Understanding the Qatar-Rwanda US$1.3B aviation deal

The Qatar money is destined to trigger a huge positive knock-on effect on several elements to Rwanda’s economy. This is known as a multiplier effect.

In simple terms, the multiplier effect refers to the increase in final incomes and related stimulants arising from any new injection of spending.

For that reason, Taarifa business team hereby breaks down a detailed preview of the likely impacts of the US$1.3 billion Qatar Rwanda aviation deal in the next 15 to 20 years.

Empirical Quantification of Qatar-Rwanda Aviation Deal Multiplier

Macro-economic experts say that the size of any multiplier depends upon an economy’s marginal decisions to spend.It is known as the marginal propensity to consume (mpc).

Rwanda is a virgin economy. This is a known fact. There are literally thousands of opportunities to be created in terms of propensity to consume services and goods from a massive injection such as envisaged US$1.3 billion on its economy.

Therefore, it is important to fully understand the implications of the Qatar-Rwanda aviation deal using simple illustrations.

For example, RwandAir the national carrier will be given the kind of muscle that the government of Rwanda has been aspiring to give it for the last 10 years; which is for Rwanda to have one of the biggest and most modern aviation hubs in East Africa.

The new hub once constructed in Bugesera is meant to serve over 14 million passengers annually by the year 2035. The new airport is meant to give Rwanda capacity to compete favourably in the regional aviation market. Currently the leader-Ethiopian hub in Addis Ababa serves over 12 million passengers annually and Kenyan hub with second spot at Jomo Kenyatta in Nairobi city currently serves 7million passengers annually.

Without doubt RwandAir will emerge as the carrier to watch in East Africa positioning it against major players Ethiopian Airlines ET and Kenya Airways KQ.

This kind of muscle by RwandAir is meant to trigger several effects within the regional aviation sector. For example, RwandAir once muscled enough will provide Rwanda with greater efficiency in the local export sector.

Rwanda’s landlocked status that forms to date one of its biggest strategic disadvantages like the case of Ethiopia will be turned by the deal over time to be its biggest growth driver.

Conservative estimates of Qatar-Rwanda aviation deal multiplier to the Rwandan economy comes to approximately 5 times the originally invested sum. This estimate is according to calculations and formulae by experts. This comes to US$6.5 billion as the effect of the deal on the economy of Rwanda in the long run.

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A Muscled RwandAir

Let us start with RwandAir. For starters the effect of the Qatar-Rwanda aviation deal on RwandAir is a topic not many government officials are willing to discuss due in part to high sensitivity of the transaction. However, there are ways of countering the deep silence from public officers.

Looking at the stage of its growth, experts say that RwandAir needs a partner with the technical resources and experience that an international carrier like Qatar Airways has. While it is still early to speculate, the likely mode of partnership between Qatar Airways and RwandAir is what is known as a strategic takeover.

This is what happened to Kenya Airways in 1996 during its privatization- the first to do so in Africa where KLM the Dutch carrier took a 26% stake something that served to turn around its operations.

The Qatar Rwanda aviation model is such that Qatar government through Qatar Airways is set to own 60% stake in RwandAir while the government of Rwanda remains with balance of 40% and Qatar Airways runs RwandAir as its African subsidiary.

This is what most likely informs the deal signed between the two countries. Hence it’s a right fit for Qatar Airways to take over RwandAir given RwandAir’s current expansion plans.

Qatar Airways a state owned operator generating over US$12 billion in revenues annually has over 8 major subsidiaries. It owns over 240 aircraft employing over 43,000 staff operating from its hub in Hamad international airport in Doha linking over 150 international destinations.

Question is; what is the business case of a likely takeover of RwandAir by Qatar Airways. Let us look closely at numbers.

While management of RwandAir remains tight lipped on its fundamentals reports by analysts says that it has revenue of US$15 million annually and employs staff of 500, according Owler a global search site.

Owler says that RwandAir’s latest funding round was a debt of US$160 million in July 2015.

In terms of core competitors Owler indicates that RwandAir can be said to have three major forms of competitors totaling 10 airlines. RwandAir competitors include its 3 sector peers on one end of competition spectrum where it is currently placed. In the next spectrum are the 4 regional carriers where RwandAir aspires to reach in the future. In the far end of the competition spectrum are 3 truly global aviation giants.

In terms of regional aviation dynamics RwandAir’s main competitors meaning its real sector peers are Mango Airlines from South Africa, Kulula also from South Africa and Fly540 from Kenya.

Meaning that RwandAir founded in the year 2002 in its current form, status and funding can be described as a small but highly ambitious player in the East African aviation sector.

