Unsustainable airfares and soaring costs are strangling the local airline sector.

“The local airline industry is in distress,” says Airlink CEO, Rodger Foster, pointing to the recent demise of local airlines such as Velvet Sky and FlyKumba. “The industry is clearly unsustainable in its current form.”

According to Foster, although much of the problem lies in a “radical” increase in costs, consumer expectations of airfares have become “disconnected” with reality forcing airlines, clamouring for market share, to keep their prices unsustainably low. “The airline business model at the domestic level is fundamentally flawed.”

He also believes South African consumers are unwilling to pay the true cost of air travel and that airfares should be benchmarked against global norms.

“There are many travellers who will only fly if the all-inclusive fare is R299 or less (the equivalent of €29, or US$38). The lowest low-cost carrier fares in Europe, for example on a flight the equivalent of Johannesburg to Durban, the ‘vanilla’ baseline without all the ancillary costs, is about €100 (R1 028). Add to that about €30 (R308), which is typically the basket of ancillary items added to the fare (seat reservation, checked baggage, on-board service etc.), and the minimum price comparator for an off-peak time flight would be the equivalent of R1 334, about four times the fare most domestic travellers in SA are willing to pay.”

Comair executive manager group marketing and loyalty, Heidi Brauer, says there’s a strange perception that airlines are wealthy and can subsidise low airfares when consumers are under pressure because of the economic situation. “We can’t change that perception but we can also not afford to keep airfares low, because it’s unsustainable.”

It’s the local airlines’ fault, says Foster, because they have created the unrealistic expectations. “Local airlines are fighting for market share regardless of cost instead of ensuring sustainability.”

He describes a challenging aviation environment, saying not only have airlines allowed Acsa to invest in “unaffordable” infrastructure, they have also had to increase their standards and procedures to comply with new legislation, which has, in turn, increased their overheads.

“The challenge now is that due to free-market competitive forces, up-selling has become impossible. Airlines are not doing enough to ensure that their revenues are adequate to cover their costs.”  

Foster predicts that airlines will have no choice but to start charging more. “Higher airfares will lead to lower demand and this will in turn lead to capacity reductions.”

Brauer agrees that base fares are going to have to increase because uncontrollable costs like oil, airport taxes and exchange rates are under pressure. “It has reached a point where it would be irresponsible for the company, its employees and shareholders and consumers not to lift the base price. We can’t afford to continue with unsustainable airfares because we would be out of business and, at the end of the day, the consumer will suffer.”

The recent failure of Velvet Sky, adds Foster, should be an opportunity for airlines to balance supply with demand to sort out their profitability and sustainability. “Inevitably the market’s inelasticity will result in a volume contraction, which airlines could easily counter by reducing capacity.”
 
1time has responded to the difficult environment by reducing capacity, says CEO, Blacky Komani. “Over the period of May and June last year, 1time flew 10 aircraft. Over the same period this year, we intend to fly eight aircraft, which translates into a reduction in capacity of 15% to 20%.”

Meanwhile, Komani squashed claims that the airline was in financial trouble after failing to submit provisional reports within the three-month period stipulated in the JSE’s listings requirements. “We asked for a deferment while we were in the process of negotiations with external investors. The results will be out on April 26,” Komani said at the time of going to print.

Accordingly, the company's listing on the JSE Tradelect system has been annotated with an ‘RE’ to indicate that the company has failed to submit its provisional reports timeously and that the listing of its securities are under threat of suspension and possible termination. Should the company fail to submit its provisional report by April 30 its listings will be suspended.

Mango Airlines communications manager, Hein Kaiser, meanwhile denies that local carriers are pursuing market share relentlessly.

“The consumer benefit of sustained lower fares walks a fine line, where the art of revenue management is married to improved operational efficiencies that now make the difference between sustainability and defeat. No airline could afford the pursuit of unrealistic load factors to gain market share alone. It just won’t pay the bills at the end of the day.”
 
Kaiser says the pie is smaller and in an overtraded market, where capacity still outstrips demand, particularly on the so-called Golden Triangle, competition is fierce and will remain.

Airlines Association of Southern Africa CEO, Chris Zweigenthal, says on some of the “thin” domestic routes there is competition from the road, which appears to be the preferred mode of travel. “The partnership between the tourism, travel, hotel and airline industries needs to be strengthened to create more attractive packages for tourism to grow both in the international and domestic market.”

In addition to a focused programme to inform the public about the characteristics of the airline sector, Zeigenthal advocates that all partners in travel should help grow and develop the sector.     

“This will not be achieved without the consumer being attracted by a competitive offering. However, this must at the same time be realistic and cost effective to ensure continued sustainability of the entire industry.”