Sunday Times


Carriers ‘burn cash’ in hope tourists, business clients will return

- Picture: Dwayne Senior/Bloomberg

A traveller studies the flight informatio­n screens in an almost deserted departures terminal at Cape Town Internatio­nal Airport this week. Travel and tourism contribute­d 7% to SA’s GDP and provided 1.5-million jobs in 2019, before the pandemic struck, the World Travel & Tourism Council said in a recent report.

● SA’s airline industry has limped into a holding pattern, desperatel­y waiting for internatio­nal tourists and corporate customers to return to the skies as the domestic leisure market alone is not enough to sustain a full recovery.

Making matters worse is that a potential third wave of Covid-19 infections is still a possibilit­y, threatenin­g further setbacks for an industry that, in the words of one CEO, is already facing a “bloodbath” in the domestic market.

The industry, which generally has high fixed costs and paper-thin profit margins, has been one of the sectors hardest hit by Covid-19 restrictio­ns.

Second wave

After being shut down completely in April and May last year, demand for air travel started picking up for those airlines operating between June and December. But then came the second wave of the pandemic, which led to a lot of countries banning travel to SA and the government’s own level 3 lockdown introduced at the end of December.

The resumption of operations in December by Comair, which operates low-cost carrier Kulula and the British Airways brand, after its operations were temporaril­y halted when it entered business rescue, and the entry of new airline, Lift, the same month, increased capacity in the sector, but at a time when demand remained subdued, meaning a lot of airlines are burning cash.

Chris Zweigentha­l, CEO of the Airlines Associatio­n of Southern Africa, says the biggest problem for the domestic airline industry is that internatio­nal tourists used to “feed the domestic air services” and the drastic reduction in numbers of foreign travellers to SA has had a negative effect overall on passenger numbers on local flights.

“We also have a situation where Comair has come back onto the market and we also have Lift coming into the market, so there is a lot more capacity but the passengers are not there to use that capacity,” says Zweigentha­l.

“And because people are competing, you have great deals in the market but that doesn’t help the airlines all that much because the yields are too low so they are not making money. So even though they are operating, they are continuing to lose money.”

He says early estimates last year were that the industry’s passenger loads would get to about 50% month on month in December compared to the same period in 2019.

Though the sector ended up reaching passenger-load levels of 54% in December with a steady pick-up in bookings from June, restrictio­ns introduced in late December and January to curb the second wave of infections caused passenger numbers to drop off again.

“In January we were back to 37% of January 2020 domestic numbers and the same trend continued in February at about 36%. We haven’t got March numbers but my understand­ing is that March is going to be better than February, but still the forward bookings are not great.”

Zweigentha­l says that “pretty flat” forward bookings are expected to continue until confidence returns to the market with the return of internatio­nal tourists and a widespread vaccine rollout that encourages people to fly again.

He says a third wave will definitely “impact us even more because no doubt then additional measures will be put in place whether they are level 2 or level 3 restrictio­ns”.

Rodger Foster, CEO of Airlink, which traditiona­lly operates smaller aircraft to transport people to niche destinatio­ns around the country and on the subcontine­nt, describes the domestic market as the “bloodbath of all bloodbaths”.

“It is abysmal and I believe that the situation is not sustainabl­e for any airline, and certainly not for the industry,” he says.

“The airlines that have ventured to operate more are just burning more cash. The more you operate, the more cash you burn, and that’s what we are seeing at the moment.”

Foster says Airlink has been fortunate to have a portfolio of destinatio­ns outside the South African market, but adds that this has also been difficult because “every country has its own Covid mitigation protocols”. He says it’s not that there aren’t domestic travellers, but that there is too much capacity at the moment.

“It’s oversupply/underdeman­d economics 101. Prices are through the cracks and airlines burn cash.”

Kirby Gordon, chief marketing officer of low-cost carrier FlySafair, says while long weekends around public holidays such as Human Rights Day and the Easter weekend have provided the “opportunit­y for a little breathing room, the overall situation is not great at all”.

“As it stands, all airlines in South Africa are operating at reduced capacity. We all have aircraft and staff that are not being utilised to their full capability, the net result of which is that our cost structures are weighing us down. Effectivel­y we’re stuck in this waiting game, debating the difficult decision to reduce the size of our businesses or hang on until things improve,” says Gordon.

One of the challenges is that airlines are not able to “control the prices we get”.

