Business Day: 31 October 2005
Flying low
SEPTEMBER 11 2001 was a watershed for the airline industry, a seismic event that finally forced the already struggling industry to make some tough decisions.
More than four years later the pressure has in no way abated, with surging oil prices now adding to the industry’s woes. Airlines have adopted a range of strategies to compete in this new, challenging environment, some with more success than others. It has become clear that traditional airlines, with their high overheads, are finding it increasingly difficult to do business.
In Europe there has been vast consolidation. Air France has merged with the Dutch flag carrier KLM, and Lufthansa has bought Swiss International Airlines, the Swiss carrier that stared bankruptcy in the face once too often.
It is hoped that through consolidation, overheads will be brought under control by sharing certain costs. While Air France-KLM’s first set of results as a merged entity were encouraging, it is perhaps too early to pass judgment on the success of this strategy.
One strategy that has undeniably succeeded the world over is that of the low-cost airline. In Europe, Ryanair has grown its share of the market to the extent that is now one of the world’s biggest airlines.
In SA kulula.com, and more recently 1time, have also been enormously successful.
In the US, several of the main carriers have sought to emulate the success of the low-cost model by establishing separate airlines. While these low-cost airlines are all profitable, they have not helped the traditional carriers that own them come to terms with their own unwieldy cost structures: four of the major carriers — Delta, Northwest, United and US Airways — are currently operating under the US Chapter 11 insolvency rules.
Against this background, it is difficult not to raise an eyebrow when South African Airways (SAA) CEO Khaya Ngqula starts talking about creating a separate low-cost airline, possibly with a regional presence.
SAA has not escaped any of the turbulence in the industry over the past few years. It has been profitable in some years, and wildly unprofitable in others, although its earlier unwise hedging policy played a role here. It still has to contend with high overheads, large management structures and heavy oil prices. SAA has targeted the continent as an area of growth — a market it sees as being lucrative for the airline.
So where does a low-cost airline fit into this scenario? Assuming the new airline will be created as an entirely separate and ring-fenced entity, will it compete head-to-head with SAA?
Certainly the low-cost model must be alluring to legacy carriers and SAA may be seeking a piece of the action. And, given the pricey tickets for flights to African destinations, a low-cost airline could be appealing to business, particularly on key routes such as Lagos to Johannesburg. It would follow kulula’s launch of daily flights to Windhoek and Harare and possible services to other destinations in the region.
On domestic routes, a low-cost airline would allow SAA to win back market share from kulula and 1time.
However, there are warning signals. SAA should be careful how it uses its dominant position in the local market. It has been accused in the past of using its weight to crush competitors. Such tactics in the low-cost market cannot be tolerated.
Furthermore, a low-cost airline might well add an additional burden to the management team, which already has its hands full trying to sort out its existing problems. Then there is its second airline, SA Express, which is in the process of upgrading its fleet, a costly exercise.
As a state-owned entity, any expansionary failure could ultimately become government’s problem. The business case for any such move into the low-cost market needs to be extensively interrogated before SAA goes ahead.