/ 16 August 2013

Looking skyward for a price war

Fastjet chief executive Ed Winter’s South African embarkation has experienced delays.
Fastjet chief executive Ed Winter’s South African embarkation has experienced delays. (Clarissa Sosin, M&G)

A flight from ­Johannesburg to Dar es Salaam will cost travellers as little as $100 each way when low-coast carrier Fastjet opens up this, its first international route, on September 27.

But industry ­players remain sceptical that it will, indeed, take off, as the aspiring pan-African airline first has a share reorganisation on the table in a bid to raise additional funds, and has some way to go to regain its ­credibility.

Fastjet’s advertised ticket prices, even though they exclude taxes, would halve the current cost of travel by air to the Tanzanian city compared to South African Airways (SAA) — the only other carrier on that route — and the route could develop the country as a competing African hub.

But confidence in the new airline has been eroded over its history of dithering on its plans.

Fastjet completed its acquisition of Lonrho’s aviation division in June 2012 and launched in Tanzania later that year. It came on to the South African scene at the same time, when it sought to save folding airline 1time.

When that failed, it announced that it had established a partnership with local carrier Federal Air and would fly the route between Cape Town and Johannesburg starting from March 2013. That, too, failed to materialise, after it was pushed back to July, then postponed indefinitely.

International routes a priority
In a recent interview with the Mail & Guardian, Fastjet chief executive Ed Winter said setting up international routes from Tanzania (the only African country in which it is presently operating) to Johannesburg and Zambia — for which permission was granted in June this year — was now the priority.

Thereafter, Winter said Fastjet would turn its focus back to South Africa’s domestic routes, saying it would make sense to try to catch the festive season.

Listed on AIM, London Stock Exchange’s international market for smaller growing companies, the company this month proposed consolidating its shares in a bid to raise funding for expansion plans, following which its share price fell 20% before rebounding.

While some are sceptical about demand for the Johannesburg to Dar es Salaam route, as well as the sustainability of the ticket prices, Fastjet’s chief commercial officer, Richard Bodin, said the market demand for the route was expected to be high and the airline was looking forward to increasing its frequency, from one flight in each direction scheduled for Mondays, Wednesdays and Fridays, in the near future.

“Fastjet expects its lower fares to stimulate an increase in the number of passengers travelling on this route, a trend that the airline has seen on its domestic routes in Tanzania,” he said.

Tickets for Fastjet’s first international route went on sale on August 1, and Bodin said the company was “very comfortable” with how sales were progressing thus far.

A cynical industry
“Our analysis shows that the Johannesburg to Dar es Salaam route will be popular with both South African and Tanzanian travellers and early sales figures are supporting this view.”

But the industry is cynical. An experienced travel agent, who asked not to be named, said that agents were waiting to see if the route does in fact launch, before booking tickets.

“No, I wouldn’t advise booking on it just yet. We are not pushing it for our clients, especially not our corporate accounts,” the agent said. There was always the possibility that it could go under, the agent said, given how frequently airlines were folding of late.

“There is so much for them to do, like [getting] clearance, before they can actually take off,” she said. “Let’s see what happens. Traffic into Africa is really picking up and a lot of businessmen are travelling up and down, but I don’t know if they are getting into a niche market.”

However, Bodin said Fastjet expected there to be a split between business and leisure travellers on its first international route.

Although Fastjet’s fares on this route are about half of what SAA charges for a flight to Dar es Salaam, the troubled state-owned airline is not biting, saying that it will hold onto its existing prices despite the fact that this remains one of its most important ­strategic routes.

SAA did not respond to the Mail & Guardian’s request for comment, but spokesman Tlali Tlali has recently been quoted in the press as saying that there has been no fare decrease on the route, as SAA does not adjust its prices in response to other airlines’ initiatives.

“When the [pricing] mechanism does indicate the need for such action, we will act accordingly,” he said.

Chris Zweigenthal, the chief executive of the Airlines Association of South Africa, said Fastjet would naturally present low fares in order to attract market share, but it was yet to be seen if it could sustain these levels.

The route was a fairly lengthy one, he said, and input costs remained high, much of which was paid in foreign currency, and were not likely to come down.

Linden Birns, the managing director at aviation consultancy Plane Talking, said that, given the costs, an upward adjustment in airfares was necessary. The average margin for airlines is 1.6% revenue, while African carriers are lucky just to break even.

But Bodin said Fastjet aimed to reduce the average fare ­substantially on this route.

Monopolised market
“For some time, the Johannesburg to Dar es Salaam route has been operated by just one airline and this has led to the inflated fares that are typical of a monopolised market.”

SAA is standing firm, despite the fact that its latest financial report notes that it enjoys good results from its African routes and that “Accra [Ghana], Luanda [Angola], Dar es Salaam [Tanzania] and Lagos [Nigeria] are extremely important routes strategically and all continue to perform well”.

“SAA is probably looking to see what the market response will be. There is so much hype about Fastjet, it has stopped and started a few times, so it is not clear how that will develop,” said Zweigenthal. “[But] Fastjet has a lot of work to do to restore its credibility.”

At present, Fastjet is a point-to-point airline and does not offer connecting flights, as is the case with nearly all low-cost-carrier business models, but according to Bodin, this could change in line with Fastjet’s strategy of becoming the first truly pan-African low cost airline.

“Combined with the fact that Dar es Salaam is not a significant transit hub, this makes us believe that there will not be a significant amount of passengers utilising the Fastjet Johannesburg and Dar es Salaam route specifically to connect to other African destinations,” Zweigenthal said.

He said it would take an immensely long time for Dar es Salaam to establish itself as a hub to compete with Nairobi, which is just an hour away by air.

Too early
Aviation and finance consultant Joachim Vermooten said the fact that Fastjet at least had operations going certainly counted for something, but he feared that it was “maybe 20 to 30 years too early in trying to establish a pan-African airline”. At present, Africa is responsible for only 2% to 3% of the global market.

“Fundamentally, what you need for a low-cost operation is an internal market,” said Vermooten.

“The European Union deregulated only in the late 70s and early 80s, and it was a consequence of a political decision to create an internal market, not the leading cause of it.”

The continent’s market is liberalising, but slowly, and obtaining improved bilateral air service agreements continues to be a major challenge for many airlines.

Bodin said he was confident that Fastjet would add more international routes in the near future, the introduction and success of which was critical for Fastjet’s future, and he expressed confidence that Fastjet’s shareholders would support its proposed reorganisation of share capital.