Aviation industry analysts are torn over whether there is money to be made for those who dare to tread on the runway.
As one airline folds another seems to pop up, despite the notoriously tough industry chewing up and spitting out two domestic low-cost airlines this year alone. But industry analysts are torn over whether there is money to be made for those who dare to tread on the runway, or whether an airline is simply doomed from the start.
With this month’s folding of 1time Airline and that of Velvet Sky in March this year, and the industry being better known for risks than profits because of low returns, it would seem ludicrous to enter the market.
But just a matter of days after domestic low-cost carrier 1time Airline filed for business rescue, local media reported that the former chief executive, Rodney James, and previous shareholders of the company had applied for a licence to start a new low-cost airline.
This was confirmed by the deputy director of licensing and permits of the department of transport’s air services and licensing council, Andries Ntjane.
“The clever people do it because they can make money out of it. It’s not dissimilar to the supermarket industry, where you have low margins but high volumes,” said Linden Birns, managing director of aviation consultancy Plane Talking.
“If it’s adequately capitalised with the right equipment, the right pricing and the right routes, I don’t see why you couldn’t make a success of it,” Birns said.
Joachim Vermooten, an aviation and finance consultant, said: “Airlines have to run very tightly in order to make a profit. There is no room for excesses.”
Profits and rising costs
But the fact remains: costs continue to rise while revenues plummet.
Chris Goater, manager of corporate communications for the International Air Transport Association, said it was a difficult period for airlines globally. Peak profitability was in 2010 when the industry rebounded from the 2008 crisis.
“Since then, profitability has halved to $4.1-billion for the entire [global] industry this year … The profit margin for the year is forecast at 0.6%.”
The reasons are many, but the cost of fuel is a key factor and the oil price has hovered at about $110 a barrel this year.
“Anything over $100 dollars a barrel for a prolonged time is uncharted territory for the industry,” Goater said. Other basic costs were also very high, which meant “airlines have to work very hard to find efficiencies”.
“The margins are so slim and there are major risks – things that are out of your control,” said Jackie Walters, a professor in the University of Johannesburg’s department of transport and supply chain management.
The fuel price and rand-dollar exchange rate were particular headaches in this industry, but “entrepreneurs will always look for opportunities”, Walters said.
Despite ticket prices remaining fairly constant, people are travelling less these days.
Mark Govender, a corporate specialist in airline development at the Airports Company South Africa (Acsa), said passenger numbers had not been good at all.
Acsa data shows consistent, often double-digit growth in passenger numbers between 1999 and 2007, but it dropped by 8% in the financial year of 2008-2009 when the recession hit hardest and saw negative growth of 1.1% in the following financial year.
Passenger numbers grew by 6.1% in 2010-2011 and by 2.7% in the past financial year.
But the numbers for this financial year, with data captured from April to September, indicates a potential 1.8% drop in passenger numbers if the trend has continued.
Capacity and demand
But basing a business decision on these figures would be a short-term view, Govender said. He believed that there was not enough passenger capacity in the market, particularly with the closure of 1time Airline. “It’s a good time to get into the market,” he said.
Birns agreed. “Undoubtedly there is demand … The market doubles every 10 to 15 years, so there is definitely demand there.”
Vermooten said: “The route between Johannesburg and Cape Town was, when last I checked, the 10th most dense route in the world.”
But Walters said new entrants would either think that 1time Airline had left capacity on the table or they had identified niche markets that had not been developed. “But I believe the withdrawal of 1time Airline has had a minimal impact on the market,” he said.
But does more competition in the market mean prices will come down?
Not likely, said Birns.“I don’t think the fares must come down to compete. Airlines, in fact, need a correction to absorb the cost environment they are in.”
Given the tough financial situation, people are hesitant to buy tickets unless they get the very best deal and effective marketing by airlines has helped to ingrain the impression that cheap flights are the only way to go.
“But I don’t think prices have ever been any lower,” said Chris Zweigenthal, chief executive of the Airlines Association of South Africa.
A new entrant would have to offer incentives to entice people to try it, “but the question is how long can it be sustainable?” he said.
The media has been awash with criticism of SAA and the effect on the industry of the R5-billion bailout it recently received from the government.
“The expectation that the government will bail you out, notwithstanding what you do, allows managers to take decisions and behave in a way that the private sector doesn’t allow,” Vermooten said.
“I think the biggest question is: Is the market conducive to investor confidence? The answer is definitely no.”
Birns said many of those who had been burnt had bought into the idea of aviation as a glamorous industry, taking the lead from the likes of Richard Branson, owner of Virgin Atlantic Airways, and Tony Fernandes, founder of Asia Air. “But the truth is they have some of the greatest business minds running these airlines.”
Asked why anyone would choose to start an airline, Zweigenthal said he did not know. “It’s amazing – something about this business attracts people. It’s an exciting industry; it gets into one’s blood.”