An overview of developments in the aviation industry in South Africa with special reference to the role of low cost carriers - Presentation to the ...
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Presentation to the Leadership and Policy Seminar
ITLS, University of Sydney
18 May 2010
An overview of developments in the aviation
industry in South Africa with special reference
to the role of low cost carriers
Overview of the presentation • Historical overview of the industry in South Africa • Aviation policy principles underpinning the domestic airline industry in SA • Progress with the implementation of the principles • Areas of consideration to ensure a more successful domestic airline industry • Overview of the domestic airline trends on the Golden Triangle • Conclusions
Historical overview • South African Airways is a government‐owned airline and has been in existence since 1934 • Comair Ltd is the oldest private airline in the country and was established in 1949 • Prior to the economic deregulation of the aviation industry in SA in 1991, SAA dominated the domestic market with a share of more than 95%. • It also operated all the high density routes as a sole franchise with little prospect of any competitor to meet the requirements to compete with SAA on these lucrative routes • The remaining market share was shared by the private sector airlines on the secondary routes
The economic deregulation of the industry • Following the success with USA aviation deregulation a policy review project was commissioned by the South African DoT to investigate the potential deregulation of the domestic aviation industry • A recommendation was made to deregulate the industry as from 1990 but allowed for a one year grace period to allow the private sector to organise itself before entering the industry • The first airline to enter following deregulation was Flitestar. It entered the market in October 1991 with new A320s and ATR 72 aircraft. From the beginning there were allegations of SAA reducing its prices to below cost in competition with Flitestar. • There were also allegations that SAA was involved in the bracketing of flights and the dumping of large volumes of below cost priced seats targeted to specific direct competitive flights with Flitestar, as well as abuse of the computer reservation system operated by SAA.
The economic deregulation of the industry • Flitestar took SAA to the Competition authority which, following an investigation, ordered SAA to increase it prices to cert levels to stop anti‐competitive activity and to ensure a viable industry. • Flitestar ceased business in April 1994. • The second airline to enter in competition with SAA (1992) was Comair on the Johannesburg‐ Cape Town route– the most dense route in South Africa. Services were soon expanded to Durban and between Durban and Cape Town. • In 1996 it entered into a franchise agreement with British Airways. • Comair embarked upon an empowerment (shareholding) agreement with a consortium who subsequently withdrew. BA took up the consortium’s 18% shareholding in Comair.
The economic deregulation of the industry • After the demise of Flitestar in 1994, Sun Air began domestic operations in 1996. It operated used DC9s leased from Safair (an aircraft maintenance and leasing organisation) and employed most of the former Flitestar staff. • In August 1999 SAA announced that it had taken over the airline and subsequently closed it down. It also agreed with the aircraft lessor, Safair, to take back the DC9s and made separate payments to Safair not to make the aircraft (9 in total) available to the local market.
The economic deregulation of the industry • Other entrants were Phoenix Air and Nationwide (both of which went into bankruptcy) SA Express and SA Airlink, a re‐positioned domestic feeder airline at the time. • SAA obtained a 10% shareholding in SA Airlink (later diluted to 2.75%) and concluded a franchise that enabled SA Airlink to share SAA’s airline code and livery. • SA Airlink mostly operates on the feeder routes to the main airports of Johannesburg, Durban and Cape Town, linking with SAA’s network and smaller secondary routes. • Nationwide, before its closure, won a R 40m abuse of dominance case before the Competition Authority against a SAA practice of paying travel agents override commissions on SAA ticket sales. • This saga is still ongoing with both Nationwide and Comair furthering the case in the High Court following favourable rulings of the competition authority.
The economic deregulation of the industry • Transnet (a fully Government owned parastatal) bought the entire shareholding of SA Express, a regional feeder service to link up with SAA’s network at the main hubs in SA. This airline originally began operations as a privately‐owned airline with a small shareholding of SAA. It operates under SAA code and livery with smaller gauge aircraft than SAA. • Transnet (owner of SAA) sold 20% of its interest in SAA to Swissair. This interest was later re‐acquired by Transnet when Swissair ran into financial difficulties. • Government acquired the Swissair shares in SAA from Transnet on 31 March 2006 (SAA was transferred to the Department of Public Enterprises) and implemented a two year restructuring programme as a condition for a limited recapitalisation of SAA, strengthened the SAA Board of Directors and appointed a new CEO.
The low cost airline entry to the market • In 2001, Comair (a listed public company) established Kulula.com, the first low cost airline in the country. • 1Time airline (a listed public company) entered the market in 2004 to become a major competitor to Kulula in the market • in 2006, SAA established Mango, a new low cost airline in direct competition with the private sector operators (and itself) • These low cost airlines mainly compete on the Golden Triangle routes ‐ Johannesburg, Durban and Cape Town, with Mango also operating from Bloemfontein to Durban and Cape Town • It is estimated that today, SAA in it own right, has a market share of about 34% (on the triangle) of domestic air services in South Africa • SAA also enjoys feed from its intercontinental and regional air services as well as from the smaller gauge networks of SA Express and Airlink
Johannesburg/
Pretoria
Durban
These three airports together
Cape handle 95% of passengers and
Town 73% of ATMs
In total , ACSA handles more
Source: http://mappery.com/maps/South-Africa-Road-Map.jpg than 23 million passengers
annuallyThe Domestic Aviation Policy of 1990
• Principles
– First principle: Safety is of the utmost importance
• Equipment to be safe and be kept in a safe condition
• Persons operating equipment should be properly trained and
operate in a safe manner
• Operator should operate his business in a safe manner
• Safety standards should be reviewed and extended where
necessary
• New entrants to be judged against these standards etc.
