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A touch of Velvet

TO EVERY EAR it has spread, on every tongue it has grown. But will we finally see the birth of a new airline in the industry in South Africa? Well known for its hostility – seeing the likes of Nationwide drop off the radar and Airtime Airlines failing to even take off – SA’s airline industry is set to welcome a new entrant called Velvet Sky. Having already launched its website (www.velvetsky.co.za) and now awaiting the green light from SA’s Civil Aviation Authority (CAA), the Durban-based airline is keen to hit the ground running, offering low-cost services between Cape Town, Durban and Johannesburg and taking on existing players 1time, kulula and Mango.

But the questions remain: Will Velvet’s offering ensure its successful entry and survival in SA? Can it meet the regulatory requirements set by the CAA and avoid the barks and bites from current players?

However, it seems Velvet is close to overcoming one of its hurdles – regulation. The CAA says “…the evaluation of the application is at an advanced stage and it’s envisaged the process will be concluded within a few weeks…” Showing extensive work has already been done to obtain its operating licence.

But the biggest tellers of the Velvet story will be its business model, which will talk to the fledgling airline’s revenue growth and pricing strategy, cost management and the macro environment it will operate in.

Kulula, now the big brother of SA’s low-cost airline industry, having been the first to break into the market in 2001, made revenue growth through product/service differentiation and effective cost management the cornerstone of its business model. 1time and Mango put more focus on pricing as a key market penetration strategy. Speculation has been that Velvet will look to enter the “mobile space” as a key product differentiator, the success of which will be interesting to see as Airtime Airlines had promised differentiation along similar lines and crashed.

Effective cost management is the biggest factor determining the sustainability of an airline, with fleet and fuel costs being the primary areas of concern. The variable nature of fuel costs (which some companies fix by hedging) – which accounts for approximately 30% of an airline’s operating outlay – becomes cumbersome for carriers. Leasing aircraft also contributes a large portion of operating costs. Kulula and Mango both saw best to piggy-back their parent companies – Comair and SA Airways respectively – to use their existing fleets. Velvet – seemingly without a “parent” – will bear the full cost itself.

On a macro level, the International Air Transport Association has forecast growth in passenger demand of 5,6% this year, while 1time and kulula expect to increase their capacity by approximately 13% to 15%. That poses a major threat it Velvet’s survival, as the current carriers are aggressively fighting for market share.

And as if the current hurdles Velvet faces aren’t enough, its financial backers remain coy about their identities due to fears of reputational risk should the project fail. So much for backing a “winning horse”. The concept looks pretty on paper but will the Velvet story fly?
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