30-Dec-2011 12:36 PM

United Airlines eager to tap expected growth in US-Africa market

Analysis

United Airlines aims to further expand its network in Africa, the fast-growing market it only began serving last year and last month tripled its capacity in with the launch of Houston-Lagos service. But the rate of expansion will likely be relatively slow, reflecting some of the growing pains in Africa experienced by rival Delta Air Lines.

The opportunities in Africa for US carriers are huge given the current small number of flights in the market and the increasing economic ties between the US and several African countries. US-Africa has always been a modestly sized market that has traditionally been served primarily with connections via Europe. Slowly more direct services are opening up and over the next several years new flights are expected to be launched by US and African carriers.

Africa finally became the sixth and final continent to be added to United's network in Jun-2010, when the carrier launched daily Boeing 767 service on the Washington Dulles-Accra route.

Summary

United Airlines aims to expand its network in Africa, a fast-growing market with huge opportunities for US carriers.
United's initial performance on the Washington Dulles-Accra route has been solid, with an average load factor of 67% in the first year.
The launch of the Houston-Lagos service tripled United's capacity in Africa to about 3000 seats per week in each direction.
Delta Air Lines is currently the largest carrier in the US-Africa market, but United's share is expected to increase as it looks to add more flights to the continent.
United is considering launching new routes to Cairo and may also explore codesharing opportunities with Ethiopian Airlines.
The US-Africa market offers tremendous opportunities for US carriers, given the ethnic and business ties between the two regions, but there is still plenty of room for growth in terms of capacity.

US Department of Transportation (DoT) data shows United's initial performance on Dulles-Accra has been solid, especially after the flight was adjusted in late 2010 to a less than daily frequency and a second leg from Accra to Lagos was added.

United's Accra flight records first year average load factor of 67%

The DoT data shows United averaged a load factor of 67% in the first 12 full months of the Dulles-Accra operation. The average load factor was 60% in 2H2010, not unexpected given it was United's first route to the continent, and improving to 76% in 1H2011. United, which consistently served Accra on a daily basis for the first four months of the service, now offers four to five weekly flights to the capital of Ghana.

The Accra-Lagos leg, which began in Dec-2010, was dropped in Nov-2011 as the new daily Boeing 777-200 flight from Houston to Lagos was launched. The new flight approximately tripled the amount of capacity United offers to Africa to about 3000 seats per week in each direction. United is now the third largest carrier in the US-Africa market behind Delta and South African Airways. Delta only began serving Africa in late 2006 but has quickly grown to become the largest carrier in the market.

US-Africa capacity by carrier (roundtrip seats per week): 26-Dec-2011 to 01-Jan-2012

In the US-West Africa market, which accounts for a majority of the flights between the US and Africa, United now has a 30% capacity share. Delta, which also serves Accra and Lagos as well as three other West African destinations (Abuja, Dakar and Monrovia), currently has a 39% share of this market.

US to West Africa capacity by carrier (one-way seats per week): 19-Sep-2011 to 16-Jun-2012

United's share of the West Africa and broader African market will likely increase as it looks to add more flights to the continent. "We are beginning to move into Africa and I think that's an area of the world we will service more and more over time," United CEO Jeff Smisek told CAPA at this month's Star Alliance event in Ethiopia.

But Mr Smisek quickly added the carrier takes a conservative approach to launching new routes. "We see a lot of promise in Africa but we're going to fly where the demand is," he explains. "With high fuel prices airlines that experiment are foolish. We are more cautious and we've got to make sure we can make money on any new route."

Houston-Lagos was a natural route for United-Continental

Mr Smisek says the decision to launch Houston-Lagos was "a logical thing for us to do" as it connects two of the biggest "oil capitals". Continental in Jun-2010, just a month after it unveiled plans to merge with United, initially announced it would launch Houston-Lagos service in Nov-2011 with Boeing 787s. The potential of the route was so appealing that the carrier, after being informed of additional delivery delays for its 787s, decided to go ahead and launch the route with less efficient and larger 777-200s.

The route gave Houston, which is United's largest hub, its first link with Africa. Houston Airport System had long lobbied for a link with Africa, a privilege previously only enjoyed by three US airports: Atlanta, New York JFK and Washington Dulles.

"We are a dynamic hub but always lacked this," Houston Airport System chief commercial officer Ian Wadsworth said at the Houston-Lagos route launch event last month. Mr Wadsworth pointed out that "Lagos and Houston share a lot in common" and Nigeria, the largest and most populous country in Africa, accounts for one third of all passengers to Africa.

The new Houston-Lagos link shortens round-trip transit time between the two cities by at least six hours and significantly speeds up connections between the western half of the US and Nigeria. The Nigerian community in the US, which played an active role in lobbying United to launch the route, is hopeful of more services by United to Nigeria including a non-stop Dulles-Lagos link.

United to re-look at launching Newark-Cairo

United also has been looking at other new destinations throughout Africa including Cairo. In Jul-2010, Continental announced plans to launch service to Cairo from its Newark hub starting in May-2011 but the launch was indefinitely postponed following the political unrest in Egypt early this year. Mr Smisek says Cairo remains "a market that we think will ultimately work for us but because of the crisis we had to postpone that. When the time is right and the demand is there we will revisit it."

As United looks to gradually expand its footprint in Africa, Mr Smisek says the carrier will consider launching African routes from its Newark hub or building on what it has now established at Dulles and Houston with its links to Ghana and Nigeria respectively. "We have a lot of hubs," he says. "Again, where the economy is today, where fuel is today, and where we are today we're going to be cautious. It's the responsible thing to do."

