Low Cost Carrer in Africa - Which market entry approach?

Before entering any given market, it is important to consider three important factors: where, when and how. Looking at the aviation industry in Africa, there are a couple of ‘’LCCs” at a domestic level i.e Mango Airlines, Kulala, Fly540. However, Fastjet has recently been attempting to create a different approach: a LCC creating a Pan African service within the continent. To a certain extent, they acquired a first mover advantage. However, if one were to start a LCC in Africa, I believe that now is the time and one has to learn from the mistakes of the first mover advantage in order not to repeat it. Also, having a second mover advantage is equally beneficial given as it enables a thorough market analysis.

Like several industries, the aviation industry has experienced deregulation and with deregulation, an increased competition. In some countries, deregulation has reduced the control of national airlines however; there are still airlines that are completely or partly owned by governments especially within the African continent. It is undeniable that government control implies a lack of freedom for airlines to operate adequately.

In view of this, what will be the best market entry mode for a LCC in Africa?

The choice of a market entry strategy is an essential part of international business strategy given as foreign involvement entails looking at several ways of expanding operations in foreign countries. There are five general ways of market entry methods (refer to the picture below).

Pertaining to establishing a LCC in Africa, I believe that in order to be successful and profitable, one could potentially opt for wholly owned subsidiary. Although there are some disadvantages with this strategy, some advantages include the fact that the subsidiary company acquires direct market knowledge, and gets access to local raw materials and labor. Air Asia and Air Asia X could be perfect examples of airlines that feed into each other through this strategy.

Likewise, given as protectionism is a significant challenge in Africa, it will be advantageous for the LCC to have the government’s support by being a subsidiary. For instance, looking at a country like Ethiopia with a total of 46 bilaterals with African states, this could potentially give rise to airport agreements in regards to easing landing rights and taxes within these countries for the wholly owned subsidiary LCC.

Do you believe that there is better market entry approach as a means to establish a LCC within Africa?



Is Africa ready for this innovation?

It is undeniable that Africa’s air travel industry is a fairly small player compared to global industries however; research undertaken by Boeing asserted that the African air traffic is predicted to grow at 5.7% per year, which is significantly faster than the world average of 4.9%. Likewise, as a result of economic growth which led to an upsurge in wealth of African citizens, it could be hypothesised that more people will have the ability to benefit from aviation as, there are approximately 68 million people journeying by air within the continent and Airbus predicted that by 2030, it will rise to 130 million. Additionally, due to occurring improvements in Africa such as political stability and flowing investments in some countries, it could be asserted that Africa is ready... to a certain extent for this kind of innovation. 

 

I'd like to place a special emphasis on East Africa wherein, air transport within that part of the continent has been subjected to remarkable growth both in regards to the number of carriers and markets. Nevertheless, it is essential to note that, when it comes to aviation in Africa, conditions are different across cities wherein, in North Africa for example, there are already well-established airlines such as Tunisair or Royal Air Maroc, whereas, other parts of Africa still cause significant challenges which are not only at a political level.


Establishing a Pan-African network within the continent could create a new outlook of Africa. Therefore, I personally think that Africa could be ready for the establishment of a LCC however, in order to be successful, the LCC will need to develop strategies that will counter continuing pressure on yields such as pricing service to cover costs, carefully evaluate new partnerships and alliances, engage in effective lobbying efforts in order to influence critical government policies, laws, regulations and taxes and finally, reduce cost structures, eliminate inefficiencies, and increase productivity to the greatest extent possible, for instance, technological application


Do you believe that Africa is ready for this kind of innovation?

What could be done to overcome the challenges facing the establishment of a LCC in Africa?

As previously mentioned, a thriving aviation industry is a gateway to economic development given as aviation has increasingly become a key component of globalisation. Looking at the aviation industry in Africa, the establishment of a LCC will be an innovation. But this kind of innovation should mean selecting and executing the right ideas and bringing them to market in record time. This post puts together a combination of all the feedback received from major and influential contributors, in regards to this topic.

As the director at Aerodromes and Contrails Mr. Bassa stated, the purpose of LCCs altogether is to make air travel accessible and affordable for people who can’t afford conventional air travel. And more so in Africa, wherein with the lack of adequate road, rail as well as water borne transportation systems, this has made air travel a commercial and socio-economic necessity.

It is undeniable that establishing a LCC in Africa will be beneficial for the continent and to support this point, the director at Air Transport Research Institute: Tom Considine mentioned that LCCs have the ability to increase the flying market size, which to the least, partially counters the poor infrastructure in some countries. Another benefit of LCCs is that they have the ability to unlock remote places which would otherwise need massive infrastructure development and this would in turn sustain growth in the sector.

