ch-aviation interview: Sanjeev Gadhia, CEO Astral Aviation

Founded in 2000, Astral Aviation is a Kenyan scheduled and chartered cargo provider operating throughout the country as well as throughout East as well as West Africa. ch-aviation caught up with founder and CEO Sanjeev Gadhia during the recent World Routes 2015 conference in Durban, South Africa

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Sanjeev could you please introduce yourself and give us a little background on who you are, how long you have been in aviation, and about Astral Aviation itself?

First of all I would like to thank you for the interview. I am Sanjeev Gadhia. I am the CEO and founder of Astral Aviation which is a cargo airline based in Kenya. We have been operating now for the last 15 years, which is a very long time for a private airline to have been around in Africa. My background is: I am from Kenya – born and raised. I did my studies overseas and I am actually a banker by profession. It is only by coincidence that I actually got into the aviation business as about 15 – 18 years ago, we were doing a lot work for the United Nations (UN) and the aid agencies where we saw strong market potential for the supply of aircraft specifically for the aid relief sector in Africa. So we acquired some aircraft and targeted the aid and relief sector and as time went by, we expanded our business to the other aspects of the aviation sector.

According to our database, Astral Aviation still operates the DC9 freighter. Is there a reason for that given their age?

Yes, we are probably the only freighter operator of the DC9. What we actually have is a very unique DC9 model which is a -34 freighter that can carry the same amount of cargo as the comparable Boeing 737-200Adv. But I think the main reason why we are still operating the DC9 is because of their overhead engines. At certain airstrips, it is actually ideal to have engines which are mounted much higher up on the fuselage because of the danger of ingesting gravel as well as other foreign objects.

Astral Aviation DC9-30(F) – Copyright: Astral Aviation

So, it is not only for economic reasons but operational reasons as well?

It is more for operational reasons but another thing is that when we acquired the DC9 about four years ago, the aircraft were available at a very good rate. We also had some crew who were type-rated on the DC9. Overall, the DC9 is generally a very, very good narrow-body aircraft which can carry up to 15 tonnes of cargo. It also has a very reliable dispatch rate. We really feel that it is a great aircraft.

In terms of operating cost, how do they compare to other narrowbody freighters in the same category? Is there a downside in that respect?

The operating cost is not as high as what you’d think compared with the same type in the Boeing family, like the B737-200Adv for example. It’s a really good workhorse and it works really well for us. In Africa we have not seen anybody else that has operated the DC9, but we like them. Also low fuel prices make the DC9 a very competitive aircraft to have in the region and we hope to keep them around for at least one more year.

Looking to the future, can you tell us more about your fleet renewal plans?

Well, we have been looking at the Boeing 737-300 and the -400 now for a while. However, a key problem is that the supply gap between the -300 and the -400 is getting bigger and bigger because the -400s are being snapped up by integrators. Consequently, demand for the B737-400 is really high and at the moment they have limited availability, at least for 2015. So what we have now decided is to go initially for B737-300 freighters of which a few of them are available. After that, we would have the option of going up to the -400 series. We have done a very detailed evaluation based on the routes we want to fly and because we have actually found that the B737-300 is more cost-effective compared to the 400, we are already in talks with three airlines over the possible acquisition of two aircraft over the next three to six months.

So the first is expected to arrive in the next three – six months?

Yes.

Will it be a gradual phase-in or will the DC-9s be withdrawn from service there and then?

Yes, it will actually be a gradual phase-in. As I mentioned, the DC9 still has certain advantages in flying to airports with shorter strips as compared to the B737-300 which we would like to restrict to the larger airports we plan to fly to. Some of the destinations we plan to use the B737-300 to serve include Kinshasa and Lubumbashi in the Democratic Republic of Congo (DRC), Brazzaville in the Republic of Congo (ROC) as well as Lusaka and Ndola in Zambia.

Astral Aviation Boeing B727-200(F) – Copyright: Astral Aviation

Why those routes in particular?

Well because of their range, but we also feel the B737-300 is better suited to the characteristics of some of those markets we plan to serve. On the other hand, we feel the DC9 and the B727 will still do very well on our existing routes.

Tell us more about your B747-400 freighter ACMI lease with Atlas Air. How does that tie into your network?

Yes. The B747 with Atlas Air has proven to be a fantastic opportunity which we currently operate at a tri-partite partnership. We have three partners – Atlas Air, our UK partner ANA aviation who that are based out of London Gatwick, and then there is Astral Aviation. So we fly twice a week from Nairobi to London with perishables from Kenya. We then fly from London Stansted to Liege, which is our European gateway, and then from Liege we fly to Lagos and then back to Nairobi.

Did you manage to secure 5th or 7th Freedom traffic rights?

We actually have 5th freedom traffic rights out of Liege with our Nigerian partner Allied Air. Allied Air is actually a partner on the B747 and the MD-11.

How has the whole deal worked out for you so far?

