Aviation in Africa whilst small relative to population sizes is already very differentiated. As the sector continues to grow there will be increasing opportunities in commercial, corporate, engineering, infrastructure or passenger or airline services. There is something for everyone.
Investing in a dynamic industry across the risk/reward spectrum can be attractive for investors will all types of risk appetites.
It is generally accepted that commercial aviation is a viable investable industry, and the increased availability has fueled investment in aircraft and related assets, mainly through leasing, enormously. But why then is aviation investment in Africa less appealing to international investors?
Transaction structures allow investors to choose from a menu of risk exposure. A typical aviation investment will look at length of tenor, amortization profiles, loan-to-value coverage, etc. And investors will take on what suits their needs.
- Assets – what is the asset? Is it an aircraft, an engine, spare parts?Drilling down through all the risks involved in types and availability of aircraft model, or location and availability of parts, owned vs leased. These are always going to be a consideration in African aviation investments
- Team – a promise to disrupt the market from an outsider without industry knowledge should be avoided at all costs. Aviation is complex and requires an integral knowledge of the industry and ability to spot the warning signs and have an ability to remedy things when they are going wrong.
- Cashflow – the killer of all businesses without stringent controls of incoming and outgoing cash. Having a team who understand timing and cost of cash and the need to re-invest in the business rather than live the “big life” is key. This is not a uniquely ‘African’ problem but it is often quoted as a suspicion and bug-bear of investors in Africa.
- Geo-political – all African countries are not equal. Some have friendly policies to business and aviation businesses in particular. Looking at the local risk factors of doing business in that country is vital to doing business in Africa. Whilst bad governance and policy hinders a lot of companies, some companies find a way to nagivate the intricacies to make it work for them. It is not by accident, but by clear strategy and implementation.
The opportunities in aviation in Africa are enormous. The potentialBut with greater reward comes increased risk. Promises of higher returns are not only commensurate to a level of increased exposure, but often indicates a lack of understanding of technical nuances, the operating environment and industry normalized returns.
Due Diligence Must be Completed
Greater complexity of sector and territory requires detailed analysis, greater oversight and understanding.
- Analyse everything – NOTHING can be taken for granted. It is imperative to properly analyse lease terms (including return conditions and end of lease compensation), security packages, cashflows.
- KYC – is a must. Reports of identity and corporate fraud is rife on the continent. Everyone knows that, but it does not mean you cannot do business there. Not everyone is fraudulent and assuming that would mean lots of truly missed opportunities. But it is a risk so you need to check and double check through multiple data points. Not accepting anything as a given is the best way of conducting business on the continent.
- External factors – don’t just look at the business or the opportunity. It is entirely possible to have the right opportunity but wrong market or country. Learn about the local business culture and the impact of government on doing business in that environment. If operating in a competitive environment look at whether relationships is more of a factor of success than a solid busines sidea. In Africa the playing field is not always level, but you can level-up more easily than in some countries, with greater accessibility to decision makers than is often possible elsewhere.