SOUTH AFRICA: COVID-19 pandemic poses a catastrophic risk to aviation and tourism sectors
The country’s aviation and tourism sectors are under serious threat due to the COVID-19 pandemic and associated restrictions on commercial activity and travel. Three major domestic airlines have entered into business rescue over the past six months. Flag carrier South African Airways (SAA) went into business rescue (a form of bankruptcy) in December 2019. Another state-owned airline, SA Express, did the same in February. Comair – the domestic flight franchisee of UK flag carrier British Airways – entered into business rescue and ceased trading on 5 May. Although that company’s finances may be in a better state than its two aforementioned competitors, Comair’s outlook is likely to become clearer in mid-June when business rescue practitioners are expected to deliver their business rescue plan. In addition, state-owned Airports Company SA (ACSA), which manages nine of South Africa’s airports, said on 18 May it needed ZAR11 billion (USD594 million) in support from the treasury to service new debt, maturing in 2025, to combat the COVID-19 epidemic in the country. Other airlines of the region which operate flights to South Africa, including Air Mauritius, Kenya Airways, and Air Namibia, are also struggling.
Ailing aviation sector will have knock-on effects on tourism, a key revenue earner
The struggles of African aviation, where South Africa accounts for about a quarter of tourist arrivals according to the World Bank, was underscored by calls from the International Air Transport Association (IATA) at the beginning of May for more government intervention to save the region’s airlines. IATA estimates that the current crisis could lead to ZAR3.02bn in lost revenue for the South African government, accounting for a contraction of GDP by 5.1 per cent, and put more than 252,000 jobs in the country on the line. Furthermore, five international air transport and tourism organisations, including the World Tourism and Travel Council and the UN’s World Tourism Organization, have issued a joint statement, asking for USD10 billion in emergency relief in the form of tax breaks or other government support programmes to mitigate the macroeconomic damage to the Middle Eastern and African operators.
Although the aviation sector was already struggling at the end of 2019, with both SAA and SA Express asking the government – their sole shareholder – for financial support which the government refused to approve, the COVID-19 pandemic and associated travel restrictions may have dealt a final blow to some of South Africa’s airlines and tour operators.
Commercial airlines worldwide are coming to realise that the previous business model of low margins and high affluence of passengers will unlikely be viable under the emerging travel requirements, including physical distancing, mandatory wearing of face masks, and health screenings at airports and other transport hubs.
Significant restructuring efforts are already ongoing throughout the industry to limit the shortfall in revenue and growing indebtedness. SAA has submitted a final retrenchment offer to its about 4,700-strong workforce, signalling wide-ranging job cuts. But the proposed plan has been challenged in court by the unions, and is currently being assessed by the labour court of appeal in Johannesburg, which will likely deliver its ruling over the coming month or two.
In addition to the severe recession that South Africa is now facing, a collapse of the aviation sector is likely to have knock-on effects across other sectors of the economy, as it accounts for more than 10 per cent of GDP. Tourism and hospitality providers will be hit particularly hard over the coming two years, as tourist arrivals to South Africa are likely to remain low, particularly due to the emerging physical-distancing requirements for airlines.
According to data by South African Tourism, the ministry of tourism’s marketing arm, tourist arrivals to the country was already declining (see graph above). Furthermore, the top five countries of origin for tourist arrivals are also among the countries with the highest number of COVID-19 infections. These include Germany and the United Kingdom. This suggests that demand for trips to South Africa will remain low even after restrictions are lifted in South Africa and elsewhere, due to the severe recession many economies are now entering.
A highly uncertain outlook
Given the dire outlook over the next six months, tour operators, owners of eateries, and insurance companies, who are likely to face a growing caseload during the period, should continue to monitor the aviation sector-specific trends and adjust their operations and business strategies accordingly. Insurance companies should also prepare themselves for a new insurance environment with higher risks of travel disruption, potentially due to failed temperature checks.
THIS ARTICLE FIRST APPEARED IN THE May 2020 EDITION OF THE SUB-REGIONAL INTELLIGENCE MONITOR FOR east & southern AFRICA
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