extent to which public investment could be used to support the air transport sector. That said, considerations should be given to airlines that otherwise were well managed but subjected to an unanticipated shock that threatens their existence. The overriding goal of state support should be preservation of an efficient, resilient, and competitive sector that is fit for purpose in the post-pandemic world. Transparency of the state aid or bailout decision process is also paramount. When deciding if an air carrier should receive state support, three essential questions need to be answered: (1) Would the loss of the carrier have a severe impact on connectivity and impact the economy significantly? (2) was the carrier viable before the COVID-19 pandemic hit? and (3) does the carrier have a viable business model fit for post-pandemic realities? As the effect of the pandemic continues to drag, the third question is becoming increasingly important and should be considered together with how an airline is performing and adjusting to the pandemic, if applicable. Airlines seeking support need to prove that they are capable of adapting to new health safety standards and propose a business model that foresees a shift from business class as a significant revenue stream to a leisure passenger and highly digitalized travel experience. Although there is no consistent bailout policy for the airline industry across countries, the decision making to answer state support requests may follow the general pattern laid out in Figure 4.5. First, it must be determined that the airline is in serious distress and will fail without support. Second, the negative impact of the loss of connectivity in case the carrier fails needs to be assessed. If it is COVID-19-Prompted State Aid and Policy Responses 58 THE COVID-19 PANDEMIC AND AFRICAN AVIATION not significant, then no public support should be provided. Instead, only a third party (e.g., private sector, another carrier) should step in to help the carrier survive. If none is available, the airline may be liquidated. If, however, the connectivity provided by the carrier was essential, then a second key question must be answered: will the carrier be viable in a post-pandemic market? A good yardstick to answer this question is the situation the carrier was in prior to the outbreak of the pandemic. Was it operating well, maybe even generating a profit? Then the carrier should be considered for public support. However, if the airline in question was losing funds and/or was poorly managed before the crisis, then public support should not be provided, and it may be liquidated. In many African countries, strict application of the above criteria would leave few airlines worthy of state support. Judging by the surprisingly small number of airlines under bankruptcy or liquidation at the time of writing, it appears that governments have mustered enough justification to bestow support to the sector. Some countries still cling to otherwise unviable airlines to ensure domestic and international air connectivity. Nonetheless, the global airline industry remains a dynamic sector where failing or liquidated carriers are usually replaced quite swiftly by new entrants, especially in international markets. Domestic connectivity goals can also be ensured with the right mix of regulatory policies which encourage competitiveness and openness, including foreign capital and airlines.31 FIGURE 4.5 • Decision Tree for Supporting an Air Carrier An airline is in serious financial Carrier needs support for survival distress due to the pandemic Loss of the carrier would have a NO: Only third-party YES: Direct support severe impact on connectivity needs to be considered support to be considered and the economy The carrier is viable YES: Restructure, in a post-pandemic recapitalize, and/or divest NO: Liquidate Divest or liquidate market Source: Authors COVID-19-Prompted State Aid and Policy Responses 59 MOBILITY AND TRANSPORT CONNECTIVITY SERIES Box 4.1 • Market Failures and Government Intervention in the Air Transport Industry What follows presents typical market failures that are often invoked to justify government regulation, support, or subsidies during normal times as well as major shocks. A. Air transport generates positive externalities implying that government support is needed for the private sector to capture the full value of its investment during times of stress or shock. The industry has long been shown to generate positive externalities by providing a rich opportunity set of routes through which existing (potential) shippers and travelers can move their goods or reach places of economic or social importance. If government support is required to maintain each link and/or the air network provided by airlines, it might be efficient to take such action (Blair 2003). That the COVID-19 pandemic has caused a significant loss in city-pair connectivity is the key argument often cited by the industry for continued state support. IATA (2020a) estimates that the number of unique city-pair air services declined by 18 percent by the end of 2020, the first decline since the 2008 global financial crisis. While there is ample evidence of the presence of positive externalities from aviation networks, the challenge lies in determining which airlines are contributing to these externalities by their operations and how those airlines can be subsidized without encouraging them to engage in predatory practices against actual or potential competition (Lewinsohn 2005). Perverse incentives could also arise as the private sector may assume that taxpayers will most likely bail out a failing but socially important firm. This results in a moral hazard where the private investors are more willing to invest in an airline in normal times and less willing to make available resources to rescue it upon failure (Zhang and Zhang 2020). Finally, it is also important to balance efforts to internalize positive externalities with negative externalities from air transport activities, including greenhouse gas emissions and noise pollution. To this end, O’Callaghan and Hepburn (2020) suggest that each bailout should include conditions that the airline reach net zero carbon emissions by 2050, with interim targets and a plan to deliver. B. Parts of the air transport value chain are natural monopolies, so the government should stimulate demand during downturns. Due to the presence of large fixed costs associated with the construction and maintenance of airports and provision of air traffic control systems, government subsidies or regulations are needed to achieve economic efficiency. Often governments engage in the construction of these fixed assets and provide the associated services as monopoly so that fixed costs do not always exceed marginal costs. As these facilities and systems are not easily redeployed during negative demand shocks, the government must ensure their usage by encouraging more people to travel to ensure system efficiency. To the extent that airlines are capable and able to stimulate travelers, governments can directly subsidize them through tax deductions/deferrals of taxes and fees/charges (Blair continues on page 60 COVID-19-Prompted State Aid and Policy Responses 60 THE COVID-19 PANDEMIC AND AFRICAN AVIATION 2003). As has been evident during the COVID-19 pandemic, however, border closures, mandatory quarantine requirements, and mitigation measures aimed at curbing mobility have severely limited the stimulatory power of such policies. C. The airline industry has an “empty core” problem which leads to inherent instability. As such, a higher level of market concentration may be warranted to reap network benefits and to withstand severe shocks. Studies show that the airline industry has an “empty core” problem because of traffic density effect (i.e., the unit cost of providing a service falls as the number of passengers carried on a route increases), so airlines have the incentive to cut prices to the marginal cost level in the face of excess capacity (Button 2017). But it is a frequent phenomenon that airlines cannot cover the full operating costs with such lower prices induced by excess competition (Zhang and Zhang 2020). In practice, this has resulted in a somewhat lax application of antitrust policies toward airlines’ mergers and acquisitions as well as their cooperative agreements such as alliances and joint ventures to help them reach a larger scale that allows internalization of network benefits. D. Governments can support airlines to preserve a well-functioning air transportation system that serves social goals. Many governments use air connectivity to tie together a diverse and scattered population that does not have a viable alternative by land. The United States’ Essential Air Service Program and the PSO policies in many European countries are the two most prominent examples where billions of state dollars are spent to guarantee essential air connectivity for citizens. At the core of such aid is the notion that aviation enables and supports social connectivity, which is vital for territorial integrity and cohesion, and as such preserving the aviation industry may be warranted during major shocks. Yet again, while there are potentially legitimate arguments to ensure the continued existence of a smoothly functioning, safe, and efficient air transportation system, it is not obvious that subsidizing individual airlines, either by directly reimbursing their costs or by providing loan guarantees to them, is the best way to achieve social connectivity (Tretheway 2020). E. There are transaction costs in the economy that can be avoided by preserving a critical knowledge base. The aviation sector is characterized by highly trained employees, with recurrent training requirements, and aircraft that need ongoing maintenance to preserve airworthiness and, therefore, value. Major economic downturns involve reallocation of economic resources where assets will still exist but be revalued and ownership transferred to new equity owners with new employees. This transition comes at a huge economic cost which would include legal costs, financing costs, and the costs associated with a lapse in time to restructure, refinance, rehire, retrain, and restart. Most importantly, there will be a loss of knowledge base that could take years to recover. In the case of aviation, critical dimensions of the knowledge base include safety and security (Tretheway 2020). This was not lost on governments as they have spent US$76.5 billion in wage subsidies so far during the COVID-19 crisis to avoid significant future costs to restart knowledge mastery in these areas (IATA 2020a). Again, the presumption here is that the collapse of the industry would continues on page 61 COVID-19-Prompted State Aid and Policy Responses 61 MOBILITY AND TRANSPORT CONNECTIVITY SERIES require far more resources and time to rebuild than the cost of the assistance. But with a protracted recovery, the cost of preserving the labor force that was needed to produce the 2019 capacity levels is becoming fast untenable. F. Under an oligopoly market structure, which is typical of airline markets, strategic competition creates incentives to subsidize and/or protect domestic airlines. Morrison and de Wit (2019) argue that “open skies” encourage strategic competition by governments to prop up airlines through federal aid, debt restructuring, market foreclosure, and surplus enhancing. As such, failure by a government to provide its domestic carriers with a competitive advantage can be costly if foreign carriers receive such benefits from their own governments. This is a revealing insight and explains the central role governments continue to play even in deregulated and liberalized markets. The size and extent of state support airlines have received during the COVID-19 pandemic is also a reflection of strategic instincts that are ever present in this industry. Source: Authors. REFERENCE Abate, Megersa, Panayotis Christidis, and Alloysius Joko Purwanto. 