South African Airways’s (SAA) cost structure, twice that of budget airlines, prevents it from competing against low-cost carriers, meaning that its stated intent of entering this market will ultimately be at the taxpayer’s expense.
SAA will enter the budget market, which has grown 44% in four years, by year-end. 1-Time and kulula.com budget carriers are crying foul, saying it stands to rack up losses and will need another bail out by its shareholder, the state.
A competitor says one reason SAA’s costs are so high is because it employs 800 pilots to fly 60 planes, nearly 15 per plane.
The budget carriers say ballooning airplane lease agreements and huge pilot salaries will restrict SAA’s new budget airline from competing on a cost-effective basis.
SAA’s decision, which was announced by CEO Khaya Ngqula earlier this month, is in response to SAA only managing to capture 5% of the 30% increase in domestic air travel during the past five years.
Ngqula’s figures under-represent actual growth, says kulula.com. It says the domestic market has grown by 44% since its launch in 2001.
In 2000, the annual domestic air-line market was worth R5,9million a year. Revenues have grown by R10million in the past four years.
CEO of 1-Time, Glen Orsmond, says it is true that SAA is losing out on market share in the burgeoning domestic carrier market, but it is not because it is losing passengers — it is simply not attracting new passengers who are entering the market.
“If SAA enters the market and charges the same price as us while making losses that are subisdised by the government, that is unfair,” says Orsmond. “If it is unfair, we would have to oppose it.”
CEO of kulula.com, Gidon Novick, says previous bail outs by the govern-ment — including for forward cover operations on foreign exchange operations — for SAA and SA Express add up to billions of rands.
“When a business is in trouble, one way to solve the problem is to fix the core business. They have taken another approach: to put pressure on one or two competitors. So they will fall by the wayside and everything will be hunky-dory, like when SAA was a monopoly,” says Novick.
Paul Zille, an independent consultant on airline deregulation, says the question that needs to be asked is: What is a state-owned enterprise doing entering this end of the market, when the private sector is doing a good job of servicing it?
“If they do displace competitors, things may revert back to a more monopolistic situation, like in the past,” says Zille.
He says the real challenge is for SAA to address its cost problems at the source.
Novick says he expects SAA to come into the market and price aggressively, which will ultimately not be profitable. Novick says it is important to look at SAA’s history of abuse of dominance.
“We will definitely oppose it with whatever means we can; there is a strong competition commission and that will form part of it,” says Novick.
“The problem with SAA’s costs, by their own admission, is that they pay too much for their aeroplanes, and they pay their pilots too much,” says Orsmond. “They can’t control costs and they have no political will or management will to reduce costs.”
“Our cost structure is about half of what SAA’s domestic cost structure is,” says Novick. “It is a model that is based on an absolute focus on efficiency.” He says it is unlikely SAA will be able to deliver this level of efficiency.
Orsmond says SAA was nailed on two sides when it purchased the bulk of its fleet. Firstly, it purchased their planes pre-September 11 2001, following which plane values collapsed. He says the airline also locked themselves into long-term finance deals when purchasing the planes, at a time when the rand was weak.
“The bulk of their fleet are 737800s,” says Novick. “These 737s have onerous balloon-payment leases that are not market related.”
Novick says the escalating lease payments are coming into effect now and the costs of these aircrafts alone will make it impossible for SAA to compete.
“If they have to compete with us, using those planes with ballooning payments, they won’t be able to compete,” says Orsmond.
He says another cost problem that SAA faces is the amount it pays its pilots. He says they are all guaranteed two increases a year and are restricted to flying a minimum number of hours that is way below required safety levels.
“If you look at the union agreements they have negotiated with their pilots, they earn more and more, and work less and less,” says Orsmond. “They have created their own problems.”
SAA spokesperson Jacqui O’Sullivan says the airline will launch a budget airline carrier before the end of the year, but would prefer not to enter into any further discussion on the matter.