High hopes for South Africa’s low-cost carriers

The arrival of a new budget airline in South Africa promises cheaper domestic fares for travellers, though the increased competition may put pressure on the low-cost carrier (LCC) segment given weak consumer spending.

With Skywise taking to the air on March 5, the number of domestic LCCs operating in South Africa has risen to four. Other operators include South African Airways subsidiary, Mango, Comair’s Kulula and stand-alone carrier FlySafair, which launched its services in October 2014.

The four budget carriers will account for just under half the available seats on domestic flights. Before Skywise was launched, the LCCs between them provided 48% of all capacity in the domestic market, with the split being around 22% for Kulula, 20% for Mango and 6% for FlySafair, respectively, according to data compiled by industry research group CAPA - Centre for Aviation.

Unsurprisingly, given the limited demand for domestic aviation elsewhere in Africa, the South African LCC market remains by far the most congested on the continent, with just five other budget carriers operating in the whole of Africa at present. In a report issued in January, CAPA warned that while consumers might benefit from more aggressive competition, demand in the South African aviation market might be too small to support four budget carriers given that two LCCs, 1time and Velvet Sky, ceased operations in 2012 due in part to overcapacity in the market.

Low-cost invasion

Skywise, owned by South Africa-based firm PAK Africa Aviation, offers 26 flights a week between Johannesburg and Cape Town, but is looking to increase this number to 52 after it doubles its fleet to four aircraft over the next few months, according to its co-chairperson, Tabassum A Qadir.

The airline is confident that there is more than enough demand for another LCC 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 conventional ones,” Qadir told OBG. “More competition should not only drive down prices but shift focus to value addition services.”

The new entrant already appears to have had a visible impact on end-user fares. Fares from Johannesburg to Cape Town fell by an average of 18% to R2083 ($173), while the price of flights from Cape Town to George declined 39% to R1278 ($106), according to Travelstart, an online company that analyses flight prices for passengers. The research, released at the end of March, compared airfares in January and February against those of previous years.

However, while this is making competition tighter, the market continues to attract more interest. In March, Bloomberg reported that Tanzania-based Fastjet was actively seeking South African investors to buy into the company to fund an extension of its route network, including into South Africa. The carrier intends to set up operations in Kenya, South Africa and Zambia as part of its expansion plan, but no timeline has been established.

Zimbabwe-headquartered flyafrica also has announced plans to break into the South African market, though its aim is to expand as a regional carrier – competing in the Zambia-South Africa market − rather than provide domestic services.

However, Africa poses several challenges to an LCC looking for expansion across the continent. The cost of establishing a ground presence in several markets is still largely prohibitive to African LCCs, due to the increased overheads which would weaken its low-cost ticket proposition, said Elmar Conradie, the chief finance officer for FlySafair. “There is still scope for a pan-African, low-cost carrier to emerge,” Conradie told OBG. “There are higher yields in regional travel, however, sustaining a low-cost model in areas of the continent where online as a distribution channel doesn’t exist is the challenge,” he added.

Costs still high, despite oil fall

While carriers across the spectrum will benefit from the decline in oil prices, this gain is largely offset by the depreciation of the rand, which has increased the price of imported fuel. South African carrier Comair said the net effect in the second half of 2014 from these factors was a 2% increase in operational costs. It also acknowledged pressure on tickets prices as consumers struggle financially, adding that the domestic passenger market remained well below the 2008 peak volumes.

With high levels of competition and tighter margins, South Africa’s LCCs may be vulnerable to market fluctuations and a weaker domestic economy. The advent of the cooler months will likely impact load factors, with an easing of holiday trade expected, said Conradie. Though bookings on the Johannesburg-Cape Town route remain strong − close to the peaks reached in the fourth quarter of 2014 when the carrier launched − there was some tapering on other routes, such as those serving Port Elizabeth and George, he said.