COVID-19 regulatory impact - demand and supply side of the industry

Airports Company

Summit on the Review of Civil Aviation Policy, 01 – 02 March 2021 1 Passenger traffic and capacity Synopsis – global traffic loss

An overall reduction of air passengers (both international and domestic) ranging from 60% - Changed narrative.

SA contraction is estimated to be below the world average.

This has negative implications for value chain service providers like MROs and ground handlers.

Source: ICAO 24/02/2021 Synopsis – Global traffic recovery in the long-term Globally, on aggregate, domestic passenger volumes are expected to recover by H1:2023.

International passenger traffic to recover to 2019 levels only by 2024. However, if a structural break occurs, global traffic may take up to 20 years to recover to 2019 levels.

Uncertainty in the industry remains high.

Source: ACI 08/12/2020; IATA 21/10/2020; Pierce, B. IATA Webinar 03/12/2020 Global travel restrictions

There has been a clear improvement since April 2020 to February 2021 in terms of border and travel restrictions.

April 2020 20 October 2020 23 November 2020 Wave risks remain high.

July 2020 06 January 2021

September 2020 03 February 2021

Source: IATA 04/2020, 27/07/2020, 20/10/2020, 23/11/2020; 06/01/2021, 03/02/2021, 28/02/2021; 22 February 2021 UNTWO 10/09/2020 Synopsis – Global traffic recovery in the short- to medium-term • Passenger traffic globally will remain severely affected in H1:2021 as vaccination operations are planned and implemented. • Global passenger traffic volume for H1:2021 is forecasted to rise by approximately 20% compared to H1:2020. • H2:2021 may record a 60% increase compared to the prior year. • International passenger throughput will remain feeble in H1:2021, but an increase is expected as an increasing number of people are vaccinated. • Domestic travel recovery will remain steady. • Africa turnaround is expected later than any other region. • In 2021, demand in Africa is expected to strengthen to 38% of 2019 levels, only 10% more than 2020 (and 7% lower than the prior expectation). Note that, globally, demand is expected to reach 50% of 2019 levels in 2021. • NB: Target first turnaround markets that can

Source: ACI 08/12/2020; IATA 21/10/2020, 24/11/2020; Aerotimehub 01/01/2021; ICAO 10/02/2021 boost the South African tourism and aviation industry. Supply side impact on the South African international segment International capacity impact of Covid-19 and recovery 10000000 9000000 8000000 Operating Airline 7000000 Year Month Capacity Covid-regulations Impact on international segment 6000000 2020 February 726 718 No regulation 5000000 2020 March 645 429 Level 1 (last week of March) Decrease in capacity 4000000 No international flight except repartiation 3000000 2020 April 55 887 Level 1 flights 2000000 No international flight except repatriation 1000000 2020 May 42 620 Level 1 flights 0 No international flight except repartiation 2015 2016 2017 2018 2019 2020 2021 2020 June 73 803 Level 1 (with business travel) flights No international flight except repatriation 2020 July 54 031 Level 1 (with business travel) flights Regions 2020 Loss 2021 Expected recovery Level 2 (interprovincial travel No international flight except repatriation Australia -73,4% 21,5% 2020 August 49 080 allowed) flights Central Africa -62,0% 64,9% Level 3 (interprovincial travel No international flight except repatriation East Africa -66,0% 107,4% 2020 September 46 000 allowed) flights Eastern Europe -64,2% 130,4% Level 3 (international travel Limited international flights (ban on Covid-10 Far East Asia -82,7% 177,3% 2020 October 173 757 allowed - limited) risk countries) Level 3 (international travel Gulf -62,4% 59,6% 2020 November 293 217 allowed - some external bans) International flights (limited external bans) Middle East -78,8% 243,6% Level 3 (international travel North Africa -71,6% 171,9% allowed - increasing external Limited international flights (ban on Covid-10 North America -70,5% 93,3% 2020 December 257 726 bans) risk countries) South America -75,3% -63,6% Level 3 (international travel Southeast Asia -69,8% 193,2% allowed - increasing external Limited international flights (ban on Covid-10 2021 January 221 238 bans) risk countries) Southern Africa -63,9% 80,3% Africa and Asia are the Level 3 (international travel Limited international flights (ban on Covid-10 West Africa -69,6% 38,2% 2021 February 149 499 allowed - external bans) risk countries) Western Europe -61,0% 38,0% recovery leaders

