/ 14 May 2020

Uncertain future for domestic airlines

Even before the first Covid-19 case was confirmed in South Africa, SAA was in as bad shape as it gets (Delwyn Verasamy/M&G)

The outbreak of the coronavirus and the subsequent shut down of air travel has left many of the country’s domestic airlines on their deathbeds.

JSE-listed Comair and state-owned SA Express are both under business rescue; meanwhile, business-rescue practitioners and the department of public enterprises are busy working on a rescue plan for “SAA 2.0” that puts the state airline’s liquidation plan on hold until the end of June.

The uncertainty of a post-Covid-19 airspace makes it even more difficult for the airline industry to forecast its recovery, with experts expecting air traffic to resume to pre-virus levels in the next three to five years.

Despite the prevailing uncertainty, what is certain is that the nature of air travel has changed forever. Around the world, airlines are considering reconfiguring seating to ensure that physical distancing is maintained and customers are safe.

This practice is being encouraged by the International Air Transport Association (Iata), but the organisation’s chief economist, Brian Pearce, says airlines could raise fares to offset the losses.

Pearce says that, given physical distancing, fewer airlines are expected to break even. For airlines in Africa and the Middle East, a plane would have to carry 75% of its load to break even. In 2019, the average cost of a domestic one-way flight ticket in this region was R3328 but with social distancing, airlines could increase fares to R4763 a ticket to cover the loss.

The latest Iata forecast shows that the local airline market could lose up to 186850 jobs and have 10.7-million fewer passengers. This is expected to result in an estimated R42-billion loss in revenue and a R70-billion loss to the South African economy.

Chief marketing officer of low-cost airline FlySafair, Kirby Gordon, says the pain of the grounding of the company’s fleet is immediate. For every month that an aircraft is grounded, the company forgoes seven months of profit, “one for the month it stood, and six more months just to earn enough to pay back the bills for that month it was standing”.

“Our aircraft are incredibly expensive assets, which we still need to pay for each month, but which are currently casting shadows on the tarmac and generating no income,” Gordon says.

The profits that are being lost during this period are “gone forever”, he notes, adding that when the industry eventually gets back to work one of the first priorities for FlySafair will be to cover the bills that have piled up while its planes have been standing still.

“Nobody will be able to last this way forever, and the longer we remain grounded like this, the tougher it’s going to be to recover,” he says.

Before the lockdown, FlySafair had a 24% share of the local market. The gap in the domestic air-travel space that is expected to be left by the developments at SAA, SA Express and Comair presents an opportunity for competitors such as FlySafair to attract more clients. In theory, this would work but expected lower demand after the lockdown has damped the outlook.

Gordon says the economic devastation of Covid-19 has left a dent in the pockets of many customers who would ordinarily have more disposable income for travel and for flying. Additionally, based on insight from other countries that are emerging from lockdowns, “and from previous shocks to the aviation industry, we know that demand takes some time to recover”.

Gordon says the company could be using as little as 30% of its fleet when the skies reopen for travel. FlySafair will then slowly ramp up its flights as demand grows.

To stem the bleeding caused by the restrictions in travel in the local market, Gordon suggests that the government provide financial relief to private-owned airlines to ensure their survival.

Instead of cash bailouts as previously handed out by the government to SAA, Gordon says airlines could be given temporary relief in the fees paid to state-owned enterprises such as the Airports Company South Africa, the South African Weather Service, Air Traffic Navigation Services and the South African Civil Aviation Authority, because those companies are in a “stronger position to borrow against state guarantees than we would be in the open market”.

Other ways in which the industry could be supported during this time is through a temporary value-added-tax exemption or a delay in carbon tax, Gordon says.

Thando Maeko is an Adamela Trust business reporter at the Mail & Guardian