2020. “Government support to airlines in the aftermath of the COVID-19 pandemic.” Journal of Air Transport Management 89 (October), 101931. https://doi.org/10.1016/j. jairtraman.2020.101931. Blair, Margaret M. 2003. “The Economics of Post-September 11 Financial Aid to Airlines.” Indiana Law Review 36: 367–395. 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June 23, 2020. http:// www.intervistas.com/downloads/Observations_Regarding_the_Economics_of_Enterprise_Bailouts.pdf. Vickers, John, and George Yarrow. 1991. “Economic Perspectives on Privatization.” Journal of Economic Perspectives 5 (2): 111–132. https://www.aeaweb.org/articles?id=10.1257/jep.5.2.111. Winston, Clifford. 2013. “On the Performance of the U.S. Transportation System: Caution Ahead.” Journal of Economic Literature 51 (3): 773–824. http://dx.doi.org/10.1257/jel.51.3.773. Zhang, Yahua, and Anming Zhang. 2020. “COVID-19 and Bailout Policy: The Case of Virgin Australia.” December 1. http:// dx.doi.org/10.2139/ssrn.3771127. COVID-19-Prompted State Aid and Policy Responses 5 63 MOBILITY AND TRANSPORT CONNECTIVITY SERIES photo / Xinhua / Alamy Live News COVID-19-Prompted State Aid and Policy Responses 64 THE COVID-19 PANDEMIC AND AFRICAN AVIATION 5. POLICY OPTIONS FOR RECOVERY AND SUSTAINABLE AVIATION IN AFRICA KEY FINDINGS AND MESSAGES ✔ Considering the unique challenges of the African aviation sector as well as the various state support given in response to the crisis induced by the COVID-19 pandemic so far globally, policy options for sustainable recovery of the sector in Africa include: „ Airline restructuring „ Direct bailout to airlines „ Reduction of taxes and charges on air transport „ Support for national carriers through Public Service Obligation (PSO) programs „ Liberalization of market entry (more fifth freedom among African carriers) „ Removal of restrictions on ownership and control to facilitate the development of multinational African carriers. ✔ Using the preceding six policy options as an overarching guide, two phases of specific policy actions are identified to address the challenges posed by the pandemic as well as the sector’s legacy problems. The actions are divided into two steps: „ Immediate policy actions for air travel: The three main immediate policy directions for a faster recovery of air travel are: facilitation of market access for airlines, establishment of a common travel and cross-border control for tourism restart, and provision of direct financial aid. „ Short- to medium-term actions for a competitive and safe air transport sector: The menu of short- to medium-term policy actions cover both domestic and international regulatory and operational areas which can be supported by development finance institutions using instruments such as a Development Policy Financing (DPF). While the policy actions are not equally applicable/relevant for all countries, they can be adapted depending on the participating country or group of countries (in case a regional DPF is considered). Policy Options for Recovery and Sustainable Aviation in Africa 65 MOBILITY AND TRANSPORT CONNECTIVITY SERIES This study has explored salient air transport sector challenges and opportunities in Africa to distil operational and policy-relevant insights for a sustainable recovery. Prior to the COVID-19 pandemic, the air transport sector in Africa faced multipronged challenges, including those related to economic regulation, profitability, safety, security, and sustainable financing of critical infrastructure. While the pandemic has exacerbated these challenges, it also presents opportunities to tackle some of them. Considering the unique challenges of the African air transport sector as well as the various state support given in response to the crisis induced by the COVID-19 pandemic so far globally, this section presents pertinent policy options for sustainable recovery of the sector in the continent. The final part summarizes a menu of prior policy actions for a competitive and safe air transport sector which could be part of a World Bank lending operation. 5.1. AIRLINE RESTRUCTURING For many African countries with state-owned airlines, the current situation presents a unique opportunity to make difficult, but necessary, decisions that were unthinkable during normal times. Decisions involving deep restructuring of ailing airlines, changes in their business models, fleet rationalization, closure of unprofitable or unviable routes, among others, could become implementable in the short term when an airline is on the verge of total collapse. Three major improvement opportunities should be considered for African airlines: network restructuring and optimization of operating resources, labor reductions and implementation of digitalized systems, and debt restructuring and increased accessibility to more sophisticated forms of financing. Governments may decide to modify the entire business concept, eventually refocusing on a different proposition, or completely withdraw from specific markets. Restructuring may change the level of involvement of a government within an airline to limit undue political influence and interference on corporate affairs and labor and financial control. Considering that the majority of African airlines were loss-making prior to the COVID-19 pandemic, the rescue measures should favor restructuring and promote regional mergers or partnerships. Realistic restructuring plans could be supported by additional measures, such as state guarantees or state loans with low or zero interest. Such facilities should be meant for debt reorganization and attraction of commercial loans. Airline restructuring, assuming it is successful, is a lengthy process. Even if there is a real commitment to carry out the process and to implement it as per the final recommendations, it may take too long to save the company from a financial shortage. A process of restructuring is time consuming and requires additional financial resources. Such a reform should be, where applicable, accompanied by immediate financial assistance, such as a bailout or a cash injection. 5.2. DIRECT BAILOUT OF AIRLINES As has been the case in many developed countries, such as the United States and most European countries, airlines have received direct cash injections either in the form of equity injections or loans. In some countries, the loans have been secured as convertible bonds, opening the possibility of further equity involvement by the state. Policy Options for Recovery and Sustainable Aviation in Africa 66 THE COVID-19 PANDEMIC AND AFRICAN AVIATION Most African countries do not have the fiscal capability to support their national airlines through the current crisis. Faced with other priorities, these economies may find bailouts in the form of equity injections or loans to be prohibitive. This leaves external financing as the last resort. A bailout for airlines that were not in a healthy situation before the crisis is not going to provide a remedy in the long run. The same structural issues, such as ineffective business models or operational inefficiencies, will continue to drain the emergency financial resources even when the crisis is over. Without proper restructuring, a bailout will be an artificial extension of an agonizing situation. Proper due diligence of the company to assess its financial viability prior to the crisis should be carried out before any financial aid is offered. A robust and transparent financial analysis based on realistic assumptions should be prepared by the entity requesting the bailout. Any bailout will have to be assessed in the context of the company’s situation after the crisis and the probability of success in the medium and long term. Countries should opt for capital injections for a limited term, and with the aim of limiting unemployment growth (and its fiscal burden on the national budget) by approving a furlough wage subsidy scheme and ensuring critical connectivity for the country. Additional measures to minimize airlines’ cash spending should include tax deferrals, access to foreign currency at an affordable rate to enable the payment of hard currency obligations, and ease of bankruptcy/insolvency procedures to allow for reorganization of their activities. 5.3. REDUCTION OF TAXES AND CHARGES ON AIR TRANSPORT Many African countries continue to impose economically inefficient taxes on air travel. Fees and charges for the use of infrastructure, including taxes, are also particularly high despite the low quality of airport services. Inefficiencies and low volumes contribute to the relatively high level of charges. By finding other channels through which the same tax revenue could be raised, thereby reducing the cost of travel, governments can incentivize more people to travel. There is also room to reduce fees and charges commensurate with the level of service provided. Note that the stimulatory powers of these policies could be minimal because air travel demand is price inelastic in Africa, especially for intra-African and intercontinental travel. While charges on passengers are passed through to travelers, charges on airlines may be transferred or absorbed by the airfare. Since yields in Africa are relatively high and travelers are proven to be price inelastic, it is not certain whether the reduction of fees and charges will have an associated impact on demand. Complementary policies, therefore, are needed to ensure that lower taxes and charges translate into lower fares for the traveling public. Similarly, policy makers should consider alternative strategies for airports and air navigation service providers to recoup lost income in consultation with all stakeholders, users, and development partners who could provide stopgap funding conditional on enacting policies in line with the International Civil Aviation Organization’s (ICAO’s) policies on user charges and taxation. A differentiation should also be made between service charges (such as airport or air navigation services) and duties levied directly or indirectly on aviation. Any proposed Policy Options for Recovery and Sustainable Aviation in Africa 67 MOBILITY AND TRANSPORT CONNECTIVITY SERIES reduction of airport charges may have implications for the ownership structure and the provision of services. Most probably, it would have to be compensated by some countermeasure to avoid the provision of infrastructure being affected. Any implementation of a tax reduction will have fiscal implications, involving different sectors of the economy. Under the current context of the crisis and reduction in general economic activity, governments would be less willing to sacrifice revenue sources, particularly sources that support foreign currencies such as international travel. It is, therefore, paramount to conduct proper and wider stakeholder consultations including development partners that can provide development policy financing conditional on enacting policies in line with the ICAO’s policies on user charges and taxation. 