Low-cost car­ri­ers battle for SA’s skies

Finweek English Edition - - INSIDE - BY TINA WEAVIND

Com­pe­ti­tion is fi­nally heat­ing up in South African skies again, more than two years af­ter the col­lapse of Vel­vet Sky and 1time.

The dogf ight bet ween low- cost car­ri­ers has been ratch­eted up with the en­try of Sky­wise, the fourth low-cost car­rier, ear­lier this month.

Pre­vi­ously un­heard of fares be­tween Cape Town and Jo­han­nes­burg are sud­denly trip­ping off the tongues of es­tab­lished and would-be pas­sen­gers. Sky­wise of­fi­cially launched this month of­fer­ing a cou­ple of thou­sand seats at R450, un­der­cut­ting pre­vi­ous en­trant FlySafair’s of­fer of R499.

But the prom­ise of a cheap flight needs care­ful ex­am­i­na­tion. FlySafair’s strat­egy is to charge per bag on top of the fare. You pay R150 for a bag up to 20kg if you book on­line and R250 if you only let them know at the air­port. Sky­wise’s claim, at least for the mo­ment, is that there are “no hid­den costs”. On a Sky­wise f light, your first 20kg bag costs noth­ing ex­tra.

But other than price there aren’t many ways for air­lines to dif­fer­en­ti­ate them­selves, par­tic­u­larly on short-haul trips. It’s why SAA has hinted it is go­ing to leave the lo­cal routes to its low-cost op­er­a­tor Mango and fo­cus purely on re­gional f lights. Last month, SAA’s act­ing CEO Nico Bezuiden­hout said that SAA’s av­er­age break-even fare for do­mes­tic and short-haul f lights was R1 700, while Mango’s was be­low R900. It was a “no-brainer” what a con­sumer would choose.

FlySafair, part owned by Ire­land-based ASL Avi­a­tion Group, got off the ground just in time to take 200 000 pas­sen­gers on hol­i­day to Ge­orge, Cape Town, Dur­ban and Jo­han­nes­burg. Only those that got in first (and were trav­el­ling light) got the deal, but it’s a good bet that a lot of peo­ple made breath­less en­quiries and the air­line has made its name known.

How­ever, last week Dave An­drews, CEO of FlySafair, ad­mit­ted that the air­line loses money on the cheap seats. While it is “mak­ing a con­tri­bu­tion” to the par­ent com­pany, it “isn’t mak­ing a profit yet”. And it prob­a­bly won’t for the next cou­ple of years at least.

Flights might have been around 75% full so far and fares are scaled up­wards the closer a book­ing is made to the time of de­par­ture, but mar­gins are ra­zor-thin and in­put costs are mon­strous.

The Air­ports Com­pany South Africa (Acsa), for ex­am­ple, charges around R169 per pas­sen­ger to pro­vide ser­vices that in­clude ev­ery­thing from park­ing spa­ces, bag pack­ing, buss­ing peo­ple to and from the planes and air traf­fic con­trol. The two big­gest costs though are salaries and air­craft costs – like lease fees, fuel, main­te­nance and in­sur­ance.

The only fac­tor that can be con­trolled is the staff costs and FlySafair, like all the other low-cost car­ri­ers, is keep­ing this rock bot­tom.

Sky­wise, owned by a “con­sor­tium of high-net-worth in­di­vid­u­als in the Mid­dle East and Africa”, kicked off with four flights a day ear­lier this month. Pak Africa CEO Tabas­sum Qadir said that the idea was to of­fer “less price with more value. We want to fo­cus more on con­sumers’ ben­e­fit than com­peti­tor’s detri­ment.”

But while Sky­wise’s R450 spe­cial was snapped up with R499 tick­ets now avail­able “with no hid­den costs”, how long can this kind of loss-leader re­ally last?

Asked whether FlySafair’s en­try into the mar­ket had been well re­ceived by Mango and Ku­l­ula, An­drews laughed. “Not re­ally,” he said. The re­sponse was to be ex­pected: a se­ries of spe­cials were quickly made avail­able from the big two – Ku­l­ula and Mango.

“So far t hey’ve been rea­son­able though,” An­drews said. “They haven’t gone f lat out to close us down.”

It’s not im­pos­si­ble though. Ku­l­ula and Mango, with their long-es­tab­lished track record, large f leet num­bers and years of ex­pe­ri­ence in the lo­cal arena, could no doubt carry th­ese kinds of losses far longer than any new up­start.

Although it is meant to be op­er­at­ing in­de­pen­dently of SAA, it is hard to tell what kind of re­liance Mango puts on the na­tional car­rier for some of the more oner­ous in­put costs. How­ever, even if it wasn’t able to stand alone it is un­likely the state would al­low it to plum­met out of the com­pe­ti­tion for lo­cal routes.

SAA has just re­ceived its l at­est tax­payer-funded guar­an­tee of R6.5bn to raise its f inan­cial po­si­tion above com­plete in­sol­vency. At a long-de­layed an­nual gen­eral meet­ing in Jan­uary, SAA ad­mit­ted it had al­most dou­bled its losses in the 2014 fi­nan­cial year to R2.6bn.

A few f light en­quiries on Tues­day, 10 March, showed you could get to Cape Town from Jo­han­nes­burg on Sky­wise the same day for R499, on Mango for R879, FlySafair for R1 029 (R879 plus R150 for a bag up to 20kg). Ku­l­ula would have got you there for R1 124.

Dave An­drews

CEO of FlySafair

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