Well the Atlas Air B747 freighter is a great aircraft. It is a nose loader and we are very happy with it. We are also very happy with our partnership with Atlas because they provide is with back-up aircraft, it is a very professional airline and we really could not ask for a better partner.

Given that Nigeria is an oil-dependent economy, have you seen any knock-on effects in recent months as a result of plummeting oil prices?

Yes, definitely. There has been a reduction in oil and gas industry-related cargo, but that’s been quickly substituted by a rise in demand for consumer goods. What has actually happened is that as soon as the [Nigerian presidential] elections were over, a lot of Nigerian businessmen began importing goods from China and Europe by air again. Prior to that, things had slowed down because of uncertainty about the future and the risk of possible civil disturbances. As Africa’s most densely populated country with a population of about 160 million people Nigeria has a very strong middle class as well as a very vibrant economy and so demand for consumer goods is there. Given these two factors, we have not actually felt any impact on our fleet or on our load factors into West Africa. In East Africa we are also seeing a surge in demand for perishable exports. The reason for that is the weak currency. For example, in Kenya, the Kenya Shilling has actually depreciated by 15% so has the South African Rand and the Nigerian Naira.

Astral Aviation DC9-30(F) & B727-200(F) – Copyright: Astral Aviation

So you are benefiting from that?

Yes. You see if you have a weak currency, it actually stimulates growth in exports. But it also makes your imports a little bit more expensive.

But is there an impact on your lease agreements with Atlas Air? I am sure your contracts are in US dollars.

Yes, but our income is also in US dollars.

So you are perfectly cushioned?

We are perfectly cushioned because all the perishables we export are billed in dollars and we actually meet our lease payments in dollars so we do not have problems there.

What is your market forecast for the future then?

Our forecast for Perishables’ growth out of East Africa this year is around 15% and this is purely because weaker African currencies have made products such as Kenyan flowers and Tanzanian fish and vegetables more competitive in Europe. I really see that over the next 6 to 9 months, we will see tremendous growth in exports. I believe we also need to be cautious because for example in Nigeria as the Naira gets weaker, we could, at some point, see a gradual drop in imports. We, however, hope it will be less than 5% of 2014 levels.

Sanjeev, in terms of your other operations, we see that you also serve Somalia. How has that been going and how has the Kenyan market been affected by the ongoing civil war there as well as Al Shabaab terrorist attacks on Kenyan targets?

Well the Nairobi-Mogadishu market is one of our best routes as we have a very nice contract to supply food to UN peacekeepers stationed in Somalia. In fact, we are actually planning to expand the frequency to two flights a week. In terms of cargo, we carry a lot of perishables to Somalia and we are the only cargo airline that currently flies to Mogadishu. We have cargo coming in from the US, China all consolidated at Nairobi and then we fly it all to Mogadishu. So Mogadishu is a route with a lot of potential. Aside from peacekeeper supplies and relief aid, there are also a lot of consumer goods coming into Somalia as well.

Are you considering perhaps any other towns there such as Kismayo, Beledweyne etc?

At the moment, no, because we feel the level of insecurity at some of Somalia’s secondary airports is still too high. Mogadishu is however a safe airport. We have fantastic turnarounds there and we have a very good Turkish groundhandler named Favori taking care of us. Recently we established an office at the airport as we are very committed to its long term development. Yes, in short, there are a lot of problems, but Mogadishu is on the up. The American embassy recently reopened, which is a very good sign, and we also have the Turkish embassy, the Chinese embassy and the UAE embassy. So we are seeing a level of confidence in the city which we have not seen before. And despite the fact there are pockets of problems that we experience in Mogadishu every now and then, I am very happy to note that the airport is very safe and we will continue to fly there for as long as we can.

Astral Aviation Boeing B727-200(F) – Copyright: Astral Aviation

We saw recently that one of your Fokker 27 freighters was recruited for use with Air Djibouti. Is the lease part of a larger partnership agreement or just a one-off?

Well we have leased the aircraft out to Air Djibouti for a period of 3 months but we are really hopeful that it leads to a partnership. We want to help them to grow their airline and at the moment we want to support them flying some of their routes. We have a lot of confidence in Air Djibouti Cargo. They are in the right location as I’m sure you are aware, Djibouti is the logistics hub for the UN in Yemen and is home to US and French military bases as well.

But do you not think that Djibouti’s proximity to Ethiopia and Kenya could lead to strong competition from established players such as Ethiopian Airlines Cargo and Kenya Airways Cargo respectively?

I actually feel that Air Djibouti has an advantage because they have access to markets such as Somalia and Somaliland as well as Yemen. A flight from Djibouti to Sana’a is only one hour 15 minutes and to Aden is only about 45 minutes. So we feel that by virtue of its geographical location, Djibouti, if they play their cards right, can actually become a strong competitor in the region. There are also a lot of exciting developments taking place in their Free Trade Zone as well as with Djibouti Ports and Airports. What Air Djibouti Cargo is doing is really capitalizing on the traffic-niche which requires smaller capacities. So I believe there is potential for Djibouti to develop into a mini-hub to compliment other larger hubs, such as Addis Ababa.

