Up in the air

African airlines: the good and the bad

A history of government interference in African state-owned airlines has led to inefficiency and unsustainable debt levels, but Ethiopia’s done it differently

The arrival of the Iberia Airlines first
flight from Madrid to the city of Bata in
the colony of Spanish Guinea
(today’s Equatorial Guinea).
Photo: IBERIA AIRLINES

Running an airline is a complicated and expensive business. Pundits argue it is best left to those who know what they are doing. But governments across Africa seem to disagree, with most refusing to relinquish the reins of state-owned enterprises and, in most cases, compromising their ability to succeed. The African aviation space has been dominated by state-owned airlines over decades, and the continent is littered with the carcasses of many that have crashed and burned. Ghana Airways (1958-2004), Nigeria Airways (1971-1993), Zambia Airways (1964- 1995), Uganda Airlines (1977-2001) and Air Afrique (1960-2002) were just some of those that didn’t make it. However, there have been some exceptions. South African Airways (SAA) is one of them. In its heyday, it benefited from regulatory measures that afforded it the pick of routes and it was once regarded as the “high-flier” of African aviation, sought after by passengers travelling around the continent.

Its service was professional and safety record solid. But years of poor leadership, political meddling and overspending have eroded its advantage. By 2019, the airline had pulled back on many loss-making routes, and it was surviving on large taxpayer-funded bailouts. Another exception is Ethiopian Airlines, which has slowly and steadily become Africa’s biggest carrier, serving nearly 60 destinations in Africa, compared to SAA’s 25, and more than 100 cities on five continents. In its 2016-17 financial year, it generated $2.7bn in revenue, up 11% from the previous year. Passenger numbers rose by more than 18%. State ownership has been the kiss of death for most African airlines. National flag carriers continue to be desired in Africa by governments regardless of the cost of running them. Though they are regarded as a proud symbol of statehood to be maintained at any cost, most have ended up in the ashes, brought down by substantial financial losses.

African airlines have also historically battled to compete with European carriers and, since the 1990s, Middle Eastern airlines with deep pockets and an eye on the underserviced African market. In addition to the examples above, a few others have survived. Air Zimbabwe, launched in 1967 as Air Rhodesia and renamed Air Zimbabwe after independence in 1980, has done so against the odds. It has all the hallmarks of failure but the government refuses to let it die. Kenya Airways, founded in 1977, is another. It was privatised in 1996 but has battled to build on its position as a leading African airline, a weakness compounded by the aggressive push into the continent by international airlines, one of which was a key stakeholder – KLM. Its financial woes led the Kenyan government to announce in 2019 that it planned to nationalise the airline to rescue it from bankruptcy.

With SAA cutting back routes and raiding the fiscus to survive while Ethiopian thrives, the obvious question is what are the factors that have led to such divergent outcomes for these airlines? Why has Ethiopian been able to make state ownership work for it and SAA not? There are several reasons to consider. One is history. For all its success today, Ethiopian Airlines had a turbulent past rooted in its country’s challenging political and economic fortunes. Its management spent the better part of the 1980s and 90s fending off aggressive state interference in its operations. Political meddling brought it to the brink of bankruptcy. But, ironically, this experience has served it well in later years, creating a resilient and problem-solving management that remains focused on maintaining the carrier’s hard-won autonomy and allowing it to run the business as a commercial enterprise. The government does, however, retain an oversight role through a presence on the airline’s board.

SAA, state-owned for more than 80 years, had a comparatively easy ride, with guaranteed market dominance until the 1990s that put it well ahead of later competition. But instead of building on this early advantage, it has been weakened by poor leadership and overzealous expansion efforts. Management stability and performance has been compromised by increasing political meddling in later years, as it was with Ethiopian in the early days. Ethiopian Airlines has been constant but careful in its expansion, particularly in fleet upgrades. SAA’s current problems are said to have gained impetus with a big push into the African market in the late 1990s by the then CEO, American Coleman Andrews. The airline spent lavishly on fleet expansion to underpin this expansion plan, and sold off a stake in the airline to Swissair to give it access to Swissair’s then-extensive network within Africa and Europe. But by 2002, SAA had suffered massive hedging contract losses. Moreover, Swissair went bankrupt, forcing SAA to buy back its stake.

