New SA airlines struggle to beat older rivals
RELIANCE on old aircraft, paper-thin margins and a rise in oil prices were some of the reasons new entrants to the South African airline market had failed, Plane Talk managing director Linden Birns said yesterday.
Nationwide Airlines, 1Time, Velvet Sky and Skywise ceased operations for different reasons in the past few years.
Birns said that Fly Blue Crane, which started flying in 2015, was the latest airline to find itself in distress. The airline lodged an application for business rescue last year. On Sunday, the airline’s business rescue practitioner, Etienne Naude, was optimistic that the company would overcome its problems.
Birns said the local market was fiercely competitive. “When new entrants get to key routes such as between Johannesburg and Cape Town, Johannesburg and Durban or Cape Town and Durban, they come up against formidable competition from established players such as SAA, which includes Mango Airlines; Comair which operates British Airways; and kulula and FlySafair.”
Birns said new entrants needed deep pockets and the right type of aircraft.
Sometimes the new entrants offered cheaper rates to attract customers. “But incumbents do protect their market. That does not help anybody. At some point it is impossible to offer much lower fares and still remain financially sustainable.”
To complicate matters, local airlines’ revenue was predominantly in South African rands while their capital costs and aircraft leases were in US dollars. “Most battle to close the gap between the revenue and the fixed costs.”
Birns said airlines struggled to take market share away from established players. “How do you increase market share when people are held up in loyalty programmes? You must come up with something new to increase market share. That includes looking at a new segment because there is no room in the corporate market. Big companies negotiate their own deals with airlines.
“So the new entrants do not go for corporate clients – they consider the self-employed, backpackers, the new middle class and students.”
But despite recent failures, the local aviation industry continued to attract new players. “But they soon realise that it is a cut-throat industry with very thin margins. It may take about four years before you get established.”
Birns said airlines such as kulula failed because they relied on the wrong aircraft. It was using old planes that were appropriate only as long as global oil prices stayed low. “The aircraft were maintenance intensive, not fuel efficient. The older the aircraft, the more expensive it is. As soon as the oil prices increased, their profits went out the window.”
Velvet Sky had also relied on old aircraft. The Durban-based airline launched in March 2011 and ceased operations in February 2012, being liquidated in June 2012.
Nationwide Airlines was one of several local airlines that were not able to keep on operating at a profit. Start-up airlines face many problems, including rising oil prices.