Source data: Sabre 2021; Source: SA Government 2020-2021 Impact of external Covid-19 regulation on the South African market – international segment

• The severe second wave due to the new SA variant has had a devastating effect on the international passenger segment in South Africa leading to temporary travel bans or other restrictions. • Regulation from international markets resulted in supply restrictions and demand for international travel was further throttled. • UK travellers are also banned from the following countries: • France, Norway, Lithuania, Latvia, Estonia, Italy, India, Austria, Hong Kong, Canada, Colombia, Morocco, Chile, Finland and Argentina (at 27/01/2021) • SA may be the next to be banned by these countries if the SA variant Source: Business Tech 23/12/2020; Business Insider SA 28/12/2020, 21/01/2021, 27/01/2021, 06/01/2021; CPH Post Online 06/01/2021; EWN 21/12/2020; News24 22/12/2020; Times Live 22/01/2021; Reuters 24/01/2021; German Missions 08/02/2021 spread is not controlled and vaccinations are slow to be implemented. Demand side impact of Covid-19 on the South African market –international segment

ACSA segment split in 2019/20 excluding March (as Covid-19 started to spread throughout the world) was as follow:

Domestic: 70% Int and Reg: 30%

So ACSA has a notably strong domestic market based on the historical throughput! The stimulation of domestic tourism demand has the capacity to pull the SA tourism sector (supply side) out of its slump.

Source: SA Tourism 2020; ACSA 2020/21 Supply side impact on the South African international segment

Domestic capacity impact of Covid-19 and recovery 25000000

20000000

15000000

10000000

5000000

0 2015 2016 2017 2018 2019 2020 2021

2015 2016 2017 2018 2019 2020 2021

Year Month Operating Airline Capacity Covid-regulations Impact on international segment 2020 February 726 718 No regulation 2020 March 645 429 Level 1 (last week of March) Decrease in capacity 2020 April 55 887 Level 1 No domestic flights 2020 May 42 620 Level 1 No domestic flights 2020 June 73 803 Level 1 (with business travel) Business domestic travel 2020 July 54 031 Level 1 (with business travel) Business domestic travel 2020 August 49 080 Level 2 (interprovincial travel allowed) All domestic flights allowed 2020 September 46 000 Level 3 (interprovincial travel allowed) All domestic flights allowed 2020 October 173 757 Level 3 (international travel allowed - limited) All domestic flights allowed 2020 November 293 217 Level 3 (international travel allowed - some external bans) All domestic flights allowed Level 3 (international travel allowed - increasing external 2020 December 257 726 bans) All domestic flights allowed Level 3 (international travel allowed - increasing external 2021 January 221 238 bans) All domestic flights allowed 2021 February 149 499 Level 3 (international travel allowed - external bans) All domestic flights allowed Source data: Sabre 2021; Source: SA Government 2020-2021 Airline developments over 2020/21 and 2021/22

