Opportunities and risks for Start up airlines in Africa

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1 Opportunities and risks for Start up airlines in Africa Nairobi, March 2012

2 Disclaimer This document was created for the exclusive use of AFRAA. It is only complete in conjunction with the underlying detailed analysis and a verbal presentation by Lufthansa Consulting. It may not be made available to third parties without the explicit prior written consent of Lufthansa Consulting

a verbal presentation by Lufthansa Consulting.

3 African air travel has a potential to grow at least threefold as air trips per capita is only 28% of South America Population (in mil., 2011 est) Air travelers (in mil., 2011 est) Air travel per capita (2011) 1, Population Air travelers Air travel per capita Source: IATA, CIA factbook Africa South America - 3 -

, 2011 est) Air travelers (in mil., 2011 est) Air travel per capita (2011) 1,000 0.

4 Although Africa is composed of 50+ countries, 8 players alone control 50% of all the traffic Major airlines and traffic Top 3 AT 5m AH 4m TU 3m MS 7m 20m pax 26% Top 3 W3 3m SA 8m ET 3m KQ 3m Top airlines on the continent: 38m pax 51% 51% Other airlines (incl. non African) 37m pax Source: AirportIS - 4 -

pax 26% Top 3 W3 3m SA 8m ET 3m KQ 3m Top airlines on the continent: 38m pax

5 Out of 140 airlines created between 2000 and 2005 in Africa, only 61 are still operating; 43% versus 60% in other regions Number of airlines broken-down by date of creation Africa based operators Operators based in Asia, Pacific and South America Start up Start up Before Source: ACAS - 5 -

operators Operators based in Asia, Pacific and South America 247 198 158 140 220 61 129 96 2000

Airlines of various sizes and shapes have survived the financial crisis, meaning that no business model is doomed Sample African airlines created between 2000 and 2005 and still operating Airline

6 Airlines of various sizes and shapes have survived the financial crisis, meaning that no business model is doomed Sample African airlines created between 2000 and 2005 and still operating Airline Country Fleet Business Model Year of creation South Africa 4x MD-87 4x MD-83 4x MD-82 Low cost service (domestic + international) 2004 Algeria 1x L-420 4x L-410 6x Beech1900D Air Ambulance, Business Charter 2002 Angola 1x E45 5x E120 Scheduled service (domestic) 2003 Nigeria 2x F100 3x F-28 1x E45 Scheduled service (domestic) 2002 Source: ACAS, Airlines website - 6 -

MD-82 Low cost service (domestic + international) 2004 Algeria 1x L-420 4x L-410 6x Beech1900D Air Ambulance, Business Charter 2002 Angola 1x

7 Too big too fast is the danger as shown in Ghana, where the failures benefited to European, Gulf and US carriers Competitive landscape in ACC, Accra, Ghana( ) Seats per week 40,000 Failed expansion attempt by Ghana International 35,000 30,000 25,000 Demise of state owned Ghana Airways 20,000 15,000 10,000 5,000 49% 36% West African carriers Other African carriers North African carriers European, Gulf and US carriers Source: Lufthansa Consulting, OAG - 7 -

25,000 Demise of state owned Ghana Airways 20,000 15,000 10,000 5,000 49% 36% 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

8 Starting an airline is an uncertain venture since only two forces are favorable; it is still a necessity in some places Porter forces in Africa Customer influence Customers are sensitive to safety but: Low income makes the market difficult to stimulate Late bookings penalized treasury Entry barriers & new entrants* Les accords de Yamoussoukro ease the framework but: AOC are difficult to obtain in certain countries Technical requirements are difficult to meet because of the logistic unfavorable favorable Rivalry among competitors Airlines come and disappear regularly leading to a stagnant level of competition but: Airlines compete on price Threat of substitutes Road and rail are not sufficient Teleconferencing is not applicable Supplier control Limited number of local suppliers Reluctance of foreign supplier to invest resources in Africa This force alone makes aviation a necessity for a lot of countries Source: Lufthansa Consulting, Note: high barrier entry is favorable to a start up because it is assumed that the start up is created and the entry barrier relates to the possibility that new entrants replicate its success - 8 -

in certain countries Technical requirements are difficult to meet because of the logistic 1 0 5 unfavorable 2 3 4 favorable Rivalry among competitors Airlines come and disappear regularly leading to

