MARK TIERNEY'S CAFE PROPOSAL

One of the many challenges faced by African airlines is access to cost effective finance.

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AIRLINES ARE NOTORIOUSLY capital intensive, yet the cost of capital and its availability are a serious impediment to airline growth in Africa.

One of the primary problems faced by African airlines in their quest for aircraft finance is that almost all the airlines cannot operate profitably, and thus have weak sustainability, which makes them poor finance risks. The African Airlines Association (AFRAA) says that 2010 was the last year that African airlines managed to return an aggregate net profit.

Continuing losses by airlines may be attributed to the usual challenges such as poor management and high taxes and charges. Further challenges include weak currencies and blocked funds. A compounding factor is that many African countries are landlocked, which makes the transport of fuel to inland airports very expensive.

Mark Tierney, the CEO of Crabtree Capital based in Dublin, makes five points about the current status of the African airline industry:

• The industry is unable to perform the ‘utility’ function seen elsewhere (it is noteworthy that air travel forms part of the spending ‘basket’ for calculating CPI in the USA).

• The inadequacy of current African air connectivity is extremely costly as billions of dollars are lost annually in permanent capital outflow to nonAfrican airlines on the one hand and to non-African suppliers of equipment and capital to African airlines on the other and many more billions are forfeited (invisibly) in terms of foregone economic growth.

• It is both unreasonable and irrational to expect airline managers – answerable to their boards and shareholders - to fix the ‘system’ themselves.

• To compound matters, current policy and practice result in the continued fragmentation of a relatively small market, making rationalisation ever less realisable.