Why Africa needs a single aviation market — IATA DG William Walsh

International Air Transport Association (IATA) Director General William Walsh in this interview with a group of reporters on the sidelines of IATA’s 78th Annual General Meeting and the just-concluded World Air Transport Summit in Doha, Qatar, discusses several issues affecting the African aviation market. This includes the inability of carriers to repatriate funds and the need for a competitive single market on the continent, among others.

Blocked funds remain a big problem in Africa, as around $1 billion is blocked by 12 African countries. What efforts is IATA making to get the funds released?

Well, I think we’re looking to get those funds out all the time. This has an impact on the market recovery. Because airlines will be reluctant to put capacity in markets where they cannot repatriate their money. And these are factors that I can speak to from my past experience when we look at network growth or additional capacity.

If you can’t withdraw your money, I’m sorry, but you know, it’s just a business decision. You are not going to add any additional capacity to it. And as airlines seek to reclaim their networks, they will focus on markets where they have more confidence. So I think that’s an important factor and it plays against the recovery on the continent. But also, I think it’s unfair to the consumers (passengers) because they won’t have a choice. They won’t get the competition. They will not get the availability of flights that they would have if the money was repatriated properly. So it’s a big problem.

What is IATA’s level of engagement with some of these governments to resolve the issues?

That’s a great, great comment; all we can do is make people understand that it has consequences. The idea that an industry that was effectively heading for bankruptcy due to shutdowns and is still losing huge amounts of money can operate in a country without being paid. This is madness. It will not happen. If governments believe that they will continue to maintain all these international links by carriers who cannot get their money for the work they do, it will not happen. So you are right, not all countries reacted the same way, but airlines are not rich. We don’t have a lot of money; we are not profitable at the industry level. And whatever people do to undermine the recovery of the industry is just going to have a direct impact on the services they contribute to.

How does the government approach the issue of exchange rates?

I’ll be honest, it’s impossible to resolve because these differences have been there forever. And they’re not going to line up easily. So the way the rates are calculated is on a different basis. So honestly, I don’t see a simple solution to this. It would be great if we could be aligned or more closely aligned. But you are right in some cases; the difference is significant and has a major impact. But I don’t see a simple solution to this.

Do you think IATA can probably give a margin of error more or less like central banks?

I do not think so. No. No, I do not think so. I am actually concerned about the surge of the Jet A1, which is wreaking havoc on airlines, not only African airlines but also global airlines.

Could you tell us how the surge of the Jet A1 is impacting the African airline and how to mitigate it?

There are two impacts. First, the price of Brent base oil, the benchmark we use, which is very much influenced by what’s happening in Ukraine and the Russian oil sanctions. So that pushed up the price of oil significantly. The second aspect is what we call crack spreads, a barrel of Brent and a barrel of jet. And that reflects the margins that refiners are making. There has been a lack of refining capacity. This is partly because there was very little demand for jet aircraft during the pandemic, obviously because the volume of activity had declined. Refiners have therefore shifted their focus from jet to other products. And it is not easy for them to go back. So you can’t do it overnight. So we need to see a return to refining capacity, which will then reduce that margin as the crack propagates again.

Thus, in 10 years, between 2010 and 2019, Brent averaged $80 a barrel and the spread of crack was 17% on average. So that would mean Jet was around $93, $94 a barrel. We are now looking at the crack spread of about 25% on average on the base price of a hundred dollars on average.

So the jet costs $125. So we’ve seen Brent go from $80 a barrel to $100 and we’ve seen the crack spread go from $13.6, $13, $14 to $25. So both increased, both had an impact. However, during the same period, fuel accounted for 27% of the industry’s cost space. Thus, if the price of oil increases, the percentage of the cost represented by fuel increases. It’s a simple calculation. And the airlines over that 10-year period, the best 10-year period in industry history, the average operating margin was 5.5%. So you can see that we don’t have big margins to absorb this additional cost.

So ultimately that ends up being passed on to consumers in the form of higher ticket prices. I don’t see any way to avoid this. If your cost, especially your highest cost, increases as it has, it causes the ticket price to increase. I see no way for the industry to mitigate this because they are not making any profit at the industry level right now. So he can’t absorb that. That’s why you see ticket prices going up. I think there is another factor with ticket prices; it is clearly and strongly influenced by supply and demand. And in some cases, the pace of recovery in demand has been faster than the pace of return of supply to the market. And that clearly leads to greater demand for a rarer product, which will drive prices up.

Regarding global funds in Africa, only a few countries were mentioned. But you were talking about 70 countries. What is your choice between innovation and bailing out the state?

Innovation. I think airlines that innovate through any crisis are more sustainable in the long run. Bailouts are welcome, but the problem I’ve often seen with bailouts is that they delay restructuring or innovation that’s needed because you get a temporary reprieve. But if you don’t take advantage of this temporary reprieve, you’re just back in crisis. So the only way to achieve a sustainable future is to seek to drive innovation and efficiency within your airline and make it sustainable through economic cycles. And on block funds, it’s not just the African continent. There are other parts of the world where we have global funds. But African countries contribute the largest element to the industry’s overall funds.

Still on the frozen fund, do you think the issue has to do with priority, ie the government is not prioritizing aviation? What do you think of airport concessions? Do you think this benefits the airlines?

On global funds, all we can do is try to convince governments to take responsibility. We cannot advise airlines on what to do. It’s a decision for the airline. We have seen countries block funds while airlines have pulled out of the country altogether. Venezuela is probably the best example, where airlines have simply stopped flying there. And those who did not stop flying significantly reduced their capacity in the country, and also limited the amount of ongoing sales.

But it wasn’t an IATA decision; it was a decision that each airline had to make. Regarding concessions, airports, if they are privatized, that’s good, but by guaranteeing a return, you cannot do it because then you will only increase the costs. You prevent innovation; you prevent airports from being pushed to become more efficient because there is a guaranteed return. So no matter what they do, they are guaranteed to get feedback on what they may be ineffective. They can waste money; they get a return and it’s only one.

Source: Ships and Ports News