African airlines to lose N$8 billion in 2016….Air Namibia needs bold decisions to improve profitability

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Seeking solutions… Air Namibia spokesperson, Paul Nakawa (left) and Managing Director, Adv. Mandi Samson, at the 72nd IATA AGM in Dublin Ireland. The meeting is being attended by more than 1000 delegates consisting of global airlines and industry experts.

 

Dublin

Air Namibia is not in isolation as a loss-making airline as airlines across the continent are expected to report a combined loss of US$500 million in 2016.

This is in contrast to all other regional airline groupings, consisting of North America, Europe, Asia-Pacific, the Middle East and Latin America, which are expected to report a collective profit of over US$39 billion this financial year.

“African airlines are faced with deplorable challenges by both internal and external forces in terms of negative media reports, especially regarding diseases such as Ebola in West Africa. The African continent is perceived to be one country, hence if such cases are not reported wisely and sincerely all aviation role players feel the pinch on our bottom lines,” said Air Namibia’s Managing Director, Adv. Mandi Samson.

Commenting on the sidelines of the International Air Transport Association (IATA) annual general meeting, taking place in Dublin, Ireland, Samson explained that major contributing factors to African airlines’ continued loss-making include high operating costs, aircraft procurement and the volatility of local currencies against the US dollar.

Samson noted that Air Namibia is hard at work to improve the airline’s financial health. She explained this exercise entails, among others, the consideration of instruments for fuel hedging; attempting to ensure capital productivity by optimally using aircraft and adding ancillary revenue streams for the airline.

She added that improving the company’s performance will entail above cost-of-capital returns to ultimately generate a positive financial return for government as the investor. This, she noted, will further be strengthened by balance sheet repair through debt repayment and other sound financial practices.

She said that Air Namibia’s profitability will further improve with the “bold decision” to replace old aircraft with new, modern aircraft that are more fuel efficient, as well as to buy aircraft rather than have them on lease.

“An aircraft’s lifespan is 30 years and when they are on  lease you pay for 12 years. It will be a noble business decision to have them on the balance sheet of Air Namibia,” she said.

Samson further noted that profitability will also improve through good industrial relations with crew and all workers to avoid a cash flow crunch in times of industrial action. “We also need to be more aggressive in pursuing key growth markets with route expansion strategy,” she explained.

Meanwhile, the massive projected loss for African carriers comes despite continental airline traffic having climbed 9.9 percent and capacity rising to 11 percent in April, 2016. The result of these developments, however, is that the load factor slipped 0.7 percentage points to 66.3 percent, which is the lowest among all the regions. The continued turnaround of African airlines’ traffic and capacity coincides with the expansion of long-haul networks by the region’s airlines.

According to the Director General of the International Air Transport Association (IATA), Tony Tyler, African carriers saw flat-line freight growth in April 2016 compared to the same period last year. Notably, on the back of long-haul expansion, the capacity for African airlines surged by 24.3 percent year-on-year, which is more than double the pace of any other region in the world in recent months.

The huge financial loss by African airlines is actually a slight improvement on the US$700 million that the region’s carriers lost in 2015.

“Capacity growth (5.3 percent) is anticipated to outpace demand growth of 4.5 percent. Carriers in the (African) region continue to confront a plethora of challenges including intense competition on long-haul routes, political barriers to growing intra-Africa traffic, high costs and infrastructure deficiencies. In addition, many major economies on the continent have been hit hard by the collapse of commodity prices, and the impact that has had on revenues and the inflow of hard currencies. Unresolved foreign exchange crises are adding to the economic difficulties facing airlines in this region,” said Tyler during the official opening of IATA’s 72nd Annual General Meeting that commenced in Dublin, Ireland, yesterday morning.

Globally, North American carriers continued to deliver the industry’s strongest financial performance with an expected net profit of US$22.9 billion, which is an improvement on the US$21.5 billion reported for 2015. European airlines are expected to post a US$7.5 billion  profit in 2016, up from US$7.4 billion in 2015, while airlines in the Asia-Pacific region are expected to post a US$7.8 billion profit in 2016, up from US$7.2 billion in 2015.

In the Middle East carriers are expected to post a US$1.6 billion profit, up slightly on the US$1.4 billion reported for 2015 and airlines in Latin America are expected to see a US$100 million profit in 2016 after a US$1.5 billion loss in 2015.

The US$39 billion profit by global airlines (which do not include Africa) is expected to be generated on revenues of US$709 billion for an aggregate net profit margin of 5.6 percent and 2016 is expected to be the fifth consecutive year of improving aggregate industry profits.

“Lower oil prices are certainly helping, though tempered by hedging and exchange rates. In fact, we are probably nearing the peak of the positive stimulus from lower prices. Performance, however, is being bolstered by the hard work of airlines. Load factors are at record levels. New value streams are increasing ancillary revenues. And joint ventures and other forms of cooperation are improving efficiency and increasing consumer choice while fostering robust competition. The result is that consumers are getting a great deal and investors are finally beginning to see the rewards they deserve,” added Tyler during his overview of the global aviation industry at the opening of the AGM.

While world-wide passenger demand continues to grow, expected at just over 6 percent this year, it signifies a slowdown from 7.4 percent growth recorded in 2015. “Load factors are expected to remain high (80.0 percent), but with a slight slip from 2015 (80.4 percent). Yields are expected to fall by 7 percent. Unit costs, driven by lower fuel prices, are expected to fall by 7.7 percent. Overall the passenger business is projected to generate US$511 billion in revenues, down from US$518 billion in 2015,” Tyler explained.  He further noted that the cargo side of the business remains in the doldrums with 2.1 percent growth in demand.

“Airlines are growing their fleets with long-haul wide-body aircraft to meet strong passenger demand growth. This adds cargo capacity to a flat air cargo market. Cargo yields are expected to fall by 8 percent this year. Overall cargo is expected to generate US$49.6 billion  in revenues, down from US$52.8 billion in 2015,” Tyler added.

(Exchange rate used: U$1=N$15.6)

 

 

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