Growing competition inspires merger between two main airlines
BY MARTINE RIVERS
The steady rise of foreign airlines into Somalia’s skies is a positive proof of growing optimism about the country’s prospects. But while Turkish Airlines, Ethiopian Airlines and Fly Dubai have only recently seen opportunity in Somalia, its home-grown carriers have been keeping vital air corridors occupied for decades.
Daallo Airlines, for instance, has had a firm footing in the region, servicing the Somalia market even at the height of instability.
Daallo, together with the two other local operators African Express Airways, and Jubba Airways still account for about three-quarters of all scheduled flights in the country. With competition heating up, Daallo and Jubba Airlines have now joined forces to create the Africa Aero Alliance (AAA).
“Competitive pressure is there, but more than that, it’s a matter of maturity,” explains Mohammed Yassin (Olad), the Chief Executive and cofounder of Daallo, which also serves as the official flag-carrier of Djibouti.
“We have been operating for the last 24 years. We have realised that Africa really needs a different way of playing the game. It’s not that easy to finance an aircraft in Africa, but by mobilizing resources locally among the people, by putting our forces together, we can have an alternative way,” he says Daallo started operations in 1991 with a tiny Cessna Caravan capable of carrying just 14 passengers. It exploited the glut of Russian-made aircraft after the collapse of the Sovie Union to rapidly expand its fleet. By first acquiring an Ilyushin Il-18 and later a Tupolev Tu-154, the airline extended its reach beyond the Horn of Africa to Middle Eastern points such as Jeddah, Dubai and Sharjah.
European expansion followed around the turn of the century, with flights to London Gatwick Airport and Paris continuing until 2009. A strategic partnership with Istithmar World Aviation, a subsidiary of Dubai World, was also formed in 2007, but it quickly broke apart during the global financial crisis.
While Daallo has had its fair share of problems (two apparent terror attacks were foiled in 2009), the airline has overcome the difficult situation in Somalia, and has continually modernised its fleet. Its success has been mirrored by Jubba, which was founded in 1998 and is considered by many to be the de-facto national flagcarrier of Somalia.
Yassin says that both airlines were profitable in 2013 and 2014. He expects this year to be “even better”, as foreign interest in the country grows. But with Doha-based Qatar Airways also eyeing Somalia’s air space, the two local carriers are mindful of the need to boost efficiency. The best way of doing this, they decided after careful consideration, is to synchronize operations under the banner of holding company AAA.
“It’s a complete reform,” Yassin says of the merger, which took effect on March 1, 2015. “Now we will have the ability to raise aircraft utilisation, so we can get better equipment. Also, instead of each airline doing some flights which are not profitable, when you put them together the situation immediately changes.”
At the start, it will be business as usual from the passengers’perspective. Daallo and Jubba will continue to offer distinct products under their own brand names, albeit with the AAA logo also appearing on the aircraft.
But, behind the scenes, financial synergies should start accruing from day one. Codeshare agreements now allow the two carriers to sell tickets for each other’s flights, thereby sharing traffic and building economies of scale.
By combining their networks in this way, the former competitors can avoid cannibalising demand on key routes. Shared procurement should also strengthen their negotiating hand with industry partners, further improving the bottom line.
The group’s fleet currently comprises two Airbus A321s, two Boeing 737 Classics and one BAe 146 Talks are underway to acquire a pair of 70-seater ATR 72-500s, while one of the 737s may be retired. The BAe 146 will largely be reserved for charter flights.
Expansion is firmly on the agenda, with Addis Ababa and Entebbe top of the target list for connectivity from both Mogadishu and Hargeisa. “We have to cover our home market adequately,” Yassin says. “That includes Djibouti, Somaliland, Somalia, Kenya, Ethiopia and Yemen. These are the countries we have to serve well.” Plans to add the Yemeni cities of Aden and Taiz to the network may be delayed given the deteriorating security situation in that country, but Yassin stresses that the group is steadfastly committed to its Arab neighbour.
After optimising domestic and regional flights in 2015, Daallo will next year turn its attention back to Europe. “We have to resume our previous operation to London and Paris, but that will not be this year,” Yassin says, noting that longer-range aircraft such as the 757, 767 or A330 would be required for those routes. “We expect that next year,” he adds.
The AAA management board is headed by the existing bosses of both companies, with Jubba Managing Director Abdullahi Warsame becoming Chief Executive of the group, and Yassin becoming its Chairman. Asked about the country’s thirdmajor player Nairobi-based African Express, which was founded in 1986 Yassin leaves the door wide open foran expansion of the partnership. Aformal approach has already beenmade, he notes, though the group’saspirations in truth stretch far beyondthe Somali market.
“The objective of this merger is to create a bigger alliance for African airlines. Daallo and Jubba are the first members, but we are looking to expand the alliance across Africa,” Yassin explains, singling out Chad and Uganda as two countries under review. “The company will expand to some countries, which don’t have national carriers, or are under-served… There is already interest coming from small carriers from different places.” Amid ambitious plans for an alliance spanning central and eastern Africa, it is only natural to ponder what prospect Somali Airlines the former flag-carrier, grounded since 1991 now has of returning to the skies.
The government has repeatedly urged local operators to club together and resurrect the brand through a public-private partnership. Although Yassin is “really excited” about this project, he cautions that the concept of a flag-carrier has changed over the years. “It doesn’t necessarily have to carry the name of the country,” he notes.
AAA is therefore focused on consolidating and revitalising the private sector, before looking to the State for equity partnerships. It is an approach that reflects how industries generally now function in Somalia, following two decades without governance.
“In Mogadishu, everything is being done by the private sector,” Yassin concludes. “So the way that the government can develop things is to set a proper and sound economic development strategy, and empower the private sector to implement the strategy. That’s the proper way of doing things with the way Somalia is right now.”