RwandAir’s peers Mango Airlines rakes in US$102.5 million annually in revenues, Kulula does US$8.5 million annually in revenues and Fly540 does US$6.5 million annually in revenues.

However, RwandAir is eying battles against leading regional flag carriers away from private operators.In this second classification is Kenya Airways making annual revenues of US$1.1 billion annually, Air Mauritius with revenues of US$568.1 million annually, Air Seychelles generating US$136.5 million annually and EgyptAir Airlines generating US$263.5 million annually.

It is in this category that RwandAir will mostly likely fit into after its impending take over by Qatar Airways.

At far end of the competition spectrum, the muscled RwandAir will mostly likely aspire in the long run may be in the next 15 to 20 years to compete against much larger international carriers such as Garuda Indonesia with revenues of US$4.4 billion annually, AirAsia with revenues of US$2.6 billion annually or Royal Air Maroc with revenues worth US$1.7 billion annually.

RwandAir’s revenue base according Owler is ranked 9th among its top 10 competitors. The top 10 competitors average almost US$1 billion in revenues.

Also read: Rwanda’s GDP increased By 11.1% in first 9 months of 2021

Battle For Regional Air Space in East Africa

The year 2020 is ushered with optimism and high expectations by East African aviation market on several fronts.

Experts in the regional aviation sector say that battles lines are already drawn where the fight for market share will be fought fiercely between three major flag carries namely Ethiopian Airlines ET, Kenya Airways KQ and RwandAir.

The battles are being fought through formation of strategic partnerships leading to further consolidation by the three main competitors working in a liberalized environment

A meeting held by stakeholders in 2017 painted the picture for the battle for East African skies. Even as competition hots up in East Africa the carriers need to overhaul their business models, increase the size of their fleet and adopt cost cutting measures if they are to sustain their operations.

The 49th African Airlines Association (AFRAA) meeting that was held in Kigali in 2017 advised the competing flag carriers accordingly.

“African airlines need good leadership at the top, a cost reduction plan and a fleet plan if they are to make profits,” said Elijah Chingosho, the AFRAA Secretary-General said.

The hub and spoke model is what the major flag carriers are using to fight in the market.

“This business model is based on how an operator does business through mergers and or acquisitions to bring in cash and capacity, maintenance programs, route code shares, use of lounges and coordination of frequent flyer programs”, says Michael Otieno an aviation expert.

Otieno adds that: “The model is executed in such a way that the carriers are realigning their businesses through strategic partnerships with investors on one hand and with their home airports on the other hand”.

There are 6 major aviation hubs in East Africa. Two are huge and the rest are relatively minor players. Rwanda currently with the smallest intends to up-stage the two biggest players by building the biggest and most modern hub in East Africa.

In the operating environment the Addis Ababa hub known as Bole with capacity of handling 12 million passengers comes on top. It serves Ethiopian Airlines ET its flag carrier in addition to second carrier National Airways of Ethiopia. Bole and ET have maintained their leadership in the market with an impressive operating track record as Africa’s top hub and flay carrier respectively. Bole hub recently completed carrying out a US$250 million refurbishment to cement its leadership position in the region.

ET’s strategy is interesting in number of ways. “With a mix of strategic investments and partnerships, airline acquisitions, and efficient service delivery, ET hopes to take over Africa’s skies and change air travel on the continent”,Otieno says adding that,its success will depend on ET leveraging its position as a leading airliner and calling others “to throw their back into the whole effort to get the continent connected.”

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The second biggest hub is the Jomo Kenyatta international airport hub that serves three carriers namely Kenyan flag carrier Kenya Airways KQ, Jambo jet, Fly540 and African Express Airways. Jomo Kenyatta serves 7 million passengers generating almost US$800 million annually contributing 1.1 percent of Kenyan GDP.

The Jomo Kenyatta hub in 2016 abandoned a US$650 million upgrade that was meant to increase its capacities to handle over 20 million passengers annually among other upgrades citing budgetary constraints and challenging operating environment for its flag carrier KQ. However, last year KQ upped its ante and is flying into profitable territory after counting losses for a number of years.

Julius Nyerere International airport in Dar es salaam comes third .It serves 2 million passengers annually and is home to Tanzanian flag carrier Air Tanzania as well as Precision Air. Air Tanzania a revival owned by the government of Tanzania re-started operations in 2016 with an aggressive approach despite its status as new kid in the block.