5.4. SUPPORT FOR NATIONAL CARRIER THROUGH PUBLIC SERVICE OBLIGATION (PSO) PROGRAMS The desire to save airlines vis-à-vis saving domestic connectivity can be adopted in tandem through PSO programs. For those countries that have national flag carriers, either state or privately owned, the PSO programs could provide an organizing framework for state aid while ensuring connectivity on essential domestic routes. This is particularly relevant for big countries with remote communities that have no direct commercial air links and no viable alternative surface-based modes of transportation. Due to the current regulatory environment, PSO programs are mainly applicable in a domestic market, particularly on unserved or underserved routes that are not commercially viable.32 The implementation of such programs may serve at least three main objectives: it provides a formal framework under which eligible communities will be connected; it defines and circumscribes the level of subsidy from the government, defining specific objectives, identifying the precise beneficiaries, and determining the financial sources; and it may provide relevant financial support to the local national airline through a predetermined and limited budget. In essence, through a PSO program, some countries may ensure domestic connectivity while backing the national airline financially at the same time.33 Having a PSO program in place ring-fences the government’s financial assistance for a specific purpose. Its overall success depends on several factors. First and foremost, a thorough definition of the entire cost structure of the program is essential to define the level of support. Second, a proper accounting system should be put in place to ensure that resources are not funneled out of the program. Third, the program should be properly structured to target exclusively the direct beneficiaries without diverting traffic from other segments. Successful PSO programs tend to be for a specific time frame (e.g., three years) requiring the entire scheme to be reassessed periodically. Any subsequent reevaluation may modify the parameters, beneficiaries, conditions, and even the service provider.34 Policy Options for Recovery and Sustainable Aviation in Africa 68 THE COVID-19 PANDEMIC AND AFRICAN AVIATION 5.5. LIBERALIZATION OF MARKET ENTRY (MORE FIFTH FREEDOM AMONG AFRICAN CARRIERS) Full liberalization of African skies should remain a policy objective even during the current crisis. There is compelling evidence that liberalization leads to lower fares and higher frequencies, which, in turn, stimulates demand. It also allows new carriers to enter the market and existing carriers to better respond to demand. While it is expected that some countries might be reluctant to allow more competition so as not to erode market share for their ailing airlines, others, especially those without local airlines, should follow a liberal approach by welcoming airlines to provide regional connectivity through full implementation of the Yamoussoukro Decision (YD). As long as airlines are owned by governments, policy makers will continue to run into a conflict of interest where the protection of a national carrier is given a higher priority than the achievement of connectivity objectives through liberalization. But during this unprecedented downturn there should be a reversal of priority where the overriding concern is connectivity as opposed to protection of unviable and loss-making carriers. 5.6. REMOVAL OF RESTRICTIONS ON OWNERSHIP AND CONTROL TO FACILITATE THE DEVELOPMENT OF MULTINATIONAL AFRICAN CARRIERS The COVID-19 crisis presents an opportunity to expand cross-border investment with the aim of creating multinational African airlines through subsidiaries and joint ventures. Such measures would enable cross-border partnerships and generation of traffic density effect necessary to reduce unitary costs and build a self-sustaining business model, which attracts private capital. In addition to providing an immediate lifeline to struggling airlines, cross-border collaborations provide realistic options for developing robust African airlines that could compete with airlines outside the region. The model of multinational airlines has proven to be the right solution in Latin America and Southeast Asia. In Latin America, TACA airlines was formed through the merger of several airlines. Operating as different subsidiaries, the airline grew into a major player in the region, expanding through the opening of an additional base in Peru. In 2009, the airline was merged with the large Colombian operator Avianca with a subsidiary in Brazil. The resulting airline became one of the three largest operators in Latin America, operating as a multinational carrier and competing fiercely with U.S. and European airlines. Another example is LAN Airlines, which expanded out of Chile into Peru and Ecuador upon the collapse of their own national airlines. LAN Airlines later expanded into Argentina and Colombia, before merging with TAM Airlines from Brazil and forming LATAM Airlines. Currently, LATAM Airlines is one of the world’s largest airlines, operating under one single brand name but through its different subsidiaries in various South American countries. As a result, the Latin American region today boasts three major airlines—LATAM Airlines, Avianca, and Copa—that integrate the subcontinent through a series of subsidiaries operating as a system. Policy Options for Recovery and Sustainable Aviation in Africa 69 MOBILITY AND TRANSPORT CONNECTIVITY SERIES A similar development took place in Southeast Asia with the progressive expansion of Air Asia into seven countries. Under one single brand name, the airline operates in different countries as independent subsidiaries and under different ownership structures. Jointly, the group has developed the necessary strength, through domestic and international markets, to compete efficiently with airlines from outside the region. All of these models are based on the interconnection of their domestic networks, consolidating traffic at various hubs, creating a route system that enables connectivity through competitive airfares. In both Latin America and Southeast Asia, Avianca, LATAM Airlines, and Air Asia succeeded in integrating air transport under less nationalistic and more profit-oriented private operators, a much- needed scenario in the current SOE-dominated African skies. The different policy options presented here may differ in their probability of implementation, effectiveness, timing, and associated effects. The following table recaps the key features of each policy option and the timing required for implementation. TABLE 5.1 • Summary Table of Policy Options POLICY OPTION EVALUATION SCOPE (TERM) Reducing charges and Has strong fiscal implications or involves airport operators, 1 Mid taxes making implementation difficult Should be combined with an immediate assistance until it can 2 Airline restructuring Mid/long be implemented Quickest but requires financial resources. Should be combined 3 Direct bailout Short with a solution for the long term Require financial resources from the government, take time to 4 PSO programs Mid implement Involving other parties, it may take time. Some airlines may 5 Liberalization Mid benefit from it, for others this might accelerate their downfall Multinational African Will require immediate assistance until such an option can be 6 Mid/long carriers implemented Source: Authors 5.7. PRIOR ACTIONS FOR A COMPETITIVE AND SAFE AIR TRANSPORT SECTOR Based on the preceding policy options, what follows presents specific policy actions to address the challenges posed by the pandemic-induced crisis as well as the air transport sector’s legacy problems. The policy actions are divided into two steps: immediate policy actions for air travel recovery (Table 5.2) and a menu of short- to medium-term actions for a competitive and safe air transport sector (Table 5.3). The three main immediate policy directions for a faster recovery of air travel are: facilitation of market access for airlines, establishment of a common travel and cross- border control for tourism restart, and provision of direct financial aid. Policy Options for Recovery and Sustainable Aviation in Africa 70 THE COVID-19 PANDEMIC AND AFRICAN AVIATION The menu of short- to medium-term policy actions cover both domestic and international regulatory and operational areas which can be supported by development finance institutions. The policy matrix in Table 5.1 is presented using a typical format for a World Bank lending operation through a Development Policy Financing (DPF).35 While the policy actions are not equally applicable/ relevant to all countries, they can be adapted depending on the participating country or group of countries (in case a regional DPF is considered). The specific actions are organized under 11 policy, regulatory, and operational reform areas: 1. Creation of a competitive international air transport market 2. Facilitation of foreign direct investment and airline partnerships 3. Provision of essential/lifeline connectivity 4. Improvement of oversight capacity of safety and security standards 5. Sector governance (builds on previous World Bank operations, including DPFs) 6. Liberalization of ground services 7. Creation of a common policy for aviation charges, taxes, and fees 8. Decarbonization of air transport 9. Modernization of air navigation services providers 10. Promotion of digitalization in the air transport sector 11. Restructuring state-owned carriers and routes A policy reform operation can be coupled with targeted infrastructure projects depending on a country’s needs. This could be akin to an earlier World Bank regional operation in West and Central Africa that employed a horizontal Adaptable Program Loan (APL) instrument to allow for a phased long-term development program in Burkina Faso, Cameroon, Guinea, Mali, Nigeria, Benin, and Senegal. The aim of the regional project was to create a safe and secure environment for air transport services, which is a precondition for African carriers to access regional and worldwide markets competitively. States were able to individually apply to join the program, which was structured in several tranches, to benefit from its total allocation of US$ 151.50 million.36 Countries joined the project under three successive phases using similar eligibility criterion: the creation of an administratively and financially autonomous national civil aviation agency, the use of aviation security and/or safety taxes for the purpose of financing its civil aviation agency, and the attainment of a definite percentage of compliance level with the ICAO’s standards in the areas of aviation security and safety, as well as improved airport security. Policy Options for Recovery and Sustainable Aviation in Africa 71 MOBILITY AND TRANSPORT CONNECTIVITY SERIES TABLE 5.2 • Immediate Policy Actions for Air Travel Recovery POLICY RECOMMENDATIONS 1. Facilitate market access for airlines 1.1. Grant temporary traffic rights to non-scheduled traffic, including the fifth and seventh freedom traffic rights, to facilitate both passenger and all air freight (cargo) flights 1.2. Lift, on a temporary basis, all remaining restrictions on air cargo operations 1.3. Promote and enable airline cooperative agreements (relax restrictions on foreign direct 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 1.4. Grant interim traffic rights to all airlines willing 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 2.1. Have a concerted approach to restarting tourism 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. Establishment of “Air Travel Bubble” arrangements to facilitate reopening, equalization of infection risk between origins and destinations 2.3. Ensure fast roll out of vaccines and prioritize travel-related personnel 2.4. Coordinate vaccination passport policies with other African states 3. Provide financial aid 3.1. Any COVID-19 state financial aid needs to be nondiscriminatory, not only to state-owned airlines, and conditional to recipients agreeing to renounce predatory practices (price dumping, capacity acquisition, etc.). Such support could be qualified by a PSO an SOE may shoulder. 