Citi News Room, May 20, 2023
By Appiah Adomako
Last week, an online petition was started by a Ghanaian based in the United Kingdom by the name Esther Lulu urging the British Airways (BA) to reduce its fares on the London-Accra-London route. She added that “it can be estimated that for a 6.5-hour economy seat on a BA flight, Customers are being charged the same average prices as flying a 24 hour to Sydney Australia. This is an unfair economic tax on the Ghanaians, tourists and visitors who visit Ghana not just for holidays but also for Business and Family connections.”
Before I proceed, I decided to check BA roundtrip economy seats departing 30th June and returning on 23rd July, 2023 for selected cities departing from London Heathrow (LHR).
|Route||Price/GBP||Flight Time (Average)|
|London-Los Angeles-London||546.91||11:00 hrs|
|London-New Delhi-London||957.41||8.30 hrs|
NB: The search for these fares were all done on Friday 12th May, 2023 between the hours of 0900 and 1500GMT from www.ba.com
From the above table, a 6 and half hour travel from Heathrow to Accra cost GBP 1,388.21 whilst 6:40 hour journey to NYC/JFK cost less than half of that of a flight to Accra. Again, a 11-hour journey from LHR to Los Angeles (LAX) cost GBP 546.91. A 11-hour journey from LHR to Johannesburg cost less than trip to Accra, Abuja and Lagos which average 6:30 hrs. Whilst the flying time between London-Abuja and London-Lagos are almost the same, it costs twice as much to fly from London to Lagos than to fly from London to Abuja. This table of comparison means almost nothing as airline fares are not necessarily computed based on mileage. Airlines make use of a pricing strategy called dynamic pricing, which means that prices can change based on demand. The revenue management algorithms for airlines are set to maximize profit. Because of this revenue optimization, airlines can still afford to fly on empty seats during low off-peak times. This is the industry standard.
However, it is an undeniable fact that flights across Africa and into Africa are prohibitively expensive when you compare with other destinations. When we put domestic and regional airlines in the continent into the spotlight, you would find out that, a flight from Lagos to Accra, a journey which is less than an hour, costs almost the same as flying a six-hour journey from Accra to Amsterdam on KLM or flying a 11 hour journey from LHR to Los Angeles.
Why is it that Africans pay more to travel?
First and foremost, the airline market is not well developed compared with the rest of the world. Most non-African carriers operating in the continent run a single service in a day compared with busy routes like London-New York, where British Airways runs more than seven services in a day. In Africa, BA and most Airlines that fly into the continent run a single flight meaning the fixed cost per passenger is higher compared with other destinations where there are multiple flights in a day from the same operator thereby reducing the fixed cost per a passenger.
Secondly, the taxes that airlines pay to fly to Africa is too expensive. The high level of taxes, fees and charges is a critical issue and it is counter-productive for air transport development in Africa. In the European Union, there is a single market for airlines so one avoids paying multiple taxes. As air transport is considered as a luxury service, African government tends to overtax the air transport supply chain leading to excessive service charges to the airlines.
Thirdly, another factor is that most foreign carriers on the African continent allows two bags of 23kg each making it 46 kg per passenger. Meanwhile, flights emanating from Europe to America or to other continents are often allocated one bag weighing up to 23kg per passenger. London to New York or to Los Angeles or Sydney passengers are entitled to one checked luggage weighing 23kg for free. This means that foreign flights on African routes require more fuel to carry the loads occasioned by the 46 kg free luggage allowances. One of the cost drivers for airlines is fuel. There is nothing like a free lunch when an a passenger is given a free 46kg luggage allowance.
Fourthly, competition is also one of the biggest factors that drive prices down. Most airlines flying into the continent do not face competition on their direct routes. For example, JFK-Accra is only served by one airline which is Delta. Again, direct flights are more expensive compared with in-direct flights. The same applies to flying from London-Accra or London to Abuja which is also expensive on BA. When an airline is not facing competition, it can price its fares above economic rates and still sustain it for a long time. In a perfect competition market, firms price at marginal cost of production and any attempt to price above marginal cost could permit rival competitors to underprice thereby making more sales than whoever prices above the marginal cost. The market is concentrated and dominant players on a particular route like any other carrier which enjoys monopoly on a particular route can enjoy rent from its monopoly.
