Form follows function. That’s at least in the design world. For the Airports Company South Africa (ACSA) it’s not been a matter of survival, but instead promise. For the 2019/20 financial year it reported a dip in aircraft landings to 248 519, from nearly 260 000. While departing passengers hover around 21 million for the past three financial years.
Where we see most of the traffic is at O.R. Tambo International Airport with 10.5 million passengers, over 106 000 aircraft, Cape Town International with 5.3million passengers over 45 000 aircraft, and King Shaka International with 3 million passengers over 25 383 aircraft. Port Elizabeth is on the brink of breaking the million-passenger mark, with 24 140 aircraft. These major centres for aviation in South Africa represent significant growth hubs in industry, tourism or commerce in general, and are axiomatic with economic development and growth.
Yet, the impact of regional airports on economic development is that they pick small towns and emerging cities up from a low base—thus having significant impact on development. There are prerequisites such as a strong municipal and provincial appetite for aviation development. One would expect passenger travel to be the core focus, but it only supports service sectors and has a multiplier effect in the crosspollination of business and the more than 1 million monthly tourists travelling by air.
However for regional airports, the impact is different. It is premised upon how the airport is linked to the broader transport network, and various other parts of the local economy’s value chains. In other words, the airport serves as a conduit to access the globe, and for the globe to access these smaller towns and emerging cities.
Narrow focus on risk and efficiency over opportunity and development
ACSA’s focus before the pandemic already anticipated weakening demand and thus has shifted away from airport development through “capacity expansion’ toward ‘innovation, alignment, integration and replication of successful developments”. Somewhat similar to where Transnet Ltd was when Brian Molefe left for Eskom, it shifted away from expanding capacity to focusing on enhancing its efficiencies. What is different however, for ACSA, is that it has built a strong profile around airport development consulting that is pinned around running and developing airports, while growing their footprint in case strategic opportunities pop-up. This is why the company has pivoted its position around international airport concessions and advisory services in some African airports against the backdrop of the Single Air Transport Market.
This level of expertise is however confronted with an important risk: economic regulation. When Moody’s issued their outlook on ACSA end of November, they maintained a negative future due to the evidently lower travel demand in the 2020/21 financial year. For September alone, passenger travel was down by 93%, only chartered flights experienced a growth in passenger numbers from about 110 000 to 121 000 or so. Airports in Brazil, though with more passengers, experienced a similar scale dip in passenger travel demand—so we are not alone.
Another reason Moody’s outlook was negative related to the “evolution of airport tariffs”; and significant government ownership of 74%; dominance in the airport market accounting for 90%. The Ba2 rating is two scales away from investment grade, thus the rating implies a speculative investment scenario with “substantial credit risk”, but the numerical modifier ‘2’ suggests that it ACSA falls within the moderate range. With the Economic Regulation of Transport Bill setting a precedent for curbing market dominance of network industries, there is a risk for ACSA’s dominance to be contained or retained depending on the politics of the time.
However, what is clear is that the dominant focus on passenger travel down-plays the regional industrial impact airports can have on small towns and emerging cities.
Regional airports rise from a low base—without passengers
Airports located in small towns and emerging cities under ACSA accounted for R250m of its R7.12 billion in revue. The passenger travel focus is reverberated by the idea of ‘the mall in the airport’, as José Castillo-Manzano and colleagues contended that this would increase consumption of items sold at the airport. Which would explain why the company has a revenue base driven by non-aeronautic revenue dominated by retail accounting for R1.2bn, property rental reflecting R821m and parking, car hire and advertising accounting for R1.07bn.
But aeronautical revenue only accounted for R2.38bn in passenger service charges, and R1.3bn in landing fees—both are down from the previous year. An increase to R54m in aircraft parking revenue is the only up-tick.
The company presents an increase in profit to R1.2bn from R0.2bn the previous financial year and a billion Rand increase in its asset base.
However, we know from some evidence that investing in regional airports beyond passenger travel is justified only by the industrial potential these areas present. Largely because the towns are small, thus fewer passengers, land is cheap and readily available.
