CAPA Middle East & Africa Regional Aviation Outlooks
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Hi, I am Richard Maslen and welcome to this March 2021 CAPA Live presentation focussing on the aviation sector in the Middle East and Africa. Over the next 25 minutes I will look at some recent developments across the regions and look in more detail at a specific market in each. This month we will be looking at Kuwait and Nigeria.
After entering the year with perhaps the most optimistic outlook we had seen for many months, the reality of the past two months has reminded us that nothing can be taken for granted. Just like the coronavirus pandemic arrived with little warning, its changing DNA with increasing mutations, highlights that while we believe we may be finally getting an understanding of the deadly virus, it can continue to surprise us. In many parts of the world new waves of the pandemic has meant that having enjoyed some short-term freedom, stricter rules have again been adopted restricting mobility.
With borders effectively closed and non-essential travel restricted it means that international flying remains severely limited. But, are we really surprised?
Here at CAPA we had warned that the arrival of vaccines would not be a silver bullet. It certainly represents a significant step to the new post-COVID world, but that still remains some distance away. A positive story in a sea of bad news was like a desert island oasis and seduced us into believing life would get better. It will, but the reality is that will remain longer-term and right now things are perhaps tougher then ever for the world’s airlines and the many business sectors they play an important role supporting.
Most airlines have now relaunched operations to some degree but these remain at levels significantly below those seen before the public health crisis. Traffic restrictions in place to avoid continued spread of COVID-19 and further waves of infection continue to blunt international recovery, although domestic travel has shown positive signs of recovery.
The Middle East is particularly impacted by the ongoing international travel restrictions with its largest airlines previously operating networks that spread across the globe and reliant on international passengers.
In 2019, our benchmark year for pre-COVID travel, the Middle East had the lowest share of domestic air capacity, just one in five seats on offer during the calendar year was defined as an internal flight. This compares to a global average of 59% and markets such as North East Asia and North and South America where domestic activity accounted for more than three quarters of airline inventory in 2019.
For some major markets there simply isn’t any domestic air connectivity to support recovery while international travel restrictions remain.
A reliance on domestic flows is not an option for markets such as Bahrain, Kuwait, Lebanon and Qatar, while in the United Arab Emirates (UAE) domestic flights account for less than 0.1% of schedules. For airlines in markets such as Iran and Saudi Arabia it is a different story and they can positively look to maximise activity in their strong domestic markets to bring much-needed revenue into their businesses.
In fact the domestic recovery in Saudi Arabia is already showing positive signs, in frequency terms at least.
CAPA analysis shows that scheduled weekly domestic frequencies in the Kingdom have grown to around the 3,000 departures level. Over the first two months of 2021 that represented around a -23% decline on the same period in 2020 before COVID restrictions hit locally.
In fact, flyadeal CEO Con Korfiatis told me last month in an exclusive CAPA Live interview that the LCC itself was offering schedules with frequencies just 10% lower than this time last year.
He described “ a very robust appetite for domestic travel” and the development of domestic tourism given people couldn't travel internationally. If you haven’t viewed the interview then you can access it on-demand via the CAPA Live platform.
While this Saudi Arabia insight shows positives in domestic markets, the pressure from international travel restrictions is hurting Middle East airlines hard. Latest IATA data for Jan-2021 shows that passenger traffic fell globally, both compared to pre-COVID levels (versus Jan-2019) and compared to the immediate month prior (Dec-2020).
Total global demand in Jan-2021 (measured in RPKs) was down -72.0% compared to Jan-2019. That was worse than the -69.7% year-over-year decline recorded in Dec-2020. Domestic demand was down -47.4% versus pre-crisis levels (Jan-2019) and the -42.9% year-on-year performance in Dec-2020. International demand in January was -85.6% below January 2019, a further drop compared to the -85.3% decline recorded in Dec-2020.
In the words of IATA’s director general Alexandre de Juniac, the data shows that “2021 is starting off worse than 2020 ended”. In the Middle East airlines saw demand plunge -82.3% in January compared to Jan-2019. This was broadly unchanged from an -82.6% demand drop in Dec-2020 versus the year ago period. Capacity fell two thirds, down -67.6%, and load factor declined 33.9 percentage points to 40.8%.
To say that 2021 has not gotten off to a good start in the Middle East, in fact the world, is an understatement. Financial prospects for the year are worsening as governments tighten travel restrictions and IATA has warned the industry will burn through USD75 to USD95 billion in cash this year, rather than turning cash positive in the fourth quarter, as previously thought.