Where there is a competition, one can see back and forth movement of flight prices. Airlines keep their friends close and their enemies closer, they do so by closely monitoring the fare prices of their competitors on similar routes. If one airline drops their price, the competitors also drop their price. This practice is called price matching. In these case, BA has no competitor on the LHR-ACC or ACC-LHR route so there is no incentive to look at how other airlines are charging on the same route and adjust prices to be competitive.
Between 2002 to 2009, Accra-London-London route was very competitive with multiple players which included the BA, the now defunct Ghana Airways/Ghana International Airlines, Chartered flights (Britannia and Astraeus) and even Libya’s Afriqiyah Airways. Even in 2008, at the height of the global petroleum crisis when crude oil went as high as $147 per barrel, the highest I paid for a roundtrip fare from Accra to London in the summer of that year was $710.
Finally, British Airways flights to Accra from UK are expensive because of Brexit. Now passengers travelling to the UK with any European carrier like KLM, Brussels Airline, Air France etc on a Ghanaian or an African passport, would need a transit visa to transit through the Schengen zone. This used not to be the case before Brexit. What this implies is that most Ghanaian and other African passengers to the UK who do not have the luxury of time to apply for a Schengen transit visa or have to travel under a short notice to the UK would have to do with the British Airways unless one has a Schengen visa already. This too has increased demand for British Airways seats. What this means is that the more there is demand, the more the prices will go up and this is what passengers are facing.
Is BA engaging in an excessive pricing?
Are we trying to suggest that British Airways or other international airlines are engaged in an excessive pricing on African bound routes? The answer is not a straightforward no or yes. The theory of excessive pricing is grounded on the assumption that a firm that has a substantial market power or dominance or monopoly can exploit the market to its advantage by sustaining prices above competitive levels.
There has been an unwritten consensus among antitrust authorities concerning the need not to intervene in the market to bring prices down. It has been argued that government intervening in an excessive price action may water down investment incentives of existing firms as well as deter new entrants into the market. High prices send signals to prospective entrants that the market is lucrative and has the incentive to spur entry thereby challenging the market power or dominance of the incumbent. Whilst an excessive pricing action could be helpful in the short run by bringing prices down and increasing consumer surplus, it would in the long run deter entry as potential entrants may fear suffering the same fate.
I have always been against using regulatory measures to force prices down. The Ministry of Transport cannot urge an airline operator to bring prices down. This is a free market and firms must be allowed to price their goods and services the way they want. Prices must be determined by market forces and not a regulatory fiat.
What are the options available for Ghana and other African Governments?
First and foremost, governments must deepen deregulation of the aviation sector and remove entry barriers to attract new players to come into the markets.
Secondly, the best approach is to allow airlines operating in Africa like the Ethiopian Airlines or Kenya Airlines or Rwandair to use Accra as a base to fly into London. This is what is called the fifth freedom right in aviation. It is the right or privilege of the aircraft of country A, from a service originating in country A, that is allowed to embark passengers and cargo in country B and disembark them in country C. Prior to the covid-19, Ghana allowed South African Airways to fly from Accra to Washington Dulles Airport . That alone put competitive pressure on Delta on the Accra-JFK-Accra route.
Thirdly, African government must reduce airport taxes and fees to make it cheaper for air travel. In a study conducted by the Predictive Mobility, found out that the elasticity of price-demand for air transport within Africa vary from -2.34% to -3.15%. That means that a reduction of 10% on the ticket price can increase the demand at continental level, from 22.3 to 30.1 million passengers yearly.
Finally, Africa needs strong competition and antitrust regulatory to check unfair business conducts of airlines operating in the continent. Fortunately, the African Continental Free Trade Agreement (AfCFTA) has a protocol on Competition. Very soon, the AfCFTA Competition Authority will be operational and can start investigating restrictive trade practices like abuse of dominance, price fixing, cartel, and market sharing practices which have the effect of harming competition in the continent and imposing hardship on African consumers. Article 12, paragraph 3 of the AfCFTA Protocol on Competition Policy mandates State Parties without competition law and enforcement bodies to enact competition laws and establish competition enforcement bodies upon entry into force of this Protocol or their accession to the AfCFTA Agreement. The AfCFTA protocol shall not apply to matters falling within the respective jurisdiction of the national competition authorities. It is therefore imperative that Ghana and for that matter African countries get their own functional competition policy and law.
The writer is a competition and antitrust economist. He is the West Africa Regional Director for CUTS International Accra, a research and policy think tank working on competition, international trade and development, consumer protection, economics and healthcare and education policy. He can be contacted through email@example.com or www.cuts-accra.org
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