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Oil rally will raise SA air fares later in 2016 - CEO

May 31 2016 18:27
Carin Smith

Dublin – Global air transport industry leaders are gathering in Dublin later this week for the 72nd annual general meeting and World Air Transport Summit of the International Air Transport Association (Iata).

Hot topics on the agenda are expected to be measures to ensure the economic and social benefits of safe, secure, efficient and sustainable global air transport, according to Tony Tyler, Iata director general and CEO.

Ahead of the event Fin24 talked to Elmar Conradie, CEO of Safair, which operates low-cost South African airline FlySafair, on the state of the industry in SA.

According to Conradie, South African aviation is in an interesting place at the moment.

"2015 was a great year for consumers, because the price of oil hit record lows, which meant that airlines were able to offer some great fares, given that fuel is generally a substantial cost for any airline. A weakening rand unfortunately offset the effect of a low oil price, so we weren't able to perhaps enjoy the full extent of those savings," explained Conradie.
 
Despite this, domestic fares dropped sharply with average fares falling as much as 39% on some routes. This was aided by a low oil price, but largely due to competition as new airlines started to contest the low-cost carrier market, according to Conradie.

"The result has been a really healthy growth in the number of passengers flying domestically, with airports like George reporting uplifts in passengers numbers over the December period by as much as 145%."
 
He pointed out that the rand has unfortunately had a rough ride the past three months, and the oil price has started a recovery which will begin to impact flight prices later in 2016.
 
"Maintaining a healthy airline, and specifically a healthy low-cost carrier, has a lot to do with managing costs. The airline industry is incredibly capital intensive, but offers fairly low margins: what this means is that it's pretty tough to make money, but very easy to lose a lot of money if you take your eye off the cost-control ball," said Conradie.
 
"That said, reports have indicated that the weak rand has been great for foreign tourism. Tourism numbers coming out of Cape Town earlier this year showed that more foreign visitors were coming to SA and that the average stay was also slightly longer. This is good for SA domestic airlines."
 
The increase in local traffic is also great for domestic airlines, he emphasised. "FlySafair regularly conducts surveys of our passengers and we routinely find that approximately 14%-15% of our passengers are first-time fliers, which speaks to a growing market.
 
"Looking forward, we suspect that it's going to be a slightly tougher year than 2015 for both airlines and consumers. A weak rand and a rising oil price are going to form a double-edged sword that will erode consumers' disposable income while significantly raising the cost base for airlines," said Conradie.

"Thus far our winter loads are looking strong against budgeted forecasts and year-on-year, but economists will be quick to remind us that we haven't seen the full effects of inflation yet."

Could Comair help open up SA skies?
 
As for the court case surrounding Comair's foreign ownership structure, Conradie said this is going to be interesting to watch.

"Effectively the law limits foreign ownership of an airline in that no more than 25% of the voting rights of the company may be held by foreign shareholders. There's an added complexity when one considers direct shareholding and indirect shareholding - that is, are the domestic holders of voting rights ultimately owned by foreign entities," explained Conradie.

"The reason the outcome of this is so interesting is that if the restrictions are loosened up, we could start to see open skies emerging. Foreign-owned carriers like fastjet and FlyAfrica have previously been denied operating licences on their foreign ownership, but a change in the legal interpretation of this regulation could have interesting results."
 
That said, Conradie said it would likely be very difficult for a new player to enter the market at the moment.

"Competition on domestic routes is really healthy and the fares are floating at pretty much the lowest point they can while still being sustainable to operate. Currently air fares are still lower than five years ago. Extra market capacity right now would be very difficult to accommodate unless we see a very significant uptick in demand, which is unlikely due to the current state of the economy," he added.

He expressed satisfaction with FlySafair's performance so far. It started out with two aircraft doing about 30 flights a week between Cape Town and Johannesburg and is now up to five operating aircraft doing more than 200 flights a week (with one extra aircraft on standby).
 
"Running an airline is a hugely complicated matter. There are so many fine balances that one needs to strike: from operating realities, to leasing and financing aircraft, managing external parties, marketing your offering, and crafting a winning customer experience," said Conradie.

flysafair  |  aviation  |  airlines
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