Delta also has yet to reinstate its New York-Cairo service, which it launched in 2008 and suspended earlier this year following the onset of the political unrest in Egypt. Delta's African expansion also was set back in 2009, when the carrier dropped Cape Town after serving the South African city from Atlanta via Dakar for only one year. Delta also has had to repeatedly postpone plans to add Nairobi, which it intended to begin serving in 2009 via Dakar, due to security reasons.

Delta, however, has been able to grow its African operation to six destinations and 44 weekly flights. Delta earlier this month celebrated the fifth anniversary of its African operation, which to date has flown more than 2.5 million passengers.

Delta's groundbreaking African operation now includes several routes

Delta was a pioneer in identifying the enormous potential of the African market back in 2006. Its initial services on the Atlanta-Accra-Johannesburg and New York-Accra routes marked the first time a US major carrier served Africa since the 1980s when Pan Am served the continent.

Delta now operates daily non-stop service on the Atlanta-Johannesburg route with 777-200LRs. It also has daily service to Lagos from Atlanta with A330-200s. Accra also continues to be served daily with four weekly 767 flights from New York and three weekly A330 flights from Atlanta. Two of the Accra flights continue onto Abuja in Nigeria while three of the Accra flights continue on to Monrovia in Liberia, according to Innovata schedule data.

Delta's Dakar, operation, however, has been reduced to only two weekly Boeing 757 flights from New York JFK. Dakar is no longer served from Atlanta and the Senegalese capital is no longer used as an intermediate point for services further into Africa.

Some setbacks, however, are expected given the volatility in the African market and the fact that only a handful of US-Africa city pairs have traditionally had non-stop service. Overall the US-African market offers tremendous opportunities given the ethnic and business ties between the two regions. Yields are typically high on African routes and there are opportunities for US carriers to work with local carriers to develop onward connections. African alliance partners can also play an important role in helping US carriers develop African point of sales for US-Africa routes, particularly given the low internet penetration rates in most African countries.

United already codeshares with South African Airways and EgyptAir. South African now operates a daily non-stop A340-600 service from New York to Johannesburg as well as a daily A340-300 flight on the Washington Dulles-Dakar-Johannesburg route.

EgyptAir operates a daily 777-300ER service on the New York-Cairo route. While leisure traffic between the US and Egypt has plummeted this year due to the political unrest, ethnic travel continues and EgyptAir is benefitting from being the only carrier currently operating non-stop flights between the two countries.

United to consider codesharing with Ethiopian

United may later begin codesharing with the third African member of the Star Alliance, Ethiopian Airlines. Ethiopian, which formally joined Star earlier this month, currently operates a daily 777-200LR service from Washington Dulles to Addis Ababa. This is the only route currently connecting the US with East Africa.

Asked by CAPA if United will look to work with Ethiopian on its Dulles service and potentially new US routes, Mr Smisek responded: "That will develop over time. They are a new member of Star Alliance. Obviously we are doing all we should be doing as base members of Star Alliance [such as frequent flier reciprocity]. As for future cooperation we will look at that. That takes time to develop."

Delta this year began codesharing with Air Nigeria, which has been looking at launching its own flights to the US. Nigerian carrier Arik Air already operates three weekly A340-500 flights between New York and Lagos.

See related article: Air Nigeria re-establishes long-haul routes

Two other unaffiliated Africa carriers also serve the US, Cape Verde-based TACV and Casablanca-based Royal Air Maroc (RAM). TACV operates two daily 757 flights to New York while RAM currently serves New York with a daily 767 flight.

When it comes to partners, United has an advantage in having three fellow Star members in Africa while Delta has only one SkyTeam member in Kenya Airways, which does not fly to the US. No African carriers are members of oneworld, although British Airways' South Africa-based franchise Comair is a oneworld affiliate.

All African alliance members are in south, east or northeast Africa. The lack of any west African members restricts partnership opportunities from North America as the US carriers would have to fly to the distant hubs.

US carriers could look at linking up at a mutual intermediate point, such as Delta and Kenya Airways in Lagos, but non-stop onward traffic in that scenario would be restricted to Kenya. Passengers wishing to reach other east African points would be required to transfer again at Nairobi. This potentially creates upwards of a three-stop journey between the US and Africa: hubbing in the US departure city, transferring at an intermediate point and then hubbing in Nairobi. Alternative one- or two-stop journeys through Europe become far more attractive, and given high intra-African fares, more cost effective.

The existing African carriers in alliances also do not help with US-west Africa traffic flows given the significant backtracking their hubs would entail. Until more west African airlines emerge and gain scale, service to west Africa from the US will be dependent on direct flights from the US or via Europe.

Current US-Africa flights only represent the tip of the iceberg

Combined African carriers now account for just over 50% of total capacity in the US-Africa market. This represents a stark contrast to the 100% market share African carriers enjoyed throughout the 1990s and through much of the last decade.

But there is plenty of room in the US-Africa market for both African and US carriers. The total number of seats between the US and Africa, about 37,000 per week, remains paltry given the potential demand as well as traffic that is currently routed via Europe. To put it into perspective, there are a similar number of weekly seats between the US and the Netherlands even though the Netherlands has a population of about 17 million with a GDP of USD734 billion while Africa has a population exceeding 1 billion with a GDP of USD1.7 trillion that is rapidly growing.