As jet fuel prices skyrocket, airlines the world over are closing down and analysts are speculating that the cheap-flight era is coming to an end.
South African Airways (SAA), in the middle of a restructuring process to become profitable, could see its fuel bill almost double, which might lead to taxpayers having to bail it out again.
The SAA group’s energy operating costs, which mostly comprises jet fuel, was R5,7-billion from the year ending March 2007.
But Africa has seen an average year-on-year increase in jet fuel prices of 83%, say analysts, which means that SAA’s energy bill could be as high as R10,4-billion for the 2007/2008 financial year.
In a statement released in November last year SAA said that “record oil prices and volatility introduce significant financial risk to the achievement of the full-year budget of a small net profit”. At the time jet fuel was being sold at $90 a barrel.
According to the International Air Transport Authority (Iata) the international jet fuel price was $146,80 a barrel (R1 101) on April 25, a 12,2% increase on the previous month’s price and a 72,5% year-on-year increase.
SAA chief financial officer Kaushik Patel said the rising fuel price has a direct effect on the airline as it constitutes 25% of its cost base, but added that fuel hedging helps to reduce this impact.
SAA spokesperson Robyn Chalmers said that the airline cannot comment on whether it might go back to government for more funding.
Airline industry analyst Linden Burns said that fuel, as a portion of input costs in South Africa, has risen from 15% a few years ago to more than 30%. “We are going to have to get used to paying more for travel by air,” said Burns.
Last week Nationwide Airlines announced it was closing its doors and was placed under provisional liquidation.
“Our cash flow has become critical and as a result [we] have decided to voluntarily cease all flight operations until further notice,” said Nationwide’s chief executive, Vernon Bricknell, last week.
Nationwide operated domestic flights to and from Cape Town, Durban, Port Elizabeth, George, Mpumalanga and Johannesburg and international flights to London and Zambia.
Nationwide’s collapse follows a number of airline bankruptcies in the United States and the United Kingdom, including three US budget carriers since March.
Kulula.com chief executive Gidon Novick said Nationwide would have been hit hard by the jet fuel price increases, especially because its fleet was made up of older-generation planes that are not very fuel-efficient.
But Novick said the aggressive way the state-backed Mango Airlines entered the market two years ago and captured 9% of the market would also have had a huge impact.
“If Mango was a private enterprise they would have been out of business by now,” said Novick.
Novick said fuel costs made up 15% of Kulula.com’s costs about five years ago and now makes up 40% of total costs.
He said Kulula.com spent R1-billion in the last year and a half, replacing its fleet of MD82s with new Boeing 737 400s, which are more fuel-efficient.
He said that as a result Kulula.com is saving 28% of costs per seat but will still be facing a fuel bill of more than R1-billion for the first time this year. “If we were still running MD82s we would have gone under,” said Novick.
He said that the market in South Africa has already started contracting as prices increase and because consumers have less money to spend because of higher petrol, electricity and food prices.
But 1-Time’s chief executive, Glenn Orsmond, said the increase in ticket costs are driven by the rise in fuel prices had not significantly affected the budget-airline industry in South Africa because consumers who used to fly with premium airlines such as SAA, Commair and Nationwide have moved to budget airlines.
Orsmond said the fuel increases have led to an average increase of R100 on all airfares at 1-Time, while Mango’s spokesperson, Hein Kaiser, said its average increase was R70 a ticket. “Mango is well on track on its two-year profitability plan and we already have been operating profitably and successfully,” said Kaiser. “Mango, as a low-cost carrier, is highly cash-generative and in no way requires additional funds.”