3.2. The following measures could be adopted by African airlines to recover from the COVID-19 cash flow problems: • Provide funds and facilitate the provision of funds (grants, loans, loan guarantees, equity) • Defer or waive payments of debt, charges, or taxes. • Allocate a portion of COVID-19 relief packages to airlines. Policy Options for Recovery and Sustainable Aviation in Africa 72 THE COVID-19 PANDEMIC AND AFRICAN AVIATION TABLE 5.3 • Menu of Prior Actions for a Competitive and Safe Air Transport Sector – Short-to-Medium- Term Actions AREAS FOR POLICY, ANALYTICAL REGULATORY, AND POTENTIAL PRIOR ACTIONS OBJECTIVE/GOAL UNDERPINNINGS OPERATIONAL REFORMS a) Creation of a.1. Sign the SAATM Solemn To enhance air The benefits of a competitive competitive Commitment Letter (non- connectivity through air transport market are international air SAATM states); fully implement competitive access well documented and transport market all SAATM Concrete Measures that meets the in line with findings and a.1. Operationalize the (SAATM states)* travel demands of recommendations by Single African Air a.2. Amend all BASAs with African business, tourism, and development partners, such Transport Market states to ensure full compliance consumers as the AUC (2021); AfDB (SAATM) with the Yamoussoukro Decision (2019); AUC (2018), ITF and (YD) provisions: all BASAs must OECD (2015); Schlumberger a.2. Allow multi- To support regional comply with Articles 2, 3, 4, 5, (2010); IMF (2019) designation of integration and boost airlines on over- and 6 of the YD text intra-African trade border routes a.3. Grant, as a minimum, the fifth SAATM is AUC’s flagship and fully liberalize freedom traffic rights to SAATM project under Agenda 2063 To give fair and equal frequencies, tariffs, member states opportunities to all and seat capacity a.4. Recognize all designated eligible players and promote Air transportation is a.3. Allow for free African airlines healthy competition considered as a key enabler exercise of first, a.5. Establish an independent in the air transport for the African Continental second, third, fourth, international route allocation market Free Trade Area (AfCFTA) and fifth freedom council where members are traffic rights for recommended to adopt a a.6. Enable an effective Competition To stimulate air travel, scheduled and well-articulated program for Authority which is sufficiently trade, and tourism freight air services by reducing all non-tariff barriers empowered to enforce market by adding tagged eligible airlines (IMF 2019); discipline and antitrust laws flights onto existing a.4. Encourage foreign a.7. Adopt a framework and destinations airlines to enter and criteria for granting state Against international best compete support measures that limits practice and in contradiction a.5. Allocate traffic rights To reduce prices and the anticompetitive effects of of ICAO provisions for foreign in a competitive and increase volumes incumbent/state-owned air operations requirements, transparent way through competitive transport operators many African states have the forces on local airlines a.6. Promote healthy a.8. Adopt the KPIs developed by practice of promulgating laws competition in the the United Nations Economic and regulations that require air transport market Commission for Africa (UNECA) To provide regional foreign operators to submit a.7. Eliminate for the monitoring of YD/SAATM connectivity without applications for operational distortionary state implementation the need to subsidize approval (foreign OpSpecs aid a state-owned airline application). Fundamentally, a.9. Grant extra-bilateral seventh for airlines to conduct a.8. Monitor progress of freedom traffic rights for all cargo operations, the operator market openness operations needs to obtain air operator’s a.9. Liberalize air cargo a.10. Remove the requirement for certificate (AOC) from the operations approval for Foreign Operations state of registry. ICAO a.10. Nondiscrimination Specification (Foreign OpSpecs) member states are required to against foreign recognize the AOC approved airlines by the state of registry of member states. continues on page 73 Policy Options for Recovery and Sustainable Aviation in Africa 73 MOBILITY AND TRANSPORT CONNECTIVITY SERIES AREAS FOR POLICY, ANALYTICAL REGULATORY, AND POTENTIAL PRIOR ACTIONS OBJECTIVE/GOAL UNDERPINNINGS OPERATIONAL REFORMS b) Facilitation of b.1. Adoption/revision of related To facilitate The benefits of a competitive FDI and airline decree international and air transport market are partnerships b.2. Adoption/revision of related regional partnerships well documented and b.1. Facilitate creation of decree through cross-border in line with findings and local subsidiaries of investment and airline recommendations by b.3. Adoption/revision of related foreign airlines37 cooperation development partners, such decree as the AUC (2021); AfDB b.2. Lift maximum foreign b.4. Adoption/revision of related (2019); AUC (2018), ITF and ownership limits that decree To allow market OECD (2015); Schlumberger hinder the potential consolidation for b.5. Adoption/revision of related (2010) pool of market optimization and decree entrants rationalization of b.6. Adoption/revision of related airline operation b.3. Lower the capital decree and revise applicable requirements BASAs applicable to carriers To benefit from b.7. Provide legal certainty for all b.4. Revise the minimum more carriers within investors (including for the fleet size applicable/ competitive air private sector) in the air transport maximum seat transport markets market and its supply chain capacity in order to facilitate entry and b.8. Adoption/revision of related decree To ensure equal and expansion in the fair conditions to market b.9. Adoption/revision of related enter the air transport b.5. Revise the system decree market and its supply of mandatory chain indemnity bond for international cargo To limit undue b.6. Facilitate protection of co-operative government-owned agreements between corporations that local airlines and would affect fair foreign carriers38 competition and/or b.7. Deregulate domestic distort the market air transport markets b.8. Ensure that financial To increase economies fitness tests are of scope and density, equally applicable to schedule coordination, all carriers “perceived” b.9. Ensure access to seamlessness, and foreign exchanges brand and marketing on an equal footing advantages with all domestic To promote profit- airlines oriented and adequately capitalized airlines continues on page 74 Policy Options for Recovery and Sustainable Aviation in Africa 74 THE COVID-19 PANDEMIC AND AFRICAN AVIATION AREAS FOR POLICY, ANALYTICAL REGULATORY, AND POTENTIAL PRIOR ACTIONS OBJECTIVE/GOAL UNDERPINNINGS OPERATIONAL REFORMS c) Provision of c.1. Revise the scope of PSOs that fall To enable efficient air A consensus exists in the essential/lifeline upon domestic air carriers services to outlying literature on the strong link connectivity c.2. Adoption of harmonized market and underserved areas between air connectivity c.1. Provide for a level regulations, by the participating where air connectivity and economic growth and playing field in terms countries cannot develop on a development.39 of enforcing Public pure commercial basis c.3. Offer targeted competitive Service Obligations subsidies to any player for PSO (PSOs) routes via open tender systems To address market c.2. Develop and failures harmonize regional cross-border PSO To promote strong routes internal market in the c.3. Benchmark PSO subregion and improve policies in the social cohesion and region to other people-to-people regions, such as contact the EU, to create relevant regulatory and institutional arrangements d) Improvement of d.1. Develop a robust State Safety To address safety and Based on their last ICAO oversight capacity of Plan that is enhanced through operational issues at audit results, 21 of the 55 safety and security adoption of a Continuous airports currently in African Union Member States standards Monitoring Approach to operation were found to be below par d.1. Establish the list and implementing ICAO SARPs for safety.40 scoping of safety d.2. Sign an agreement between the To relieve the and capacity critical participating countries pressure on training works that need to d.3. Adopt/amend National Civil investment and the be implemented Aviation Security Plan (NCASP) ongoing maintenance d.2. Pool experts and and the Quality Control Plan of compensation resources into (NCASQCP) necessary to retain regional institutions, experienced personnel e.g., by merging CAAs at a regional To increase the critical level for recruitment, mass levels in all training, retention facets: infrastructure of suitably qualified development and inspectors, maintenance, efficient certification and and effective air traffic surveillance services management, aviation by a regional core of safety, and adequate inspectors human resources d.3. Comply with the aviation security- related provisions in the annexes to the Chicago Convention on International Civil Aviation continues on page 75 Policy Options for Recovery and Sustainable Aviation in Africa 75 MOBILITY AND TRANSPORT CONNECTIVITY SERIES AREAS FOR POLICY, ANALYTICAL REGULATORY, AND POTENTIAL PRIOR ACTIONS OBJECTIVE/GOAL UNDERPINNINGS OPERATIONAL REFORMS e) Modernization of e.1. Adopt a government resolution To ensure a According to international sector governance on separation of policy making transparent and best practices, a country’s e.1. Reform regulatory and technical regulation activities accountable air transport institutional frameworks by in civil aviation governance framework should present a separating policy e.2. Adopt a government resolution framework that meets clear separation between four making from to establish a timetable for the international safety core functional roles: policy regulatory functions legal and operational separation and security standards making, technical regulation, of the airline, airport, and air for air transport operation of infrastructure, e.2. Unbundle vertically traffic control management and air accidents/incidents integrated air investigation41 transport operators e.3. Effect statutory separation of To prevent serious e.3. Enable independent accident investigation functions competition concerns and impartial that are governed and financed regarding, among These preconditions have investigation of independent of any entity within other things, access been common in several aircraft accidents and the sector’s recommended to essential facilities World Bank operations42 serious incidents institutional framework and which or supplies by rival report directly to the parliament airlines International best practices seek to preserve the To prevent any independence between two influence or vertical providers when one interference toward of them enjoys monopolistic applying any unstated benefits (Tretheway and policy positions Markhvida 2013) f) Liberalization of f.1. Adoption/revision of related To set proper Studies show that vertical ground services decree competitive access integration with other related f.1. Provide a level f.2. Adoption/revision of related regime service providers, such as playing field decree ground handling services between all handling and in-flight catering, results f.3. Adoption/revision of related To avoid the creation operators in in the removal of competing decree monopoly/scarcity servicing domestic companies providing those rents airlines services, extending with this the monopolistic power that f.2. Eliminate exclusive the airport has over other rights to supply fuel customers at airports Bundling all operations f.3. Clarify access rules to removes transparency in the catering services cost structure for services provided through airport charges, in contradiction with international standards and recommended practices continues on page 76 Policy Options for Recovery and Sustainable Aviation in Africa 76 THE COVID-19 PANDEMIC AND AFRICAN AVIATION AREAS FOR POLICY, ANALYTICAL REGULATORY, AND POTENTIAL PRIOR ACTIONS OBJECTIVE/GOAL UNDERPINNINGS OPERATIONAL REFORMS g) Common policy for g.1. Adopt the resolution on the To reduce operational In many parts of Africa, aviation charges, development of a common expenses of airlines current policies and practices taxes, and fees policy on aeronautical charges contradict the International g.1. Apply transparent and taxes in the ECOWAS area43 Civil Aviation Organization’s To stimulate air and common g.2. Conduct stakeholder consultation (ICAO’s) principles (Doc 9082) transport demand and aviation charges, with users with respect to avoidance of connectivity taxes, and fees discrimination among users g.3. Find other channels (i.e., broaden (AFRAA 2020) g.2. Set up policies on tax base) through which the same To ensure a level airport fees and tax revenue could be raised playing field