Airlines gear up for mergers as competition bites

Financial Standard

By Jackson Okoth

The African Airlines industry is gearing up for a new wave of consolidation as operators seek ways to sail the financial storm suffered by most of them last year.

The Nairobi-based African Airlines Association (Afraa) says through mergers, airlines would be able to expand into new markets, save costs and avoid competition from outside the continent.

Afraa outgoing Secretary General Tewodros Tamrat says the pan-African airlines association would lobby States to develop the legislation that facilitates consolidation of the industry.

"Consolidation is important for airlines to continue offering attractive services, reap economies of scale and to compete against the influx of mega gobal carriers," he says.

Rough skies

The envisaged consolidation would entail mergers or acquisitions, strategic partnerships and joint ventures. Kenya Airways took Precision Air under its wing in 2003 after its bid for Air Tanzania failed. The local management, which remained in place despite the acquisition of a 49 per cent stake in the carrier, helped the Tanzania’s largest private-owned airline navigate the sometimes rough political waters of entrenched resource and commercial nationalism.

According to Precision Air Group Chief Executive Alfonse Kioko, the growth of what is arguably the most successful business partnership is testimony that small and medium sized airlines can partner not just to survive but to also post profits.

The Tanzanian airline group is now gearing up to raise capital in support of its aggressive expansion plans and further enhance its presence in Africa.

Tamrat said Afraa would move to convince stakeholders about the benefits of consolidation such as airlines that often resist consolidation for fear of losing jobs and African States that fear losing the national identities of their airlines.

He said the small and medium sized airlines that may experience challenges of being accepted as partners by the larger airlines need to be encouraged to consolidate with their counterparts.

"However consolidation with counterparts must be undertaken with the participation of the private sector to bring the necessary business and entrepreneurial expertise and financing," Mr Tamrat who spoke on the sidelines of the Afraa 42nd Annual General Assembly in Addis Ababa, Ethiopia last week added.

The resolve by Afraa to push its member airlines to consider consolidation comes at a time when consolidation continues to be the name of the game for many of the world’s biggest carriers, following a dire couple of years for the airline industry.

So great were the losses last year, that it now seems mergers are the only way to ride out the financial storm.

In the US, United Airlines are merging with Continental to form the world’s biggest carrier while in Europe, British Airways has taken the plunge, joining up with the Spanish flag-carrier Iberia.

And that is not the end of it for BA-Iberia, which is also seeking regulatory approval for a looser tie-up with American Airlines.

Speaking during the opening session of the African airline’s assembly, the Ethiopian Airlines Chief Executive, Ato Girma Wake deplored the continuing penetration of foreign companies into the African market, which he said, would make small airlines already too weak to withstand competition, even more fragile.

Currently, non-African carriers dominate air transport to and from the African continent. For instance, the German Lufthansa Group has about 220 flights a week to 33 African destinations.

Continental growth

Several Middle Eastern and Asian carriers like Emirates, Qatar, Turkish Airlines, Air India and Cathay Pacific fly into the continent. China Southern and China Eastern Airlines have operations into Africa, which are expected to expand in the future while Delta Airlines has continued to increase its operations on the continent.

The Afraa annual general assembly meeting under the theme "Adapting to Survive and Prosper" last week deliberated on recent trends in the aviation industry and plan on repositioning African airlines for growth and success.

Wake said megers would generate economies of scale, help negotiations on fuel, computer equipment and service on land.

Mr Tamrat said African airlines needs know that ‘small is no longer beautiful.

"If an airline is to survive and prosper in this 21st century, it must aspire to grow and collaborate with other players in the industry," he added.

Wake, who is also the outgoing Afraa president also said whether they consider themselves small or major, African carriers, are all waging a battle for survival in a context of hyper-domination of the continent’s skies by non-African carriers.

He said given the magnitude of challenges, African carriers need to define a bold vision of unity if they are to survive and prosper in the coming years.

"Unless we are able to forge and implement a vision of real unity, our industry will simply wither away in the coming years and with it, the critical medium for the fulfilment of the aspiration of the people of Africa to move and trade freely across the continent", said.

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