Astral has been a cargo operator since its inception in 2000. But recently, you signed an equity agreement with China’s Hainan Airlines to commence passenger operations. What is the status of that deal?

There has been a bit of deliberation with Hainan Airlines and its parent HNA Group. They have big plans for Africa as you are aware. They have an airline in Ghana – Africa World Airlines (AWA) – and they recently acquired a minority stake in South Africa’s Comair. While we have held talks in Nairobi, we have not yet completed a strategic plan on the way forward. In any case, we only expect to be in a position to determine which direction we are going at the end of this year.

Is your entry into the passenger market contingent on the signing of that agreement or do you have plans to go it alone?

We have been really fortunate because the license that we have allows us to operate both passenger and cargo services. And with a strong management team already in place, there is nothing that can stop us from operating scheduled passenger services. However, there are two important things to consider: the first, which I think is the most important, is to have access to working capital which can actually support a passenger network because a Low Cost passenger carrier’s business model is very capital intensive – more so than cargo we feel. Secondly, there is need for a strong partner to make passenger operations work.. So to answer your question, our entry into the passenger market will only occur once we have a strong partner that has experience in passenger operations. We are not in a hurry to get into the passenger business as despite the fact it’s been 18 months since we signed the MOU with Hainan Airlines, we already have a very good business model, which is based on cargo. If it is going to happen, it will happen, if it is not going to happen life will still go on and we will continue to haul freight.

Astral Aviation Fokker 27(F) – Copyright: Astral Aviation

Here in Africa, we hear passenger carriers complaining about difficulties in securing bilateral traffic rights to countries around the continent. As a cargo operator, do you encounter the same obstacles?

Well, on the cargo side, it is more difficult because historically a lot of the bilateral air service agreements were based on a set model which viewed passenger and cargo rights as one and the same. But we have been lobbying the African Airlines Association (AFRAA) to have a separate set of rules for cargo and in many developed markets like South Africa, Nigeria, Egypt, Ethiopia, and Kenya there already have separate agreements for passenger and cargo rights. In all, I would say the biggest challenge we have in Africa is market accessibility. There are a lot of markets in Africa that are closed. Africa is a continent of 54 countries and I would actually say very confidently that at least a third of them are still not open while the remaining two thirds are open or fairly open. But for Africa to achieve its true potential we need full liberalization and there are some good initiatives taking place under the auspices of the African Union (AU) to this end. In April this year, eight countries got together and agreed to implement a more hybrid version of the Yamoussoukro Declaration (an AU-endorsed document for the liberalization of access to air transport markets in Africa) by 2017.

They actually committed themselves to opening up their markets, but only to each other or to Africa as a whole?

To each other and within Africa. There was a study done by IATA through a consultant called Intervista where they looked at the positive benefits of liberalization in 12 countries and they actually found that liberalization would benefit the market through lower fares and better connectivity. The African Union is also working on a continent-wide Open Skies agreement which would in essence be a more hybrid version of thee Yamoussoukro Declaration. The other very good thing is that trading blocs such as COMESA (The Common Market for Eastern and Southern Africa), ECOWAS (Economic Community of West African States), and SADC (Southern African Development Community) are beginning to open up to each other. Should it continue, it will greatly improve intra-African trade and thus Africa’s ability to solve its own problems as opposed to relying on the United States, Europe, and China where there are always strings attached.

Where do you see Astral Aviation in ten years time?

We actually have a very big strategy to expand Astral Aviation over the next 5 years, which will take us into West Africa and into Southern Africa. We are setting up a hub in Lagos and we also have big plans to set up a hub in South Africa and at the moment we are looking at Johannesburg and Durban. In particular, we are excited about South Africa as a potential hub for southern Africa because a lot of countries there like Madagascar, Mozambique, Zambia, Zimbabwe, Angola, and Malawi rely on Johannesburg. But all this will occur in 2016 as we are still in the process of setting up a hub in West Africa.

So that will take you head to head with Ethiopian Airlines which already has a hub in Lome (Togo)?

We respect Ethiopian Airlines because of their status as a national carrier, but we also feel that we still have an opportunity because we are a privately-owned airline. As a private carrier we have certain advantages that allow us to be more pro-active, and more focused on the routes we want to fly. In addition, we also want to focus on a sector which Ethiopian Airlines is not in and that is the 15-20 tonne category. This is where the B737-400 comes in as Ethiopian’s market segment is 35-100 tonnes. So in all, we have a unique opportunity of having our own footprint while at the same time not stepping on anybody’s toes. But, at some point in the future, we will have to collaborate on common routes with Ethiopian Airlines to a greater extent than what we are doing now.

Thank you so much for the interview.

My pleasure.

 

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