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It’s easy to start an airline but staying in business is a different matter. Over the past 20 years, 10 privately controlled airlines were launched in South Africa. Only two of those – 1time and kulula – are still flying. The rest, including operators such as Sun Air, Nationwide and Interlink, have had their wings clipped. Now another new player – Velvet Sky – has entered the South African market and the inevitable question to be asked is: What are its prospects?
Airlines in SA face two major problems: the oil price and competition. Both factors are largely beyond the control of the companies themselves. However, their effect is that airlines have to operate under enormous pressure in terms of ticket prices. That makes it difficult for the companies to earn enough to be sustainable.
There are currently seven established commercial airlines operating on domestic routes in SA: British Airways, kulula, 1time, Mango, SA Express, SA Airlink and SA Airways. Three of those are State controlled.
And now there’s newcomer Velvet Sky. It will initially use just one Boeing 737-300 to fly SA’s “golden triangle”: Durban-Johannesburg-Cape Town, the country’s busiest routes. Durban businessman Cecil Reddy is chairman and major shareholder of the new company. Reddy says 9 000 tickets were sold over the airline’s website in its first three days and more than 1m people visited the website in its first week alone.
He reckons there’s great demand for affordable air transport in SA and the time is right for a new player in the market. So now’s the perfect time to launch a new airline. “After the recession there were many aircraft that could be bought cheaply – much cheaper than the amounts many of our competitors have to spend on renting their planes. That means our cost basis is low, which makes us competitive right from the start.”
Erik Venter, joint CEO of the airline group Comair, admits it’s easy to start a new airline but not all that easy to stay in business. “Business models for airlines are simple to compile and even look attractive to prospective investors. You estimate how much you’ll get for an airline ticket and if the business plan doesn’t work, you simply add a few rand here and there. But the reality is a bit different, with airlines in SA just not able to afford to charge the ticket prices their business plans call for.”
The average price of an airline ticket in South Africa is very low and as soon as input costs – such as the world oil price – suddenly rise, the company finds it difficult to absorb the additional cost pressures.
Venter says ticket prices in SA usually only vary by a few rand. “The pressure is aggravated by privately controlled airlines having to compete against State-controlled airlines, which are to a large extent protected by their shareholder.”
Linden Birns, an independent analyst, agrees competition in SA’s airline industry is exceptionally fierce. He also feels it will be difficult for Velvet Sky to be successful as long as it only operates one aircraft. “For an airline to be successful in SA it must fly high frequency – 12 to 14 hours a day – with high load factors. But with only one plane at its disposal Velvet Sky may well find it’s too difficult to achieve its targets, especially if the airline were to encounter delays.”
However, Birns says Velvet Sky has a few experienced people involved in its operation, people who know the industry. “At least that will help.”
Reddy says Velvet Sky is currently acquiring two more Boeings but it’s not yet clear when they’ll start flying. The choice of aircraft is critical to an airline’s success. Cheap planes aren’t necessarily always the most modern and the problem is older models are less fuel-efficient and also require more regular maintenance. That means aircraft fly less frequently and that can affect the airline’s business plan and create problems for its owners.
Venter says the impact of the oil price on running costs is as much as 30%. He says airlines can take the risk of hedging against the oil price but feels that actually adds more risk to the carrier. “You win some, you lose some. Airlines aren’t financial institutions. In the end we found the best hedge against the oil price is to use the most modern – therefore the most fuel-efficient – planes. That means it has less impact on you when the oil price rises.”
Comair itself uses Boeings and it recently signed a contract for eight new 737-800 aircraft. “The airline industry in SA is like the story of the guys being chased by a lion. They’re all in danger, and the only thing you can do is make sure you aren’t the one nearest to the lion,” Venter says.
The problems experienced by domestic airlines aren’t unique to SA. The International Air Transport Association (Iata) says the fluctuating oil price over the past few months will result in a 46% fall in the airline industry’s combined profit this year. Iata represents more than 230 of the world’s biggest airlines accounting for close to 93% of commercial air transport worldwide.
