Founder: Turnaround Talk
Are we entering into a sustained period of financial distress for the aviation industry? Despite showing great resilience during the harshest months of South Africa’s very long lockdown, Comair was forced to raise the white flag of surrender when its BRPs could raise the funds to implement the company’s business rescue plan.
It’s not that the company did not have an attractive business model. Holding close to 40% of the industry’s seating capacity, coupled with the resilience shown in 2020 and 2021, funders should have been chomping at the bit to fund the Comair Rescue. However, the ever-increasing cost of fuel was a risk that funders were not prepared to go to war with.
A recent article by News24 took a closer look at the fuel issue. Subheadings and further sections were added by Turnaround Talk.
Blame it on Ukraine
The article points out that the main impact on ticket prices currently is the sharp increase in the price of fuel since the start of the war in Ukraine, spiking airlines’ costs.
Fin24’s sister site Business Insider reported in September 2019 on the cheapest prices available for a return flight between OR Tambo and Cape Town International, departing 1 November 2019 and returning 8 November 2019. It found kulula.com at R1 555.22, FlySafair at R1 998, Mango at R2 065, and South African Airways (SAA) at R2 607.72.
The article adds that a look at the lowest fares for a return flight over the same period this year shows FlySafair now at R2 262 and SAA at R3 328.92. Kulula.com and Mango are not flying at the moment.
Photo By: Comair
During the pandemic, some other domestic airlines started serving the popular route between Johannesburg and Cape Town. Their cheapest return ticket price on Wednesday for 1 November and return on 8 November were Airlink at R2 115.92, CemAir at R3 509.28 and LIFT at R1 970.
Independent Consultant, Dr Joachim Vermooten believes that increased ticket prices are just in the short-term until the current operators can add more capacity. Furthermore, the last seats sold are usually full fares and not discounted at all.
“Market dynamics are at play, of course. I think the top consumer advice at this point is to book in advance, because otherwise you simply won’t get a seat and if you do it will be pricey. Similarly, don’t miss your flight because you might not get a seat on another aircraft on that day – even on routes with many departures,” advises Gordon.
The News24 article points out that aviation expert Linden Birns of Plane Talking cautions that, when comparing ticket prices, one must compare apples with apples. Prices offered by Comair on the day before it stopped flying, for example, were sub-economic and not representative of average fares.
One must, therefore, compare prices in terms of unit costs, day of the week and time of flight, how far in advance was it booked, whether there were terms regarding a minimum stay, whether it was refundable and flexible regarding changes at no cost, whether luggage was included, and whether it was economy class or business class.
Too much too soon
The News24 article points out that aviation fuel historically accounted for between 20% and 25% of most African airlines’ cost base. Today it can be as much as half, if not more, and is their biggest single line item, according to Kamil Al Awadhi, regional vice president for Africa and Middle East at the International Air Transport Association (IATA).
“Although fuel prices have come off their June 2022 peak, in South Africa, jet fuel sells at a premium and averaged $160.63/barrel for the first 10 days of July. This was 79.8% higher than it had been over the same period last year. We are now seeing the inevitable fares increases,” he says.
The article adds that Airlink CEO Rodger Foster says, if the remaining airlines in the SA domestic market are sensible, they will add capacity responsibly so that the industry becomes sustainable.
“I understand from a consumer’s point of view that they want to fly around for R500, but why do they think we can produce air tickets cheaper than the cost of a long distance bus ticket? We have to recover our average costs and some [airlines] have not been doing that. The evidence is in the number of airline failures in SA. These are the brutal facts,” he says.
LIFT CEO Jonathan Ayache agrees that the domestic market was heavily oversupplied over the last 18 months. In his view, a key reason for Comair’s failure was that it added too much capacity too soon.
“Comair’s [provisional liquidation] has allowed the market to stabilise, and we have and will continue to add capacity gradually and responsibly to ensure a sustainable industry,” he says.
“Our load factors remain high [and] at a similar level to what they were before. The difference is that flights are filling up sooner. Our pricing model has not changed and works on an automatic system – as flights fill up, seat prices will automatically increase, which is an industry standard.”
Photo By: Canva
A different kind of traveller
Air fuel is the one challenge that aviation companies need to address when it comes to rising ticket prices. The other is the move from business passengers to leisure passengers.
The Covid Pandemic forced business men and women to conduct meetings and customers visits virtually. This proved to be successful and showed business owners that the days of expensive business trips can be managed. In a recent report, McKinsey pointed out that the immediate future of the airline industry will be driven by leisure passengers.
Speaking in an exclusive interview with Turnaround Talk, Vermooten said that this effectively eliminates the cross subsidisation of leisure travellers by business travellers.
Pressed about whether this will price consumers out of the market, Vermooten said, “It’s not a case of pricing yourself out of the market, unfortunately costs have increased and the ability of airlines to distribute those costs in terms of pricing has reduced. We don’t have the wide scale of pricing that we used to. Ultimately, the absolute pricing of transport and air transport is a factor for creating growth and consumers feel it themselves with the high price of petrol and diesel.” Reading between the lines, it seems as if even if airlines are cognisant about pricing air travel out of the reach of most consumers, they are left with little choice.
Hammer to fall
Following the liquidation of Comair, all eyes turned towards the three carriers who are left to fill the gap that was left in the market. these were SAA, Lyft, and FlySafair.
At the moment, these companies are coping well with demand and are seemingly able to negate the price pressure that is being created by fuel costs and the lack of business travellers. However, how long will this last? will we see more disruption in the future and will we see more airlines entering into business rescue and filing for liquidation?
