fbpx

African Airlines Face Bankruptcy Without Government Bailouts

Arican airlines face bankrupcies without government bailouts
Spread the love
Advertisements

As the Covid-19 pandemic continues to decimate air passenger numbers, many African airlines risk bankruptcy.  Governments across the continent currently lack the financial resources needed to support their national carriers.

In April, Air Mauritius was the first African airline to enter voluntary administration as result of the crisis. Meanwhile, South African Airways (SAA) has been in a form of business protection since last December. British Airways’ South African franchisee Comair filed for business rescue in May.

The secretary general of the African Airlines Association (AFRAA), the continent’s industry said, airlines are under pressure. He further said if nothing is done by early July many African airlines will go insolvent.

Most airlines were already in financial turmoil before Covid-19. The loss of virtually all passenger traffic due to widespread lockdowns has aggravated this trend. Traffic volumes reduced by 45% in March, 86.4% in April and 90.3% in May leading to a total estimated revenue loss of $8.1bn in 202. If this continues, most airlines will need to source external funding or risk going bankrupt.

Recovery rate for the Airline Industry

Though industry stakeholders are hopeful that modest traffic will resume in July, the sector may take far longer to recover. AFRAA estimates that traffic volumes will not return to pre-Covid levels until 2022. It has however predicted a 40% recovery in Q3 and 70% in Q4 of this year.

The lack of passenger revenues is bad news for airlines that must continue to pay fixed costs such as staff salaries, aircraft maintenance, aircraft leasing costs, aircraft orders and debt servicing.

In March, Kenya Airways (KQ) CEO Allan Kilavuka announced an 80% salary-cut and introduced unpaid leave for non-essential staff. Also, IATA  says around half of Africa’s 6m aviation jobs are at risk of being lost should airlines fail to secure bailouts.

Yet aside from reducing aircraft orders and staff overheads, airlines are struggling to reduce costs. Ethiopian Airlines CEO Tewolde Gebremariam said that the airline currently spends around $144m each month on fixed costs including the maintenance of 125 planes, the largest fleet in Africa. 

Big players like SAA and KQ must also make regular debt payments to a variety of creditors following earlier bailouts. South Africa’s national carrier has racked up more than $3.9bn in debt since 1994. This huge amount of debt has led to a bailout proposal by administrators of $1.2bn in June. The lion’s share is directed towards repaying creditors including commercial banks and the National Treasury.

Meanwhile, KQ has requested a $70m bailout from the government to help the carrier cope with revenue loss during Covid-19. Kenya’s national carrier had last year received $50m in financial assistance. This is despite having $2bn of debt restructured in 2017 during a failed turnaround strategy.

Why Bailouts are needed

While governments and taxpayers are hesitant to pile more funds into chronically unprofitable ventures, organisations like AFRAA and IATA have repeatedly called on African governments for decisive action.

Advertisements

Senegal’s provision of $128m to its tourism and air transport sector is one of the few examples of public support in Africa. Rwanda’s government increased the allocation in the national budget to RwandAir from $127m to $152m. Yet most governments simply cannot afford to support a sector which requires large amounts of capital and promises little in the way of immediate return. More than 35 African countries have requested $13bn in emergency assistance from the IMF since the outbreak of Covid-19.

Related: Tanzania – Fastest Economic Growth in East Africa

The airline industry has received little support as policymakers prioritise key sectors of the economy and the health response. Advocates of the airline industry argue that governments must see aviation as a long-term investment and one which is critical to rebuilding battered economies.

France recently announced it would pump $16.9bn into the national carrier Air France and airplane-manufacturer Airbus. In Germany, the government swapped $8bn for a 20% stake in the privately-owned airline Lufthansa.  

Multilateral lenders have also acted as key sources of funds in the past. Afreximbank, Africa’s trade finance institution, welcomed engagements from airlines under its Pandemic Trade Impact Mitigation Facility (PATIMFA), during a webinar hosted by AFRAA, IATA and the United Nations Economic Commission for Africa (UNECA). The African Union is working on establishing an aviation recovery fund under a High-Level Task Force.

Making hard choices 

Yet aside from this, Africa’s multilaterals, like national governments, face capacity limitations and must make hard choices about where to invest. The only option remaining for African airlines is private capital, either as debt or equity.

Virgin Atlantic is currently seeking more than $500m from private creditors including US hedge funds and UK private investment firms. This is extremely unlikely in the African context due to political interference in many airlines and the lack of profitability.

“In South Africa we have a law that South Africans must hold the majority ownership, which limits foreign investment,” says Linden Burns, managing director of communications firm Plane Talking. “Foreign investors are going to want a stake. Why would I invest if I don’t get the same voting rights?”

Ethiopian Airlines is reportedly looking at buying a stake in both Air Mauritius and SAA. Its CEO has however denied these claims, saying the airline is only looking to help with technical operations.

Therefore, the only solution for most African airlines is public support. As the pandemic continues the calls for government bailouts grow louder as every day without passengers leads more and more airlines to the brink of collapse. 

Advertisements