Founder: Turnaround Talk
In terms of the global impact that was cause by the Covid-19 Pandemic, South Africa – while small – suffered greatly as Government dragged its feet when it came to the easing of the lockdown restrictions that it implemented in response to the Pandemic. This caused a highly volatile business environment that saw many industries suffer significant damage.
The mining industry was forced to cut production as the majority of its workers could not come to work. However, it needed to be business as usual as the industry is the major driver of the South African economy. The retail sector suffered an initial shock but then recovered as many businesses opened online stores and South Africans embraced online shopping.
The industries that suffered the most damage were the tourism and airline industries. South Africa lost no less than five airlines in a space of two years. This has created a situation where there is a unique operating environment.
The current state of play
There is a significant demand for airline tickets on the weekends, and lower demand during the week as many businesses embrace online (virtual) meeting platforms.
This is great news for the five operators that managed to survive the Covid storm as the price of these tickets increased significantly as players exited the industry. Obviously, this is bad news for consumers who are facing increased pressure on their finances as the global recession vultures start circling. I recently read an article by News24 which paints a perfect picture of the airline industry.
“The pandemic accelerated the demise of unsustainable airlines,” says an airline executive, who spoke to News24 on condition of anonymity, “it is important to note that, contrary to many other countries, the SA government failed to provide financial assistance to any local private airlines.”
Miles van der Molen, CEO of CemAir, agrees that it was not so much the Covid-19 pandemic that brought about a change in the domestic airline industry but the fact that it was in bad shape even before the pandemic arrived.
“Our view is the industry is in a recovery phase and, for the first time, is being guided by market forces. In the last 25 years in SA, we have seen approximately 20 airlines come and go. This was largely due to the distorted market and artificial funding enjoyed by certain players,” says Van der Molen.
“With this phase hopefully behind us, we are hoping for a more stable, more investable and level playing field for the industry in the coming years. A stable and sustainable set of airlines is to the benefit of the industry and travelling public alike.”
Van der Molen told News24 that he believes that the private sector will continue to add capacity through the next six months.
According to aviation expert Linden Birns, managing director of the communication firm Plane Talking, the biggest challenges for local airlines remain profitability and yields, despite demand in the market.
Photo By: Getty Images
Ticket prices
Birns explains that ticket prices are not just about competition in the market but also about capacity.
“I think there is more than enough competition in the market – with five domestic airlines currently flying. Right now, there is surplus capacity on weekdays, but a shortage on weekends, Friday afternoons, Monday mornings, and on evenings before a holiday period and at the end of it,” says Birns.
“Airlines, therefore, must be careful about adding too much capacity. They do not want to have a surplus and end up unable to fill seats at viable fares. They do not want to get to a situation where there is an airfare war to defend their market share with fares of which they cannot cover the cost. That is not a sustainable model.”
The News24 article points out that it also has a lot to do with per capita income in the markets in which SA airlines operate compared to airlines in Europe and North America. The SA market is a more price-sensitive market with less price elasticity.
Foster says fares across the industry have risen, primarily because of the jet fuel price, which is more than double what it was a year ago. Jet fuel is now the single largest cost item – for most airlines at about a third of all costs. Other inflationary costs have also impacted ticket prices, including labour, service providers and the recent interest rate hikes. The weaker rand is also making an impact.
Jonathan Ayache‚ a co-founder of LIFT‚ told News24 that margins airlines face are, at the best of times, razor thin and it is imperative for the industry to behave responsibly when it comes to pricing and supply to ensure sustainability.
SAA
The News24 article points out that SAA was in financial trouble even before the pandemic hit. It went into business rescue at the start of December 2019 when government did not provide yet another bailout. SAA stopped flying in May 2020 and only restarted again in September 2021.
SAA is awaiting Competition Commission and other regulatory approvals to green-light a strategic-equity partnership deal brokered by the Department of Public Enterprises (DPE), by which the Takatso Consortium will obtain a 51% stake in the airline.
The News24 article adds that Takatso comprises infrastructure investment firm Harith and Global Airways, which operates LIFT. Takatso is expected to put about R3 billion into the flag carrier over two years once it takes the helm. But in the meantime, SAA has had to make do on its own financially. It is unclear what SAA’s financial position actually is as it has yet to publish financial statements covering the last few years.
FlySafair
The article points out that FlySafair has become the dominant player in the domestic market, with market share of 60%. Pre-pandemic, it had about 25% of seat capacity.
“In absolute terms, we are now flying about 160% of what we did in December 2019. We did not have to lay off anyone during the pandemic – they all jumped on board and took pay cuts to keep the airline going. We were ready to start flying again as soon as the relevant lockdowns were lifted,” says spokesperson Kirby Gordon. “Our regional route expansion is exciting for us.”
Airlink
The article adds that Airlink has about 15% of the domestic market share and a good route network in the southern African region.
Foster says the airline has been adding capacity through acquiring additional aircraft and increasing the utilisation of its fleet and personnel.
“From a commercial perspective, while our business is built on providing affordable, great value and reliable services, we can only add capacity on those routes where the market can support the services at economically viable fares,” he explains.
Photo By: Business Insider
LIFT
The News24 article points out that, as the youngest domestic airline, Ayache says the focus remains on building its brand and network. He says customers like the airline’s flexible business model.
“We try to be as agile as possible to respond to market changes. When Comair stopped flying earlier [in 2022], we could have our first additional planes ready within three months,” he says.
CemAir
The article adds that CemAir has about 12% of the domestic market share. It services popular tourist destinations and business hubs.
Mango
The article points out that Mango’s possible return to the skies is in the hands of the DPE and National Treasury for approval of a sale (to an unknown party) already approved by the business rescue practitioner. The longer the delay in Government approval, the greater the risk of the deal falling through.
If the sale fails, Mango will have to be wound down by the rescue practitioner.
kulula.com
The article points out that, at the start of December, the court case to determine whether Comair, which owns kulula.com, can be saved or should be placed in final liquidation was postponed until June next year.
According to the office of Comair’s provisional liquidators, the Sechaba Trust, a postponement was requested because they are still in talks with parties interested in potentially buying certain parts of the company. It mainly relates to intellectual property like brands and licenses.
British Airways
The article adds that Comair operated domestic and regional British Airways flights under a licence agreement. The BA agreement was terminated when Comair was placed in provisional liquidation in June.
SA Express
The News24 article points out that the High Court placed SAX in final liquidation in September 2022 after it went into provisional liquidation already in April 2020 when a business rescue attempt failed. Due to the current fiscal constraint, government could not provide the post-commencement finance to implement a successful rescue process.
Repeated attempts to conclude a sale of the airline also failed.
Swings and roundabouts
The South African airline industry is in an interesting position. If the market is currently being driven by market forces, then will we see a return of the status quo that the country was so used to in the past? One would think not particularly if the volatility surrounding the price of airline fuel persists and the adoption of virtual meeting platforms gain momentum.
The winner in this may turn out to be the tourism industry. Many South Africans will be forced to take to the roads and explore the country the old-fashioned way. My mom lives in KwaZulu Natal and I have spent many wonderful vacations in the province exploring the midlands and Northern KZN with my family. Revenge tourism (the practice whereby families spend extravagantly on holidays because of the inability to do so during Covid) is gaining momentum and South Africans may find that they will get a lot more bag for their buck travelling locally than they will travelling internationally.
Smaller towns such as Pilgrims Rest, Dullstroom, the Natal Midlands, Saint Lucia and George may prove to be popular vacation spots boosting tourism in towns that always lamented the fact that they are considered an afterthought over more popular local destinations.
