Golden Triangles, Partnerships & Innovation: Africa’s Latest Opportunity

Ethiopian Airlines aeroplane at the Jomo Kenyatta International in Nairobi

January 31, 2019//-Airline alliances, partnerships, joint ventures and equity shares. The ownership structure of airlines are changing rapidly as the industry plans for the next decade of rapid growth fueled by the ambitions of millennials to travel the world.

African aviation has reached a point where change is inevitable and where airline ownership can no longer be restricted by national interest at the expense of regional success.
It is no coincidence that the aviation industry’s recent record of profitability has coincided with airline consolidation in many markets, controlled capacity growth and of course a very advantageous price of oil over the last five years. And whilst some progress has been made the latest forecast from IATA continues to paint a disappointing picture for African aviation.

Despite the most favourable market conditions, as we know, profitable operations remain a challenge across Africa with those few profitable carriers the exception rather than the
norm.

Looking forward, slightly higher oil prices combined with a slowdown in global trade may prove IATA’s forecast for 2019 to have been optimistic across all regions, not least for Africa.
We all know African aviation has to change, but what shape is that change going to take?
Applying a model that worked in another market is no guarantee of success in Africa and,
indeed, applying a previously applied solution will perhaps miss some of the opportunities
that a new progressive Africa provides.

We’ve looked at the opportunities from a few perspectives ranging from potential networks and partners to technology and innovation and have come up with a new take on an old idea!

A Potential Golden Triangle Network
Creating a viable network of regular scheduled services within Africa is difficult and we have
previously commented on the way that even the largest cities across the Continent are not
connected.

The creation of critical hubs in Africa has long been a discussion point but, aside
from Ethiopian Airlines and to a lesser degree Kenya Airways, they have proved difficult to
develop and maintain over time.

Now, cast aside history, forget previous relationships and failed partnerships and instead take a clean piece of paper and look at how the largest airlines in West (Arik Air) South (South African Airways) and East Africa (Ethiopian Airlines) could connect the continent via their respective hubs.

Three powerful hubs combined through a combination of joint ventures providing consistent daily
scheduling through each hub to all potential secondary markets could create a range of single and double
connections that finally creates continental rather than intercontinental connectivity.

In parallel with the continental connectivity each of the respective hubs could also then develop a trans-continental network; the West African Hub connecting to the United States and The Upper half of South America, the Eastern
Hub to the Middle East and rapidly growing Asia market, and the Southern Hub connectivity to Lower South America and Australia with all three Hubs providing services to key markets in Europe.

Perhaps this requires a leap of faith, but then again is this any different to the United Airlines hub operations from their New York Newark, Houston and San Francisco Hubs across North America; the map would perhaps
suggest more similarities than you think; whilst the density of destinations is greater the principle of a three-hub network works well for the airline and the addition of a further hubs in Chicago and Denver could be replicated by the creation of “focus cities” in other African markets.

Potential Partnerships
Creating such a big, bold and brave network would represent too high a risk for one airline. As we’ve seen elsewhere, partnerships are perhaps a more realistic way forward. Early signs of partnerships and equity shares have developed in recent years but in truth these appear to be founded on a mix of politics and opportunity rather than a bigger and bolder perspective of how to create change and address untapped demand.

A suitable example of such a change catalyst has occurred in Latin America when in 2011 LAN and Tam Airlines signed a partnership agreement that brought two of Latin America’s largest airlines together in one entity – LATAM.

Combining management teams, cultural differences, years of competitive operation, network alignment, operating systems and products presented a whole series of challenges as well as short-term costs for two airlines.

It took five years for them to be in a position where they could roll out a single unified brand but in that time codeshares, schedules and operations were slowly combined to create a powerful continental carrier rather than two large but distinctly geographic airlines.

As a result, LATAM now provides a deeper set of connecting market opportunities to their customers whilst at the same time being able to withstand the sometimes dramatic changes in demand consistent with developing economies.

Shareholders also benefit, with the airline expecting an operating margin of between 7-9% this year, significantly ahead of industry averages and other carriers in the region. The partnership was big enough and bold enough
to provide the scale that could deliver for both travelers and shareholders.

Moreover, national interests were not sacrificed for the sake of retaining an airline with a country’s
name on the side. Other partnership options could include strategic investment from a major global airline or
group.

Correctly presented, such an opportunity for a truly continental airline with open access to all markets would be of interest to established carriers in both established and emergent markets looking at the long-term opportunity for African aviation.
Innovative Technology
Correctly aligned, innovation, technology and market opportunity can create a powerful success story. Recent developments in aircraft technology and specifically the development of longer-range regional jets such as the Embraer 190 E-2 with a capacity of some 106 seats and a payload range of 2,850 miles provides state-of-the-art cost effective operating capabilities across the whole of the African continent from key hubs with a capacity that will
match many market demands.

For many years new air services connecting regional cities have been frustrated by either the operation of too much capacity or, ironically, smaller aircraft with less range; both the Embraer E190 E2 and Airbus A220 overcome that
particular issue.

A Golden Moment & Opportunity
For too many years, African aviation has been looking for a way forward. Burdened with politics, surrounded by a history of start-ups and shut downs, frequently adopting concepts that worked elsewhere and challenged by geography.

Being a successful airline and creating successful airport cities has been but a dream for all but the very few. At the end of the second decade of the 21st Century, it may just be that all the factors that are necessary for success are beginning to come together and with a collective effort there could finally be a reason for optimism and a brighter future ahead for everyone.

Aviation Development Conference report 2019

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