SAA also battled to build links with other African carriers. Its attempts to set up regional airline Alliance Air in East Africa and establish joint ventures with Nigeria Airways and Uganda Airlines were unsuccessful. Plans to establish a hub in West Africa never materialised. Ethiopian has always prioritised the African market, with a view to positioning itself as a hub for traffic into international markets. The airline has managed to build solid relationships with other African carriers to pre-empt rivals eyeing Africa and to provide secondary feeder hubs for the airline into the main hub in Addis Ababa. The country, a proponent of greater African unity, has put itself in pole position for a new push for intra-continental trade by providing an ever-growing network of air links. A stable, visionary and disciplined management is another factor that separates the fortunes of SAA and Ethiopian Airlines. SAA has had nine CEOs in the decade from 2009.

The revolving door of CEOs was almost matched by a similar trend in key government ministries such as finance. These changes undermined the potential success of turnaround strategies, which were almost as numerous as the CEOs. Mostly, the executives were brought in from outside the airline, lacking the requisite skills and history to counter political meddling. This was at its height during the 2009-2018 tenure of former president Jacob Zuma, whose close friend Dudu Myeni was appointed chair of SAA in 2012. Myeni presided over years of mounting losses, wasteful expenditure and procurement fraud, becoming untouchable until her removal in 2017. During this period, Ethiopian Airlines was run by experienced hands who had grown their careers within the airline. One of these is current CEO Tewolde Gebremariam who has been there for the best part of 30 years. Since becoming CEO in 2011 he has steered the airline through its greatest period of growth.

Ethiopian Airlines has prioritised cost containment, which underpins its long-term business plan. It has also successfully cross-subsidised passenger services with revenue-generating businesses that support its core operation and give it greater control of costs. These include the establishment of training academies, an aircraft maintenance centre and an in-house catering business, which are now core to its operations. Ethiopian’s cargo operation is now the biggest in Africa. In the case of SAA, cost issues appear to have been overtaken by political expedience. Now its extravagant spending and its inability to implement a sustainable, long-term plan have led it to the brink. Its other services, such as SAA Technical and Air Chefs, contribute little to the bottom line – 2.29% and 0.41% respectively in the 2016-17 financial year. SAA’s freewheeling expenditure on free tickets for civil servants does not exist in the Ethiopian stable.

Moreover, the South African airline is vastly overstaffed but held hostage by militant trade unions that are steadfastly against privatisation and staff cuts. SAA also has growing domestic competition; by 2017 its domestic market share had declined from 98% in its heyday to about 23%. With both SAA and Kenya Airways in trouble, Ethiopian Airlines is likely to continue its dominance of the African skies, but it is not without challenges. One is managing its rapid growth, which is having an impact on service delivery. It also needs to bed down its new African acquisitions and ensure these airlines add value rather than drain resources. But SAA remains a force in Africa’s aviation landscape. It has a fleet of 64 aircraft, 10,000 staff and flies to 25 regional destinations and eight cities outside Africa. Its demise would not be good for already patchy connectivity in Africa and passenger convenience. With a business-friendly president in place and professional ministers now in key posts, SAA’s $2bn turnaround plan may gain some traction.

Analysts have urged the airline to follow the Ethiopian model. Researcher Andrew Barlow, writing for the Helen Suzman Foundation, says: “The lessons for SAA’s shareholder are manifold and yet straightforward and easy to implement. An entirely new board should be appointed with a mandate to operate along business lines. The senior management team should be strengthened by the appointment of people with industry experience, who can develop the strategic vision to take the airline forward as a business. Then allow the managers the freedom to do their jobs. It’s not complicated.” Brenthurst Foundation Director Greg Mills echoes this sentiment. “The [Ethiopian] airline’s formula is quite simple,” he says. “They have a plan, they are cost conscious, and they are constantly exploring new routes and partnerships. In South Africa there is little appetite for doing things properly.”

