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SA skies only for the brave

Cape Town - Over the past decade the South African low-cost airline market has seen numerous failures by those brave enough to attempt to compete against the two market giants Comair (compromising British Airways and Kulula) and Mango, a subsidiary of South African Airways (SAA).

Previous competitors such as Velvet Sky, 1time and Nationwide buckled under the pressure and eventually ended up in liquidation.

Last week one of the newer kids on the block, Skywise, had all its flights suspended due to non-payment to the Airports Company South Africa (Acsa) and the Air Traffic and Navigation Services (ATNS). Some R8m is owed between the two institutions.

While there are a number of external reasons that impact the South African airline industry, let's first have a look at what basic principles Skywise was seemingly pretty much oblivious to.

While it’s well understood that every business needs to be well capitalised and have good cash flow systems in place, it is an absolute imperative for airlines. These firms lay out significant amounts of cash far in advance. This mainly compromises fuel costs and, in most cases, the hedging of oil prices as well as foreign exchange hedging (which is of significant importance in the South African case), airport fees and charges (Acsa and ATNS in this case) to name just a few.

According to media reports, cash flow has been the immediate stumbling block for Skywise.

When the co-chair of Skywise, Tabassum Qadir, was interviewed on Talk Radio 702 last week, she made a number of rather curious statements. The company requested a 48-hour extension to the payment deadline on December 1 so that they could meet their obligations, but she clearly contradicted her statement by stating the capital injection transaction would only have been completed on December 7.

I fail to understand how the 48-hour extension, if granted, would have helped in any way. The airline was well aware of its obligations weeks in advance, so much so that the Air Services Licensing Council was becoming highly concerned about its financial position.

During the interview, Stephen Grootes asked Qadir what she believes to be the cause of the failure of so many low-cost airlines in SA. Qadir said she did not know, was baffled by how this could happen and implied there was a "third force" behind the airline's problems.

Qadir, your airline was grounded due to your failure to meet your financial obligations as an airline. It's that simple.

The trust factor

Failed local airlines have on numerous occasions left South African passengers not only stranded, but out of pocket for flights paid for but never received. Cases in point include Nationwide, 1time and Velvet Sky. So, not only has Skywise failed to manage its business efficiently, but it has made the disastrous error of betraying SA passengers' trust.

Airlines have a critical commonality with financial institutions: trust. Every time any one of us boards a plane, we trust that the airline is maintaining its aircraft to the utmost standard and that its pilots are not only competent, but highly trained and comply with the strictest professional standards.

In a September interview with Fin24, Qadir was emphatic about the role of competition in the airline industry and its impact on economic growth. Post last week’s shenanigans, Qadir seems to have missed an enormously important aspect of her business.

By neglecting the cash operations of the airline, particularly over the busiest period of the year, she has quite literally destroyed any "competitiveness" in the market and has sent not only her disgruntled customers, but also potential customers running straight to her competitors.

Qadir's co-chair Javed Malik also made some interesting comments last week. Here is one of my favourites: "This is not about Skywise, but about everyone trying to bring innovation in SA's aviation industry. Don't treat Skywise as an individual company. Any decision relating to Skywise will affect all of SA."

Malik, first and foremost, Skywise brought no real innovation to the aviation industry. None. Nothing. Do you really view Skywise as "too big to fail"? How can you possibly believe that decisions relating to Skywise would affect all of SA?

Below is some basic and free advice on how Skywise could have brought innovation to the aviation industry (assuming they could stay in business long enough).

What Skywise should have focused on

The airline cannot compete solely on price. Where is the differentiation factor for Skywise? Here are some areas Skywise needed to be focused on:

- Offering good frequencies and schedules;

- Great on-board products. For example: Mango has benefited tremendously by introducing on-board Wi-Fi. Kulula still has to come to the party on this product. On-board Wi-Fi is great for all passengers - it is just awesome. Guess who else loves - and I mean loves - the on-board Wi-Fi: business passengers.

How awesome it must be to be able to attract loads of business passengers who can be productive while being in the air. Embrace technology. (Oh, by the way Malik and Qadir, more than anything else, productivity is what drives economic growth.)

Speaking of technology, there are even more basic value-adders that the company should have pursued.

Mango is currently the only low-cost carrier with a smartphone app available to passengers for bookings, payments and online check-ins. How about taking it one step further and utilising Apple wallet, where passengers across the board can have their boarding passes loaded into the wallet on their phones. Therefore, creating simplicity and efficiency for all passengers is a major differentiating factor.

The SA domestic airline industry sits at about 12 million passengers a year. Even though competition is good, an over-capacity exists which will inevitably squeeze out smaller players, in particular those who do not differentiate themselves.

Economy tight and getting tighter

The South African economy is being squeezed hard and will only get worse over the next year. With slower economic growth, lower disposable incomes and cost cutting by businesses, it only makes sense that for any low-cost carrier - let alone a newbie - to continue to exist in a tight economy, there has to be sound financial management and strong technological integration.

My greatest concern for the future of the South African economy is entrepreneurs like Javed Malik and Tabassum Qadir. Firstly, to come out and plead for the president of the country to intervene in your business blunders is desperate, unethical and the greatest sign that you are incapable of running a business. Why should a president interfere in the affairs of a government department and a private company?

Tread carefully here. The line between assistance and corruption is a murky one at best. I would also be interested to know why Skywise deserves a "bailout" or for South African Airways to accommodate your passengers? Yes, the government has been funding SAA for decades at a huge cost to taxpayers, but that is outside the scope of this article.

There is no reason why, in a capitalist economy, any taxpayer should be obliged to assist a private company financially, whether it is directly or indirectly.

In past interviews both Malik and Qadir stated the significance of entrepreneurs, but they operate with the mentality of entitlement and that for some reason they are entrepreneurial victims of the South African airline industry.

Surely you knew what you were getting yourselves into? Having invested R65m of your personal funds into Skywise (I’m assuming there is a lot more where that came from and that you could not possibly have bet your entire worth on the airline, because let's face it, who does that?) you had/have two quick and easy options:

- Cough up the R8m out of your own pocket - that is, if you truly believe in your business. Elon Musk and Tesla are a great example of this exact situation. You should read up about it sometime.

- Get funding or a loan or a revolving loan facility - particularly because you have stated in your open letter to the president that the business is actually about to turn a corner and things were only going to get better from here on out. I see no reason why any institution would deny you some sort of debt facility.

Another example of the inexperience and lack of basic economic understanding from the joint chairs is the statement that “instead of trying to squeeze competitors out, we should focus on growing consumers”.

That is a wonderful sentiment, but "growing consumers" in South Africa requires aggressive economic growth and structural changes to our economy. The airline industry alone cannot produce what you are asking for. Your statement is a simplistic view of the real and harsh economic challenges our country faces.

To those who believe they are entitled to succeed without having gone through the greasy rungs, without having had to fight their way to a seat at the table, you are the “entrepreneurs” that make me fear for South Africa’s economic future.

* Terry Stratis is an economist and business consultant who focuses on developing strategies for start-ups, SMEs and major enterprises.

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