that charges that ensure A World Bank-sponsored attracts private sector nondiscrimination study by ECOWAS shows participation and are uniform that high taxes and charges among all users, remain an existential threat to including foreign and To bring sustainable the growth of African aviation national airlines alike financing for the sector and YD implementation. g.3. Reduce fees Aircraft departure fees alone and charges in Africa are 30% above the To ensure financial global average, while taxes, commensurate with sustainability of air fees, and charges are 8% the level of service navigation/airport higher. Given lower per capita provided services through incomes in Africa, high fares transparent and essentially tax the poor out of nondiscriminatory fees the air. and charges h) Decarbonization of h.1. Attain carbon neutral airport To limit and reduce the Studies show that if no air transport accreditations from Airport impact of aviation on additional actions to decrease h.1. Minimize airports’ Council International the global climate the carbon intensity of environmental and h.2. Implement measures to improve aviation beyond historical climate footprint fuel efficiency through air traffic efficiency increases are To establish a clear management procedures in the taken, total CO2 emissions h.2. Implement measures long-term vision for air and on the ground combustion in 2050 will that progressively decarbonizing air increase by 38% to 71% introduce h.3. Provide incentives for fleet transport by setting compared to 2019 levels (ITF environmentally renewal by rewarding the and monitoring 2021) friendly adoption of newer, more fuel emissions reduction developments efficient, and safe aircraft targets aligned with for connective h.4. Prepare State Action Plan for the Paris Agreement infrastructure and emissions reduction as per ICAO services guidance To support an h.3. Promote progressive international approach environmental to mitigating the policies aimed at climate change introducing newer, impacts of aviation more fuel-efficient while implementing aircraft into the fleets decarbonization h.4. Establish a long- policies domestically term strategy on and on a regional level climate change for the international aviation sector and the implementation of voluntary carbon offset schemes continues on page 77 Policy Options for Recovery and Sustainable Aviation in Africa 77 MOBILITY AND TRANSPORT CONNECTIVITY SERIES AREAS FOR POLICY, ANALYTICAL REGULATORY, AND POTENTIAL PRIOR ACTIONS OBJECTIVE/GOAL UNDERPINNINGS OPERATIONAL REFORMS i) Modernization of air i.1. Unbundle ANS provider from To equitably Studies have called for navigation services regulator accommodate all harmonization and opening providers i.2. Align ANS priorities with the airspace users’ up of Africa’s disreputably i.1. Establish an ICAO’s strategic objectives operations in a safe, fragmented air space (Ohaeri independent, to implement the Global Air secure, and cost- 2021) financially self- Navigation Plan (GANP) by effective manner sustainable body upgrading and modernizing air for air navigation navigation capacity To increase services (ANS) i.3. Adoption of harmonized market capacity, efficiency, i.2. Form collaborative regulations by the participating predictability, flexibility ventures and countries while ensuring common air traffic interoperability and navigation of systems and services, including harmonization of the upper airspace procedures control centers (at subregions), To promote subregional safety the effective oversight operations implementation of i.3. Harmonize air safety oversight and law and code of a safety management air navigation approach to oversight regulations j) Promote j.1. Participation by experts and To boost efficiency and The commission payable digitalization in the policy makers in relevant resilience of global to travel agents in Africa is air transport sector capacity-building activities supply chain typically about 7% of a ticket j.1. Promote safe and and confirmation that their price. Apparently, the main secure and more knowledge has been improved cause is ticket distribution To expand direct air efficient air cargo j.2. Pass policy instruments (e.g., an problems arising from Africa’s ticket sales and cut movement through agreement, a plan of action, a low internet and credit card distribution costs the accelerated piece of legislation, or another penetration rates (Gavira adoption of digital instrument) to implement 2020). and emerging electronic exchange of trade and technologies transport information, aligned (UNECE 2021) with international standards j.2. Utilize harmonized j.3. Strengthen information sharing electronic and internal coordination among documents and data both national and regional exchange to increase public health and air transport the digitalization authorities, in addition to and efficiency industry groups of multimodal transport, and establish multilateral legal instruments to maximize air cargo’s role in national and global recoveries j.3. Embrace airline digital transformation continues on page 78 Policy Options for Recovery and Sustainable Aviation in Africa 78 THE COVID-19 PANDEMIC AND AFRICAN AVIATION AREAS FOR POLICY, ANALYTICAL REGULATORY, AND POTENTIAL PRIOR ACTIONS OBJECTIVE/GOAL UNDERPINNINGS OPERATIONAL REFORMS k) Restructuring state- Prior actions for restructuring of airlines To facilitate the exit of owned carriers and is case specific and may include: the least efficient firms routes k.1. Provide funding based on a fully time-bound and costed project To refocus plan government’s role k.2. Establish the minimum economic and promote resource scale of activities as part of reallocation to more up-front funded restructuring important basic plan and release funding upon needs and support of successful completion of specific displaced workers stages k.3. Oversee the suitability of aircraft To stop wastage of type and capacity to maximize public money by connectivity and profitability breaking the cycle k.4. Limit the amounts and the of subsides to loss- purpose (“strings attached” as in making airlines the EU) for which funds can be used by recapitalization To restore profitability k.5. Discipline state-owned airlines and funding to operate within funding attractiveness ceilings and to reduce scope of operations and dispose of assets should there be a shortfall. This could be done by creating an asset management special purpose vehicle where toxic/ unwanted assets are transferred to clean balance sheets k.6. Encourage leasing instead of purchasing of aircraft to minimize debt exposure, and provide more flexibility in case of early termination of contracts k.7. Implement associated scale-down of activities and the sale of non- core assets k.8. Abandon the strategy of annual grants and regular bailouts by restructuring, privatizing, and disposing of, winding up, or liquidating the state-owned carriers k.9. Develop a time-bound suitable plan that ensures the up-front funding of the suitable alternative, including a social plan for staff k.10. Mandate the publication of audited financial statements and build in additional accountability mechanisms Policy Options for Recovery and Sustainable Aviation in Africa 79 MOBILITY AND TRANSPORT CONNECTIVITY SERIES *SAATM Concrete Measures44 „ States shall notify other signatory State Parties to the Declaration of Solemn Commitment that the State’s skies are fully liberalized in accordance with the Yamoussoukro Decision of 1999 and that all restrictions on traffic rights under the third, fourth, and fifth freedoms, frequencies, fares, and capacity for signatory States to the Solemn Commitment have been removed. „ States shall publish, in accordance with their national laws, that they are committed to the immediate implementation of the Yamoussoukro Decision under the terms of the Declaration of Solemn Commitment in line with the AU Agenda 2063 while the Executing Agency shall notify other signatory States. „ States shall immediately constitute their National Implementation Committees for the Yamoussoukro Decision and the establishment of a Single African Air Transport Market, designate a dedicated focal point, and notify the Executing Agency (AFCAC) who shall inform all other signatory States accordingly to facilitate contacts. „ State Parties shall ensure that all national Laws, Regulations, Rules, Policies are in conformity with the express provisions of the Yamoussoukro Decision and notify the Executing Agency of the YD. „ States shall propose to the Executing Agency (AFCAC) at least one airline established in their State for international air services for consideration under the eligibility criteria Article 6.9 of the Yamoussoukro Decision. The proposed airline can also be from another State Party or a multinational African airline in accordance with Article 6 of the Yamoussoukro Decision. „ State Parties shall promote air transport sustainability through safety and security regulatory framework and strict adherence to ICAO Guidance and Policies on taxes, charges, and fees. „ States Parties shall submit relevant air transport data to the Executing Agency in a prescribed format. REFERENCE African Development Bank (AfDB). 2019. “Liberalization of Air Transport in Africa: 2019’s Status and Way Forward.” Infrastructure and Urban Development Department. AFRAA (African Airlines Association). 2020. Airlines Taxes, Fees and Charges in Africa. May-October. Nairobi, Kenya: AFRAA. https://afraa.org/wp-content/uploads/2020/10/Airlines-taxes-fees-and-charges-in-Africa.pdf. AUC (African Union Commission). 2018. Decision on the Establishment of a Single African Air Transport Market Doc. EX.CL/1067(XXXII). https://au.int/sites/default/files/decisions/33908-assembly_decisions_665_-_689_e.pdf. AUC. 2021. “Continental Study on the Benefits of the SAATM and Communication Strategy for SAATM Advocacy.” Addis Ababa, Ethiopia: African Union Commission. European Union. 2020. Aviation Round Table Report on the Recovery of European Aviation. November. https://ec.europa. eu/transport/modes/air/internal-market/pso_en. Policy Options for Recovery and Sustainable Aviation in Africa 80 THE COVID-19 PANDEMIC AND AFRICAN AVIATION Gavira, Mario. 2020. “What Are the Forces Shaping Airline Distribution in a Pandemic World?” PhocusWire, October 1. https://www.phocuswire.com/Four-forces-shaping-airline-distribution. IMF (International Monetary Fund). 2019. “The African Continental Free Trade Area: Potential Economic Impact and Challenges.” Staff Discussion Note No. 20/04. https://www.imf.org/en/Publications/Staff-Discussion-Notes/Issues/2020/05/13/The-African- Continental-Free-Trade-Area-Potential-Economic-Impact-and-Challenges-46235. ITF (International Transport Forum). 2021. Decarbonising Air Transport: Acting Now for the Future. International Transport Forum Policy Papers, No. 94, OECD Publishing, Paris. https://www.itf-oecd.org/sites/default/files/docs/decarbonising-air- transport-future.pdf. ITF (International Transport Forum) and OECD (Organisation for Economic Co-operation and Development). 2015. Liberalisation of Air Transport: Summary: Policy Insights and Recommendations. April 30. Paris: ITF; OECD. Ohaeri, Roland. 2021. “ATM: Is Single African Sky Realistic?” Aviation & Allied Business Journal, August 20. https:// aviationbusinessjournal.aero/magazine-cover-story/atm-is-single-african-sky-realistic/. Schlumberger, Charles E. 2010. Open Skies for Africa: Implementing the Yamoussoukro Decision. Washington, DC: World Bank. https://openknowledge.worldbank.org/handle/10986/2467. Tretheway, Michael W., and Kate Markhvida. 2013. “Airports in the Aviation Value Chain: Financing, Returns, Risk and Investment.” International Transport Forum Discussion Paper, No. 2013-15, International Transport Forum (ITF) and OECD (Organisation for Economic Co-operation and Development), Paris. UNECE (United Nations Economic Commission for Europe). 