The lesson Ethiopian Airlines offers is not necessarily how to run a successful state owned business. Rather, it highlights the importance of having a strategic plan and the willingness to implement it without having to pander to political expedience in what is already a tough operating environment.

Dianna Games is a leading commentator on business trends and developments in Africa. She is the author of many published reports on African business and is a columnist on Africa for Business Day newspaper in South Africa and African Business magazine in the UK. She also heads the SA-Nigeria business chamber.

Bribes make bad business

Africa: corruption

The tide of corruption that has swept the continent may be ebbing as governments and Africans are investing more in their own countries

By Dianna Games

The issue of corruption does not often make the headlines any more in Africa, or for that matter in South America. This is not because it doesn’t exist, but because it has become part of the fabric of society. So far as Africa is concerned, it is certainly true that of the 20 countries ranked lowest on the 2015 Transparency International (TI) Index, 10 are from this continent. Chantal Uwimana, the organisation’s director for sub- Saharan Africa, says that 40 countries in the sub-Saharan region had a “serious corruption problem”, including the two economic powerhouses— South Africa and Nigeria. It is common cause that corruption undermines economies, social development and poverty initiatives—and it makes it expensive to do business. It is not just governments that are responsible for corruption in African markets, although they do have the advantage of being gatekeepers and decision makers on issues that are often vital to corporate success in a country. Companies also engage in unethical behavior to stave off competition or to deal with problems in the local business environment. For years, countries such as the UK, Germany and France allowed bribes to be claimed against tax as legitimate business expenses.

The African Union’s high-level panel on illicit financial flows, which estimates that between $60 billion and $80 billion is leaving the continent illicitly every year, claims that 60% of this activity derives from the activities of large commercial companies in the form of transfer pricing, tax dodges, trade mis-invoicing and other such mechanisms. Companies defend themselves by saying they have to build in safeguards against high risk in African markets where they believe their taxes fall victim to state corruption and inefficiency. They have to deal with the consequences of poor and often unpredictable policies, and have to ensure good returns in high-cost, difficult environments. But it does not make business sense for multinational companies to enter into unethical deals in emerging markets. The gains are short term and undermine the development of sustainable economies.

Companies that are known to be corrupt become “marked” in local markets, which compromises their success from the outset and it is hard to get back up that slippery slope. According to the World Economic Forum (WEF) “Global Competitiveness Report 2015-2016”, corruption ranks alongside access to finance and government bureaucracy as the most significant economic and political barrier to business. The risks of unethical practices for business are greater than ever. For one, corporate reputation matters more in a connected and competitive world—and one increasingly dominated by social media and rapid information flows. Increased scrutiny of offshore banking and finance hubs and “Deep Throat” leaks such as the Panama Papers are also brakes on unethical behaviour. Developed country multinational corporations have a plethora of anti-corruption conventions and legislation to adhere to, which limits their ability to behave unethically or at least imposes penalties for such behaviour.

The US Foreign Corrupt Practices Act (1977) and the UK Bribery Act (2010) carry stiff penalties for companies found to have bribed foreign public officials, for example. There are also the UN Convention Against Corruption, the Organization for Economic Cooperation and Development’s (OECD) Bribery Convention, and voluntary initiatives such as the UN Global Compact and the Extractive Industries Transparency Initiative, which aim to make financial flows between corporations and governments in extractive industries more transparent. The WEF’s Partnering Against Corruption Initiative (PACI) is a collaboration of 100-plus companies, which work alongside international organisations, academics and governments to rebuild and foster trust in business and institutions. “Growing social distrust and demands for greater transparency are reshaping relations between society, government and business. Indeed, awareness of and expectations for sound corporate behaviour and governance have never been stronger,” the PACI launch document says.