For international flying it takes two to tango and the recovery of Middle East connectivity is reliant upon the freedom of movements from abroad.
Comparing international schedules over the first two months of 2021 with the same periods in 2019 and 2020 shows how deep the chasm indeed is. International flight capacity within and from the Middle East remained down almost two thirds, down -65.0% versus 2020 and down -63.8% versus 2019. On a country basis only Iran, Lebanon and Qatar have recovered half the capacity they had on offer during the first two months of last year.
Interestingly, while the region’s largest markets have been hit hard by international travel restrictions and subdued demand, they are actually performing better than many other major global markets. They are performing weakly, yes, but others are bleeding more heavily.
Last week, CAPA’s corporate travel arm, CTC – Corporate Travel Community completed some internal analysis of the world’s largest international country markets, comparing schedules for Feb-2021 with Feb-2019. It showed that countries in the region have risen the global rankings. Qatar has risen from being the 25th largest international market in Feb-2019 to the 7th largest in Feb-2021, Saudi Arabia rose from 25th to 13th, while, United Arab Emirates rose from 6th to 2nd place.
As we see COVID-19 continues to cast a massive shadow over air travel. Take for example Kuwait.
This is a country without a domestic air network and where despite draconian steps to combat coronavirus transmission, has still struggled with high infection rates per million people.
Kuwait’s initial response has received praise from the World Health Organization, but its geographical and social inequalities, and failures in urban planning, management and policy, have ultimately failed to contain the pandemic.
Cases of COVID-19 in Kuwait are now hitting new highs, over a year since its first cases were recorded and now more than 196,000 cases have been confirmed in the country, albeit fatalities have fortunately remained low. Tough travel restrictions had been in place, but these have been tightened, further impacting the country’s air carriers – Kuwait Airways, and Jazeera Airways.
Jazeera Airways in particular had been flying high ahead of COVID’s arrival. Investing in its own terminal at Kuwait International Airport, and a modern fleet of aircraft serving an expanded network, it was proving a popular option for travellers.
In Oct-2019 it even launched flights to London, ending a British Airways and Kuwait Airways duopoly Its service to London Gatwick represented a key milestone in a city market that had not seen a new entrant in over 50 years. Ahead of its arrival Kuwait Airways and British Airways had provided stable levels of capacity between Kuwait City and London, albeit the former added three additional weekly rotations in summer 2019 just prior to Jazeera entering the market.
What’s more, Jazeera’s growth was being delivered sustainably and profitably – some would say a rare achievement in the airline business. But, the impact of COVID is now clear to see.
In the last few weeks the airline has announced its 2020 results and a net loss of KWD26.4 million Kuwaiti dinar (that’s around USD87 million), an operating loss of KWD20.7 million with annual revenues declining to KWD41.4 million. In the previous year the airline had recorded a net profit of KWD14.9 million, an operating profit of KWD14.2 million and generated revenues in excess of KWD103 million.
Meanwhile, Kuwait Airways marked an important milestone last year, not just in Kuwait, but across the world, receiving the first A330-800s from Airbus… in fact two of them. The aircraft are part of an order for eight of the type, which incorporates latest-generation Rolls-Royce Trent 7000 engines, along with multiple aerodynamic improvements to provide a more efficient aircraft than its older versions.
In Kuwait Airways’ configuration the A330-800neo accommodates 235 passengers, featuring 32 fully-flat beds in business class and 203 seats in Economy while offering a large cargo hold capable of accommodating the generous passenger baggage allowances on offer in this part of the world. The use of Collins Aerospace Super Diamond seat in the business class cabin is nothing innovative – the seat is already offered by a host of other airlines – but represents a notable product upgrade for the carrier. In fact its represents an enhanced offering than that fitted on its 777 fleet that serve the airline’s flagship routes.
With the absence of a domestic market, air service recovery in Kuwait will be reliant on the control of COVID-19 infections within the country as well as international markets.
CAPA’s Air Capacity Projection model for Kuwait shows that international capacity recovery has been relatively flat, but it projects an improving performance from June through November. At its worse, Kuwait’s weekly capacity fell to less than a fifth of levels seen in the corresponding week in 2019, but currently it sits at between a quarter or as good as a third of corresponding 2019 levels. The international capacity recovery in 2021 is projected to reach close to, but not exceed, 50% at best.
Kuwait Airways and Jazeera Airways are already adapting to the changing market, resuming many former routes as markets again open up for international travel, while also adding new routes.
