Feature Article: Globally competitive African airline industries

The raison d’être of any business is to make a profit.  For a business to be successful, it must generate an income that exceeds its costs of production.  This is the case whether the business is big or small, simple or complex, formal or informal. 

Consumers, on the other hand, shop around quite brutally and uncompromisingly in search of goods and services that will give them the best value for their money. 

From this, it can easily be seen that the competitive pricing of goods and services is a crucial factor when consumers are deciding which goods and whose services to buy. Some might be shocked, but when it comes to the bottom line, for the producer, service provider, or consumer, altruistic considerations and patriotic sentiments are of no relevance or significance.  They simply do not form part of the equation at all.

And this is so in all industries; including the airline industry. 

Many of the policies that govern the airline industry in Africa are hostile to competition. To become globally competitive, we must subject our existing policies to rigorous scrutiny. Any policies that impede or distort competition between rival airlines warrant special attention, because they invariably restrict the size of the industry to the detriment of its users.  Air travel plays a crucial role in economic growth. It is more than a mere convenience.

Efficient airlines have a very positive effect on business travel and tourism.  Businessmen and women rely on swift, dependable travel so that they can execute their duties professionally by being on time for appointments and by knowing with some certainty that they will have enough time available to attend to all their business engagements. 

Tourists and others travelling for recreational purposes, if they are able to get to their destinations faster and more cheaply, are encouraged to travel frequently.  If their travel is stress free, they will enjoy their destination and probably spend more money on local food, accommodation and leisure activities, which is another plus for the economy.

Competition in the air freight sector would ensure that goods are ferried faster, more cheaply and reliably to their destinations.  This is extremely important. It enables businesses to meet the needs of their customers, or to cope faster with any increases in demand, especially in this instant, internet-connected world. 

If the airline industry is to have an even greater beneficial effect on economic growth, there has to be increased competition. Increased economic growth, in return, will lead to greater prosperity, which will generate even more demand for air travel.

Empirical evidence from around the world shows that high economic growth, correlated with a rise in per capita incomes, brings about overall improvement in the socio-economic circumstances of people, such as better education, better health and higher standards of living. These are just some of the indicators of a good life that improve in economies which achieve high growth rates.  These findings are substantiated in studies such as the Economic Freedom of the World, the Index of Economic Freedom, and Habits of Highly Effective Countries, published respectively by the Fraser Institute in Canada, the Heritage Foundation in the USA, and the Free Market Foundation, South Africa. 

A thriving, globally competitive African airline industry must therefore be based upon a dual strategy.  Policies must be in place that, on the one hand, attract as many airlines as possible into the market, and, on the other, create an environment conducive to increasing prosperity.

For this to happen, governments have an essential role to play. But their role has to be limited to bringing about an enabling policy environment in which private businesses can operate to the best of their ability.  If governments play their part correctly, there will be a proliferation of businesses, both big and small, and job creation will be enhanced. 

Governments should begin by critically evaluating existing economic policies.  Once errant policies have been identified, no time should be wasted in removing them.  With the utmost urgency, all policies and unnecessary regulatory encumbrances which raise the cost of going into business and operating a business should be done away with. Of necessity, this means that government has to get out of the airline industry.  A government is not a business, and governments are not good at running businesses. 

This is because governments are not subject to the rigorous discipline of market forces.  Private business entails personal risk on the part of entrepreneurs and their investors.  It follows, therefore, that entrepreneurs and investors will do their best to ensure, not only the survival, but also the viability and progressive profitability of the business.  Risk demands resourcefulness and innovation to enable firms to compete against each other for the patronage of customers. They are compelled to offer competitive pricing and quality or suffer eventual closure.  The market rewards industrious, efficient, innovative and competitive risk-takers. 

State-owned enterprises, by contrast, operate to quite another set of rules. The government department in charge and the personnel employed are not at personal risk.  Irrespective of whether a state enterprise succeeds (highly unlikely) or fails (the general case), those involved are only personally affected when the minister, who is the employer, may decide to take corrective action. Those who are ultimately responsible for the inefficient operation of state-owned enterprises invariably escape the punishment usually suffered by failed private firms.  This state of affairs is self-perpetuating because it is not the state employees, but the taxpayers, who foot the bill, time and time again, to bail out failing state enterprises. Taxpayers tolerate this situation because the cost is dispersed among them and thus, at an individual level, they are fooled into thinking that the cost to them is lower than it really is.

South African Airways (SAA), the apartheid era dinosaur, is a case in point.  Over the last decade, SAA has relieved the South African taxpayers of at least R12bn, in conservative terms.  The government’s perennial habit of throwing substantial taxpayer funds at SAA translates into unfair competition against its rivals. This economically burdensome, morally objectionable, highly protected and privileged status, places SAA in a position to undercut prices charged by private airlines.  The users of the national carrier might then unjustly accuse the private airlines of charging exorbitant prices.  It is not surprising, therefore, that over the years several independent airlines have been forced to close.  In the absence of a plentiful number of competing airlines, the cost of air travel and freight services has skyrocketed.  Government-owned airlines will invariably be protected from economic realities and pose these problems for the industry and its users. 

To prevent further damage and address this problem, economist Jasson Urbach has proposed that the state airline SAA and its subsidiaries be auctioned off to interested private parties.    That way, substantial funds would become available for government to spend in other, more beneficial, areas and the beleaguered South African taxpayer would at last be relieved of the burden of having to subsidise a demonstrably failing enterprise.

The Urbach proposal could provide a solution for all countries with tax-revenue-gobbling national airlines.

There are governments that do not want to let go of their costly state airlines, despite the fact that they waste taxpayers’ money and undermine competition in the airline industry.  They deny users of these airlines the benefits that accrue from competition, such as affordable, good quality travel and freight services.  Until things change, such policy shortcomings will always result in high costs, the brunt of which is borne by the end users; the consumers.

In 1999, in Yamoussoukro, Côte d’Ivoire, 44 African states signed the Yamoussoukro agreement committing their nations to an open skies policy, thereby promising to liberalise regional aviation markets and promote international competition. This was a significant step in the right direction, but the actual implementation, however, is another matter altogether.

A great deal remains to be done in terms of doing away with unnecessary regulatory impediments to the goal of opening the skies to competition.  For the foreseeable future, air travel and air freight in Africa will continue to be costly and globally uncompetitive.  Part of the collateral damage will be that fewer tourists will visit the continent than otherwise would be the case.

Governments should stop rationalising state involvement in the airline industry by using the excuse that state-owned airlines are of strategic importance. This is an empty argument. Freely competing private airlines provide better services at lower cost, so what is strategic about a state-owned airline?  

An open skies policy and the removal of trans-national trade barriers will ensure that Africa delivers affordable and globally competitive airline industries that will efficiently contribute to trade and tourism and help establish and grow entire economies.

Author: Temba  A  Nolutshungu, Director, Free Market Foundation. This article may be republished without prior consent but with acknowledgement to the author. The views expressed in the article are the author's and are not necessarily shared by the members of the Foundation.

(Based on his “Global Competitiveness:  Scenarios for Africa” address to the Association of Airlines of Southern Africa Annual General Assembly on 18 October 2013)

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