2021. “Use of digital UN/CEFACT standards in air cargo boosts efficiency and resilience of multimodal transport and supply chains.” Press release, April 26, 2021. https://unece.org/general- unece/press/use-digital-uncefact-standards-air-cargo-boosts-efficiency-and-resilience. Policy Options for Recovery and Sustainable Aviation in Africa 81 MOBILITY AND TRANSPORT CONNECTIVITY SERIES APPENDIX A. TAX AND CHARGES BURDEN IN AFRICA International air travel is highly burdened in many African countries by various charges and taxes. For example, in the Economic Community of West African States (ECOWAS) region, on average, each state collects close to 12 different charges and taxes and some impose a civil aviation safety charge. The combined financial burden of these levies makes the operating environment in the region the most expensive in the world (Figure A.1, panel A). Note, however, that there exists big heterogeneity as the North African and Southern African regions impose much lower burden. Airlines in the ECOWAS region face the highest turnaround cost for long-haul international and regional flights, three times higher than the one they face in the North African or Asian region (Figure A.1, panel B). The East African region imposes the lowest national charges and taxes, about a fifth of Europe where these levies are estimated to be more than US$5,300. FIGURE A.1 • Passenger Charges and Government Taxes Constitute the Biggest Portion of Overall Levies in Africa A. Comparison by Cost Elements International Longhaul Flights $14,000 $12,000 $2,589 $10,000 $8,000 $902 $1,731 $7,637 $6,000 $756 $3,227 $745 $2,591 $5,963 $4,000 $1,812 $1,005 $3,866 $2,854 $931 $940 $663 $2,514 $2,000 $2,044 $739 $1,582 $923 $565 $787 $496 $246 $1,939 $261 $368 $599 $517 $199 $653 $457 $199 $139 $421 $531 $631 $0 $345 $232 North Africa Asia South Africa Europe East Africa Americas Central Africa ECOWAS Airport Infrastructure ATC Security Passengers Taxes B. Breakdown of Turnaround Cost for Boeing 737 $14,000 $12,000 $10,000 $8,000 $6,000 $4,000 $2,000 $0 North Africa Asia South Africa Europe East Africa Americas Central Africa ECOWAS National Regional International Source: Authors’ based on PPIAF Appendix 82 THE COVID-19 PANDEMIC AND AFRICAN AVIATION Note: The y-axis represents the total charges, fees, and taxes incurred by a Boeing 737-800 with a maximum take-off weight of 79.02 tons, carrying 114 passengers (70 percent load factor) and no cargo, landing in daytime at the main gateway airport. The average charges and taxes applicable are broken down between airport infrastructure, ATC charges, security charges, passenger charges, and governments taxes. B. ICAO SAFETY OVERSIGHT AUDITS FIGURE B.1 • Effective Implementation Score of USOAP, by Geographical Region (excluding high-income countries) 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Average of Average of Average of Average of Average of Average of Average of Average of Legislation Organisation Licensing Operations Airworthiness Accident Air Navigation Aerodromes Investigation Services Sub-Saharan Africa (IDA & IBRD) East Asia & Pacific Middle East & North Africa South Asia Europe & Central Asia Latin America & Caribbean Global Average Source: Authors based on data retrieved from Safety Audit Results (database), International Civil Aviation Organization, Montreal, Canada, https://www.icao.int/safety/pages/usoap-results.aspx. C. AIR TRANSPORT PORTFOLIO OF THE WORLD BANK GROUP: SUMMARY45 Air transport is critical to achieving the World Bank’s twin goals of ending extreme poverty and boosting shared prosperity. It plays an important role in accelerating development by fostering economic integration, generating trade, promoting tourism, and creating employment opportunities. It also facilitates integration into the global economy and provides vital connectivity on a national, regional, and international scale. Many small and island developing countries critically depend on a resilient air transport sector to be able to adapt to challenges and devastation caused by climate change. However, in many countries air transport equipment and infrastructure, regulatory frameworks, and safety and security oversight systems are inefficient or inadequate. In view of these challenges and Appendix 83 MOBILITY AND TRANSPORT CONNECTIVITY SERIES to assist clients in establishing a safe, secure, cost efficient, accessible, and reliable air transport network, the World Bank is mandated to undertake the following major activities: „ Operational work through projects and technical assistance „ Economic sector work, research, and knowledge dissemination on air-transport- related issues „ External relations and collaboration with partner organizations „ Internal services (such as the airline advisory service for World Bank Group staff travel). Portfolio size and project highlights With no new major air transport infrastructure projects having been initiated as a result of the COVID-19 pandemic, the overall sector portfolio currently stands at US$851 million (see Figure D.1 for recent trends). Nevertheless, as many World Bank Group (WBG) client countries are facing unprecedented challenges in the new economic environment, current and planned projects will continue to be a focus. In addition, the WBG is responding with non-lending technical assistance, including advisory services and efforts to facilitate the mobilization of private capital for the development of air transport. FIGURE C.1 • World Bank Group Air Transport Portfolio $1,600 15% $1,400 10% $1,200 5% $1,00 0% $800 -5% $600 -10% $400 $200 -15% $- -20% FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 IBRD IDA IFC Growth Source: Air Transport Annual Report 2020, which can be accessed here. Appendix 84 THE COVID-19 PANDEMIC AND AFRICAN AVIATION The air transport segment makes up around 2.15 percent of the WBG’s US$39.5 billion Transport portfolio. The breakdown across the International Bank for Reconstruction and Development (IBRD), International Development Association (IDA), and International Finance Corporation (IFC) is 5.2 percent, 36.4 percent, and 58.4 percent, respectively. The WBG’s FY2020 Transport portfolio constituted approximately 12.0 percent of the WBG’s active portfolio of US$329.2 billion (excluding the Multilateral Investment Guarantee Agency; MIGA). In FY2020, the Air Transport portfolio included a total of 31 lending and non-lending projects or project components through IBRD and IDA, including active and completed projects. The IFC had nine active operations in its Investment portfolio and supported 28 Advisory Mandates. The MIGA provided three Guarantees for the Air Transport Sector. TABLE C.1 Active Air Transport Portfolio across the World Bank Group Source: Air Transport Annual Report 2020, which can be accessed here. Project highlights The WBG’s air transport projects span all regions and cover many parts of the sub-sector, including airlines, airports, air navigation service providers, and regulators. IBRD and IDA Four new aviation investment operations were approved in FY2020, including three Caribbean Regional Air Transport Connectivity Projects in Haiti, Saint Lucia, and Dominica. The development objectives of each of these projects are to (i) improve operational safety and navigation efficiency of air transport and (ii) enhance resilience of airport infrastructure to natural disasters. The project in Dominica was cancelled per the government’s request in November 2020. Another project approved in FY2020 was the Sint Maarten Airport Terminal Reconstruction Project whose development objective is to restore the passenger capacity of Princess Juliana International Airport to pre-Hurricane Irma levels with improved resilience toward hurricanes. Appendix 85 MOBILITY AND TRANSPORT CONNECTIVITY SERIES Three IBRD/IDA lending projects, which were implemented in Kenya, Tonga, and Vanuatu, closed in FY2020 with satisfactory outcomes. For instance, the Kenya Transport Sector Support Project enhanced aviation safety and security standards leading to Kenya meeting safety and security standards set by the International Civil Aviation Organization (ICAO) and the U.S. Department of Transportation. Kenya was granted Category 1 status on February 27, 2017, by the Federal Aviation Administration (FAA) thus allowing direct flights originating from Jomo Kenyatta International Airport (JKIA) to and from the United States. In addition, the capacity of the international passenger terminal destroyed in a fire at JKIA in 2013 was restored with project support through the construction of fully operational international passenger terminal facilities with a combined capacity to handle three million passengers annually. Project highlights in FY2019 include the privatization of 51 percent of Cabo Verde Airlines, achieved under the ongoing Cabo Verde Transport Sector Reform Project, which provided technical assistance for the transaction. In addition, airport infrastructure work for the US$52 million DRC Goma Airport Safety Improvement Project picked up and advanced. The Tonga Transport Sector Consolidation Project was closed with a satisfactory outcome rating based on its achievements, which include attaining the ICAO certification for the Fua’amotu International Airport. Three new aviation investment operations were approved, including the Central Asia Regional Links Program - Phase 3 Project in Kyrgyz Republic, which will support the strengthening of the aviation sector’s safety and service provision to help the Civil Aviation Agency comply with the ICAO’s international standards and recommended practices, as well as to overcome the current blacklist of Kyrgyz carriers by the European Union (EU). In FY2017 and FY2018, major project activities included the preparation of a US$285 million Aviation Modernization Project in Kenya and the additional financing for the Aviation Investment Projects in Vanuatu, Tuvalu, and the Pacific Aviation Safety Office (PASO), which are part of the Pacific Aviation Investment Program (PAIP). PAIP was implemented in Vanuatu, Kiribati, Tonga, Tuvalu, and Samoa. The Shangrao Sanqingshan Airport, in the northeastern Jiangxi Province of China, was implemented during this period with a US$50 million loan with the aim of improving airline connectivity and the environmental sustainability of the development and operation of the airport. IFC Major active projects financed by the IFC include Queen Alia International Airport in Jordan, the Zagreb Airport in Croatia, the Enfidha–Hammamet International Airport construction in Tunisia, as well as Belgrade Airport in Serbia. In addition, the IFC investment portfolio includes Lima Airport in Peru and 14 regional airports in Greece. In addition, IFC is active through the provision of Advisory Services for Kingston Airport (Jamaica), the Saudi airports (26 in total), Sofia Airport (Bulgaria), Podgorica and Tivat (Montenegro), Beirut Airport (Lebanon), and Clark Airport (Philippines). For FY2020, it is important to highlight the Sofia Airport, in which the IFC, as the lead transaction advisor, helped the government of Bulgaria design a competitive and transparent tender for a public-private partnership (PPP)—the first major PPP in Bulgaria in the last decade and the first under the country’s new Concession Act. Appendix 86 THE COVID-19 PANDEMIC AND AFRICAN AVIATION MIGA The MIGA has been involved in the air transport sector in the past through the issuance of guarantees for three airport projects: in Ecuador, Madagascar, and Peru. The MIGA Guarantee provided to Peru expired in FY2020. Advisory Services and Analytics (ASA) The WBG has been a trusted source of knowledge and advisory services funded through Bank Budget, Reimbursable Advisory Services (RASs), and Trust Funds. As follow-up to a well-received RAS in Uzbekistan in FY2020, the World Bank is implementing far-reaching aviation sector reform, including restructuring of the national airline and exploration of a PPP option for the country’s airports. In Bahrain, the World Bank successfully implemented a RAS that developed a road map for regulatory, institutional, and legal framework needed to reform the aviation