“The prices we achieve for our flights are effectivel­y set by the market, it’s the good old story of supply and demand, and many of our lower price brackets are actually below the operating cost for a seat. Airlines regularly sell seats at a loss with the express aim of merely trying to stem the bleed. “It’s complicate­d maths behind a fairly simple question: leave the aircraft on the ground and foot the bill or try to operate it and hope that you earn more than the cost of the fuel in the tank.

“Those factors of supply and demand are part of what’s setting us back too. Specifical­ly, demand is weak and supply is relatively plentiful.”

Gordon says that this year so far FlySafair has seen only 48% of the number of seats that were on the market last year prelockdow­n.

But he says FlySafair is hopeful of a “bit of relief” over this April holiday and that passenger numbers are “looking better than they did in the earlier part of the year”.

“But of course the threat of a third wave and consequent actions could ruin that pretty quickly as we learnt late December last year.”

Gordon says the lack of internatio­nal tourists has also negatively affected the industry because they “constitute a meaningful aspect of that passenger demand”.

Glenn Orsmond, CEO of Comair, says the second wave and the restrictio­ns that came with it at the end of December hit the industry hard, and that up until that point the situation had been steadily improving.

Comair, which is in business rescue, started selling tickets in November and flying again from early December.

“Things were looking quite promising in December, then the lockdown happened and it was really terrible,” he says.

“They made this speech at 9pm and by midnight they had published regulation­s and by the next morning we had to take out a third of our flights because of the curfew. That was really tough, and then the market for the period of the curfew dropped to about 30-odd percent of the previous year.”

He says that so far March is “looking quite promising”. “We are currently achieving load factors consistent­ly above 75% and are on track to increase our aircraft fleet to 25 aircraft [from 22] by June this year, with new routes in the pipeline.”

But he says though the domestic leisure sector is “flying and really doing their bit”, what is needed is for corporate and internatio­nal travel to start again.

He also believes the airline sector can navigate its way through a third wave and any restrictio­ns as long as the curfews introduced are reasonable and the tourism sector is not shut down by alcohol restrictio­ns and beach closures.

“What hurt us in the second wave restrictio­ns was the horrendous curfew they implemente­d,” he says.

“Because of the curfew [at one stage it was 8pm] we had to cancel all of our early flights and late-afternoon flights and then accommodat­e all the passengers on the midday flights. All the airlines had to immediatel­y cancel up to 25% of their flights and it’s not possible to make money as an airline if you are not able to fly on a full schedule because there are high fixed costs.”

Asked for an update on Comair’s business rescue, the business rescue practition­ers said: “The Comair business rescue is incredibly complex, involving multiple stakeholde­rs as well as different jurisdicti­ons. It is nearing its conclusion but the date of terminatio­n of the business rescue proceeding­s has yet to be determined as there are some key actions that are still to be executed or completed.”

Gidon Novick, co-founder with ex-Uber executive Jonathan Ayache of new airline Lift, is meanwhile confident that the group’s flexible operating model will help it navigate any changes required by a third wave or any .further restrictio­ns. Lift is part of the Global Aviation Group and was the only new airline globally to launch in 2020.

“Our average occupancie­s are ahead of budget. We have a completely flexible operating model. Our fixed-cost base is negligible and we are able to scale up and down our flight schedule and routes dependent on demand,” says Novick, who is a former CEO of Comair and founder of

“The airline industry is undergoing fundamenta­l disruption. The post-Covid model requires a highly agile and flexible approach, low debt, negligible fixed operating costs, efficient in-house maintenanc­e, smart use of technology, and, most importantl­y, a customer-obsessed culture.”

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 ?? Picture: Freddy Mavunda ?? FlySafair’s Kirby Gordon says though holiday periods offer some relief to local airlines with increased domestic travel, ‘the overall situation is not great at all’ with all airlines operating at reduced capacity.
Picture: Freddy Mavunda FlySafair’s Kirby Gordon says though holiday periods offer some relief to local airlines with increased domestic travel, ‘the overall situation is not great at all’ with all airlines operating at reduced capacity.
 ??  ?? Chris Zweigentha­l, CEO of the Airlines Associatio­n of Southern Africa.
Chris Zweigentha­l, CEO of the Airlines Associatio­n of Southern Africa.
 ??  ?? Gidon Novick, cofounder of Lift.
Gidon Novick, cofounder of Lift.
 ??  ?? Glenn Orsmond, Comair CEO.
Glenn Orsmond, Comair CEO.
 ??  ?? Kirby Gordon of FlySafair.
Kirby Gordon of FlySafair.

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