Companies listed on international stock exchanges have another raft of compliance issues to deal with. Rules drawn up in and suited to developed economies make it difficult for compliant companies to adapt to less developed operating environments in Africa. But for all this, graft is still pervasive across Africa. It has almost become a way of life, especially in countries with corrupt leaders, deep patronage networks and a lax and compromised application of the rule of law. A culture of doing business has evolved around the problems and inefficiencies inherent in many economies, which has elements that are regarded by outsiders as being corrupt. Efforts to fight the scourge from within have been patchy. Many governments have introduced anticorruption initiatives only as a result of donor pressure. This lack of domestic ownership shows, with officials having no real power to net the big fish or being directed by political interests to target specific people.

The entry of new countries to the investor landscape, such as China, has undermined the inroads made by international anti-corruption laws in some parts of the world. It was once the view that it was necessary to engage in unethical behavior to succeed in Africa. This is no longer the case. But it requires planning, knowledge and management of local environments. It also may require patience to deal with much longer turnaround times for services and decisions from state agencies and government ministries, waiting months to get goods out of the port, and other inconveniences. It may even require walking away from a deal or losing business to a less scrupulous competitor. The first principle of fighting corruption is to just say no in the face of an attempt to solicit a bribe or enter into a dodgy deal. But it is glib to believe it is that easy. Ethical dilemmas can be unpredictable and often emerge without notice. Foreign managers, often with little experience of such matters, have to react fast often in complex situations.

To assist them, companies need to become familiar with the potential ethical issues that may arise and decide how to manage these. It is also important for local managers to know how to behave when bribes are solicited. Being affronted or hostile can have implications for the company with the agency or ministry concerned down the line. Building strong local partnerships and strategic relationships within a country, particularly with relevant state agencies and officials that are critical to one’s business, is important. Although many companies prioritise high-level relationships, the most useful relationships are often those lower down the chain. A grey area with regard to ethical behaviour is that of third parties. These tend to be local companies who know how to “manage” their officials and may, without disclosing this, pay “dash” to unlock bottlenecks, source deals or facilitate government business. The definition of such parties is extremely broad and allows a lot of leeway for ignorance of the business practices of these companies. Due diligence of third parties is thus advisable, as is sharing with them the company’s own ethical standards before entering into an arrangement with them.

The payment of commissions for a host of things is standard practice in Africa. But it can be used to camouflage bribes and kickbacks, risk analysts say, so this is another possible red flag. While it is important to be able to deal with issues around ethics and business in Africa, there is reason to be optimistic that things are starting to change. As Africans themselves invest in their economies and create greater linkages with international business, they are putting pressure on governments to do things differently. There is a lot of talk within and among governments about domestic resource mobilisation to underpin development. This is incompatible with corruption, as is the equally popular idea of building sustainable economies that deliver jobs and wealth. As these issues gain more traction, governments will have to change the way they operate. Africa is not without success stories with regard to corruption. There are five African states in the top 50 nations ranked in the Transparency International 2015 Index—Botswana, Seychelles, Cabo Verde, Rwanda and Mauritius.

The key to their success in this regard is a strong message of zero tolerance for corruption and strong leadership, which has prioritised the strengthening of legal and institutional frameworks and sensitising citizens to the need to eradicate graft. Nigeria, coming off a low base (ranked 136 out of 167 countries by TI in 2015), is being led from the front in its new war against graft by its no-nonsense leader President Muhammadu Buhari. Though his campaign has claimed few high-profile scalps as yet, his strong messaging is slowly starting to change the behaviour of state agencies, ministries, local business and citizens. In Tanzania, new president John Magafuli has become a social media hero for his no-nonsense approach to corruption and cutting wasteful expenditure.

