A high-level delegation from the Brazilian Development Bank (BNDES) visited the African Development Bank Group on September 18 in Tunis to share industry knowledge that may help revolutionize aviation in Africa. The workshop entitled "Developing Africa's Air Transportation" was co-chaired by Tas Anvaripour, Manager for Infrastructure Finance in the Private Sector Department of the African Development Bank.
What is the project about and what developmental impacts are expected?
The project intends to procure Embraer E-170/190 jets, which are considered to be the world's most optimal aircraft in their class (70-120 seats; medium-haul), for onward placement in six to seven different African airlines through an Africa-based leasing facility.
The project is expected to: i) serve over 1.15 million passengers every year, ii) result in the creation of over 1,600 direct jobs, and iii) catalyze some US $68 million in additional tax revenues per annum. By lowering operational costs, improving intra-Africa connectivity, promoting competition, and introducing a strong demonstration effect, the project may contribute to lowering airfares, thereby increasing the number of people who benefit from air transport in Africa.
The project is in line with the Bank's Regional Integration Strategy Papers (RISPs), the Bank's Medium Term Strategy (MTS) to support Infrastructure and Private Sector Development, and the Bank's Long Term Strategy (LTS) (draft form). Additionally, the project is aligned with the African Union's Yamoussoukro Decision and NEPAD's orientation towards the air industry.
What is the general context for this transaction? Why should a development institution invest in this project?
The air transport industry is highly developmental. According to Oxford Economics, aviation contributed over 55,000 jobs and ZAR 20 billion to South Africa's GDP in 2009 alone. Regional economies derive substantial benefits from the spending of tourists travelling by air (up to 3.1 per cent of GDP in South Africa's case). Africa-wide, it is estimated that more than 250,000 direct jobs and over 500,000 indirect jobs derive from the air transport sector. According to a recent report, the industry contributed US $67.8 billion to Africa's GDP in 2010.
Moreover, air transport connectivity has the potential to enable Africans to leapfrog ahead of physical infrastructure challenges, particularly when considering the continent's vast geographical landscape. Air transport connectivity - route convenience and frequency of service - is an important consideration for investors when selecting target markets. This makes air transport development an important factor in increasing country competitiveness.
Despite its importance for Africa's development and latent private sector development opportunities, the air transport sector in Africa is being neglected. In part, this is due to the lack of financiers willing and able to finance modern equipment (aircraft) and modern facilities (airports). As a result, better financed European and Middle Eastern carriers are expanding capacity in Africa, thereby capturing profits, tax revenues and job opportunities. KLM, Brussels Airlines, Air France, Lufthansa and Emirates Airlines find African destinations to be amongst their most profitable routes.
The Bank aims at reversing this situation through an innovative financing option: aircraft portfolio leasing. By promoting this financial product, the Bank would not just support one African airline but a number of middle- and top-tier airlines in their quest to reduce costs and improve their quality of service, thus achieving growth.
Why is the Bank supporting the acquisition of regional aircraft technology in Africa?
There have been important developments on advancing inter-continental connectivity between Africa and the rest of the world. However, this has not been the case with intra-Africa travel. In its effort to advance regional integration in Africa, the Bank has identified air transportation as a tool that will help unlock trade and investment opportunities throughout the continent. Regional jets constitute an important requirement to further develop point-to-point air connectivity, thereby advancing trade and investment.
What are the major constraints for African airlines in purchasing aircraft and what are the advantages of leasing over purchasing planes?
Aircraft are expensive assets to purchase. With constrained access to long-term financing, African airlines often opt for acquiring near-end-of-life aircraft. Unfortunately, this practice results in the operation of inadequately large, fuel inefficient and maintenance-intensive planes. Aircraft leasing provides a solution to this situation as it can render modern equipment more accessible to capital-constrained airlines.
The three advantages of leasing as opposed to purchasing aircraft include: access to modern equipment in spite of constrained company balance sheet (e.g. low capital reserves); flexibility - airlines are more readily able to try new routes and/or increase flight frequencies with relatively lower commitment; and lower risks - airlines effectively transfer residual asset value risk to the lessor, thereby focusing on their core business: "filling seats."
What markets are these planes going to serve and how do we ensure that the aircraft operate in Africa only?
The regional aircraft leasing facility will exclusively serve African airlines and African markets. An indicative pipeline of carriers has been developed based on the Sponsor's market analysis. Potential (but not definitive) lessee airlines include: EgyptAir, LAM, SA Express, Kenya Airways, and Air Senegal - amongst others. As a result, the leasing facility is expected to be active across the African continent. It is worth noting that the aircraft's flight range (4,000 km; approximately the distance between Johannesburg and Dar es Salaam) is ideally suited to foster intra-Africa connectivity.
The Bank's loan will be governed with specific covenants to ensure that only African airlines are able to tap into this leasing facility. The Bank has requested a review of individual aircraft lease agreements prior to disbursing on the loan facility, thereby conducting a final due diligence on prospective lessee airlines. The Bank's Legal and Risk Departments are working closely with the origination team on designing the specific arrangement and will continue to conduct due diligence on appropriate risk mitigation measures.
Aircraft are movable assets. How do we ensure that the Bank's security package will not be compromised in the event of default by a lessee airline?
In this particular transaction, the interests of the Bank (i.e. risk mitigation) are well aligned with the interests of the Sponsor. The leasing company will conduct careful due diligence when selecting beneficiary airlines and their respective countries of origin to ensure that lease agreement terms are met. Before airlines run into troubles, leasing companies play an active role in re-allocating planes. Additionally, a favourable regulatory environment constitutes an important part of the Sponsor's decision-making process when selecting lessees. The appraisal team is currently assessing optimal ways for the Bank to conduct monitoring and oversight of the loan; this may include the appointment of an aviation advisory firm for periodic monitoring missions.
