Macroeconomic risks and African aviation

ACI (the voice of the world’s airports) recently published its 11th quarterly assessment to analyse the impact of COVID-19 pandemic, its effects on airports and the path to recovery. In the publication, the aviation industry continues to recover as more countries ease travel restrictions and open their markets. The propensity for air travel along with the above will expectedly make industry recovery reach 2019 levels in 2024.

It states further that there is increased industry optimism though there is uneven recovery because of a notable gap among markets. The major aviation markets of Asia–Pacific lagged behind their North American and European counterparts. There was however a surge in demand in countries like Colombia, Mexico and Nigeria such that they exceeded their 2019 levels.

Macroeconomic risks due to the ongoing conflict in Ukraine and bottlenecks in the supply chain will impact African aviation because of the heightened risk of stagflation as central banks continue to raise interest rates to curb inflation globally.

The effect of monetary tightening by central banks increases the risk of a decrease in economic activity as well as a decrease in the willingness and ability of consumers to spend. So, the possibility of a recession is not ruled out and African aviation needs to look ahead and begin to think of measures to take across different scenarios.

Africa has a youthful population. Africa ranks second among regions of the world (roughly equivalent to ‘continents’), ordered by population. (www.worldometers.info), ‘Africa demographic trends reveal a growing ageing population and unprecedented growth of the youth population. Population ageing is expected to accelerate between 2010 and 2030, as more people live to age 65’ ( www.afdb.org). With a rising youthful population and increasing unemployment as airlines and firms declare redundancy and reduce labour costs in the face of rising inflation, the risk of stagflation and a recession are not too far fetched for many African aviation businesses to ignore.

The added challenges of a weak external position in the economies of African countries, rising debt, depreciation in currencies, declining real incomes impacting propensity to spend and the consequent effect on travel demand should not be out of sight and mind of aviation business strategists as they could dampen the prospects of investors in the industry.

As central banks across the globe continue to raise interest rates to tackle rising inflation the consequence on global financial flows should not be lost on African aviators. When interest rates rise, lenders in an economy get higher returns relative to other countries. This attracts foreign capital which causes the exchange rate to rise. This flow of hot money will impact African economies as investors seek higher returns with less risk offshore. Such outflows also affect the exchange rate negatively.

Mitigating these macroeconomic risks will require African governments to direct attention to such issues as a reform of institutions with a deep commitment to it. This will be to ensure that investments can be more long term than speculative flows.

As a temporary measure in the face of low diversification of African economies, import regimes can be tilted towards investment goods and a reduction in non-investment goods import.

The prospects of a more flexible exchange rate should be high on the agenda of central banks across Africa as part of their exchange rate management.

The strategic implication for aviation businesses across Africa will among others require businesses to re-evaluate controls over revenue collection and organisational processes. This became more important as the pandemic had resulted in many processes being re-engineered with increased use of technology. These processes cannot sit on previous controls. They will need to be re-evaluated and updated to match them.

Airport business is capital intensive. So, replacement of infrastructure will be prioritised. The customer experience can be dampened by poor and decayed infrastructure. The more critical are those that have reached their replacement threshold. The goal will be to make airports more efficient, reduce congestion, enhance capacity and safety and improve customer experience without turning a blind eye to sustainability.

The industry should not shy away from asking for government intervention after showing evidence of improved controls and discipline over capital expenditure. This intervention should be with an eye on improving the customer experience which will assure return on investment. ACI research has shown that every one percent increase in the global passenger satisfaction rate generates an additional 1.5 percent in non-aeronautical revenue.

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