He has a strong approval rating from citizens and continues to show up his peers in this regard. There are other examples. Strong leadership with regard to fighting corruption is essential. There is only so much that can be achieved through laws and penalties. Leaders, not just political leaders but leaders across communities, need to play a stronger role in inculcating new value systems within their societies and reactivating positive norms that make it undesirable to engage in unethical practices. This is what will make the difference in the long term.

Dianna Games is the chief executive of business consultancy Africa @ Work and a regular columnist on African issues for Business Day newspaper. She is and a regular columnist on African issues for Business Day newspaper. She is a fellow of the GIBS Centre for Dynamic Markets in Johannesburg.
Forging their own paths

Forging their own paths

Image: Graeme Williams

Is Africa ready for the future? Is the continent ready to tackle the technological disruption and challenges of a rapidly changing world? Importantly, are its young people ready to take up the mantle of change?

Africa’s youth have moved from relative obscurity in political deliberations to centre stage in continental forums and conferences from Cape to Cairo. This new focus stems from concerns about how to educate and employ the millions of young people in Africa and so improve their livelihoods.

There are also concerns around the question of how to counter the potential challenges for social, economic, political and security policy from a large, restive youth population.

Firstly, it is important to note that the gap between modern economies and African markets is growing. Leaders talk about the challenges posed by the fact that some 60% of Africans are under 30 years old, but they seem unable or unwilling to recognise that this has real implications for their countries. This is despite the constant reminders from scenario planners, technology buffs and consultants. A new world is upon us – one in which traditional sectors and jobs are being disrupted by technology and replaced with artificial intelligence and robots.

This trend has been given a name – the Fourth Industrial Revolution (4IR). The term was coined by the World Economic Forum to describe a digital age in which technology is disrupting existing business models and sectors and, importantly, jobs. Meanwhile, much of Africa is viewed as being stuck in the Second Industrial Revolution, with governments prioritising industrial programmes and skills that will be disrupted, and even marginalised, by current technology trends, which present both huge opportunities for tech-savvy young entrepreneurs but also major challenges for employment for millions of unskilled young Africans.

There are pockets of Africa – sectors rather than countries – that have leapfrogged into the Third Industrial Revolution, in which the technologies of ICT and electronics are the drivers of change. Africa’s underdevelopment has provided a clean slate for technological innovation that bypasses traditional models to address longstanding challenges.

Energy is an example. With millions of Africans still far from a power grid, renewable energy innovations are reaching across the continent. An initiative in Kenya, M-Kopa Solar, has in five years connected more than half a million homes to its pay-as-you-go solar solution for rural and low-income households. It is now rolling out in Tanzania, Uganda and Ghana. In another example, the mobile revolution has highlighted the enormous appetite for technology and entrepreneurship among Africans, particularly the youth. Africa has seen the highest mobile phone growth of any region over the past decade.

According to the Mobile Ecosystem Forum, the continent has a subscription penetration (percentage of the population) of 82%, which is expected to reach 100% by 2021. Much of this growth will come from the new generation. This is also increasingly being shown in the banking sector. According to the UN, 12% of adults in Africa have mobile bank accounts as compared with 2% of adults globally.

In Kenya it is as high as 58%. IBM CEO Ginni Rometty has coined the phrase “new-collar jobs” to describe work that doesn’t require a traditional degree but does require high skills levels in areas such as cyber security, data science, artificial intelligence and the cloud. This describes workers who sit somewhere between “blue collar” and “white collar” on the traditional work spectrum. She first raised it in 2016 in an open letter to then president elect Donald Trump, detailing ways she felt Americans could benefit from advances in technology.

The private sector, recognising the potential opportunity – and challenges – of Africa’s demographic, has stepped in, focusing efforts on these “new-collar” jobs. For example, IBM has, with the UN, launched a $70 million initiative to create jobs in Africa, focused on digital literacy. It aims to train 25 million youths over five years, kicking off in five countries – South Africa, Kenya, Nigeria, Morocco and Egypt.

