The entry of a new low-fare airline, and the price war that has erupted between budget carriers, may lead to “someone getting hurt”, John Morrison, CEO of the Airline Association of Southern Africa warned last week.
Morrison’s comments came as a new airline, 1Time, started selling tickets for the Johannesburg to Cape Town route.
At the same time, its major competitors, kulula.com and Nationwide, slashed fares on major domestic routes. Both airlines announced one-way flights from Johannesburg to Cape Town, George and Port Elizabeth for less than R300, and Durban fares of less than R200. These exclude airport taxes of R80 each way.
Morrison told the Mail & Guardian that he was not surprised that a new low-fare carrier had entered the market. Low-fare carriers are the most profitable in the world at the moment, simply because they bring “a service people want and can afford”.
His main concern was that such operations typically serviced high-density routes and South Africa had at most three of these — the connections between Johannesburg, Durban and Cape Town. Morrison warned of a potential oversupply of capacity, which, combined with a price war, could prove damaging to the industry.
However, 1Time’s CEO, Rodney James, insisted that the new air operator would not engage in a price war with its low-fare competitors.
He said that 1Time’s approach was to charge a guaranteed, maximum fare of R581 for all flights, with the possibility of paying less. This made 1Time, a “genuine low-fare” carrier.
James argued that by offering low prices on certain flights, 1Time’s competitors were effectively penalising passengers who travelled at peak hours. 1 Time started ticket sales on Thursday and will start operations on February 25.
The kulula.com offer applies to 100 000 seats, or 15% of its capacity. However, James’s point that peak-time passengers are being “penalised” is borne out by Nationwide’s fare for a single flight from Johannesburg to Cape Town next Saturday at midday — R1 344, including taxes.
Rich Mkhondo, spokesperson for South African Airways, suggested the airline giant was not bothered by the battle taking place around it. “It’s competition, which is healthy,” he said.
Mkhondo maintained that SAA retained an edge, because of the frequency of the flights it offered. “You stand a better chance of getting a good fare on SAA than you do of getting the other low prices”. The airline flies 250 times a week to Cape Town and 190 times a week to Durban.
Aviation consultant and author Linden Birns welcomed the price cuts, but expressed doubts about their longer-term viability. “They will be good if they open up the market,” he said. “But they are not sustainable.”
It costs R14 000 an hour just to run the engines of an MD-82 aircraft, which kulula and 1Time are using on the cut-price routes. Other costs include the crew, catering and various airport fees.
Given that the plane has only 130 seats, a flight filled with low-fare passengers would not cover its costs.
Birns said he believed the aim of the price cuts “is to see who will blink first and drop out of the race”.
If that happened and one, or even two, of the airlines closed down, the public would be left with a narrower choice.
Birns expected kulula to allocate the 100 000 seats mainly to off-peak flights. The airline would stomach the low fares with the help of its parent company, Comair, which also owns BA/Comair.
Birns said the airline industry traded in “single digit margins in a good year”. This meant that, just as in retail, the only way low prices could benefit an airline was by increasing volumes.
One way to do this was to offer more flights. This was unlikely on the Cape Town to Johannesburg route, the second most heavily serviced in the world.
Birns pointed to the misfortunes of Austrian Airlines last year. The airline cut prices to a point where, to break even, it needed to fill each flight with 125% of fare-paying passengers.
James said that because of the industry slump after the September 11 2001 terrorist attacks MD-82 aircraft were available for discounts of up to 30% on the second-hand market. According to kulula executive Gildon Novick, these aircraft cost 30% less to operate than a Boeing.
1Time will also add two DT-9s to bring its fleet to four.
Morrison said the only way the price war could benefit the local industry was if it brought in a new generation of air passengers.
Airlines faced cost pressures because of the lack of options. Airport and weather services were all provided by monopolies. In Europe and the United States, cheaper secondary airports serviced budget airlines, he said.
Morrison confirmed that international passenger traffic in the worst-affected regions was recovering slowly following September 11. South Africa experienced marginal growth after the attacks and this had continued.