Operating Capacity: Capacity: Capacity: airline (seat 2020 against 2021 against 2021 against capacity) 2019 2020 2019 Developments Started operating in June 2020 after lock down; continuously adding new routes and additional frequencies, domestically and -49,7% 111,4% 6,4% internationally. Cemair also started limited operations in June 2020. CemAir is increasing operations by 50%. Buying 3 more Airbus A319 and applied for approvals to fly to six more destinations in Africa. The airline intends to expand its operations in Africa. Cemair has applied for rights to operate scheduled flights to six destinations outside of South Africa. The fact that certain regional destinations are still not being served by any airline presents an ideal opportunity for Cemair to launch new routes. CemAir 104,2% 90,6% 289,1% Regional airline Ethiopian Airlines and CemAir sign interline agreement. Resumed limited services from OR Tambo International Airport to and from 15 June 2020. Continually added additional seats as demand for flights has increased, but that ability is almost came to an end in November 2020 because the airline was almost operating at 100% capacity. Added international flights (Mauritius) to its scheduled flights. FlySafair -63,9% 129,3% -17,3% Dubai-based Emirates airline and Quarter airlines has announced a partnership with the carrier. Airlines resumed flights on the 15 June. The South African government is not just seeking strategic equity partners for but for its subsidiaries as well, including Mango Airlines according to a Bloomberg report quoting Public Mango -64,4% 36,9% -51,3% Enterprises Minister Pravin Gordhan. ’s kulula.com airline started flying on 1 December, after a business rescue process and started to BA -68,1% 225,7% 3,8% operate flights from December 9. Their aircraft will gradually return to service from December with a seven-month ramp-up period until June 2021. Comair targets 1 July for all its flight routes to return, with the expectation to add all regional flights by March 2021 Kulula -65,9% 172,2% -7,3% Nedbank recently acquired 7.5% stake in Comair. The government so far had received 31 expressions of interest in SAA. A decision on an equity partner for it could be made by the end of March. The DPE’s presentation said a plan for SAA to resume operations had not yet been agreed. SAA grounded SAA -78,6% -40,2% -87,2% until July. The Department of Public Enterprises indicated on 03/02/2021 that SA Express was on the verge of being sold to a private SA Express -59,1% -100,0% -100,0% buyer. South African start-up carrier Lift is launched domestic services in December 2020, selling tickets on flights from Source: Sabre 2021; Airlink 08/02/2021; EWN 03/02/2021; Business Insider 01/02/2021; Reuters 03/02/2021; Simple Flying 01/02/2021; SA People News 08/02/2021; CAPA 07/02/2021; Logistics update Africa 04/02/2021; New LiftBusiness Ethiopia 26/01/2021; FlySafair 27/10/2020; TimesLive 10/11/2020; Businessto Cape Insider Town SA 16/11/2020; and George Reuters from 06/11/2020, 10 December. IOL 17/12/2020, Lift will ch operate-aviation 07/12/2020 three Airbus ; Flight A320s. Global 11/11/2020;King Shaka Business to be Insider introduced SA 23 November later. 2020; ComAir 18/09/2020; IOL 28/10/2020; Moneyweb 20/11/2020, ch-aviation 07/12/2020, Business Maverick 09/12/2020; ; Business Insider SA 16/11/2020; Moneyweb 18/11/2020; CAPA 19/11/2020 Demand side impact of Covid-19 on the South African market – domestic segment • The South African domestic traveller demand is not as flimsy as we think, and is strengthening. • However, the downside risks remain and in the forefront is the resultant erratic nature of COVID-19 aligned to new case developments. • But, this is an indication that underlying demand is strengthening and that capacity may need to expand significantly in future. • This will however depend on how quick herd immunity is achieved through vaccination- Time is of the essence. ACSA recovery (as % of 2019/20 volumes) SA Traveller domestic market recovery International and 70% Month Domestic Regional 60% April 2020 0,0% 0,1% May 2020 0,0% 0,1% 50% June 2020 3,3% 0,1% 40% July 2020 8,7% 0,0% 30% August 2020 15,0% 0,0% September 2020 26,2% 0,0% 20% October 2020 36,1% 8,2% 10% November 2020 43,0% 12,7%

0% December 2020 53,7% 19,3% Apr-20 May-20 Jun-20 Jul-20 Aug-20 Sep-20 Oct-20 Nov-20 Dec-20 Jan-21 January 2020 36,5% 14,2% Recovery

Source data: ACSA 2021/21; Stats SA 2020, 2021; Sabre 2020; Sacoronavirus 02/02/2021; South African Government; Calculation ACSA BD MRA 02/02/2021 COVID implications short- to medium-term

Vaccine? Will it be effective? Will it boost traveller, investor, business confidence? Keep in mind that the expected 3,6% GDP growth rate in 2021 in South Africa is a recovery from the expected low of -8,2%, however GDP levels (in constant 2010 price terms) will remain below 2019 terms even in 2022. Key factors

• New waves in SA and in key international markets exacerbated by the many other Covid-19 variants in the world (UK,

Brazilian and SA variant are deemed the most dangerous at present) that the vaccines may be less effective against.

• A further resurgence of COVID-19 cases in the coming months will remain, till such time a vaccine is distributed and/or

the possibility of herd immunisation has been established with certainty.

• SA may open/close borders at a time when active cases are on the rise in key markets, which may warrant travel

restrictions to and from these markets- as observed currently.

• Slow roll-out of vaccines.

• The effect on employment, thus the direct implications for airlines and other value chain service providers unknown.

