The Civil Aviation Sector as a Driver for Economic Growth in Egypt

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2 The Civil Aviation Sector as a Driver for Economic Growth in Egypt EDSCA Conference Cairo, November 10, 2013

3 Agenda 1. Facts and figures 2. Socio-economic impact of the civil aviation sector 3. Options for the civil aviation sector to stimulate growth - 3 -

4 GDP in Egypt has been growing over the last decade, but growth has substantially declined in ,0% ,0% 219 6,0% ,0% ,0% 3,0% 2,0% 50 1,0% GDP in Billion USD (current USD) GDP in Billion USD (constant 2005 USD) GDP growth (annual %) 0,0% Source: World Bank - 4 -

5 The service sector is the largest sector of the Egyptian economy, accounting for 48% of the GDP Egyptian GDP by Sector 11% 15% Tourism as key sector in Egypt is representing: 11% of Egypt s GDP 40% of the total Egypt s non-commodity exports 19% of Egypt s foreign currency revenues One of seven workers is directly or indirectly employed by the tourism sector 37% 37% Agriculture Industry Services (excl. Tourism) Tourism But it is struggling with substantial problems: Tourist arrivals to Egypt have substantially declined by 30% from approx Million in 2010 to approx. 9 Million in 2011 Although slight recovery took place, figures in 2012 and 2013 are far below the levels of prior to 2011 As a result, the Egyptian civil aviation sector, is facing strong declines in passenger numbers Source: CIA World Factbook, Egypt SIS, LH Consulting Research - 5 -

6 Although the traffic in and out of Egypt grew by approx. 8% per year on average, the market share of EgyptAir has been declining 20 48% 18 Market share of EgyptAir 46% 16 44% Million Passengers ,0 11,3 13,5 16,3 16,5 17,7 16,8 17,5 42% 40% 38% 36% % Total passengers from/to Egypt Source: IATA AirportIS, Lufthansa Consulting Analysis The Civil Aviation Sector as a Driver for Economic Growth

7 GDP impact is driven by a mutual relationship between economy and airlines in the first step Economy Direct / indirect / induced employment impact Enabling impact (access to markets, people, capital etc.) Travel / freight need Demand Supply Capacity, network, schedule, pricing Capital Revenue / profitability Airlines Source: Lufthansa Consulting; Ishutkina/Hansman International Centre for Air Transportation Note: Simplified illustration - 7 -

8 The civil aviation sector has a significant socio-economic impact supporting GDP growth directly and indirectly Hotels Utilities Ground Handler Ground Transportation Maintenance Providers Other Airport Providers IT Airline Caterer Retail Tour Operators Training Financial Services GDP impact of up to 3% in a national economy Direct impact Creates jobs (industry average is 60 to 80 FTE per aircraft) Generates payroll Increases government revenues from local taxes Produces airport rental fees Landing and parking fees Gate and hangar space rental Increases supplier revenues Fuel & maintenance Catering & ground handling services Indirect social impact Increases expenditures (e.g. trade, restaurants, hotels, local transportation, etc..) Facilitates business, import / export, government affairs and VFR travel Jobs & demand for skilled workers Creates publicity for the region Link to key world economies Source: Economic catalytic effects of Air Transport; Oxford Economic Forecasting, IATA, Lufthansa Consulting - 8 -

9 Typical effects can be categorized in four groups and can be quantified to estimate overall effects for a national economy Direct Contribution (GDP, employment etc.) that is directly attributable to aviation Airline Airport Ground Services Maintenance Cargo Handling Induced Contribution stimulated through the spending of those employed (directly or indirectly) by the industry Retail Restaurants etc. Indirect Contribution from outside the aviation sector, but part of the overall supply chain Business located in the vicinity of airports (e.g. shipping companies) Providers of goods and services to aviation companies Enabled Contribution from the tourism industry, which benefits from aviation as a major source of inbound tourists Benefits from the global connectivity created by aviation; e.g. a company locates its HQ in a city, due to its attractive air connections Source: Lufthansa Consulting - 9 -

