African Airports Need to Expand to Cope With an Ever Growing Market

Kenya Airways

Running an airline in Africa is not an easy task, at least not any more.

Passengers are demanding top-of-the-range safety and service, small old planes can no longer do the job and global airline brands are flying in for a piece of the already busy airspace.

Any African airline which wants to expand its fleet as a way to win the continent’s airspace faces a stiffer challenge in the coming years. Airports can no longer hold the surging traffic while governments dilly-dally in fixing the capacity problem largely due to economic challenges which have hurt funding for capital intensive projects.

Ordinarily, the worst outcome for any airline is that economies slow, currencies become extremely volatile making it hard to plan and oil prices surge.

But now, capacity at airports is dimming growth prospects of airlines: Leading airlines such as Kenya Airways, Africa’s third-largest by passenger numbers have been on an expansion binge but some hubs are increasingly getting clogged

“KQ wants to grow too, but the rights issue to kick start a new round of aircraft purchases is tough to place,” said analysts at Renaissance Capital in a research report on Airlines and Airports in Africa and the Middle East. “Even if successful, the risks are high as competition for travel in Africa is getting stronger and we believe the state of the Jomo Kenyatta International Airport does not make it an obvious hub.”

Most African airports are expected to see an increase in passenger traffic as the continent opens up to the world for business.

The need to expand the airports is highlighted by the aggressive growth plans most carriers have: To increase their fleet and almost double their passenger numbers in 10 years’ time.

Kenya Airways, the national carrier, is this year expected to raise Ksh23 billion ($270 million) through a rights issues that will help it acquire 21 new airplanes in an expansion plan aimed at deepening its routes in Africa and Asia. The 10-year strategic plan, which runs until 2021 should see the airline deepen its presence in China and India with six and five new destinations respectively planned.

Titus Naikuni, CEO, Kenya Airways said an expanded airport would afford the airline more parking space adding that because JKIA is over stretched, security was also at stake. “We are now forced to take additional measures in order to avoid any potential threats,” he said.

His comments came last week when the airline got the IATA Operational Safety Audit and the IATA Safety Audit for Ground Operation certificates following an audit of its operations.

KQ though has been faced with increased competition especially from Middle East carriers such as Etihad Airways, Emirates, Qatar Airways and Royal Air Jordanian, which are opening up more routes on the continent where the Kenyan carrier draws nearly half of its $1 billion revenue.

Part of the problem about Nairobi as a hub is that JKIA handled about 5.5 million passengers in 2010, with the forecast being over 6 million passengers in 2011. The 2010 official figures are double the 2.5 million passengers the airport was originally meant to handle.

But the Kenya Airports Authority (KAA), the parastatal charged with the responsibility of overseeing airports in the country says plans are underway to expand JKIA. By 2013, it is hoped Unit 4 will be constructed helping expand the capacity of the airport to 4.5 million passengers, which, however, is still below KQ’s requirements.

Construction works of a new terminal worth about $500 million, should see the number of passengers that can be handled by the airport increase to 20 million each year.

“We appreciate KQ’s concerns and commit to ensuring the success of this project; We are in negotiations for a loan denominated in dollars from two international financiers,” said Stephen Gichuki, the managing director KAA.

Nairobi also faces stiff competition from Uganda, Tanzania and Rwanda who are also expected to expand their international airports.

Tanzania is planning a multi million-dollar transformation plan of its Kilimanjaro International Airport with an eye to developing it into a regional hub. The move will see all runways, aprons, taxiways and passenger lounges refurbished to offer holidaymakers a hassle-free trip to the northern Tanzanian tourist circuit. Kilimanjaro Airport Development Company has secured a $30 million loan from Netherlands-based firm Orion Grand Facility.

Rwanda’s government on the other hand plans to build a new airport, Bugesera International airport, located 25km southeast of Kigali at a cost of $350 million. It is set to be complete in 2014. The airport will complement the Kigali international airport, which is operating beyond its capacity handling 300,000 passengers a year.

On the other hand, Ethiopian Airlines, KQ’s major rival plans to increase its fleet of 47 planes by ordering an additional 35 aircraft in the next 15 years.

This means that the carrier will be looking to travel more frequently to African airports but it will also call for the expansion and modernisation of Bole International Airport, Ethiopia’s main airport.

Ethiopia’s grand project

The Ethiopian Airport only allows for parking of 19 aircraft but is already increasing the capacity to 44 aircraft at a cost of 1.1 billion birr ($62 million dollars). This will be covered by the Ethiopian Airports Enterprise with the main contractor being the China Road and Bridge Corporation.

The first phase of the project was completed last month and the second should be done by the beginning of 2013.

But Eric Musau, an analyst from Standard Investment Bank in Kenya says: “Even though Ethiopia is challenging Nairobi’s position as the preferred hub, I doubt it will overtake JKIA soon because Kenya is a liberalised economy compared with Ethiopia.”

The capacity bottlenecks come at a time when airlines in the region have begun regrouping as they prepare for what could be the busiest year in East Africa’s airspace.

Precision Air listed at the Dar es Salaam Stock Exchange to fund its expansion plan, raising $7.5 million of the expected $17.5 million, in the October IPO. Rwanda airline, with its $60 million loan from the PTA Bank remains the only other carrier in the region to conclude a financing arrangement in 2011. More airlines are expected to raise the cash in 2012. Tanzania Air is looking at concluding a $500 million financing arrangement with Export Development Canada in early 2012.

Analysts said despite the airlines’ plans to acquire a fleet, their operating performance in 2012 will be pegged on external factors especially the recovery of the global economy and oil prices. Oil accounts for the biggest single cost for airlines. For example, KQ spent $275 million on oil while its total direct costs (aircraft maintenance, commission on sales, oil, passenger services) came to $593 million.

With the airlines expected to have a war chest worth millions of dollars, the battle to control the African airspace promises to be intense.

But the continent’s airlines are not taking the busying airspace alone. Belgian carrier Brussels Airlines for example, is upgrading its operations and launching its first direct flight to the US as it seeks to hold on to its African customers following the recent entry by Gulf carriers into the continent’s airspace.

Brussels Airlines’ global boss Bernard Gustin, said the firm had hatched a three-pronged strategy, part of which involves launching an own service between Brussels and New York, a sector that until now has been operated with code-share partners.

“We see the newcomers coming,” Mr Gustin said in reference to the recent entry into the Ugandan market by Qatar Airways and Gulf Air. “We need to defend our position and we are developing a strategy for Africa.

Since its launch in 2001 after the collapse of former Belgian flag carrier Sabena, all Brussels Airlines flights outside of the EU have been to Africa, a market that has been pivotal to its success.

One of the key reasons as to why air travel on the African continent remains expensive is because most airports charge airlines higher fees compared with others around the world as they look to recoup their investments, airline executives say. Also, the fact that there are fewer international and local planes flying into the airport means those few airlines flying into the airports absorbs most of the costs. This is one reason why Kenya Airways has maintained that its fares are higher on a shorter African route compared with the same distance in Europe.

But as the African airports grow and expand, there will be increased pressure on their management to be moved from state parastatals such as KAA or the Ethiopian Airport Enterprise. The trend across the globe has been for the private companies to come and build the airports though concessions or in Build Operate and Transfer concessions.

For example, Turkish Tepe Akfen Ventures, which manages the Istanbul Airport among other airports in the country, has received contracts to manage airports in Georgia, Tunisia, Macedonia, Saudi Arabia and Latvia.