Growing number of carriers joining South Africa's aviation market

Following the liberalisation of the aviation industry in 1991, the survival rate of new entrant domestic airlines has been low. Two new entrants launched services in South Africa – a trend that is set to continue as new start-ups seek to capture a share of the air passenger growth that is predicted to grow over 5% annually up until 2032. Competition has led to a drop in fares early in 2015, but carriers have to grapple with shrinking margins and a challenging operating environment. “There are around 17m people flying in South Africa each year and the market is served by nine domestic carriers, which is far more airlines per person than one sees in the US, Europe or China,” Chris Zweigenthal, CEO of the Airlines Association of Southern Africa, told OBG. “New entrants have helped add some additional domestic traffic, but passenger numbers are not growing that fast. This will result in carriers eating one another’s market share.”

The National Carrier

Carrying around 7.1m passengers in 2014 according to aviation market intelligence provider CAPA, state-run South African Airways (SAA) is undergoing a turnaround strategy, dropping some of its loss-making international routes. In 2014, the Minister of Finance took over from the Minister of Public Enterprises as the airline’s lead government shareholder, announcing that it is open to offers for foreign investment. With SAA reporting an operating loss of R374m ($32.3m) for the fiscal year ending March 31, 2014, observers believe that a change of direction is required before the carrier returns to profitability. While there have been rumours of foreign airlines looking to buy in, SAA would likely need to first restructure and turn its losses around before offers could be expected. “SAA continues to borrow to meet its deficits, and it is doing so with external loans backed by government guarantees. Without these guarantees it would have to pass on cost increases to customers like purely commercial airlines have to. It can be argued that this leads to unfair competition locally,” Joachim Vermooten, an independent transport economist and aviation specialist, told OBG.

Low-Cost Carriers

The launch of Skywise and FlySafair – who join SAA subsidiary Mango and British Airways franchise Kulula as the market’s non-full-fare carriers – will result in low-cost carriers (LCCs) accounting for around half of the available seat capacity on domestic flights, according to CAPA.

Although consumers benefit from the increased competition, the South African market may be too small for a large number of LCCs, with two LCCs, 1time and Velvet Sky, ceasing operations in 2012 due in part to overcapacity, some of which was brought about the expansion of Mango’s capacity in the market. When speaking to OBG, Nico Bezuidenhout, the current CEO of Mango, contends that South Africa does not possess the requisite attributes of more developed markets that allow multiple LCCs to thrive.

“If you look at Europe, competing easyJet and Ryanair are hardly ever flying the same routes or serving the same city pairings. In South Africa, LCCs cover the main domestic routes, as there just aren’t enough commercially viable secondary routes to fly,” Bezuidenhout told OBG. “Of South Africa’s cities, only Johannesburg has a secondary airport. It is no surprise therefore that there have been so many airline failures.” For Zweigenthal, to label the incumbent non-full fare carriers as pure LCCs, as the term has become known in Europe and elsewhere, is also slightly misleading. “Kulula is affiliated with Comair (a British Airways subsidiary) and benefits by sharing its infrastructure. So for new, unaffiliated players operating under a pure no-frills LCC model, it is very challenging,” Zweigenthal said.

Cost Correlation

Undeterred by the collapse of airlines Velvet Sky and 1time just two years prior, two new carriers, Skywise and FlySafair, took to the airs over 2014-15, bringing the number of domestic LCCs to four and the number of carriers to eight. Skywise, owned by South African-based firm PAK Africa Aviation, is confident that there is more than enough demand for new players in the market. “There is still scope to grow demand in this segment, enlarging the pie to attract new fliers rather than just fighting for existing customers,” Tabassum A Qadir, Skywise’s co-chairperson, told OBG.

According to Travelstart, an online company that analyses flight prices, adding capacity to existing routes appears to have a visible impact on ticket prices, with fares in January and February 2015 from Johannesburg to Cape Town falling by an average of 18% to R2083 ($180) compared to the same period the year prior following Skywise’s introduction of an additional 26 flights per week between the two destinations. A similar connection between competition and fares was made by Zakhele Thwala, deputy director-general at the Department of Transport, who told a local newspaper at the time of FlySafair’s launch in late 2014 that airfares doubled the day after 1Time Airlines went bankrupt in 2012.

However, other factors, including fuel price and currency swings, are often at play and the causal link between the number of carriers and fares is not a direct one. “I’ve seen a number of newspaper articles suggesting that fares decreased by as much as 30-35% when the two most recent airlines began services, but this happened to coincide with a low fuel cost environment, so I am not certain these fares are sustainable in the long term,” said Zweigenthal.

Paying Less Dues

While it is hard to predict to what extent the launch of new carriers will keep fares in check over the medium and long term, something from which airlines and passengers can take solace is a low likelihood of the Airports Company of South Africa (ACSA) dramatically increasing its airport fees for the foreseeable future as it enters a mostly maintenance and refurbishment phase. Over the five-year period preceding the 2010 World Cup, the company spent R17bn ($1.5bn) towards a capital expenditure programme aimed at modernising the country’s 9 main airports. In order to pay back the money borrowed, it was granted tariff increases between 2010 and 2015 that totalled up to a 161% rise.

““Aside from the construction of the re-aligned runway in Cape Town, some terminal improvements in Cape Town and the construction of additional apron space at OR Tambo, no significant expenses and expansions are anticipated,” Zweigenthal told OBG. “Tariff increases for the next few years should come out below inflation, which will be to the relief of most airlines that already feel fees are over-inflated.”

Jackie Walters, head of the Department of Transport and Supply Chain Management at the University of Johannesburg, feels similarly that charges should remain relatively flat. “ACSA tends to build infrastructure first and charge after, which accounts for the sudden increases. The major airports have spare capacity, and there is no major construction work coming up, so charges should be contained.”

In late 2014, ACSA reported that throughput at OR Tambo Airport was 18.6m, whereas annual passenger handling capacity stands at 28m. Demand is also unlikely to spike significantly so long as the global economic slowdown persists.

Limited Skies

According to figures from plane manufacturer Airbus, air traffic into, from and within Africa expanded by 89% between 2000 and 2012. While the volumes of traffic have dramatically increased, barring a few exceptions, African carriers have largely not capitalised on this growth, with international airlines accounting for around 82% of international traffic into and out of the continent. Part of the challenge stems from a lack of regional open-sky and bilateral agreements, which in turn limits the amount of African carriers serving other African markets outside of their home territory.

Africa is divided into 52 air traffic control regions, compared with just two in the US and one in the EU. The continent, despite accounting for less than 5% of global air traffic, has 227 airlines compared to just 10 in the US. This is because many countries support and protect their national carriers, which would otherwise be non-sustainable, by preventing competing African airlines from attaining landing rights.

“South Africa’s Department of Transport has successfully negotiated some liberal bilateral agreements, but it has not yet been successful in doing so in the Southern African Development Community region, where there is high demand,” Joachim Vermooten, an independent transport economist and aviation specialist, told OBG. “It is easy to accuse other governments of being protectionist and not liberalising. But so long as SAA is subsidised by a government that makes more funds available to subsidise its national carrier than its neighbours, it is understandable that other governments are reluctant to open capacity restraints in bilateral agreements or implement open skies,” he further added.