Ready for Takeoff? • 95 96 Opportunities and Challenges for LCC Development: the Case of East Africa
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CHAPTER 5 Opportunities and Challenges for LCC Development: The Case of East Africa Introduction After having established the key elements of the low-cost carrier (LCC) business model, and identifying the market environment that they can flour- ish in, chapter 5 provides insight into the potential development of LCCs in Sub-Saharan Africa, a region which still represents largely unexplored territory for the business model. Due to the region’s vastness, complexity, and diversity, this chapter focuses on identifying opportunities and challenges using the exam- ple of the East African Community (EAC). East African Community (EAC) The EAC is a regional economic community (REC) formed between five East African countries: Uganda, Tanzania, Rwanda, Burundi, and Kenya. The region covers around 1.82 million square kilometers, and includes a population of 141.1 million (East African Community Statistics Portal 2013). The history of the EAC goes back as far as 1917, when Kenya and Uganda formed one of the first cooperative entities in Africa by establishing a customs union. After assuming different shapes and forms—and even a temporary dis- solution in 1977—the three major economies of Tanzania, Kenya and Uganda formed the EAC in 2000. In 2007, Rwanda and Burundi joined the EAC. Based on the EAC Treaty of 1999 (EAC 1999), which forms the legal basis of the community, its prime objective is to “develop policies and programs aimed at widening and deepening cooperation among the Partner States in political, economic, social and cultural fields, research and technology, defense, security and legal and judicial affairs, for their mutual benefit” (EAC 1999). To achieve Ready for Takeoff? • http://dx.doi.org/10.1596/978-1-4648-0282-9 95 96 Opportunities and Challenges for LCC Development: The Case of East Africa these objectives, the EAC was to establish a customs union, a common market, and subsequently a monetary union, ultimately leading to a political federation (EAC 1999). The EAC Treaty lays out a set of fundamental and operational principles that must govern the achievement of these objectives. The most significant funda- mental principles include “mutual trust, political will, and sovereign equality,” as well as “peaceful coexistence and settlement of disputes” (EAC 1999). The community’s key operational principles are “the establishment of an export oriented economy for the Partner States in which there shall be free movement of goods, persons, labor, services, capital, information and technology” and the “principle of subsidiarity” of the EAC, which secures multilevel participation and the involvement of a wide range of stakeholders during the integration process (EAC 1999). Air Transportation has been given particular attention in the EAC Treaty under Section 92. As its objective, EAC member countries are to “harmonize their policies on civil aviation to promote the development of safe, reliable, efficient, and economically viable civil aviation with a view to developing appropriate infrastructure, aeronautical skills and technology, as well as the role of aviation in support of other economic activities” (EAC 1999). There are also some specific provisions for different areas of the industry, which are outlined throughout this chapter. Overall, the institutional framework of the newly established EAC is well defined and consists of all of the necessary elements for effective implementation of its goals, including economic cooperation and integration among its partner states. In addition to the EAC, some of its member states are also part of other RECs. These may have different policies with regard to the air transport sector. Burundi, Rwanda, Kenya, and Uganda, for example, are also part of the Common Market for Eastern and Southern Africa (COMESA), a regional organization that has established a free trade zone between eastern, southern, and central African states.1 Tanzania is also a part of the Southern African Development Community (SADC). SADC’s objective is socioeconomic cooperation and integration, as well as political and security cooperation. It includes 15 members from the southern African region. These dual/multiple regional bloc memberships of EAC states have, in some cases, slowed down decision-making processes due to the need for harmonization between individual RECs. To address this obstacle, EAC, COMESA, and SADC founded the COMESA-EAC-SADC Tripartite in 2005. The Tripartite decided to develop a road map for the harmonization of the three RECs at the Tripartite Summit of Heads of State in 2008. However, this has not been achieved yet. It has also been working toward the imple- mentation of a comprehensive Trade and Transport