In Jazeera Airways’ case that includes a promise from chairman Marwan Boodai of “several new launches in the coming months” as the airline adds four new aircraft in 2021. These could include Bishkek, Tashkent and Addis Ababa. In fact, Mr Boodai has said the airline is considering ordering 13 narrowbody aircraft and taking advantage of the circumstances to pick up discounted aircraft from orders that were cancelled in 2020. He has said“The high demand for travel to and from Kuwait will always be there and our passengers will want to travel as soon as restrictions are lifted”.
Adapting how we do business will be key to the successful recovery, but that goes far beyond network tweaks to meet demand changes. It could ultimately also be about the building blocks that provide the structure of the business. New thought processes could lead to new directions.
This brings us to the comments of Sir Tim Clark, president of Emirates Airline at last month’s CAPA Live. Now, rumours about some tie-up between Emirates and Etihad Airways had been around pre-COVID, but sensationalist media questions about a merger of UAE’s largest airlines have clouded what have been exploratory discussions on some form of relationship. The question is how has COVID pandemic influenced these discussions, timescales and the nature of any relationship? I guess we may learn more in the coming months.
The CAPA market projection that we looked at for Kuwait is far beyond a simple graph. A fairly intensive model sits behind these numbers, breaking things down in cases by city pair, but certainly at least by country pair. When we look at it from a wider Middle East perspective it shows, interestingly enough, that the region has performed extremely well, at least when compared to other parts of the world.
ICAO may have highlighted last week that the Middle East had the worst performance in terms of ASK reductions in 2020, positively the market has been in recovery from the depths of the initial impact of the COVID virus and projections suggest this performance will continue to improve right through 2021 and onwards. That’s a positive observation to consider as we try to take an optimistic viewpoint of the future.
Now, turning our attention to Africa. We can question what is any different there to what we have been discussing for years, decades even! We know the potential for building a better air transport network across the vast Continent is massive, but is there genuine appetite to deliver this by the stakeholders that will ultimately decide if we can turn years of discussions into firm actions? Has the COVID-19 crisis changed anything?
As I mentioned earlier IATA warns that tepid demand” means global traffic will only hit 38% of 2019 levels in 2021. For Africa, the poor January-2021 performance seen across the world was not replicated across the Continent, although traffic levels were still heavily reduced. African airlines’ traffic was down -66.1% during the month, which was actually a modest improvement compared to a -68.8% year-on-year decline recorded in December-2020. The January comparison is with 2019 rather than 2020 with capacity also contracting -54.2% and load factor falling 18.4 percentage points to 52.3%.
It’s a small positive. African airlines had been pretty much grounded from Mar-2020 to Sep-2020 due to border restrictions, but unlike many other parts of the world there was no aid forthcoming. As a result "the African airline industry has been severely damaged," Ethiopian Airlines Group CEO Tewolde GebreMariam explained at last month’s CAPA Live and he said it has affected African airline industry “much more and much worse than the rest of the airline industry across the rest of the world”.
Africa’s aviation industry hasn’t been in the best of health for a long, long time and the Ethiopian Airlines Group CEO acknowledged this in the interview. In Ethiopian Airlines’ case, a swift switch to freight operations has helped weather the worse of the crisis, plus a strong performance during the 2010s when the carrier was one of the few profitable airlines in Africa, has built a strong foundation for today’s more troubled circumstances.
Africa was expected to bear the brunt of the COVID-19 pandemic. Scientists described it potentially as a “ticking time bomb” for the continent due to the fragility of some countries’ healthcare systems, crowded cities and the existing big public health issues, namely malaria, TB and HIV. In May-2020 the World Health Organization had predicted that nearly a quarter of a billion people across Africa would get infected due to being home to a population disproportionately affected by infectious diseases.
Fortunately, that has not proved to be the case. As we entered 2021 the Africa Centres for Disease Control and Prevention was reporting just over 2.6 million cases and 63,300 deaths across the Continent. That’s roughly one case for every 500 people and much less than levels seen in Europe and North America.
This may be due to lack of testing - we had seen significant spikes in other parts of the world in the autumn as testing become more commonplace – but there is no definitive reason why. Maybe the climate, a younger population, living habits, even previous exposure to pathogens. It could also be due to the fast and strong action taken by governments. After decades attempting to break down borders, restrictions were quickly re-installed. The ongoing fear of COVID-19 means these are becoming even harder to breakdown.
Although most African countries have fully – in a few cases – or partially – in the majority – reactivated their air connectivity, there are still migration restrictions in the vast majority of them. For some though the freeze in air transport activity continues. Algeria is among them and its Minister of Health Abderrahmane Benbouzid stated in Feb-2021 that there are no plans to reopen the country's air borders until coronavirus cases decline "in a sustainable way, after a few weeks, or even months". It is now a year since it introduced its lockdown.