• The future of the national carrier remains unclear.

• Though key airlines may remain operational post-COVID, capacity changes, and airline mergers may be realised. Cargo traffic – Modal shift Global air cargo

• Global air freight demand last year registered its steepest decline since the International Air Transport Association (IATA) started to monitor cargo performance in 1990. • Due to capacity restrictions on passenger flights, underbelly air cargo capacity registered significant losses. • The majority of trade capacity was ascribed to belly-hold of passenger carriers. This makes the air cargo business to be directly susceptible to developments in the passenger traffic market. • But demand from distressed sea freight, e- commerce, hi-tech launches, and general retail due to delays caused by lockdowns has been favourable to air cargo. • Furthermore, freighters have made the delivery of humanitarian or medical or PPE equipment, etc. efficient, due to no long waiting times. • The role of air cargo became crucial and positively viewed by the global world. • This can be seen as air freight is required to transport Covid-19 vaccines presently.

Source data: Accenture 17/02/2021; Loadstar 22/10/2020; Logistics Update Africa 2020; Flight Global 09/09/2020 South African air cargo

• Freighter cargo throughput in South Africa has increased in the past year.

Cargo freighter data for three international airports (volumes in kg) 35 000 000 In 2018, for South Africa, total imports 30 000 000 and exports by air accounted for 17,8% 25 000 000 and 7,3% of total imports and exports 20 000 000 values (Rand) respectively. With 15 000 000 aircraft technology advancing, the 10 000 000 competitiveness air transport against 5 000 000 other modes from a cost perspective 0 can be expected to be enhanced, Apr-20 May-20 Jun-20 Jul-20 Aug-20 Sep-20 Oct-20 Nov-20

Inbound Outbound Total thus presenting an opportunity for further growth in air cargo.

The question is how to maintain this momentum? • The answer is simple: A modal shift is required

Source data: ACSA 2020; Quantec 2020 South African air cargo

Many of the road friendly goods, link well to those that may be moved through air.

Source: Department of Transport 2011 cited in Freight shift from road to rail 2015 Which products can be moved by air?

• In Africa, the main products shipped by air are cut flowers, electronic parts, motor vehicle parts and fresh fruits and vegetables. • Typically high value consumer and producer goods are also transported by air. • Lastly, air cargo transport is critical for temperature-sensitive pharmaceuticals, that’s why VACCINES are mostly transported by air. • Issue in developing countries in Africa (and South Africa) without a significant outbound flow, the inbound air freight rates are higher — reducing the types and quantities of goods transported by air.

• So which products may be moved by air to decrease costs, and boost exports (and imports?) • Derived by calculating the unit value (UV) by product for each of the HS export and import products (for South Africa). • The product with the highest unit values (high value goods) are included if the weight of the product is acceptable for air transport and it does not form part of the banned list of air transport products. • Aircraft compatibility for cargo: • Each aircraft type has container acceptability dimensions and weights with respect to, Cargo Door Clearance Dimensions, and Cargo Size Acceptability.

Source: World Bank 2009 Air Freight: A Market Study with Implications for Landlocked Countries; IATA cargo N.d.; Source data: DTI (SARS) Trade Statistics 2020; Calculations: ACSA BD MRA 2020; American Airlines Cargo 2020 Product that may be moved by air

Selected results of the calculation based on exports (complete results provided in Excel sheet below)

• There are more than 20 000 8-digit product codes, which according to classification may be a product or a product group (henceforth referred to as products) in the DTI(SARS) database.

• Selected top 100 UV products by continent that can be transported by air: • Africa: PGMs (semi-manufactured form or powder mostly platinum); Jewellery; Smaller machinery; Machinery parts; Electrical machinery and parts; TV and related goods and parts; Train, vehicle and aircraft engine parts and accessories; Organic chemicals. • Europe: PMGs (semi-manufactured form or powder); Jewellery; Smaller machinery; Machinery parts; Electrical machinery and parts; TV and related goods and parts; Train, vehicle and aircraft engine parts and accessories; Organic chemicals. • Asia: Paper and paperboard; Tyres (rubber); Textile machines; Other smaller machinery; Machinery parts; Electrical machinery and parts; Train, vehicle and aircraft engine parts and accessories; Optical, photographic, cinematographic, medical or surgical instruments and goods as well as parts and accessories thereof; Watches (and clocks) • Americas (combined North and South): Seeds; Organic and inorganic chemicals; PGMs (semi-manufactured form or powder mostly platinum); Train, vehicle and aircraft engine parts and accessories; Electrical parts; Optical, photographic, cinematographic, medical or surgical instruments and goods as well as parts and accessories thereof; Watches and clocks (precious metals base). • Oceania: Organic chemicals; Plastics (face shields); Motorcycle filters; Train, vehicle and aircraft engine parts and accessories; Electrical parts; Optical, photographic, cinematographic, medical or surgical instruments and goods as well as parts and accessories thereof.

