South Africa special: Mango in the mix

The launch of state-owned South African Airways' own low-cost carrier has caused controversy. But can it succeed in winning market share?

Sceptics have described South African Airways' (SAA) launch of low-cost carrier Mango on 15 November as the desperate folly of a financially struggling flag carrier that will end up competing against itself, while protagonists say it is a clever stroke to regain lost domestic market share. What is certain is that little else has created as much buzz in local aviation circles recently, with consumers set to benefit from the domestic price war that is sure to follow.

Mango is a wholly owned subsidiary of state-owned SAA, but is a separate legal entity that will operate at arm's length with its own management, in compliance with competition laws. It leases four Boeing 737-800s from the national carrier to operate five domestic trunk routes. Insiders say regional expansion is planned.

Ian Phillips, special adviser to transport minister Jeff Radebe, says this is not an attempt by the state to strengthen its hold on aviation. SAA's behaviour will be monitored closely, he adds, with sanctions imposed if it is seen to be uncompetitive.

SAA's domestic market share has dwindled by 15% to about 50% in the last three years because of competition from privately owned low-cost carriers 1time and kulula.com, the latter owned by Comair, a British Airways franchisee listed on the Johannesburg stock exchange.

Since 2001, the budget carriers have doubled the size of the domestic market to about 11 million passengers. They now hold a 30% market share, estimated to be worth R3 billion ($392 million). This represents only about 8% of South Africa's population, while the domestic market is growing by more than 12% a year, demonstrating the potential of this segment.

Strongly criticised

Mango is South Africa's third state-owned airline after SAA and its feeder carrier SA Express (SAX), a fact strongly criticised by its privately owned rivals. "Like any taxpayer, we are unhappy that more government money is being invested in another [loss-making] airline, whereas it would be far more appropriate for the government to invest in health, education and housing," says Comair and kulula.com joint chief executive Gidon Novick.

The fear is that SAA will use its low-cost subsidiary to drive its competitors out of business. "I'm pretty sure Mango will be state subsidised, because the current SAA cost structure cannot sustain low-cost fares," says Novick.

1time chief executive Glenn Orsmond doubts the newcomer can undercut its rivals if it operates truly independently of SAA. He foresees little impact on the market, just a shift in capacity from SAA to Mango if it plays by the book.

But far from Mango cannibalising its business, SAA chief executive Khaya Ngqula is confident international and corporate travellers will continue to fly SAA for its convenience, network and frequent flyer benefits. "SAA is repositioning itself with a strong focus on improvements to its schedule, route network and customer service," he says. "SAA will be able to refine its target market and its product offering and will offer a focused service."

The focus remains on growing profitable routes and strengthening relationships with other Star Alliance members. Long-term plans include increasing capacity in Africa, and to Europe, Asia and the USA. Chicago is shortlisted as SAA's third US destination. It already serves New York and Washington DC. Details of two more international routes and a new Libreville (Gabon) service will be announced soon.

Ngqula believes business travel will increase following the introduction of lie-flat seats on all long-haul routes, a modern fleet, and schedules that suit business travellers. He says SAA is working on a new fleet plan, which should be ready by the end of January, but declines to discuss details. "We're looking at all possible options, to compare products and identify aircraft that will be most suited to the specific requirements of the airline."

The government intends to keep a hand in SAA for foreign policy, trade and tourism reasons, but plans to sell SAX, owned by state transport controlling body Transnet, which is unbundling its aviation assets to focus on its rail business.

Comair has stated an interest in acquiring SAX and is awaiting guidance from Transnet. If unsuccessful, Comair wants to hire another regional turboprop operator to expand kulula.com's business to low-density routes. If it does, it will compete with SAA regional feeder Airlink and whoever ends up owning SAX.

Airlink chief executive Rodger Foster says low-density routes are traditionally unviable for budget carriers. He thinks it more likely that SAX would don the BA badge because their networks complement each other. He also believes it makes sense to merge SAX and Airlink because they are integral parts of SAA's network. A previous merger attempt failed in 2001-2.

SAX chief executive Siza Mzimela is confident all stakeholders will make the right choice of buyer. "SAX is a sustainable and rapidly growing business and, until a decision is made, it's business as usual," she says. "We will continue to expand to as many lucrative routes as possible."

Meanwhile, Botswana has received three bids for Air Botswana - from Airlink, local freight operator Lobair, and African World Airways, a private consortium planning a pan-African network. Comair decided not to bid, saying Air Botswana was too small for its African expansion plans.

