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With around 12.9m airline passengers a year, the South African domestic market compares with the number of people passing through Stansted Airport north of London, says Erik Venter, CEO of Comair.
His company, which operates the British Airways brand in SA and low-cost carrier kulula.com, holds about 40% of the local market share.
Increased competition from new entrants FlySafair and Skywise Airlines saw Comair sacrificing revenue by passing on a substantially lower fuel price to customers in a bid to keep its market share, according to the company’s latest financial results. The company continued to invest in switching its fuel-guzzling Boeing 737-300s to 747-400s and eventually the efficient 747-800s.
Since 2001 the average airfare in the market rose by 25%, whereas the cost of inflation for aviation overall jumped by almost 200%, Venter says.
“Every year you basically have to find a cost saving to offset the inflation because it doesn’t come in the airfare,” he says. “One of the main ways to realise that cost saving is to keep upgrading the aircraft to be more efficient.”
The only way to upgrade a fleet is to have adequate income to fund the costs of leasing the aircraft or owning the airplanes, Venter says. This calls on airliners to realise good cash flow and good profits, he says.
Rock-bottom prices unsustainable
Comair looks to work at a minimum profit margin of between 4% and 5% for long-term sustainability, says Venter. In order to maximise the efficiency of an airliner, through upgrading the fleet as soon as is practical, the ideal is a margin of between 7% and 8%, according to him. At a margin of 4%, the profit per passenger is about R50.
“The current airfares are just completely out of the ballpark,” Venter says. At a net airfare of R1 000, the company realised a profit of R50 per head. This computed to a sustainable airfare of about R1 300 one-way after adding taxes and VAT, he says. Some of the competitor low-cost airliners are currently offering return tickets, including all additional charges, between Johannesburg and Cape Town at R1 400.
“The kinds of losses being incurred at that level are humongous,” he says. “It’s seriously unsustainable and it’s really a question of who’s got enough cash flow to stay in business the longest and who’s prepared to lose the most money in ?the process.”
Switching its fleet is on track and the company plans to phase out all its small Boeing 737-300s by year-end. These planes are unviable and too small and the cost per seat too high, Venter says.
“As an interim measure we’ve taken on a couple of 737-400s, which fill the gap until the delivery of the 737-800s,” he says. The operating cost on a 737-300 and 737-400 are identical, but it is spread over more seats in the 737-400, he says.
By the end of 2016 Comair’s fleet will consist of eleven 737-400s and fourteen 737-800s and by the end of 2021 the company plans to retire all its 737-400s, Venter says. The 737-800 is about 6% more fuel efficient than the other two models, according to him.
Drop in tourist numbers increase pressure
The company’s drive to increase fuel efficiency together with the number of seats and comfort on its aircraft comes at a time where the domestic economy is shrinking and strict visa regulations inhibit tourist arrivals.
Typically passenger number growth equals two times GDP growth, subject to GDP growing in excess of 2%, Venter says. When GDP growth decelerates to below 2%, the industry typically experiences a decline in the overall number of air passengers, he says. SA’s economy shrank by 1.3% quarter-on-quarter annualised in the three months to end June, according to Stats SA.
“We really need to get the GDP [growth] numbers up,” Venter says. “That will stimulate new revenue growth in the industry again.”
This is an excerpt of an article that originally appeared in the 1 October 2015 edition of Finweek. Buy and download the magazine here.