Iata CEO Giovanni Bisignani says airlines can expect a profit margin of 1,4% this year; last year’s figure was 2%. Bisignani says airlines expect a total net profit of US$8,6bn this year. In 2010 the figure was $16bn. “The problem is that profit is earned on total turnover of $594bn. What kind of profit is $8,6bn on that level of turnover?”
Airlines in SA face two major problems: the oil price and competition. Both factors are largely beyond the control of the companies themselves. However, their effect is that airlines have to operate under enormous pressure in terms of ticket prices. That makes it difficult for the companies to earn enough to be sustainable.
There are currently seven established commercial airlines operating on domestic routes in SA: British Airways, kulula, 1time, Mango, SA Express, SA Airlink and SA Airways. Three of those are State controlled.
And now there’s newcomer Velvet Sky. It will initially use just one Boeing 737-300 to fly SA’s “golden triangle”: Durban-Johannesburg-Cape Town, the country’s busiest routes. Durban businessman Cecil Reddy is chairman and major shareholder of the new company. Reddy says 9 000 tickets were sold over the airline’s website in its first three days and more than 1m people visited the website in its first week alone.
He reckons there’s great demand for affordable air transport in SA and the time is right for a new player in the market. So now’s the perfect time to launch a new airline. “After the recession there were many aircraft that could be bought cheaply – much cheaper than the amounts many of our competitors have to spend on renting their planes. That means our cost basis is low, which makes us competitive right from the start.”
Erik Venter, joint CEO of the airline group Comair, admits it’s easy to start a new airline but not all that easy to stay in business. “Business models for airlines are simple to compile and even look attractive to prospective investors. You estimate how much you’ll get for an airline ticket and if the business plan doesn’t work, you simply add a few rand here and there. But the reality is a bit different, with airlines in SA just not able to afford to charge the ticket prices their business plans call for.”
The average price of an airline ticket in South Africa is very low and as soon as input costs – such as the world oil price – suddenly rise, the company finds it difficult to absorb the additional cost pressures.
Venter says ticket prices in SA usually only vary by a few rand. “The pressure is aggravated by privately controlled airlines having to compete against State-controlled airlines, which are to a large extent protected by their shareholder.”
Linden Birns, an independent analyst, agrees competition in SA’s airline industry is exceptionally fierce. He also feels it will be difficult for Velvet Sky to be successful as long as it only operates one aircraft. “For an airline to be successful in SA it must fly high frequency – 12 to 14 hours a day – with high load factors. But with only one plane at its disposal Velvet Sky may well find it’s too difficult to achieve its targets, especially if the airline were to encounter delays.”
However, Birns says Velvet Sky has a few experienced people involved in its operation, people who know the industry. “At least that will help.”
Reddy says Velvet Sky is currently acquiring two more Boeings but it’s not yet clear when they’ll start flying. The choice of aircraft is critical to an airline’s success. Cheap planes aren’t necessarily always the most modern and the problem is older models are less fuel-efficient and also require more regular maintenance. That means aircraft fly less frequently and that can affect the airline’s business plan and create problems for its owners.
Venter says the impact of the oil price on running costs is as much as 30%. He says airlines can take the risk of hedging against the oil price but feels that actually adds more risk to the carrier. “You win some, you lose some. Airlines aren’t financial institutions. In the end we found the best hedge against the oil price is to use the most modern – therefore the most fuel-efficient – planes. That means it has less impact on you when the oil price rises.”
Comair itself uses Boeings and it recently signed a contract for eight new 737-800 aircraft. “The airline industry in SA is like the story of the guys being chased by a lion. They’re all in danger, and the only thing you can do is make sure you aren’t the one nearest to the lion,” Venter says.
The problems experienced by domestic airlines aren’t unique to SA. The International Air Transport Association (Iata) says the fluctuating oil price over the past few months will result in a 46% fall in the airline industry’s combined profit this year. Iata represents more than 230 of the world’s biggest airlines accounting for close to 93% of commercial air transport worldwide.
Iata CEO Giovanni Bisignani says airlines can expect a profit margin of 1,4% this year; last year’s figure was 2%. Bisignani says airlines expect a total net profit of US$8,6bn this year. In 2010 the figure was $16bn. “The problem is that profit is earned on total turnover of $594bn. What kind of profit is $8,6bn on that level of turnover?”