Additionally, a LCC in Africa will be advantageous for the continent given as it will be a significant player contributing not only to the economy of the continent, but equally induce social, political and technological developments wherein, it would for instance, generate employment opportunities, and equally stimulate tourism within the continent.

In spite of these benefits, there are however several challenges that could hinder this establishment.

The owner of African Star Airways stated that the concept of a LCC in Africa is still in infancy stage given as most airlines in Africa are state owned and thus do not like competition. The biggest challenges will be bureaucracy and corruption. Mr. Bassa furthermore stated that due to governments’ inability to implement the much need Yamoussoukro Agreement, there is a big obstacle for a truly Pan-African LCC to make air travel affordable to African citizens, who need to travel for both business and leisure. Another obstacle he mentioned was the high airport associated costs that even conventional and foreign carriers object to on a regular basis. Research proves that African airports impose the highest airport taxes when compared to developed countries.

Mr. Hafeni, Air safety investigator confirmed that there is a huge untapped potential for air travel with the growing middle class and, with the high GDP growth rates in most parts of Africa, it is fair to assert that LCCs could revolutionize the nature of air travel in Africa. However, he equally supported the fact that government protectionist policies are a huge hindrance. Likewise, Mr. Laszlo, airline start up manager equally agreed that the main problem with this establishment is protectionism and corruption in several African countries.

In addition, Mr. Blass, aviation, tourism & hospitality executive indicated that a first challenge would be Bilateral Air Traffic Regulations, followed by ground handling, regulations on crew nationality, as well as distribution cost. To support this point, both Mr. Considine and Mr. Hitler Adikiny Olwenge, chairman of Africa & Indian Ocean PBN Implementation task force affirmed that although there are several benefits associated, there are several limitations including but not limited to poor infrastructure such as ANSP, power, fuel, and water; but equally the lack of regulations pertaining to aviation inspectors.
Finally, Mr. Mabonga, Director at System Safety Technics, stated that another major hurdle is in regards to safety given as according to statistics, African Airlines have the worst safety record.

As Mr. Bassa stated, a truly African LCC must be able to fly across Africa with full access to all countries and cities with the ultimate objective to benefit Africa and its citizens.

But how can this be achieved?

I believe that the first step is to fully understand the African culture and market specifications given as like I mentioned in my previous post, the African market is a complex one and it requires a thorough market research if one was to establish an airline within the continent – let alone a LCC. The main recommendation that was agreed on by many, was that, in order to overcome the challenge pertaining to protectionism, it will be an advantage to partner with either local operators or governments given as the Yamoussoukro Declaration and Abuja Protocol failed to be ratified by various African States simply because they want to protect their Flag Carriers.

Do you have any other recommendations on how these challenges could be tackled?

What are the benefits of establishing a LCC in Africa?

As previously mentioned, “the airline industry is the flywheel for the engine of the world’s industry”. This means that the airline industry is regarded as a distinctive and attractive sector. Research indicated that the airline industry is directly, indirectly, and induced, worth more than US$1,000 billion and employs approximately more than 22 million people, transporting and servicing over 1.25 billion passengers every year. The aviation industry is equally at the core of travel and tourism, which is considered to be the world’s largest industry.
So what would the benefits be for Africa?

 

Africa is a vast and diverse continent with a population of over 1 billion, with more than 50 countries and accounts for less than 2% of global airline passenger traffic. Research undertaken by Boeing predicted that African air traffic will grow at 5.7% annually, which is considerably faster than the world average of 4.9%.

Up until now, it is fair to assert that an ''average'' person in the street does not think about travelling by air as it is still perceived as a luxury that is solely accessible to certain members of society. To put this in perspective, the flying tendency in Europe is 2 seats per head, while it is only 0.02 in Africa. This therefore supports the fact that air travel is significantly expensive.

Introducing a LCC in Africa will be beneficial for the continent given as it will be a significant player contributing not only to the economy of the continent, but equally induce social, political and technological developments. 

“Aviation is a machine that will develop the region” - (Van Rex Gallard - Boeing’s vice president of sales in Africa)

Do you have any other suggestions on the benefits of establishing a LCC in Africa?

What are the challenges that could hinder this innovation?

In my previous post, I talked about the different opportunities that could favor the establishment of a low cost carrier in Africa. However, in spite of these opportunities, there are several challenges that could impede on this innovation.