10 Positive effects are not limited to GDP impacts, but further socioeconomic development is stimulated by the civil aviation industry GDP Some benefits are obvious: Civil Aviation Industry Social & economic contribution Induced Enabled Direct Indirect Trade Investment / Capital Development of new industries Employment Access to new markets Knowledge / Skills Tourism Social Direct employment opportunities Direct creation of income and purchasing power Facilitation of tourism Less obvious aspects go beyond and might be underestimated Increasing attractiveness as business location by connectivity Facilitation of (foreign) trade Allocation of new industries Development of know-how and skills Provision of market access Others Source: Lufthansa Consulting

11 The airline start-up project of an airline in Africa performed by Lufthansa Consulting gives some practical example on a smaller scale Impact Employment GDP Direct activities m Indirect & induced activities 1, m Enabled activities 4, m Total airline impact 6, m Share of airline s contribution Source: Lufthansa Consulting ,5% 2% The airline started its operation in 2011 and currently operates a fleet of five aircraft Proving the airline s contribution to the nation s wealth was a vital part of securing the government s support for the project IATA estimates that aviation s total economic impact is 7.5% of the world GDP and that it generates over 32m jobs globally But actual levels of national contribution vary widely, and need to be evaluated on a caseby-case basis For Egypt having a much larger economy with more interdependencies, evaluation and quantification would be different and definitely more complex, while total impact created will be much higher

12 What are possible options for the civil aviation sector in Egypt? Situation The civil aviation sector is dominated by Government owned entities, which allows for aligning all entities under one strategic umbrella Egypt has a well established national carrier, bundling many core and non core business activities of an aviation group Egypt has a sound airport infrastructure in general and Cairo Airport being continuously further developed to fulfill its role as an international hub Complication Tourism being a large sector of the Egyptian economy has been heavily suffering during the last two years Tourism is an important source of direct and indirect revenues for the civil aviation sector in Egypt, in particular for EgyptAir GDP growth and (foreign) investments in Egypt have been significantly reduced during the last two years What could be the right options for they way forward?

13 While direct effects should be stabilized, focus should be put on achieving indirect and enabled effects Stabilize direct and induced effects Stimulate indirect and enabled effects Strengthen the national airline Competitiveness Quality Efficiency Reduce dependency on tourism traffic Meet non-touristic passenger segment requirements Focus on transit traffic via Cairo Further develop talent, know-how and skill of existing workforce Materialize on existing strengths Capabilities of the national airline group Competitive labor cost Further develop and strengthen third-party business in the group Maintenance Catering Training Establish regional center of competence Provide and develop infrastructure in vicinity to the airports Attract (foreign) investments and allocation of new businesses, directly and indirectly related to the aviation sector Transport and logistics Packaging Light manufacturing Information Technology Training Finance Entertainment etc. Establish special zones to increase attractiveness of business location and to stimulate growth such as: Free zones Airport City Cargo City

14 The Cargo City Concept Tier 1 Tier 2 Tier 3 Source: Lufthansa Consulting

15 Creation of coordinated and streamlined processes enhances bottom line value and maximises returns on investment Economic Benefits Logistics and Operations Optimized land use through one campus approach Operational flexibility intelligently linking multiple modes of transport Cost-effective time savings Efficiency potentials Creation of value added ancillary services Improved synergy and economy of scale by bringing together major stakeholders Macro and micro level advantages Attractive new mix of businesses opportunities (e.g. express freight, high value cargo, frozen foods, hazardous goods, etc.) Greater regional economic development and impact v v Weighted Avg. Income/Employee (Index)* v *Source: Lufthansa Consulting

16 Cargo Cities create mutually advantageous relationships that improve the overall customer experience hence generating trust and repeat business Improved Service Environmental Benefits Streamlined and efficient customs processes Agricultural, veterinary, and customs inspection stations in one place Reduced traffic congestion through coordinated landside traffic management Reduced fuel consumption and decreased general waste through better organization and scheduling of resources Improved image amongst the local community Enhanced security level meeting international standards Improved transparency, track and trace E-connectivity, paperless operating environment International Comparison * Customs 5 Tracking and Tracing Infrastructure 0 Timeliness International Sshipments Logistics Competence Brazil Germany *Source: World Bank

17 Contact Alexander Manakos Partner Lufthansa Consulting GmbH Unterschweinstiege Frankfurt Germany Tel.: Fax: +49 (0) (0)