• Safety aspects should be monitored on a continuous basis to
ensure compliance
• Air traffic control services and airports should be operated
efficiently
• Relevant safety legislation and the institutional structure were
substantially revised to clarify responsibility and
accountability.The Domestic Aviation Policy of 1990
The Domestic Aviation Policy of 1990
The Domestic Aviation Policy of 1990
The Domestic Aviation Policy of 1990
Have we achieved these policy principles?
• Mostly yes – more inter‐airline competition, more fare
competition, safety is not compromised, more user choice etc.
• However, in some areas we did not make good progress:
– The playing field is not level in the aviation industry – state vs. private
sector operators
• The State is still competing with privately‐owned airlines in a fully deregulated
market – government is referee and player in the market
• We now have three government airlines whereas at the time of deregulation we
had only one
• Ownership of SAA and its privileges due to it being a governmental airline
• State funding support for SAA over many years have skewed the market and is
an unfair advantage
– SAA being found guilty of predatory behaviour and abuse of its dominance.
The latest case involved SAA paying agent‐override commissions which
directly affected Nationwide and Comair ticket sales
– Strong frequent flier programs (SAA/SA Express/SA Airlink and Comair)
effectively foreclosing market accessWhat can be done to “normalise” the situation? • The governmental ownership of SAA, SAX and Mango should be addressed • Competition Commission cases take too long to be heard and financial harm is caused in the interim. The power to intervene and stop anti‐competitive conduct through temporary “cease and desist” orders should be granted to the Commission, on the basis adopted in Canada. • Investigate the impact of FFPs on consumer behaviour and consider (if found negative) prohibiting the exchange of FFP miles on domestic services • State financial aid to SAA distorts the market – this should be avoided
What are some of the major trends since deregulation? • New entrants since deregulation – Flitestar, BAComair (although well established on the non‐major routes before deregulation), Sun Air, Phoenix, Nationwide, Mango, 1Time and Kulula.com (Airlink and SA Express) • Four of the new entrant airlines have folded for various reasons • Much larger choice amongst airlines, a wide range of fares and extensive competition on the domestic airline network • New business model developed in the form of low cost airlines (Kulula.com; Mango and 1Time) • Large growth in the domestic market through the stimulation of the low cost airlines
Major events impacting on domestic PAX
departures: 1995‐2008 (Cumulative plot)
Oil price
hits Global
US$ financial
147/barrel crisis
(Jul ’08) emerges
Mango (Sept ’08)
1,100,000 enters the
market (Nov
’06)
1,000,000 CPI at 4%
and Prime
at 10.5%
(Jan ’06)
900,000
Number of Passengers per Month
1Time
enters the Prime
market at
800,000 15.5%
(Feb ‘04)
(Jun
Prime ’08)
700,000 at
25.5%
Kulula 9/11
(Aug
GDP at enters (Sept
‘98)
600,000 5.7% market ‘01)
(Jul (Jul ‘01)
‘96)
500,000
GDP at
CPI at R/$
400,000 5.93%
(Nov 13.1% and exchange at
Asian GDP at R11.48/$
Oil price R/$ exchange SARS virus ’04)
debt 0.7% (Sept (24 Oct ’08)
crisis GDP at US$ at and US
300,000 10/barrel R 13.44/$ occupation of
’08)
(June -0.4%
‘97) (Sept (Feb ‘99) (21Dec ’01) Iraq (March
‘98) ‘03
200,000
Jan‐95
May‐95
Sep‐95
Jan‐96
May‐96
Sep‐96
Jan‐97
May‐97
Sep‐97
Jan‐98
May‐98
Sep‐98
Jan‐99
May‐99
Sep‐99
Jan‐00
May‐00
Sep‐00
Jan‐01
May‐01
Sep‐01
Jan‐02
May‐02
Sep‐02
Jan‐03
May‐03
Sep‐03
Jan‐04
May‐04
Sep‐04
Jan‐05
May‐05
Sep‐05
Jan‐06
May‐06
Sep‐06
Jan‐07
May‐07
Sep‐07
Jan‐08
May‐08
Sep‐08
FCC hp(FCC) LCC hp(LCC)
21US Airline PAX after 9/11
Industry
Industry is
is resilient
resilient –– volume
volume growth
growth may
may be
be postponed
postponed due
due to
to events,
events,
but
but typically
typically recovers
recovers to to former
former levels
levels in
in 24‐36
24‐36 months.
months.
22Some information about the slides to follow • The information was gathered as part of a major econometric forecasting study on passenger, ATM and airfreight activities • The information about the low cost airlines was calculated in order to forecast future passenger and ATM trends for this important market segment • The slides represent only domestic passenger trends and excludes regional and international flights • Only scheduled services are shown • Only departing passenger and ATM information is shown • Only information for the Golden Triangle is shown
Passenger volumes of
the traditional full
cost carriersThis market segment represents
significant gauge differences in
aircraft type operatedConclusions • Airline deregulation has resulted in a highly competitive market with a range of service offerings and choice of airlines • The role of the state in the industry has diminished significantly but the state owned airlines combined still have a sizeable market share • SAA’s market share has reduced from about 95% to 34% • The low cost airlines have significantly stimulated the market • Airline safety has not been compromised following deregulation • SAA’s role in the demise of at least two airlines and the impact of the agent override commissions should not be underestimated
THANK YOU
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