9 Start up process in 3 steps has to be conducted in order to properly start up and guarantee a sustainable company Start up process breakdown Phase 1 Business Planning Phase 2 Ramp up Phase 3 Implementation Phase 1 activities Review & assess existing passenger & competition market data Define strategy Build a network and fleet plan Establish a marketing plan (product, price, distribution etc..) Create high level 5-year financial P&L model Perform sensitivity analysis on major market drivers Phase 2 activities Develop detailed step by step ramp-up plan for carrier Define the responsibilities, timelines and milestones Assessment of requirements/ additional resources Phase 3 activities Negotiate the financing Acquire the aircraft Recruit the experts (expats if need be) Apply for AOC Promote the product Set up the sales and operations... Source: Lufthansa Consulting - 9 -

etc..) Create high level 5-year financial P&L model Perform sensitivity analysis on major market drivers Phase 2 activities Develop detailed step by step ramp-up plan for carrier Define the

10 A good business plan has to be Complete Accurate and Flexible What makes a business plan good? Complete Accurate Flexible Strategy Objectives, goals Commercial competition, customer habits Financial currency, Available equity, Interest rates, Local supplier s availability Operational black listing, Local expertise Regulatory taxes, Traffic rights Data Passenger, Revenue, Costs (availability of data) Market match Is the product we supply tailored to the customers we target? Forecast passenger growth, yield development, cost inflation Structural flexibility (comes at a cost) Leasing, small aircraft, outsourcing Buffering Are we taking some margins to maneuver? Sensitivity What if fuel price goes up? Source: Lufthansa Consulting

Operational black listing, Local expertise Regulatory taxes, Traffic rights Data Passenger, Revenue, Costs (availability of data) Market match Is the product we supply tailored to the

11 To complete a ramp up plan, focus on what is needed for the first flight then move backward to build the links How to structure a ramp up plan? Sample The aircraft of Start Airlines takes off from XXX with 100 pax on board Aircraft Start Airlines Takes off from XXX 100 pax Airframe Brand Traffic rights Sales Engines Legal entity Maintenance Flight attendants Pilots AOC Fuel Catering Staff Ground handling ATC Project planning software Source: Lufthansa Consulting

Sample The aircraft of Start Airlines takes off from XXX with 100 pax on board Aircraft Start Airlines Takes off from

12 Like a flight, start up implementation has to follow the 3 guidelines: prepare, monitor, adapt; to reach its destination 3 principles for a successful implementation Monitor Adapt Prepare Be prepared to resist external pressure that would be too costly Start negotiations as early as possible as no good deal is signed on a hurry Define all the KPI and adjust the KPI only when necessary Make sure you review them on a regular basis Do not trust to the fullest a Business Plan made years ago without any update Do not be afraid of changing course in case of unexpected events and updating the Business Plan when required Source: Lufthansa Consulting

signed on a hurry Define all the KPI and adjust the KPI only when necessary Make sure you review them on a regular basis Do not trust to the fullest a Business

13 It takes only 2 good people to make a successful take off, it takes many more to make a successful start-up Cleared for take-off Source: Lufthansa Consulting

14 Contacts Faical Allou Senior Consultant Lufthansa Consulting GmbH Von-Gablenz-Str Cologne Germany Tel.: +49 (0) Fax: +49 (0) Mob: +49 (0) Stanislav Solomko Managing Consultant Lufthansa Consulting GmbH Von-Gablenz-Str Cologne Germany Tel.: +49 (0) Fax: +49 (0) Mob: +49 (0) faical.allou@lhconsulting.com stanislav.solomko@lhconsulting.com

Consulting GmbH Von-Gablenz-Str. 2 6 50679 Cologne Germany Tel.

15 Thank you for your attention

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