OUR OPERATING ENVIRONMENT

Consistent with our business model, our strategy delineates and guides our operations, shaping our responses to internal and external factors within our operational sphere. This section aims to provide a comprehensive overview of our approach as a precursor to the subsequent performance review. Here, we delve into the key environmental factors that influenced our operations throughout the reporting period. We present details about our primary risks, how we manage them and our engagement with stakeholders.

Macro-economic factors

The global economy reported a modest 3.2% growth during the reporting period, which was consistent with growth in the previous period. Inflation nevertheless remained high at 6.8%, but the International Monetary Fund (IMF) expects this to decline to 5.9% in 2024.

Despite the positive growth, the economy continued to grapple with challenges posed by rising prices and limited growth prospects. This was partly due to heightened geopolitical tensions resulting from the Israeli - Palestine war and the ongoing Russia - Ukraine conflict, which entered its third year in February 2024. Together, these factors had direct implications for the aviation industry, leading to reduced demand for air travel, decreased revenues for airports and heightened operational risks.

Although growth exceeded expectations in the first quarter, the subsequent tightening of policy rates across major markets slowed trade and undermined confidence among businesses and consumers. Additionally, factors such as deglobalisation and consistently high oil prices posed a significant risk to both the macro- and micro-economic environment during the reporting period and since.

The resilience of global air travel was partially bolstered by economic growth and the excess savings accumulated by households during the Covid-19 pandemic, driving pent-up demand for air travel. Moreover, the lifting of Covid-19-related restrictions on international travel by China provided a steady yet modest demand for air travel and freight services, positively impacting passenger traffic and revenue streams for airports. The reliance on growth in Asian economies highlights the importance of strategic partnerships and route expansions into these regions for sustained industry growth and competitiveness.

In the final two quarters of the year, we observed a rapid decline in global inflation due to favourable global supply dynamics, surpassing initial predictions. However, the Red Sea crisis in Israel-Palestine introduced an additional factor that threatens to undermine this downward trajectory.

South Africa GDP growth experienced a slight contraction according to data released by Stats SA, driven by negative growth in key industries such as agriculture, manufacturing and construction. Despite an increase in government expenditure, a significant decrease in Gross Fixed Capital Formation offset the overall GDP growth. Household consumption therefore saw a decline, potentially indicating reduced discretionary spending that will impact on domestic travel. However, net exports contributed positively to GDP growth, driven by a rise in exports and a decline in imports.

The overall inflation outlook for South Africa has shown some improvement, with inflation projected to decelerate to an average of 5.2% in 2024, partly due to lower global food and fuel prices as well as subdued domestic demand. Despite recent fuel price cuts offering relief, inflationary pressures persist across other sectors of the economy (Stats SA).

According to analysis by ICAO, ACI and IATA, market segments worldwide are either achieving or nearing pre-pandemic levels of total passenger traffic, highlighting the resilience and recovery underway in the global aviation industry. Recovery trajectories do, however, vary across regions, with Africa showing notable growth while Asia–Pacific and Europe are facing challenges in regaining pre-pandemic air travel levels. Additionally, a modest uptick in air cargo demand has been observed, particularly in the Asia–Pacific region.

Persistent trade tensions between major economies, especially for the semiconductor industry, are adding strain to global trade dynamics. The 30th WTO Trade Monitoring Report on G20 trade measures highlighted concerns regarding the implementation of more traderestrictive measures on goods than trade-facilitating ones. Global supply chains are facing additional disruptions in the aftermath of Covid-19 and the impacts of the Russia-Ukraine conflict. This is being compounded by issues along major trade routes, such as the Panama Canal and the Suez Canal, leading to supply chain disruptions.

In South Africa, the rand continued to be volatile and exhibited a general downward trend against all major currencies, losing around 8% of its value over the period. This naturally had a profound effect on the economy, pushing up the price of imports, petrol and food in particular – and driving up inflation. Interest rate hikes implemented to cool inflation had some effect but, in turn, limited consumer spending, resulting in growth for 2023 closing at 0.6%. More specifically industry-related, uncertainties in the supply of jet fuel continued to be an issue and, as a result, we have several initiatives in place to manage this risk.

With this ongoing uncertainty, especially in travel and tourism, we continued to implement our Innovate, Grow and Sustain Strategy, focusing especially on sustainable growth through innovation and on diversifying our revenue streams. Our operating model, developed in tandem with the strategy and illustrated on page 47, continues to provide a framework for this effort.

By mid-year, we had managed to bring all of our infrastructure back into full service and started to put mechanisms into place to enable innovation to enhance value creation. We were also able to reinstate our maintenance and infrastructure development programmes to ensure the business is fully capacitated for short, medium and long-term growth, and to fast-track the recruitment of suitably qualified personnel to fill critical vacancies.

From a traffic and route development perspective, we continued to face many challenges. Global recovery has been steadier than recovery at home, although international traffic volumes at Cape Town International Airport have continued to exceed targets, with many international flights, including flights from Brazil, now flying directly into Cape Town.

With Russia cut off from Society for Worldwide Interbank Financial Telecommunication (SWIFT), which is crucial for global transactions – and with the assets of the Russian Central Bank frozen – the country’s ability to conduct trade and access foreign assets has been severely curtailed. This has led to a major shift in traffic patterns.

Furthermore, while flights between South Africa and Israel have remained steady since the conflict between Israel and Palestine began in October 2023, the national airline of Israel, El Al, has embargoed flights to and from various countries and vice versa. This has compounded the effects of the war on both air traffic and supply chains, which has led to the decoupling of many economies worldwide.

Both the global and local situations therefore remain uncertain, with weak demand in some of ACSA’s key source markets, most notably the United States. Demand in the UK and Europe is more robust, with load factors between South Africa and the UK and Europe at an average of around 93%.

Furthermore, several airlines that cut flights to South Africa during the Covid-19 pandemic, including Cathay Pacific and Saudia (the national airline of Saudi Arabia), have resumed flights into both OR Tambo International and Cape Town International. Demand on airlines such as Emirates, Qatar Airways and Turkish Airlines also continues to be strong. In the regional market, there are now direct flights between Durban and Lusaka (Zambia) and between Johannesburg and both Harare (Zimbabwe) and Mbabane (Eswatini).

Domestic demand has dropped off as a result of constrained economic conditions and also as a result of a decrease in business and government travel since the start of the Covid-19 pandemic. Many domestic travelers are now moving to self-driving as an option, especially between destinations that involve a day’s drive or less. This trajectory is expected to continue throughout most part of the 2025 financial year due to constraints on disposable income.