Take for example, Upington International Airport with the longest airstrip in South Africa, capable of landing the largest cargo carriers in the globe. The airport contributes R85 million to the GDP, creating 333 jobs and contributes R77 million to the company’s revenue. The municipality hosts just over 100 000 inhabitants and the airport contributes 0.88% to the Northern Cape Province’s GDP. It is 400km away from Kimberley and about 140km away from Namibia—placing it in close proximity to the Southern African Development Community. However, ACSA’s business model for this airport leans into passenger travel through Airlink, but not leveraging on the industrial potential of such a location and airport capacity.
Other examples are Kimberley, George and Braam Fischer under ACSA, Polokwane, Wonderboom (severely underutilised) and Mahikeng under their respective Provincial Governments to my knowledge. Air cargo has been one of the big winners in the global pandemic, and with online purchases dominating the scene, the trend toward online, high value and short-lead times will not go away any time soon.
Leveraging on the future of consumer demand in Africa
Africa has consistently lead in freight capacity over the last few years, but filling this capacity requires the domestic production and, or assembly of products in the continent. In a recent World Bank Report, the African Continental Free Trade Area could boost incomes by nearly $450 bn in 2014 US dollars by 2035—that’s about R4.7 trillion assuming Rand-to-Dollar of R10.50 in 2014, that is R63 trillion for the whole continent in today’s terms. Much of the trade benefits are driven by manufactured goods, and the big question is how these goods will be transported.
Air transport could carry some of the high value, short-lead time consignments throughout the African continent. In conversation with the authors of the World Bank report, the main assumption is getting all the pre-requisites right. That is, offering the policy certainty and reforms necessary for intra-Africa trade to take place. Which will involve becoming more tech-savvy from a regulatory perspective, and grappling with the perceived risks associated with building industry. The Quarterly Bulletin once reflected how political stability not consumer demand, nor cost of capital was the perceived risk in the manufacturing industry. Last year, JP Morgan pinched on growth forecasts for SA, Turkey and Brazil largely due to “policy disappointments” and for SA specifically it was motivated by “rent-seeking” behaviour (or corruption).
Besides this, the major firms driven by consumer demand were leaning into air cargo investment before the pandemic. Amazon Air was reported to push 100 flights per day in May this year, and projected to reach 200 aircrafts by 2028—from only 39 end of 2019! India has had an ambitious air cargo programme as part of its integrated development, where in 2014 it identified key airports for cargo hubs, and it still aims to transport 10 million tons per day by 2027 in order to optimise freight costs. The appetite for airfreight leans on the increasing pace of global value chains through e-commerce, and the pandemic. Keuhne+Nagel, the integrated logistics company noted in early December this year, that these two factors justified the conversion of passenger aircraft to freighters. Much of the logistics gains are contained on a regional level, for more than 200 million inhabitants—hence an Africa focus.
Replicating Ekhuruleni—at a smaller scale
Looking at ACSA, and the role it could play in supporting, advising and enabling the development of airport development hubs, similar to Ekhuruleni’s massive aerotropolis programme, would go a long way in the small towns and emerging cities.
A significant shift away from ‘passenger’-thinking toward economic development. This drive, is premised upon a municipality gearing itself toward incentivising and consolidating Special Economic Zoning, transport planning and bringing industry, government, finance and infrastructure in the same room—from the draft incentives, there is much to explore and replicate.
In my view, SA needs to diversify its development and investment bases in a prudent and bankable manner. In the smaller towns and emerging cities, replicating some of the above mentioned elements could be helpful.
Maybe ACSA should not be the one to drive this effort, alone, but a new entrant, taking on and developing airports for this purpose. Of course, professionalising public service and bringing in strong municipal capacity could benefit from ACSA and other reputable providers of consultancy that supports provinces and municipalities in regional airport development.
There is also room from private operators to run airports with the right concession agreements—ACSA is proficient at this.
With capital so cheap and a travel demand dip temporarily this low, futures look bright enough for an opportunity to activate airports in places that haven’t made national headlines in years.
At the same time, bringing strong network gains from reducing its monopoly footing by increasing the number of publicly and privately operated airports could invite a vibrant aviation economy.
Thank you for reading.