Why More African Airlines Should Embrace Low Cost Business Model
By Chidozie Uzoezie
The aviation market in Africa is not only the least developed, but also one of the toughest in the world. Despite being home to 16.1% of the world’s population, Africa is still grappling with many developmental challenges, including unprofitable aviation market and poor air connectivity. One of the reasons for this poor air connectivity in Africa is the obvious lack of sustainable airline operations. And more importantly, the near absence of low cost carriers which drive route development and air connectivity in other parts of the world.
In terms of route development and Available Seat Kilometers (ASK), low cost and ultra low cost airlines are gradually taking over commercial passenger operations across the world. However, there’s no significant corresponding rise in the activities of low cost carriers in Africa. With only 7.5% of the global low cost airlines domiciled in Africa, it’s obvious that the continent has been left behind in the no frills airline business model (see figure 1). It’s imperative for more African airlines to consider adopting the low cost business model. Let’s see why.
Opportunity to Save Cost
The major factor that determines an airline’s scope of operations and its growth trajectory is its business model. By default, many airlines go full service with all the pecks and frills and glamour that are traditionally associated with flying. One of the fundamental problems of African airlines is that most of them have wrongly chosen the full service business model, with many of them not turning in profit year-on-year. Going low cost will enable African airlines to save costs by several margins by maximizing fleet and crew, operating into secondary airports, effecting quick turnaround times, incurring less airport charges, and most importantly, by ditching the traditional in-flight meal service. Not that passengers care much about in-flight meals, anyway.
According to a survey carried out by Africa World Airlines, less than 10% of passengers choose an airline based on food offering. That number drops even further to below 5% on flights less than 2 hours. With this in mind, more African airlines (both existing and start ups) should consider choosing the low cost business model. The best way to save money is to not spend it, isn’t it?
Latitude to Diversify
The airline industry is increasingly becoming contingent on ancillary services as airlines around the world think outside the box to improve their revenues beyond ticket sales. In addition to saving costs, going low cost will give African airlines the latitude to diversify and make extra revenues. Revenues generated from ticket sales alone is often not enough to sustain an airline’s long term operations. This is why it’s imperative for African airlines to diversify their operations and have multiple revenue streams including ancillary services.
In 2019 alone, global airlines generated total revenue of $75.6 billion from ancillary services. Ancillary revenues come from non-ticket services including in-flight refreshment, advanced seat selection, extra legroom, Wi-Fi, baggage fees, express bag drop, priority boarding, fast track security. According to a report, consumer spending in the hospitality and leisure industry in Africa is projected to rise to about $300 billion by 2030.
In addition to a la carte ancillary services, African airlines can also make extra revenues from commission-based ancillary services including selling holidays, tours, hotel accommodation, car rentals, and travel insurance. They can also generate extra revenues from advertising for third parties on their websites, seatback screens, in-flight tray tables, aircraft overhead bins, and in-flight magazines. The bottom line is that, ancillary services are very crucial sources of extra revenues for low cost airlines. And the low cost business model is the perfect latitude for African airlines to provide ancillary services and increase their revenue streams.
Low Cost Isn’t ‘Petty’ and ‘Inferior’
One of the wrong impressions about low cost airlines is that they are petty and inferior airlines that can’t stand the test of time. However, across the world, low cost airlines are some of the largest airlines both in terms of fleet size and revenue potentials. Southwest Airlines, an American low cost airline, is the third largest airline in the world by passenger traffic. In 2019, it carried 163 million passengers and generated a total of $22.4 billion. With over 750 aircraft in its fleet, Southwest Airlines is also the world’s fourth largest airline by fleet size.
Ryanair, another low cost airline, is the world’s largest airline by number of routes served. The Irish airline flies to 1,830 routes and has the world’s highest load factor of 96%. Ryanair is also Europe’s largest airline by passenger numbers, and has the highest operating margin of all the European airlines. I decided to put these figures into perspective to empirically show that low cost airlines are a force to reckon with in the global aviation industry.
Perhaps, the most interesting thing about going low cost is that, contrary to popular belief, it doesn’t weaken the airline’s brand value. In 2019, Brand Finance ranked Southwest Airlines the fourth most valuable airline in the world, higher than most full-service legacy carriers including Emirates, British Airways, China Southern, and Lufthansa.
Driving the Competition
Besides airline’s safety record, ticket cost is the single most important factor that determines the choice of airline by intending passengers. In a recent joint online survey by The Afritraveller Blog and the African Aviation Group, 44% of the respondents said they would choose their airlines based on the cost of the ticket. Ticket cost was ahead of other factors like aircraft type (5%), in-flight catering (4%), and schedule (4%). Ryanair is a low cost airline, but it has the world’s highest load factor of 96%.
When Green Africa Airways, a new low cost airline based in Nigeria, unveiled its fares a few weeks ago, the travelling public was agog with excitement. Not just because the fares were over 50% lower than the prevailing average fares in the market, but also because their low fares forced the existing full service airlines to reduce their tickets prices which were hitherto very exorbitant. More low cost airlines will bring competition to the doorsteps of the full serviceairlines with the ultimate goal of making air travel affordable in Africa.
Currently, only a handful of low cost carriers dot the African skies. This is in a sharp contrast to what is obtainable in Europe, Asia, and the Americas. Operational variables like higher-density seat configurations, less operating costs, quick turnaround time, and lower capital costs, can help new and existing low-cost carriers in Africa to break even on domestic and regional routes with more profitability prospects than their full-service counterparts. With aircraft acquisition costs at their lowest due to surplus aircraft in the second hand market, this is the time for new low cost airlines to emerge in Africa. It is also a good time for the existing ones to expand their operations.
While national carriers cannot embrace the low cost model, their subsidiaries and privately owned airlines should take the bull by the horn and venture into the no-frills space. The entrance of more low cost airlines into the African aviation market will significantly reduce the cost of air travel, increase regional air connectivity, and ultimately give airlines the latitude to operate profitably.