Big Question for Discussion

What are the barriers to this potential modal shift?

UV for Exports Enabler: AfCFTA It is estimated that untapped intra-Africa potential is estimated at $48bn, and if exploited could increase intra continental trade by 20%, to more than $210bn.

Africa Free Trade Agreement- at a glance- 51% of signatories have ratified the agreement, with strong The African Continental Free Trade Agreement (AfCFTA) was compliance from West African, formally endorses in 2012. which may be influenced by the existence of Central and West Objective: African Franc, and the move to To create a singly continental market for goods and services formalise the ECO which will be a with free movement of people and investment. regional currency. The largest African economy-Nigeria appears Market Size: to be hesitant. The market will cover 1.2bn people and $3.5tn of production. Enablement: POLICY CONSIDERATION • Rule of Origin • Elimination of tariff and non-tariff barriers The bulk of the opportunity resides in the Southern African region, aviation policy • Digital Payment System. should take advantage of the first mover advantage. Status Update: It is clear that intra-regional connectivity needs to be prioritised as most of the potential trade will be with regional neighbours followed by East Africa. The AfCFTA came into force in May 2019, to date 54 countries have signed, with 30 countries(55%) having complied with domestic requirements for ratification, with 28 Realising SAATM becomes a building block to unlock this trade potential, and the countries having deposited their ratifications(51%). regulatory environment should be biased towards regional (and intra) connectivity.

Source: TRALAC, 2020 Key discussion points

• The air passenger market is expected to return to 2019 levels in 2024 (domestic 2023 and international 2024), however in the event of a structural break, a sluggish return would only be realised in two decades. • In 2021, demand in Africa is expected to strengthen to 38% of 2019 levels. • The ACSA network in January (keep in mind the second wave and regulatory impact) recorded an almost 30% recovery, and 43,4% in December. • This implies that the SA market is recovering above the expected norm. • The South African domestic traveller is the key driver thereof, and has shown that in the absence of extreme waves and regulation, the segment may bounce back faster than expected. This segment needs to be nurtured. • The international market recovery will take a bit longer, and the markets that are showing interest in terms of capacity to South Africa is Africa and Asia. • African travellers have been the leader in the international segment for South Africa during Covid-19, immensely contributing to its slow recovery. • For the SA aviation sector it is pertinent to target (fast) turnaround/recovery markets to boost the South African tourism and aviation industry. • The vaccination rollout in South Africa and key markets is critical to sustainable recovery. Key discussion points

• The role of air cargo became crucial and optimistically regarded by the global world, especially pertaining to the transport of medical goods, PPE equipment and now the vaccines. • This has resulted in increased freighter cargo throughput in South Africa in the recent past. • The question now is how do we keep on developing the cargo segment? High value products have been determined, but they have always been there yet not always clearly stated. So what are the barriers to this potential modal shift? • Could it be normal tariff and non-tariff barriers? Non-tariff barriers to trade include port congestion, technical standards, customs valuation above invoice prices, theft of goods, import permits, antidumping measures, violations of intellectual property rights (IPR), an inefficient bureaucracy, and excessive regulation. • Could it be the absence of a strong internal body governing technology and regulation on cargo? Specifically looking at end-to-end digitization of the supply chain? • Higher levels of safety and security? • Infrastructure issues? Congested and old airports and cargo facilities? • Move away from old ways and be more customer centric? • One of the enablers of cargo is the African Free Trade Agreement, which aims to create a single continental market for goods and services with free movement of people and investment. • Furthermore, SATAAM, may enable open skies and enhance cargo throughput. • But, how does liberating open skies balance with the South African National Development Plan, and its plan for the aviation sector as a whole?