The African market is very unique in the sense that the rapid expansion in Africa's aviation industry is hampered by a number of factors such as:

• Poor record of safety and security 
• Protectionism from governments

According to me, one of the biggest challenges facing African airlines are safety regulations. In effect, the poor safety record which damaged African airlines could significantly jeopardize the launch of a LCC within the continent as; several carriers are banned from European airspace by safety regulators.

In an attempt to operate between African states, it would not be sufficient to persuade the licensing council that the carrier is able to safely and efficiently operate within states. Indeed all traffic rights are controlled in terms of bilateral agreements which date back to the late 1940s and the creation of the UN and the International Civil Aviation Organization (ICAO), in which these bilaterals specify the routes and the frequency of flights each airline serves. These agreements are settled at a government-to-government level and are considered as an artificial barrier to entry, which inhibits supply and consequently, demand. Therefore, breaking this monopoly and obtaining some reform into the system could prove to be beneficial. But how? - Now that is the question.

 

Despite the growing awareness of the role that the aviation industry could play in the development of the continent, the industry is still not the top priority of African governments. Additionally, despite increased liberalization of the African aviation industry and the growing presence of foreign companies, some African governments are still reluctant to open their skies fearing foreign competition could undercut national airlines, some of which are short of commercial viability besides being just symbols of sovereignty.

Are there any other challenges you think can hinder the establishment of a LCC within Africa? Please feel free to comment and share your thoughts. 

What are the opportunities in Africa that could favor the establishment of a Low Cost Carrier?

Africa is renowned for being the world’s second biggest and most populous continent, as well as one of the fastest developing areas for commercial aviation. However, Africa is equally the least developed market in regards to air traffic.

This market could therefore potentially offer several opportunities and challenges.

Having a population of above one billion, research undertaken by Boeing asserted that the African air traffic is predicted to grow at 5.7% per year, which is significantly faster than the world average of 4.9%. Likewise, as a result of economic growth which led to an upsurge in wealth of African citizens, it could be hypothesised that launching a LCC in Africa will enable people to benefit from aviation as, there are approximately 68 million people journeying by air within the continent and Airbus predicted that by 2030, it will rise to 130 million. 

It is undeniable that air transport has the ability to generate growth and economic development by promoting and encouraging trade and foreign investment. However, up until now, the aviation industry in Africa has been designed to business traffic, high network individuals, and tourists, due to the fact that an “average” person in the street does not think about travelling by air as it is still perceived as a luxury that is solely accessible to certain members of society.

Growth in air transportation has directly maps into economic growth due to spillover effects through creation of direct and indirect jobs in the industry and other auxiliary sectors such as tourism. Expansion in air transportation creates market opportunities for local entrepreneurs by creating regional and global economic centers.
In 2010, the aviation industry in Africa supported about 7 million jobs (including 257,000 direct jobs) through the impact on travel and tourism which translated into USD67.8 billion of the continent's GDP.

Africa can maintain the growth of its aviation industry if more and more people can afford to pay for the cost of air travel. However, in a research conducted by Prabu, he studied the tendency of flying and noticed that in Europe, it is 2 seats per head while, it is only 0.02 in Africa. In percentage it is 32% per seat kilometre in Africa, in comparison to 8% per seat kilometre in Europe. This subsequently supports the fact that air travel is significantly expensive and this is one of the several factors that does not permit an average individual in Africa to travel. Thus, democratizing air travel within the continent is aviation's next boundary.

Air travel is essential to the prosperity of Africa as it opens up opportunities that did not exist before. Fostering the African aviation industry may be one of the driving forces of regional integration on the continent. Better connected African countries and regions through a viable air transport industry could be the catalyst that can boost intra-African business, trade, tourism as well as cultural exchange. Developing the aviation industry may also represent an opportunity to mitigate chronic transport problems faced by the 16 landlocked African countries.  

What are other potential opportunities within Africa that could favor the establishment of a Low Cost Carrier within the continent?



Shaping the future of air travel within Africa

Today, innovation is about much more than new products. It is about reinventing business processes and building entirely new markets that meet untapped customer needs. Most important, as the Internet and globalisation widen the pool of new ideas, it is about selecting and executing the right ideas and bringing them to market in record time.

It is undeniable that a thriving aviation industry is a gateway to economic development. Aviation has become a key component of globalisation and with the surge in economic growth on the African continent, accessibility has become very important.

This blog will not only aim at assessing the feasibility of launching a LCC in Africa, but will equally aim to review the means by which the establishment of a LCC in Africa could shape the future of the African aviation industry.

Hope you enjoy reading these weekly posts, and feel free to share any comments, suggestions and your thoughts on this topic.