Egypt’s aviation sector benefits from renewed focus

Many of Egypt’s airports have been operating beyond their design capacity for years. Now funds are at last being ploughed into expanding them. Published in MEED, 24 May 2015

Few travellers to Sharm el-Sheikh seem to enjoy their experience at the airport, if the reviews on websites such as Skytrax are anything to go by. Stories abound of chaotic check-in procedures, impolite staff and poorly organised baggage reclaim systems.

Perhaps some of the delegates to the Egypt Economic Development Conference, which was held in the resort town in March, suffered with similar problems. By the end of the conference, the Islamic Development Bank (IDB) had agreed to provide $457m to improve the airport. A month later, the African Development Bank (AfDB) approved a $140m loan for the same purpose. The $670m expansion project involves the construction of a new terminal, runway and control tower.

Stretched infrastructure

Sharm el-Sheikh has an important position in Egypt’s tourism industry and the investment in its airport will increase its capacity from 8 million passengers a year to 18 million by 2025. The money is badly needed. The airport is Africa’s third-busiest, according to the AfDB, but it has been operating beyond its design capacity for years.

The investment is, however, only part of what is needed to bring the country’s aviation sector up to scratch. Some other airports have also been getting an overhaul. According to regional projects tracker MEED Projects, $1.4bn-worth of airport projects are being studied, designed or built at the moment. In December, a $350m overhaul of Hurghada International airport on the Red Sea coast, another important tourist resort, was completed, lifting capacity to 13 million passengers a year from 4.6 million, through the construction of a new terminal and runway.

Other projects include a new terminal for low-cost airlines at Borg el-Arab International in Alexandria. The scheme has a budget of $170m and a main contract award is expected in July next year.

A new passenger terminal is also planned for El-Nozha airport, also in Alexandria, and work is in theory still ongoing to renovate Terminal 2 at Cairo International. A new Cairo airport has also been earmarked as part of the new capital city project unveiled at the Sharm el-Sheikh conference, although whether that ever gets built remains in question.

Most of the major airports in Egypt are controlled by the state-owned Egyptian Holding Company for Airports & Air Navigation, through two subsidiaries: Cairo Airport Company and Egyptian Airports Company. The latter’s remit covers 18 international and domestic airports.

In addition, two airports are operated by private companies under build-operate-transfer (BOT) contracts. Marsa Alam International on the Red Sea coast is run by EMAK Marsa Alam for Management & Operation of Airports, a subsidiary of Kuwait’s MA Kharafi Group. El-Alamein International, on the Mediterranean coast, is run by International Airport Company, part of the local Kato Investment group.

Such BOT contracts are used in other parts of the country’s transport system. For example, tenders were issued last year for new shipping terminals at Damietta, Safaga, El-Tor and Alexandria, all to be built under BOT contracts. However, they have not been used in recent times for airports, and few expect that to change in the near term, given the ongoing difficulties in Egypt.

“Maybe in the medium-to-long term there will be more BOT contracts, but I wouldn’t have said there would be a great deal of appetite among investors in the short term,” says John Strickland, director of JLS Consulting, an independent transport consultancy.

Along with expanding airports, changes are needed at the nation’s main airlines. Tourists and business travellers alike have been put off by the political turmoil over recent years and EgyptAir and its domestic subsidiary EgyptAir Express have been feeling the pain.

According to the Washington-based World Bank, the number of passengers flying on Egyptian-registered airlines fell by 19 per cent in 2011, the year President Hosni Mubarak was unseated, and it is taking time for the situation to improve. OAG, an airline industry data provider, says there was little growth in airline capacity to Egypt between 2011 to 2014, although a recovery of sorts is under way this year, with airlines adding more than 600,000 seats.

International carriers

Most of the growth is coming from international carriers, with the likes of Qatar Airways, Dubai’s Emirates Airline, Turkish Airlines and Russia’s Transaero Airlines all expanding fast. In contrast, EgyptAir has cut 60,000 seats this year in a clear sign that even if the sector as a whole is recovering, not everyone will benefit.

“It’s an interesting picture of overseas carriers putting more capacity on, whereas local carriers are actually reducing capacity,” says John Grant, executive vice-president at OAG.

Egypt’s national carrier needs to reform if it is to compete. Although it was consistently profitable before the revolution, the airline has been making heavy losses in recent years, ending 2011/12 with a £E3.1bn ($406m) deficit and posting a further loss of £E1.9bn the following year.

Other parts of the wider EgyptAir Holding Group are profitable, including the cargo, maintenance, and ground services divisions, and EgyptAir Express, which returned to profit in 2012/13. However, their contributions are nowhere near enough to offset the losses at the main airline.

A process of reform is under way. In December, the airline signed a deal with US travel consultancy Sabre to develop and implement a programme of changes designed to increase revenues and improve efficiency. At the time, Sameh el-Hefny, chairman and CEO of EgyptAir Holding, said the aim was to return the airline to profitability by the end of the fiscal year 2015/16. Doing so will not be easy, although the current low oil price environment should help.

“The losses at EgyptAir are coming down, but they’re still quite high,” says Hatem Alaa, an analyst at local bank EFG Hermes. “This year, with low oil prices, there’s a good chance we’ll see some improvements. Tourism is picking up and fare prices have not come down as much as oil prices, so there’s a chance there will be an improvement.”

Increasing competition

The problem is that pressure from nimbler, better-funded airlines in the Gulf and Turkey is only likely to increase. As well as the likes of Abu Dhabi’s Etihad Airways and Turkish Airlines, these include low-cost airlines such as Air Arabia and Flydubai. To the south, Ethiopian Airlines and Kenya Airways have better reputations and better structured hub operations than EgyptAir these days.

“EgyptAir is surrounded by very good global hubs and airlines with good products and competitive prices,” says Grant. “It could return to profit, but it has got to be commercially oriented. It may be profitable again, but perhaps not at the size they are at today.”

The best option for the airline, according to Strickland, could be to focus its activities on key destinations where there is heavy demand from business travellers, tourists and Egyptian expatriates.

There may also be gains to be found in opening up more to Africa. In a report published in July last year, research firm InterVistas looked at the impact that liberalising the market between 12 major African economies would have, including Egypt. It suggested an additional 318,000 passengers could pass through Egyptian airports as a result of Open Skies deals with the likes of Algeria, Nigeria and South Africa, creating 11,000 jobs and $114m in GDP in the process.

Even so, the country may simply have to accept that it can no longer sustain as large an aviation sector as it might once have hoped.

“Many people see aviation as an economic catalyst and generator of jobs,” says Grant. “Undoubtedly in Sharm el-Sheikh and Hurghada that is the case. But on a country level, continually investing in something such as EgyptAir to try and get it right is going to be a hard task to support.”