Mombasa Wednesday 22nd June 2016: Kenya Airports Authority in conjunction with the Kenya Tourism Board this morning welcomed the inaugural Condor Airlines flight from Munich to Mombasa’s Moi International Airport. The weekly flight operated on a Boeing 767-300 will make it possible for passengers to have a direct flight between Kenya’s coastal city of Mombasa and Munich in Germany.
There is a famous story in the frequent flyer circles about a man who torn between spending New Year’s eve with family and attaining the highest level of recognition on an airline, chooses the latter and goes on a trans-Atlantic flight.
He attains the million miles status and gets a lifetime offer of free flights on the carrier; arguably the highest level of recognition the airline could give to a loyal customer.
If you are a frequent flyer to the scenic South African city of Cape Town, you must have been thrilled at the recent Kenya Airways announcement of direct flights from Nairobi to Cape Town. The flights, to commence on July 1, will be operated thrice a week via Livingstone, Zambia.
The direct flights will bring an end to the hassle of having to transit via other connecting points currently, your top three options to Cape Town from Nairobi are: Via Johannesburg by KQ, via Johannesburg on South African Airways and via Addis Ababa on Ethiopian Airlines.
Earlier this year an aviation writer for The Economist started off his commentary by saying “Africa is ripe for air travel.” True, air travel in Africa is on the rise. And with this come the issues of airport and aircraft safety and most important, in-flight safety.
Aviation is probably one of the few service sectors where the proverbial “customer is king” phrase does not entirely apply. Actually, this is always subject to the safety and wellbeing of the passengers first. This where the airline crew comes in.
Why do fares to the same destination and sometimes on the same flight vary?
On a recent regional flight from Dar es Salaam to Nairobi an interesting conversation taking place on the row behind me made me want to turn around and join in but due travel fatigue and the prospect of a stiff neck, I decided to wait it out and peacefully eavesdrop.
Notably irked that what he paid for his ticket, was higher than what his sitting companion paid, passenger X was not relenting in his curses and tirade of not so pleasant things to say about the airline. And because such misfortunes don’t come singly, they made him pay a penalty and some excess baggage fee. Dar es Salaam to Nairobi is only an hour twenty minutes by flight but this was a long one.
Your service contract with any airline you choose to travel with is pretty simple; to deliver you and your baggage to the destination of your choice safely, preferably together. There have been or there will be those anxious moments when your baggage has not or will not arrive with you at that destination. It gets more complicated when you are on international travel.
You have either felt or will feel even more aggravated when that airline of choice remains aloof and unresponsive amid your frustration and mad rants about how you will never fly with them again since your baggage is lost/delayed.
Here is a glimpse into what you should know about your service contract with an airline when you purchase a ticket.
As airlines take delivery of new aircraft, owners must be found for second-hand aircraft. In the past, airlines from developing economies have taken these, which has created a natural flow of ownership. This is changing as new and smaller airlines place orders for new aircraft direct with manufacturers, often taking advantage of Export Credit Agency (ECA) finance. This, together with concerns of oversupply of some aircraft types, particularly narrow body, could put aircraft values and lease rates under pressure.
These factors could have a significant impact on the demand for the second- hand fleet going forward. If values of aircraft are driven down, this could raise questions around financing these older aircraft, even if there is a willing customer, as the risk of financing such aircraft increases.
Aviation finance could provide an attractive opportunity to deploy large amounts of capital efficiently in ‘hard assets’.
Why invest in aviation financing?
Direct Purchase vs. Operating Lease
We come across many governments and airlines in Africa struggling with fleet acquisition modalities and mulling over fleet financing alternatives. There has been an unending debate on which is the most suitable operating model; whether direct purchase or operating lease. When I first heard the phrase “if it flies or floats you should rent it” I though it was funny, that aside, the methods used for financing the purchase of or operating an aircraft are through Direct Purchase, or through an Operating Lease either or both options come with financing options.
Direct Purchase with Financing
In a direct purchase arrangement for commercial planes, the prospective operator or airline purchases the aircraft direct from the manufacturer or vendor, using a secured or unsecured loan or structured finance lease. Usually, a syndicate of banks come together to raise the required loan amount. The loan amount advanced for the aircraft can vary from 70% up to 90% (or even 100%, but rarely, and heavily dependent on the borrowers’ profile) of the value of the aircraft depending on the airline, profile of its guarantors and its available capital. In cases where the financiers put in less than 100% of the aircraft value, the manufacturer or vendor expects the purchaser to make the pre-purchase deposits. Most financing arrangements usually come with a term limit (up to 12 years) accompanied by mortgage style amortization and either fixed or floating interest rates.
Should an airline decide to go for direct purchase of an aircraft, there are several advantages for the buyer mainly;
On the other hand, there exits some disadvantages of direct purchase key of which are;
In an operating lease arrangement, the lessor acquires the aircraft from the manufacturer having made all the advance payments and financing arrangements for the aircraft at delivery. The operator/lessee, in this case a commercial airline will then leases the aircraft from the lessor. Aircraft is usually leased out at approximately 1% of the new aircraft cost per month as rental, however demand for the aircraft type, supply, operating environment and region of deployment are some other factors that lessors take into account during pricing. Monthly rentals aside, most lessors will ask 2 -3 months equivalent of rental fee in security deposit and maintenance reserves costs.
Nearly all lease agreements have a minimum lease period of 3 years to a maximum of 7 years for narrow body aircraft and a longer lease period can be expected for a wide body aircraft. In most cases at the end of the lease period airline/lessee returns the aircraft to the lessor. However, an airline may have option to renew lease or purchase aircraft at fair market value.
While the key benefit of operating lease is the huge reduction in capital investment required, other positive factors include;
Some of the shortcomings with leasing are;
If you are a Chief Marketing Officer for an airline in Africa, there are many reasons why we should expect your marketing plans to have moved from the limited-in-reach and expensive traditional avenues such as brochures, magazines, billboards, print, radio, television etc to include digital marketing avenues as a key component of your communication planning.
With shrinking margins, non existent profit, ever increasing operating costs, cost of aircraft lease/purchase, world fuel prices beyond airline control etc how does an airline “spare” more funds for digital marketing?.
Online Reputation Management: Why what they say about you online matters
Does your organization actively manage its reputation online?
A few years ago, I got an invitation to be part of a turn around team for one of the regional carriers in Africa. Naturally excited about the opportunity and knowing very little about that airline I went straight to my best information source at hand – Google.
The search results were least to say mortifying; ranking highest on the search result was “Here is why you should not fly airline WXYZ” complete with a blog posted under the airlines’ domain with a .net and .org extensions. Whoever posted and managed this blog had a sad story to tell about their experience with the airline. This person gave a blow by blow account of his experience with the airline and its staff in a Stephen King kind of script.
Opinion:The business model of discount/no frills/budget airlines or Low Cost Carriers (LCCs) is based on low fares with limited services to keep costs to a minimum.
LCCs employ several cost cutting measures to ensure that their operating costs are less than those of traditional or Full Service Carriers (FSCs). The most common are; online ticket sales and check in, charges for checked in baggage and on-board refreshments, utilizing cheaper un-congested secondary airports, etc.