Thinking about aviation infrastructure in Africa
Air travel in Africa can be notoriously difficult relative to most other parts of the world. Tickets are significantly more costly for similar flight times and distances. The historical reasons for this air travel difficulty in Africa are numerous. From governments which restricted market access for private participation while trying to protect inefficient state-run airlines, to the requirement for difficult and costly agreements to expand to new destinations. The difficulty in air travel also has other unforeseen costs most notably in reduced links between countries, lost trade and investment, reduced tourism, and the associated jobs that are not created. Notwithstanding these challenges, the continent is witnessing a steady growth in its air traffic. According to the 2017 passenger traffic results released by International Air Transport Association (IATA) in February, African traffic rose by 7.5 per cent compared to 2016. Given the rise in air passenger traffic, it will be short-sighted for airports to rely solely on income from airport charges. Lower airfare can be achieved if they paid more attention to what in aviation economics is known as non-aeronautical assets i.e. income from retail, car parks, hotels etc. Sectors such as tourism and hospitality would also benefit.
A 2012 report about South African airports gives real life meaning to this submission. The report reveals that in 2010/11, non-aeronautical revenue grew by 22 per cent to $185 billion, close to half of total revenue generated by the country’s aviation industry. The challenges of interconnecting flights and opportunities in non-aeronautical revenue, are not news to many governments. Over the last few years there have been renewed efforts to change the fortunes in Africa’s airports through concessions and public-private partnerships. These efforts would be a win-win situation at best. If the passenger numbers rise, necessary investments will need to be made to expand and improve Africa’s air transport infrastructure. This will require investments not just from governments but from the private sector as well. It is in this context that the Airports Council International (ACI) Africa hosts its annual conference. This year’s conference is appropriately themed “Business Transformation and Sustainable Development of African Airports” and amongst other things hopes to tackle key questions with regards to investment, safety, and environmental concerns around air infrastructure. Mind you, one key factor behind the higher costs of tickets in Africa is the relatively small number of passengers, the costs of airport infrastructure, and the difficulty in attracting long term private sector investment.
Indeed, if a few passengers have to indirectly pay for infrastructure built using short term financing then the burden can get quite large given that more of the costs will need to be included up front in ticket prices. For instance, a $250m airport terminal which handles one million passengers a year and is financed with a ten-year facility that charges eight percent per year will result in an added cost of about $36 per ticket for the financing repayments alone. Increasing the facility to 20 years reduces the impact per ticket to about $25 per passenger even at the same interest rates. This will of course reduce ticket prices which should positively influence passenger numbers, triggering a virtuous cycle. The key strategy for private sector investment therefore, involves lengthening the financing terms for airport infrastructure. Longer term financing implies lower ticket costs as infrastructure costs are more spread out. Accessing long-term financing will however require institutional arrangements to deal with the risks involved. Extra financing options outside of ticket prices also play a vital role in airport infrastructure financing. That is why issues on business partnerships aimed at improving extant services or creating new revenue facilities and resources would take the centre stage at the ACI 2018 conference. It is hoped that experts and investors meeting at the event would also look critically at the different roles that partners can play in the transformation and development of the industry through business innovation in airport retail and other such avenues. Of course, earlier versions of such meetings have yielded desired fruits, producing some of the current growth experienced in the industry, while creating enabling environments for consolidation. Before the issues of investments, safety standards and environmental concerns had been focus of deliberations, especially as they interface with infrastructure.
As a direct gain from previous ACI conferences, Africa has made significant strides in improving its safety record with regards to aviation. For instance, in 2016 there were no fatal accidents in sub-Saharan Africa according to the International Civil Aviation Organization (ICAO), the region’s best performance in a decade. Certainly, there is still room for improvement. As passenger numbers increase, continued special attention will have to be paid to maintaining and improving the safety records in African aviation. I will be watching out for the panel discussion on tax-free shopping which is the first source of non-aeronautical revenue in most airports around the world. It is a problematic issue as its future is uncertain in many airports given the new national and regional regulations such as the ban on the sale of cigarettes and alcohol or the limitation of transport of purchases by air carriers. I’ll very much like to see how the panelists – Keith Spinks, Secretary General, the European Travel Retail Confederation and Mr Sherif Toulan, Chief Executive Officer, International Duty Free Trading & Agencies – would approach the topic in the light of the present situation and the future outlook of airport tax free shopping which continues to be one of the best supports for airports sustainability.
The conference will hold in Lagos from the 14th to the 20th of April at the Lagos Oriental Hotel and will hopefully result in ideas and solutions for providing aviation infrastructure for an expanding African aviation sector.
Obikili is an economist working in Nigeria and South Africa.
No comments yet