sector and establish the foundation for private sector participation. Both RASes have also identified areas where the WBG can be of support through its various products, including Investment Project Financing (IPF). In response to the COVID-pandemic-induced crisis, the World Bank has several ongoing advisory services to help client countries build back a competitive air transport sector that meets international, regional, and local demands. Just-in-time advisory services are being provided to clients in Seychelles, Mauritius, and select Southern African countries as the pandemic continues to have a severe impact on their flag carriers. As part of a flagship report on the decarbonization of the transport sector, a study is underway to explore the impact of the COVID-19 pandemic and increasing pressure on the aviation sector to reduce greenhouse gas emissions. It will also identify strategies to promote sustainable recovery of the aviation sector. Finally, the study will assess options for sustainable aviation fuels and explore opportunities for their production in developing countries. Another promising ASA was recently initiated in partnership with the GIF46 to prepare the development of innovative pilot project proposals for Remotely Piloted Aircraft (RPA) usage in the Latin America and the Caribbean (LAC) region. The ASA is analyzing successful existing examples, such as the African Drone Forum (Lake Kivu Challenge) carried out by the Word Bank Transport Global Practice (GP) under the Unlocking Drones for Development Project (P171737) and the Zipline project experience in Rwanda. This review seeks to identify key drivers and market fundamentals for commercial operations while assessing opportunities, regulatory frameworks, market players, and obstacles for developing drones’ applications in the LAC context. Although some countries are exploring the possibility of drone use for delivering medicines and goods, operations are still rare. However, given the COVID-19 crisis, the need for efficient delivery of vaccines to remote regions, such applications for RPA may develop. As a starting point, Guatemala, the Tocantins State (Brazil), and Haiti will serve as pilot regions given their respective government’s interest in exploring this innovative initiative and its potential to benefit future sector initiatives. Appendix 87 MOBILITY AND TRANSPORT CONNECTIVITY SERIES External relations and collaboration with partner organizations, research, and knowledge dissemination World Bank staff members continually represent the organization externally at various air transport conferences and events, notably at the ICAO, International Air Transport Association (IATA), and the Airport Council International (ACI). Notably, the World Bank has been hosting an annual joint symposium with ACI, which is focusing mainly on PPPs for airports. The WBG is also active with several regional bodies such as the African Civil Aviation Commission (AFCAC), Latin American Civil Aviation Commission (LACAC), and European Union Aviation Safety Agency (EASA). Research and knowledge dissemination also continue to constitute critical functions of the Transport GP’s Aviation Solutions Area (AVSA). The FY2021 output of AVSA included several COVID-19-related papers, as well as some chapters of the Handbook for the Development of Air Transport which is currently underway. Due to COVID-19, several international events were cancelled, but the World Bank has been active in those that were carried out virtually, including ones organized by the International Transport Forum (ITF), Organisation for Economic Co-operation and Development (OECD), U.S. Transportation Research Board (TRB), ICAO, ACI, and LACAC. Outlook The COVID-19 pandemic crisis, which has caused the biggest collapse in air travel since World War II, and the pressing need for decarbonization of aviation are central to the outlook of the air transport sector. When considering the future of air transportation, nations around the world need to address its development in three stages: (i) the short-term survival of the industry, (ii) the medium-term restoration of air services, and (iii) the long-term development of a sustainable air transport sector. The sector that was affected the most in the short term was the airline industry. Many carriers had to ground parts of their fleet, and rapidly faced serious cashflow problem. Many governments, especially in developed countries, granted financial support, but in most developing countries public funding is very sparse as there are many competing sectors that require support. When considering support for airlines, two main questions need to be answered positively: (i) Would the carrier’s demise negatively impact connectivity or are there other operators to take over the markets? and (ii) was the carrier profitable before the impact of the pandemic? If the answer to one or both questions is negative, support may not be justified. For the medium term, restoration of air services, the principles of safety and security, financial sustainability, and a competitive environment allowing the participation of the private sector must be implemented. Finally, the reset triggered by the COVID-19 pandemic provides an opportunity for the long-term development of a sustainable air transport sector that should not be missed. The greatest challenge to sustainability of air transport is climate change. While the sector is only responsible for about 2.4 percent of the global CO2 emissions from fossil fuel use, it is often perceived that it is the least involved in mitigating its climate and environmental impacts. Despite the small share of the global CO2 emissions, the growth of the sector’s CO2 emissions was strong—about 32 percent between 2013 and 2018. While the steep decline in air traffic caused by COVID-19 resulted in a reduction in emissions and environmental impacts, it also may jeopardize the aviation-related Appendix 88 THE COVID-19 PANDEMIC AND AFRICAN AVIATION climate and environmental programs and agreements. For example, the carbon price governing the EU’s Emissions Trading Scheme, which includes aviation, has dropped severely, affecting the effectiveness of the program. Equally affected is the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA) where the 2019–20 CO2 emissions level should be used as the baseline to calculate future CO2 emission reduction targets. Finally, the burden for developing countries to address and implement the global mitigation programs of aviation must be addressed as an opportunity to “build back better” when rising from the ashes of COVID-19. Given these challenges, but also the opportunities for the air transport sector in developing and emerging countries, the WBG will continue to support its client countries in the development of sustainable, safe, and affordable air transport services. It will address the short-term challenges by shaping policy measures as well as means of supporting the aviation sector at large. In the medium and long term, the WBG will continue its development support, which includes institutional reforms, capacity building, sector reforms, and infrastructure financing where warranted. To foster private sector participation, financing by the IFC and by the provision of guarantees by the MIGA will be considered. This will be supported by partnerships with the industry, as well as with bilateral and international partners, which include the ICAO, ACI, IATA, as well as with multinational and regional development banks. Appendix 89 MOBILITY AND TRANSPORT CONNECTIVITY SERIES ENDNOTES 1 Airlines also received tax and fee/charges waivers totaling US$2.32 billion since the pandemic hit. Most of this relief came earlier in the pandemic. However, IATA (2021) reports that infrastructure and service costs have increased by US$2.3 billion in 2021, essentially wiping out the wavier. Notable developments in Africa include a 35 percent increase in 2021 by the Ethiopian Air Navigation Service Provider (ANSP) and 38 percent increase in 2022 by the Airports Company South Africa (ACSA). 2 This is relevant as of June 2021, before the relaunch of South African Airways under a mixed ownership scheme. 3 Development Policy Financing (DPF) provides rapidly disbursing financing to help a borrower address actual or anticipated development financing requirements. DPF supports borrowers in achieving sustainable, shared growth and poverty reduction through a program of policy and institutional actions aimed at, e.g., strengthening public financial management, improving the investment climate, addressing bottlenecks to improve service deliv- ery, and diversifying the economy. DPF supports such reforms through non-earmarked general budget financing that is subject to the borrower’s own implementation processes and systems. The World Bank’s use of DPF in a country is determined in the context of its country engagement (see this link for more details). 4 According to a recent World Bank report (World Bank Group 2020), implementing the AfCFTA would boost Africa’s income by US$450 billion by 2035 (a gain of 7 percent). Africa is ambitious with its plans for easier, freer trade, although trading across borders remains challenging in many parts of the continent. 5 While charges are levied to recover the capital and operating expenses of infrastructure and service provi- sions (such as airport and air navigation services) to users (passengers/shippers and airline operators), taxes are imposed to generate revenue for state coffers (Figure A.1 in the Appendix presents tax and charges burden in Africa). 6 From a fiscal standpoint, tax bases in Africa are scarce overall and as such air transport demand does present cer- tain ideal characteristics of a tax base: low price elasticity and highly progressive consumption patterns. From a tax perspective, while the tendency to impose high rates appears balanced, there is a tendency in some countries to tax the sector at rather high rates and in a discriminatory manner which prevents the market from growing. 7 In case charges and fees have been set in contracts (e.g., concessions), they may not be easily amended. But with only 11 percent of African airports with some kind of private sector participation, governments continue to have a decisive role in this matter. 8 Given the nature of demand, especially in the intra-African market, the low price elasticity finding is well founded empirically. Admittedly, there is a price-sensitive customer base, especially in the face of a growing middle class in the continent and increasing number of tourists traveling outside Africa to popular leisure markets. Under the current situation in Africa, given the high prevailing fares, demand is probably less elastic to fees and charges. However, under a more competitive scenario of free access to markets and the proliferation of low-cost services, the relevance of fees and charges would then become an important component of the cost of travel and, there- fore, in the overall demand of air services. 9 This is in contrast to what ACI (2020) describes as the a double-edged sword effect of high income elasticity of air transport demand: “When incomes are growing, the sector is benefiting from it at an accelerated pace, when incomes are falling, as is currently the case, demand for air transport shrinks at even a faster pace than the decline in income, as consumers reorient consumption towards necessity goods (income elasticity between 0 and 1).” 10 Domestic market penetration by country based on data from oag.com. 11 Overview of EU-27 domestic air passenger transport by member states in 2019 (Eurostat 2021). Endnotes 90 THE COVID-19 PANDEMIC AND AFRICAN AVIATION 12 The EU facilitated €5 million for technical assistance to help the blacklisted African carriers improve safety over- sight and efficiency. This amount is, however, insufficient and an “organized” sectoral approach is required. Among the findings of the EU task force: inadequate governance practices were an essential culprit for the poor state of safety oversight of the respective countries’ national aviation sectors. 