Facing a slowdown in both international and domestic demand, combined with rising oil prices and airport fees and tariffs, carriers in South Africa are feeling the squeeze. With economies booming elsewhere in Africa, there is some optimism that new profitable routes could be established, but governments throughout the continent will need to further liberalise their skies to make this happen.
South Africa is considered to have some of the world’s most-developed airport infrastructure, largely due to development efforts leading up to the 2010 World Cup. These investments came at a significant cost to government coffers and debt levels, and in order to recover the large capital expenditures, state-owned Airports Company South Africa (ACSA) – which operates according to a “user pay” principle – has since been implementing substantial annual tariff increases of 33% for 2010, 34.8% for 2011 and 30.6% for 2012. Moving forward, however, this the annual increase is expected to reduce to around 5.5% beginning in 2013.
On account of these tariff increases, ACSA was able to generate a profit of R188m ($21.29m) for the fiscal year ended March 31, compared to a loss of R221m (25.03m) for the previous fiscal year. However, South Africa is currently ranked as the third-most expensive destination in the world when it comes to landing fees. Simon Newton-Smith, the country manager for South Africa at Virgin Atlantic Airways, told OBG, “While fees are a contentious and debated issue, as an airline all one can do is pass these costs onto the passenger in an environment of price sensitivity”.
Inati Ntshanga, the CEO of regional carrier SA Express, feels that South Africa’s “user pay” tariff model needs to be re-evaluated. “The payment principle might have worked before all of the spending towards the World Cup took place. But today, it is making things prohibitively expensive. We are paying the price as an industry today and will be for years to come,” Ntshanga told OBG.
The toll taken by the difficult operating environment can be seen in the turbulent financial issues under negotiation by local carriers. On November 2, two months after 1time Holdings, a local budget carrier, revealed that it sought protection from its creditors after failed negotiations towards the repayment of around R400m ($45.29m) in debt, the airline suspended all flights and is in the process of applying for liquidation. 1time was the second private carrier that closed shop in 2012, following the bankruptcy of low-cost carrier Velvet Sky in February.
Meanwhile, over the past few months, national carrier South African Airways (SAA) has seen its CEO, chairperson, and six other board members resign due to disputes over strategy and company finances. The airline has been seeking R5bn ($566.2m) from the treasury to finance the acquisition of new fleet. The parastatal is struggling to cope with stiff competition from global carriers benefitting from stronger currencies, as well as increased competition from expansionary airlines throughout the Middle East. One option for the SAA is privatisation, as some sources in the industry believe the carrier’s underperformance is due to political interference.
Rodger Foster, the CEO of Airlink, a regional airline operating as an SAA franchisee, said, “All businesses, especially airlines, require the accumulation and retention of institutional memory and expertise. Continuously discarding and replacing the governance layers of a corporate entity, especially the executive leadership, cannot augur well for the business,” referencing the high turnover of executives amongst state-owned entities.
Regardless of what ultimately transpires with the national carrier, some industry participants foresee further domestic consolidation. “South Africa’s airlift strategy is very clear and open, which has allowed multiple domestic airlines to launch but with mixed results,” Ntshanga told OBG. “Inevitably there will be more convergence and some airlines will fail as competition is intense and margins are falling.”
There are also a number of major stumbling blocks preventing interested airlines from serving in-demand regional routes. Despite a Pan-African treaty on the liberalisation of access to air transport markets coming into effect in 1999, this has only been partially implemented, with many governments restricting the use of certain airports to prevent competition against their national carriers.
Despite the challenging outlook, Africa’s aviation industry indirectly supports economic activity measuring $67.8bn, which is forecast to more than double to $220bn over the next decade, according to the International Air Transport Association. And South Africa, with arguably the continent’s most-advanced and established aviation sector, is certainly looking to capture some of this growth trajectory.
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