The problem is most of the initial supply of COVID-19 vaccines have been pre-ordered by wealthy nations. This occurred even before the safety and efficacy data was made available. In the 1990s it was six years after antiretroviral (ARV) treatment for HIV/Aids was introduced in the US for it to reach the continent, despite it having a much bigger population of people infected.
The Covax facility, an initiative of the WHO and the Vaccine Alliance, aims to overcome this time lag and equitably distribute Covid-19 vaccines across the world. In Africa it has now started vaccination programmes in Ghana and the Ivory Coast and is said to have 600 million doses promised for the continent’s citizens.
So, where do we currently stand in terms of air service activity in Africa.
Well, looking at capacity data for the first two months of 2021 versus the same period last year we see some strong recovery in domestic markets, although there remains notable variation. Tanzania has a similar domestic capacity offering to the same period last year, while in Algeria and Kenya levels are down less than -10%. The average for the Continent sees domestic capacity down almost two fifths, with the majority of the largest markets performing below this average.
It is a very different story when it comes to international schedules with capacity down more than half year-on-year across the first two months of the year.
Again, there is notable variation among countries. Looking at the ten largest international markets in Africa across the first two months of 2019 we find that three now have an offering above half the levels of last yearEthiopia, Nigeria and Tanzania. At the other end of the scale, Algeria and Mauritius had not recovered 10% of international capacity over the comparable periods. With the exception of the loss of the link from the mainland to St Helena, these were the worst performing international markets across all of Africa.
Africa is a very diverse market and as such there are clear regional variations across the Continent.
Over this same timescale we see that East Africa leads with the recovery of domestic capacity; in Central and Western Africa there is very little difference in domestic and international performance, while Southern Africa trials behind all the other areas and where a new variant of COVID is thought to have contributed to record case numbers in the region.
Among Africa’s largest markets is Nigeria, a country where commercial aviation is a critical element in its transportation system and indeed its economy.
Nigeria has been a positive story in liberalisation terms having deregulated its domestic airline sector back in 1985 and subsequently transitioned from a national carrier focus to one focused on private carriers. The industry though has witnessed a high turnover of domestic carriers with many lasting short periods. Images of derelict aircraft at the nation’s airports had not offered a positive impression of the process.
That start-up process shows little sign of changing.
Last month United Nigeria launched domestic operations using Embraer ERJ-145 equipment; NG Eagle (effectively ArikAir under a new name) has rebranded two of its predecessor’s Boeing 737-700s ahead of its impending launch; while LCC Green Africa, one of the most eagerly anticipated start-ups around the world, continues working towards securing its AOC and beginning commercial flights in the coming months. The airline has 50 Airbus A220-300s on order and plans to operate domestic flights within Nigeria and then build a pan-African network.
Earlier in 2021, domestic airline Azman Air also unveiled plans for an ambitious growth strategy in 2021. The airline intends to add another A340-600, three 737-800s and five regional aircraft to its fleet. Ibom Air, which launched in Jun-2019, is reviewing its business plan to further grow its network.
CAPA’s Air Capacity Projection model for Nigeria shows positive recovery in both the domestic and international markets but that has stuttered as we entered 2021.
Nigeria’s domestic market had been growing strongly year-on-year during 1Q 2020 before capacity levels hit the floor in Jun-2020 and into Jul-2020. Since then there had been positive recovery through to the end of 2020, but a seasonal decline has seen levels fall again. The recovery has gone a little flat, but the model projects an improving performance from the end of this month, peak at a level down just a fifth in Jun-2021, before settling back to around a third down on 2019 levels as we approach the end of the calendar year.
In terms of international activity, Nigeria had a mountain to climb at the midpoint of last year, but a recovery in capacity meant that more than half scheduled seats had been returned by Nov-2020, at its peak reaching over a 60% recovery of 2019 seats through Dec-2020 and into Jan-2021. That is now slipping back below the halfway mark and is expected to slide down to around a third of 2019 levels in Jun-2021, according to CAPA projection. By the end of the year international capacity levels are projected to be back above half of 2019 levels, but actually below comparable levels seen in 2020.
Africa has been slowly breaking down barriers between countries as it seeks to final deliver a long promised liberalisation. While the world has changed around us over the past year, it is still too early to see if Africa’s aviation industry will take the opportunity to reset and adapt. Reverting to normal is no longer a real option and the opportunity to finally reinvent Africa’s air transport strategy must be the future path.
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