13 Analysis based on IATA-registered airlines as per 2019 published data. 14 An exception to this is Ethiopian Airlines. In Ethiopia, there is a clear separation between the state’s role and its respective national airline’s activity and accountability, as well as strong safety oversight authority, at significantly higher levels of compliance than ICAO’s recommended standards. 15 These BASAs were defined as restrictive, partially liberal, or fully liberal (open skies) based on the following char- acteristics. 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 air- craft 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 countries’ aeronautical authorities was not mandatory; it was defined as “restrictive” otherwise. 3) Fifth free- dom 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. 16 According to Article 7 of the YD, its provisions take precedence over all previous BASAs signed between African countries. However, so far, the practice has been that individual countries negotiate bilaterally on the basis of the YD provisions, which results in limited openness. Each country has control over the pace and extent of its air transport market openness. That countries still have the ultimate discretion on fifth freedom rights, which are cru- cial to the thin intra-African market, has resulted in a “limited open skies regime” in Africa (Schlumberger 2010; Abate and Kincaid 2018). 17 Benin, Burkina Faso, Cabo Verde, Ghana, Lesotho, Mozambique, Niger, Republic of Congo, Rwanda, Togo, and The Gambia. 18 Benin, Burkina Faso, Cabo Verde, Ghana, Mozambique, Niger, Republic of Congo, Rwanda, The Gambia, and Togo. 19 Fifth freedom rights would allow another country’s airline to pick passengers and drop them off in a country other than its own. 20 See the European Commission’s website at https://ec.europa.eu/transport/modes/air/internal-market/pso_en. 21 The 14 African countries where governments have provided support to the airline industry include Angola, Burkina Faso, Cameroon, Cabo Verde, Egypt, Côte d’Ivoire, Kenya, Mauritius, Morocco, Nigeria, Reunion, Rwanda, Senegal, and South Africa. 22 It should be noted, however, that owing to its pre-COVID-19 woes, Kenyan Airways was ultimately loaned US$101 million in 2020, which followed a US$192 million state loan in 2019. The Kenyan government has lent approxi- mately US$474 million to Kenyan Airways over the course of the past three years. Total bailouts during 2017–21 have now reached US$875 million. 23 This section draws from Abate, Christidis, and Purwanto 2020. 24 Note that countries rarely offer cabotage rights for foreign airlines to operate in their domestic markets. In the lib- eralized market of the EU, the “domestic” market is essentially the whole internal market across member states. In spite of this, in many countries, domestic travel is cross subsidized by international operations, meaning that they are provided at yields below cost of operation. 25 Airlines have used several strategies to circumvent these rules, including the creation of global alliances and the acquisition of minority stakes in other airlines to build global connectivity and to gain market access, which can later serve as a prerequisite to a commercial partnership (O’Connell and Bueno 2016). Endnotes 91 MOBILITY AND TRANSPORT CONNECTIVITY SERIES 26 Another recent example is Etihad Airways, which in recent years has bought minority stakes in several smaller air- lines, including Air Serbia, Air Seychelles, India’s Jet Airways, Virgin Australia, and the Swiss-based Darwin Airline. While some of Etihad’s ventures have been successful, e.g., Air Serbia, there were a number of high-profile fail- ures, including the recent insolvency of Air Berlin and Italy’s Alitalia (Wober 2017). This implies that strategic part- nerships have their limits when an airline has fundamental problems that are difficult to solve regardless of the size of capital injection. 27 The idea of competing regional airports is unlikely in Africa where, except in Johannesburg, South Africa, where there are two airports [Lanseria International Airport (HLA) Johannesburg - OR Tambo International Airport (JNB)], there are no airports with competing catchment areas. 28 Notwithstanding the central role of governments, it has been well documented that in a regulatory environment that ensures competition, a higher level of private and foreign ownership provides management with greater incentives to cut costs and enhance incentives. Whether privatization is superior to public ownership on economic grounds, however, depends on the extent of the market power controlled by the privatized firms (Winston 2013; Roland 2008; Vickers and Yarrow 1991). And even under competitive market conditions, government ownership is not inherently less efficient than private ownership. The existing evidence suggests that competition is the key to efficiency rather than private ownership per se; in markets with monopoly elements, the major factor that appears to be at work is regulatory policy (Estrin and Pelletier 2018; Oum, Adler, and Yu 2006). 29 Lewinsohn (2005) asserts that having a well-functioning transportation system that can move people and goods smoothly and quickly to wherever they are valued more provides a type of public good. 30 In many other economic activities, private sector businesses will allocate resources efficiently in response to prices determined in competitive markets. In such markets, the government should not be providing subsidies or other aid to support a particular kind of economic activity in order not to distort the signal provided by market forces. 31 The degree of financial burden on the airlines post-COVID-19 will be so immense that many will not be able to afford debt services (even at the current extremely low interest rates). This is before any consideration of assess- ing the capability to return the principal. 32 Even in the liberalized and open aviation markets of the EU, countries are largely left to their own devices to maintain appropriate air services on (domestic) routes which are deemed vital for economic development (see the European Commission’s website at https://ec.europa.eu/transport/modes/air/internal-market/pso_en). The European Commission’s regulation allows member states to restrict access to such routes to a single carrier and compensate its operational losses on the condition that the operator is selected via a public tender at Community level. There is a call now, as part of an EU-level policy response to the crisis, to broaden the scope of PSO routes to allow many more intra-European cross-border routes (European Union 2020). 33 Another option for PSOs is to bid them out as negative subsidy concessions, to introduce some competition and avoid propping up an ailing state carrier. These vehicles have been used with some success in other infrastructure sectors (e.g., rural telecom). That said, in most African countries PSOs are currently conducted via national carri- ers without much of an explicit framework. The issue is rather complex, especially if the rules were to apply across countries, since PSOs are limited in scope and apply in domestic markets only for the most part. The PSO issue is an area where more analytics are needed to design the best strategy. 34 Altogether, for an effective PSO program, the following elements are crucial: a route network analysis that con- siders any possible viable substitutes for air travel, analysis of connectivity gains due to potential PSO routes being put in place, market analysis to determine what PSO options are possible and if/how the market for specific routes should be constrained, and based on best practice, development of a PSO program to ensure costs/unin- tended consequences are minimized (i.e., consideration of periodical reviews, sunset clauses, etc.). Endnotes 92 THE COVID-19 PANDEMIC AND AFRICAN AVIATION 35 Development Policy Financing (DPF) provides rapidly disbursing financing to help a borrower address actual or anticipated development financing requirements. DPF supports borrowers in achieving sustainable, shared growth and poverty reduction through a program of policy and institutional actions aimed at, e.g., strengthen- ing public financial management, improving the investment climate, addressing bottlenecks to improving ser- vice delivery, and diversifying the economy. DPF supports such reforms through non-earmarked general budget financing that is subject to the borrower’s own implementation processes and systems. The World Bank’s use of DPF in a country is determined in the context of its Country Engagement (see this link for more details). 36 More details on the West and Central Africa Air Transport Safety and Security Project can be accessed via this link. The World Bank Group’s Annual Air Transport Reports contain additional group wide projects and activities here. A summary of the 2020 annual report is presented in Section C of the Appendix. 37 The main aim here is to facilitate merger with another local carrier, merger with another regional carrier, and/or franchise (outsource) the national flag carrier branding. 38 These include wet lease, codeshare, Interline, block space, etc. 39 The need to connect people and markets is part of national policies in different territories. The existence of remote areas, that is those that under strict market criteria would not be transport supplied due to a lack of com- mercial profitability, has led to the development of different public policies aimed at supporting air connectivi- ty in regions where commercial airline operations are not viable. Such major programs include the United States Essential Air Service (EAS) program and Europe’s imposition of PSO air services, which are nationally funded and intended to increase access to remote areas. 40 Ten of these were SAATM members (Chad, Central African Republic, Democratic Republic of Congo, Eswatini, Guinea, Guinea-Bissau, Lesotho, Liberia, Sierra Leone, and Zimbabwe) while 11 were not SAATM members (Burundi, Comoros, Djibouti, Eritrea, Libya, Malawi, Sao Tome and Principe, Seychelles, Somalia, South Sudan, and Western Sahara). 41 The sphere of operations is divided into three separate responsibilities: air navigation services, airports, and airlines. 42 These include recent projects in Kenya, Nigeria, Tajikistan, and Uzbekistan where the recipient has satisfactorily implemented restructuring of the aviation industry for the separation of airport, airline, and air traffic control func- tions in accordance with the plan set as part of loan disbursement. 43 This could address critical binding constraints and serve as an indirect support to airlines for recovery: 1) acceler- ate the adoption process of the new law on a state-by-state basis to enable a competitive and sustainable sec- tor in the long run and 2) support countries that provide temporary relief from fees/charges/taxes to airlines as a COVID-19 pandemic-related support to the sector. The global support for airlines, which has surpassed US$200 billion, includes such relief for airlines, but very few in Africa have provided it. In fact, some are even increasing charges/fees as the level of traffic goes down. 44 The Concrete Measures are a set of recommendations outlining the critical elements toward SAATM imple- mentation. The first set of eight SAATM Concrete Measures were formulated following the Declaration on the Establishment of a Single African Air Transport Market [(Assembly/AU/Decl.1(XXIV)] in 2015. During the Fifth Ministerial Working Group (MWG) meeting held in Cabo Verde in February 2019, it was noted that some SAATM states were reluctant to honor their commitments with respect to the implementation of the Concrete Measures. As a result, the above set of seven Concrete Measures were introduced and adopted. 45 This section draws from the Air Transport Annual Report 2020, which can be accessed here. 46 Global Infrastructure Facility (Trust Fund). Endnotes