Monday, 28 October 2013

Clash of the Titans

Imagine a soccer or rugby cup final in which one team had unlimited replacements, who do you think would win.

Well in the South African airline market that situation is a reality, and the economic and human costs are very significant. This is accentuated by the mini-price-war now being raged between Airlink and SA Express. Here is the reporting picked up so far:

Fin24 Sep 29 2013
"SA Express on Friday announced that it would be launching flights on three routes where Airlink had up to now enjoyed a monopoly: Cape Town to George, Johannesburg to Nelspruit, and Johannesburg to Pietermaritzburg."

Fin24 Oct 8 2013
"SA Express shocked the industry by announcing flights from Cape Town to George in direct competition with Airlink. Before the SA Express announcement, a one-way flight from Cape Town to George with Airlink cost R570 (excluding taxes/fuel surcharges). SA Express then had an opening special of R300 (excluding taxes/fuel surcharges) on the route, and Airlink has now responded with an astonishingly low R40 (excluding taxes/fuel surcharges) one-way fee from Cape Town to George."

IOL Travel 28 October
"It is hard to understand why the heavily indebted SA Express, which told the parliamentary committee on public enterprises this week that a R539-million government loan guarantee is due to expire in February 2015 and is ordering a new fleet, should be competing with Airlink by offering lower fares on three new routes all at once."

Once again the players in the South African domestic airline industry have created a dichotomy of interests. At first glance, the consumer clearly wins, as the fares on these routes will reduce significantly. In broader economic terms this may not be true however. SA Express, like its bigger brother, is in dire financial straits, and subject to qualified audits, and unexplained unathorised expenditures. There are a wealth of financial articles eluding to this. So in reality, in the case of SAX, the reduced fares are in fact subsidised by the taxpayer, and so in the long run, the consumer does not really save.

In broader economic terms, the possibiity exists, once again, that the state will drive a vibrant private enterprise out of the market and out of business. There is little that a privately funded entity can do to counter a price war conducted by a state-owned enterprise with infinite cash, and 1Time and Velvet Sky bear witness to this, as do a string of SA airline failures starting way back with Flitestar.

Airlink roots go back pretty far and pre-date SA Express by a decade or so. Airlink has traditionally provided service on the so-called "thin routes", and in the early years provided a feeder service into larger carriers such as SA Express. Today it has broader scope and has become a powerful player in the regional market alongside SA Express.

SA Express has laboured along for nearly 20 years and has cost the country millions. It has now been called on by its owners to turn around its poor performance, and the immediate response has been to adopt a posture to remove competition. Through the narrow looking-glass this tactic sounds reasonable, and we can understand how the owners may fall for this approach.

The doomsday scenario, however, is that in 5 years we are left with a sad collection of state-owned "airlines" that continue to knock on Treasury's door every few months, are granted further funding, and achieve this by rewriting the "Grand Strategy" and the 20 year plan.


Tuesday, 8 October 2013

Court interdict prevents FlySafair operations

FlySafair flights, which were due to start on October 17th, have been suspended due to legal action. The courts yesterday granted an interdict which forces the Safair licence application to be reviewed by the Air Services Licencing Council. This is as a result of questions being asked about the true ownership of FlySafair.

Passengers are protected in that they can obtain a full refund, or elect to travel on Comair for the same price.

This, and the fastjet episode, once again highlight the strict regulatory regime which exists in Southern Africa.

Whilst we cannot predict the final outcome of the FlySafair chapter, the fact remains that it is a diificult tightrope to walk between encouraging competition versus protecting the travelling public from risky business ventures. If one looks further North in Africa, the results of uncontrolled airline proliferation can clearly be seen. That road is littered with failures and accidents. And indeed, South Africa also has a high proportion of domestic airline failures.

South African civil aviation law requires a local ownership portion of 75% in order to obtain a domestic air services licence. This is not an uncommon provision, and it would be argued that this is an equitable policy, considering that competing nations have similar rules.

Given this, why are there few new entrants. Clearly, local investors fully understand the dynamic of the South African domestic air market. The structural problems created by the existence of 3 state-subsidised, loss-making airlines, are the root cause.

In the meanwhile, the incumbents enjoy outstanding profits due to the uncompetitive nature of the majority of the major routes.