The fourth biggest hub in the region is the Entebbe international airport hub flying 1.5 million passengers annually home of Ugandan Airlines Pearl of Africa’s flag carrier a second revival by government of Uganda hence the newest entrant carrying out initial first baby steps of entering into the fray. The other carrier is Eagle Air.

The government of Uganda is carrying out refurbishment of Entebbe hub at cost of US$200 million by the year 2023 with expected completion of a new international passenger terminal building with a capacity of 3 million passengers.

The fifth hub is Mt Kilimanjaro international hub serving cities of Moshi and Arusha in Tanzania. It serves 800,000 passengers annually.

The Kigali International airport hub comes sixth and last major hub. It serves over 700,000 passengers annually using 3 carriers with RwandAir Rwanda’s flag carrier being the dominant operator. Others are Akagera Aviation- Rwanda’s heli firm as well as Tempus Jet an American charter airline and Nexus Aero a Saudi VIP airline.

Rwanda made plans to replace Kigali international airport with a new one at Bugesera in 2016 that culminated in signing of an agreement with Mota-Engil Engenharia e Construção África, S.A., a Portuguese firm. The company was meant to construct the new airport in two phases worth an estimated US$818 million with capacity to handle 4.5 million passengers upon its completion.

In December 2019, Rwanda signed a deal worth US$1.3 billion with the government of Qatar meant to increase capacity of the new airport to handle 14 million passengers annually by the year 2032.

It is important to note that the Qatar Rwanda aviation deal is the main plank that RwandAir hopes to use in order notch up its game in a market whereby carriers have bought new planes and have announced lofty operational plans.

The operating environment is also improving tremendously. Experts say the market is very promising buoyed by the signing of last year of the landmark Pan African trade agreement the AfCTA. The boost in the sector will further be complemented by the single African air transport market(SAATM) protocol meant to make Africa borderless.

Over 80 percent of African states are SAATM signatories something that will further unlock the tremendous opportunities in the sector that informs moves such as the Qatar-Rwanda aviation deal.

With the projection of where RwandAir intends to reach in the next medium to long term the next thing to do is attempt to predict how the battle of regional air space will play out after impending takeover of RwandAir by Qatar Airways.

RwandAir is very likely to move into the second cluster of its competitors. This is where Kenya Airways KQ is placed.

Let us look at the numbers associated with KQ. The Kenyan national carrier with a fleet of 40 planes flying in 53 destinations moved from its rough patch into safe operating environment last year. It posted revenues of US$1.1 billion and made a net profit of US$250 million with staff of over 4,000 following successful entry into US market among other achievements.

This was made possible after its hub Jomo Kenyatta International airport finally attained the coveted FAA Category 1 status which is a security and safety certificate required by airports that handle direct flights to USA.

KQ fortunes were bolstered by Kenya’s 2018 tourist arrivals that grew by 37.33 percent from the previous year to cross the two million mark for the first time.

Sources says that in 2018 Rwanda initiated in 2018 the multiple processes needed for it to access launching of RwandAir flights to the USA.

These are some of the main dynamics that are informing the Qatar-Rwanda aviation deal that are likely to give muscle to RwandAir for it to reach the capacity of its two major competitor flag carriers ET and KQ.

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Rwanda Air Force to Get Significant Upgrades

Qatar’s investment of U$1.3billion into Bugesera airport facility in Eastern Province minutes away to the border with neighbouring Burundi is slated to trigger a lot of changes in Rwanda’s security policy.

Rwanda’s annual Defence Spending is U$120million and experts estimate that the country allocates almost U$30million to its Air force. But this is destined to substantially expand with the entry of Qatar aviation investments in the country.

With an annual defence spending of about U$1.93billion, Qatar is expected to discuss with Rwanda on how best to protect its investments by extending its advanced security systems, technology, and equipment and skills training.

Qatari Chief of Staff Lt Gen (Pilot) Ghanim bin Shaheen al-Ghanim has already been in Kigali for two days to explore and strengthen areas of mutual defence and military cooperation.

Considering the magnitude of investment, the Qataris are expected to boost Rwanda’s Air Force capabilities to be able to protect Bugesera airport in real time once it’s completed and operational.

Experts estimate that Rwanda expenditure on its Air Force (RAF) alone could expand to a bold figure of at least U$212million annually in the next five years as the country adjusts for the future.

This country hosts the Qatar Air Academy the first military training centre to be certified in the Middle East. It has ISO 9001 certification by Défense Conseil International Group (DCI), the reference operator of the French ministry of defence for the international transfer of French military know-how.

Officers of the Rwanda Air Force could definitely be destined for advanced training at the Qatar Air Academy as part of a deal package between the two countries.