Strict procedures

Air Botswana chief executive Lance Brogden says the evaluation of bids began on 12 October and privatisation should be completed early next year. Independent transaction advisers are overseeing strict procedures to determine a winning bidder, who will enter negotiations with the Botswana government. Brogden says Botswana is keen not to inhibit potential interest or possible business models and is entertaining proposals for ownership, franchising, concessions or partnerships.

Several South African carriers are upgrading their fleets. Having acquired two new Bombardier Dash 8 Q400s, SAX is expanding further with three CRJs leased from Bombardier to operate coastal routes. The first aircraft will be delivered in November and the others early next year. SAX already operates six CRJs and seven Dash 8s on secondary feeder routes for SAA.

Next year, Comair will replace six Boeing MD-82s flying under the kulula.com brand, possibly with 737-400s. Its fleet of 23 aircraft already includes 17 737-400s, -300s and -200s, of which 12 operate under the BA brand, nine under the kulula.com brand, and two are spare aircraft.

1time unveiled its latest MD-83 on 11 October, acquired from Safair under an R18 million lease agreement. This brings its fleet to seven aircraft, including four MD-83s and three McDonnell Douglas DC-9s.

Airlink is considering leasing used Fokker 100s in 97-seat configuration or BAE Systems Avro RJ85s in 85-seat configuration to use on some of its longer routes to Antananarivo (Madagascar) and Pemba (Mozambique). The additional aircraft will free Airlink's five Embaer ERJ-135s to be deployed to Harare and Lusaka.

Africa has the potential to be the most lucrative market for South African carriers and many are keen to expand their networks regionally and beyond.

SAX launched services from Cape Town to Maputo (Mozambique) on 2 October and has applied to serve Livingstone (Zambia) from early 2007. Comair recently introduced flights from Johannesburg to Mauritius, and Airlink is starting services soon to Harare (Zimbabwe), Lusaka (Zambia) and Pemba (Mozambique).

However, Airline Association of Southern Africa chief executive John Morrison points out that no local carriers - with the exception of SAA - operate aircraft that will enable them to expand beyond southern Africa and believes it is time for them to take a "quantum leap".

A major stumbling block to the airlines' regional and intra-African expansion plans have been restrictive bilateral air service agreements favouring monopolies by African flag carriers. This results from the failure by African Union states to implement the Yamoussoukro Decision (YD) to liberalise the continent's intra-African air transport regulatory framework. So far, only 13% of member states have agreed to implement YD, including Botswana, Egypt, Ethiopia, Gabon, Kenya, Libya, South Africa and Uganda.

Morrison says a recent meeting of airline executives in Tunisia decided to appoint an independent agency to drive YD implementation, but this is unlikely to happen before mid-2007. New impetus has come from the South African government, which in July signed a five-year airlift strategy committing South Africa to implementing YD bilaterally with "willing partners" pending full implementation across Africa.

South Africa's Department of Transport will quantify the economic cost of regulatory constraints and benefits of YD to guide it in negotiations with the African Union, Nepad (New Partnership for Africa's Development) and bilateral counterparts. In particular, South Africa will prioritise negotiations with Angola, Mozambique and Nigeria to ease capacity constraints.

An air freight logistics strategy will follow soon and a draft white paper on a new national civil aviation policy will be published for public comment, providing a more comprehensive policy reform.

Morrison says the urgency for YD implementation has never been greater because budget carriers could help to develop new intra-African routes and increase existing frequencies at affordable rates.

Willing partners

However, the challenge remains to find "willing partners" to implement YD, says Foster, who remains "frustrated and disillusioned by the lack of progress". For two years, Airlink has been requesting a daily service between Johannesburg and Beira, but claims Mozambique has been blocking liberalisation and growth to protect its own interests. Only one extra frequency to Beira was granted in recent bilateral talks. Foster says this epitomises the attitude of smaller states towards liberalisation.

Nationwide Airlines' regional expansion plans are equally hamstrung by bilaterals. "One of the most lucrative routes regionally is Luanda, with yields equivalent to London, but SAA has sewn it up," says financial director Peter Griffith.

Nationwide is a full-service network carrier serving London Gatwick, with a Boeing 767-300ER three times a week, Livingstone regionally, and major domestic routes. Griffiths says it has an option on an ex-Air Sahara 767 enabling a daily Gatwick service by year-end. It begins code-shares with Air France in November and Delta in December.

Source: Flight International