South Africa's domestic aviation market is a potential gold mine waiting to be exploited.
Chris Yates/MANCHESTER
TO AN OUTSIDER, the recent bout of high-profile airline collapses in the South African aviation industry might appear indicative of a market still in a state of flux. This is not the case, argue those who are still battling for a meaningful share of the potentially lucrative domestic market.
"The departure of Phoenix, Flightstar and the others that come and go really doesn't affect the market a lot. A poor operator remains a poor operator and does not deserve to be in business," says John Hare, deputy chief executive of South African Airways (SAA). Hare believes that the market is "stable". It consists of around a half-million passengers a month domestically, but growth figures "...are not spectacular. It is similar to the country's overall growth position, and what we're seeing is a 4% or 5% rate."
If the market is to grow at more than its present rate, Hare argues that inexpensive air travel has to be introduced to people who do not usually travel by aeroplane. There is some "casual leisure travel", says Hare, but most people travel by road. He says: "It is an area where we should concentrate a lot of effort and, indeed, forms part of our business plan."
He concedes that it would be difficult, if not impossible, to achieve that from within SAA because of the carrier's cost base, but adds: "It really means finding some alternative organisational structure firing it up, keeping it focused on that area and, then, away we go."
Hare believes that secondary-level carrier SA Express (SAX) (in which SAA has a sizeable interest) is the ideal vehicle. SAX - which is modelled on the regional carriers associated with North America's major airlines - was by far the biggest start-up when it entered the domestic market two years ago. SAA gave SAX about 10% of its thinnest routes on start-up which is said to have generated 54% of the airline's revenue in its first year.
POSITIVE OUTLOOK
Don Wallace, chief operating officer of SAX, says: "We share a brand with SAA, operate in the smaller markets and use only turboprop aircraft. From our point of view, we can only report positive things. In the first quarter of this year, we saw a 15% growth in passenger traffic and a similar growth in yields. This market responds very well to frequency. For example, on the Johannesburg-Bloemfontein route, where SAA had, and still has, a double daily operation, we're up to seven flights a day now and we've increased the market by 35%".
He claims that SAX is a disciple of the fact that, for every increase in frequency, there is a corresponding rise in the size of the market. "Growth boils down to frequency, seat availability and timing. The South African market, or at least the smaller end of it, has never been exposed to that," he says. Having carried over 600,000 passengers on its fleet of 12 Bombardier de Havilland Dash 8-300s, with an average load factor of 53%, the figures seem to bear out that assertion.
Wallace admits that SAX's SAA branding made a big difference as the airline cut its niche in the marketplace. The SAA brand is a formidable presence, and one against which other start-ups have had difficulty in making their mark. That has partly contributed to recent failures. "There's more to running an airline than gassing the tank. The basic fundamentals in this market are that you have to have the top brand, scale, the best aircraft you can afford and the best people running the operation," he believes.
Comair, SAX's key competitor, also recognises that fact. Despite a half-century track record in South African aviation, the airline says that its perception in the marketplace is not consistent with its age. Keen to distinguish itself from the failed start-ups and to underscore its presence, Comair has taken the unusual step of ensuring that passenger payments do not clear its books until the journey is completed. To enable this, it has established a multi-million Rand trust fund.
Comair's director of marketing, Bert van der Linden, agrees with the SAA assertion that this recent round of collapses does not indicate volatility in the marketplace. He says that Phoenix's demise, in particular, was only a matter of months away after the airline started hacking back its service in June 1995. Comair describes itself as a low-cost niche carrier and, along with rival Sun Air, undercuts SAA fares by around 30%. Van der Linden is keen to point out, however, that the airline is not trying to compete with the flag carrier, which, almost all industry analysts agree, would be akin to committing commercial suicide.
Since taking on the mantle of domestic scheduled carrier in 1991, Comair has captured an 18% chunk of the market and its fleet has grown to six: a one-class Boeing 737-200, four Fokker F27s and two ATR 42s. The airline now believes that it has outgrown its economy-market niche, however, and its single-class concept in particular is understood to be under close scrutiny. The airline may yet switch to a twin-class product.
Its rival, Sun Air, already flies a twin-class service aboard its fleet of predominantly McDonnell Douglas DC-9s. Once known as Bop Air and owned by the former homeland of Bophuthatswana, Sun Air has seen its fortunes rocket since the twinjets entered the fleet, and operates primarily on the "Golden Triangle" route of Johannesburg-Cape Town-Durban.
Since the homeland was absorbed back into South Africa, ownership of Sun Air has reverted to the national government. Marketing manager Birgit Coster says that the airline is up for eventual privatisation, but declines to speculate on when this might happen.
SURVIVAL TECHNIQUES
Both independents attribute their survival to avoiding direct competition with SAA, which holds an 80% stranglehold on the domestic market and a conservative approach to expansion. Neither is likely to overtake SAA soon in the pursuit of greater market share, but both hope that potential strategic alliances with overseas carriers may have a positive impact on passenger numbers. British Airways and Virgin are known to have targeted both airlines as alliance partners in an effort to offset the dominance created by the SAA/Lufthansa link which came into operation at the beginning of April.
BA is understood to be talking to Comair to secure feed and better coverage domestically, and the South African domestic has also been talking with KLM. Meanwhile, Sun Air's Coster confirms that "...discussions have taken place with Virgin Atlantic". Virgin's thrice-weekly service between the UK and South Africa is planned to start in October. While denying, that the SAA/Lufthansa deal will have anything but a marginal impact on passenger traffic, there is a certain urgency surrounding the talks. Comair is on record as saying that it hopes to have a strategic alliance in place by the end of 1996.
Guaranteed feed generated by an alliance partnership can only have a positive effect on traffic statistics, which are also likely to be boosted by growth in overseas tourism. The current figure of 750,000 overseas tourists a year is expected to double by the turn of the century.
All current domestic players agree that the market is becoming harder to tap into for start-up airlines. "South Africa has gone through a lot of ordeals with low-cost operators and, as a result, people are now wary of travelling too cheaply," says Coster. Wallace at SA Express adds: "Now, you have to have the right ingredients, including a named brand, to make it out here and, if they're all taken, then you've got a problem." Nobody rules out more start-up activity however. Wallace, in particular, believes that "...we haven't really seen the emergence of a true discount carrier - the ValuJet type operator - here yet. Phoenix tried to do it, but didn't do it right. There's a niche left for such a carrier, and it will come."
According to SAA's Hare, the survival prospects for such a carrier are open to question. "The drawback to an operator such as that starting up is, in fact, establishing that end of the market. It is difficult to assess whether the market exists or not, and I don't believe someone launching that type of service is immediately going to attract a reasonable percentage of our traffic. That is where the great danger lies. We've seen it with Phoenix and Flightstar, although the latter was not a true low-cost operator. It may be an interesting experiment, but I'm not sure how long they're going to stay in business," he says. air
Source: Flight International