Facilitation Programme, including providing support for various aspects of the air transport sectors (OECD and WTO 2011). Ready for Takeoff? • http://dx.doi.org/10.1596/978-1-4648-0282-9 Opportunities and Challenges for LCC Development: The Case of East Africa 97 Demand As established in chapter 4, the key factor for LCCs to flourish in a market is high utilization of their aircraft and personnel. This in turn requires high expected volumes of traffic. These volumes can be achieved by either targeting existing customers on high traffic routes to reduce market share of incumbent carriers, by stimulating new demand by attracting a larger segment of the population through a lower fare offering, or by opening previously unserved routes. In order to assess the opportunities in the EAC market, a short overview of the existing market, as well as an analysis of the potential for future growth opportunities, are provided below. This is by no means an exhaustive assessment, but serves as an overall indicator of trends in the market. A more detailed analysis would be required to assess actual route-level opportunities, and is beyond the scope of this research. Existing Air Transport Market—Thin Routes and High Concentration In order to provide a broad overview of the air transport market, this book pri- marily focuses on current air traffic capacity, as well as on the key participants in the market. Although some passenger data is available from the EAC Secretariat for an analysis of the existing EAC market, it is difficult to verify the data’s accuracy. Therefore, this analysis relies on information from airline schedules as collated through the online database DiiO SRS Analyzer (2013), and a sample of passenger flow data for some African airports as provided by the Airports Council International. Using schedules data has the disadvantage that only capac- ity is provided rather than actual passengers flown. However, it does serve as an indication of overall traffic flows. The current intra-EAC air transport market is still very small and the major- ity of domestic and regional traffic is still concentrated around the two major hubs of Nairobi, Kenya, and Dar es Salaam, Tanzania. These two airports absorb the largest number of passengers followed by Mombasa, Kenya, and Entebbe, Uganda (see table 5.1). Table 5.1 Passengers by Airport, 2012 Airport IATA PAX Jomo Kenyatta International Airport, Nairobi, Kenya NBO 6,271,922 Julius Nyerere International Airport, Dar es Salaam, Tanzania DAR 2,088,282 Moi International Airport, Mombasa, Kenya MBA 1,347,908 Entebbe International Airport, Entebbe, Uganda EBB 1,342,134 Abeid Amani Karume International Airport, Zanzibar, Tanzania ZNZ 787,813 Kilimanjaro International Airport, Kilimanjaro, Tanzania JRO 665,147 Kigali International Airport, Kigali, Rwanda KGL 458,807 Mwanza Airport, Mwanza Tanzania MWZ 392,298 Aéroport International De Bujumbura, Bujumbura, Burundi BJM 291,838 Eldoret Airport, Eldoret, Kenya EDL 103,729 Source: ACI 2012. Note: IATA = International Air Transport Association; PAX = number of passengers. Ready for Takeoff? • http://dx.doi.org/10.1596/978-1-4648-0282-9 98 Opportunities and Challenges for LCC Development: The Case of East Africa As figure 5.1 shows, despite growth in recent years, the capacity for total traf- fic between the EAC member countries is still at less than 2.6 million available seats in 2013. This represents around 44 percent of total traffic within the region, highlighting the key role of domestic traffic, particularly in larger countries such as Kenya and Tanzania. Some domestic markets have grown considerably in recent years, especially in Rwanda and Tanzania. After a period of decline between 2008 and 2010, Tanzania in particular has managed to increase its capacity significantly, reaching almost the same level of domestic traffic as Kenya, the largest domestic market in EAC (see figure 5.2). Rwanda experienced a spike in domestic air transport starting in 2010 (see figure 5.3), with the country’s national airline Rwandair increasing its weekly frequency between Kigali and Cyangugu sixfold between 2010 and 2013. After a short period of increased traffic, Uganda’s domestic market has been declin- ing considerably (see figure 5.3), with many of the domestic, probably largely unprofitable, routes being abandoned by 2010. Burundi currently has no sched- uled domestic air transport. As map 5.1 shows, the majority of traffic in East Africa can be broadly divided into three main categories: (a) a few high-frequency domestic routes in Tanzania and Kenya; (b) a small number of key intra-EAC routes with low frequency; and (c) a number of secondary, low-capacity intra-EAC routes. The top 15 routes amount to around 80 percent of the overall EAC market. Figure 5.1 Intra-EAC Traffic, 2004–13 3,000,000 2,500,000 2,000,000 1,500,000 Available