The Rockefeller Foundation’s Digital Jobs Africa initiative offers skills training and linked job opportunities for Africa’s young people. More than 150,000 youths have already been trained and 455,000 connected to jobs. There are many other international initiatives of this kind. But these efforts are not limited to international interventions.

Africans are also coming to the party. A leading player is Nigerian philanthropist and businessman Tony Elumelu, chairman of Heirs Holdings. His foundation is spending $100 million on entrepreneur training programmes in Africa. Africa’s youths are its future and their fate cannot be left to chance, he told Africa in Fact. “Africa’s development will have at its heart young African innovators and their transformative ideas. Only they will create the millions of jobs Africa needs.”

The African Development Bank Group (AfDB) has launched a “Jobs for Youths” strategy to create 25 million jobs over 10 years. African millionaire Ashish Thakkar, chairman of pan-African investment firm Mara Group, is a member of the AfDB’s Presidential Youth Advisory Group. He says it is vital that Africans acquire the right skills sets for the future.

“With artificial intelligence and everything else that is happening, the reality is that what we are training our youth for today may not be relevant in 10 years’ time,” he told Africa in Fact. “So it is important to see how we can create systems and thinking to get them to learn, unlearn, and relearn when necessary.” Similar initiatives are gaining traction. Technology hubs are driving innovation across the continent. According to the mobile operators’ association, GSMA, there were 314 technology hubs in 93 cities across 42 countries in 2017, and the number is growing.

Non-governmental organisations are playing a key role in delivering innovation to communities around Africa. But the initiatives currently in play are a drop in the ocean compared to the need. Meanwhile, the continent’s leaders, who might have been expected to take a lead in such an important matter, appear to be stuck in redundant ways of thinking that have not delivered development over the past few decades, let alone knowledge-based economies.

The continent’s developmental challenges are still enormous. Out of the 37 countries listed in the 2017 Low Human Development category of the UN Human Development Index, some 31 are African. This is what young people stand to inherit. The popular view that rising labour costs in China will lead to millions of low-skilled jobs relocating to Africa is optimistic, given the automation of work globally and the lack of skills and low productivity in Africa.

There is a concern that digital transformation could increase Africa’s income gap even further, given the challenges in education. The new skills and competencies required by 4IR are not being taught in schools in Africa, where thousands of children don’t have classrooms, let alone computers. Connectivity in Africa still trails behind at 21% as compared to the global average of over 40%, and more than 70% in the European Union, according to the International Telecommunications Union.

Rather than stimulating entrepreneurship, policymakers are regulating it. A general lack around the continent of enabling policy in this regard is acting as a handbrake on progress. Governments in Africa don’t understand the integral role that technology can play in an economy, according to Ghanaian Bright Simons, president of digital company mPedigree Network. They treat it as a marginal factor, and fail to see that it is a transformational sector that, properly stimulated, could increase economic inclusion and growth.

Africa is not short of young entrepreneurs with good ideas, ambition, energy and talent, which can be harnessed to drive more inclusive growth. Young people are also impatient for change. As their access to information increases, they will gain more power to hold their leaders accountable, and to push for a new political agenda that will allow them input into the processes and policies that shape their lives.

But digitally savvy young Africans across the continent are mostly being left to forge their own paths through a rapidly changing world. If Africa is to realise and build on the opportunities presented by 4IR, a radical mindset change at the policy level will be necessary. Policymakers should be seeking every opportunity to support, and not hinder, the modernisation of African economies. Young people are increasingly recognising that this is the only way to build a decent future for themselves, and one day, their children.

DIANNA GAMES is the chief executive of business consultancy Africa @ Work and a regular columnist on African issues for Business Day newspaper. She is and a regular columnist on African issues for Business Day newspaper. She is a fellow of the GIBS Centre for Dynamic Markets in Johannesburg.
Attracting capital

Attracting capital

South African political economist, Moeletsi Mbeki © Wiki Commons

 

African states and multinational corporations must trust each other in order to stop illicit financial outflows, and spur growth and development

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