Lack of profitability in Low cost Carrier

1. PRESENTATION TO PORTFOLIO COMMITTEE ON
TRANSPORT
CHALLENGES FACED BY LOW COST AIRLINES
AND THE ACCESSIBILITY OF AIR TRAVEL BY
THE POOR
18 September 2012
Department of
Transport

2. OUTLINE OF PRESENTATION
 Definition of low cost carriers
 Key challenges faced by low cost airlines and the
access of air travel
 Lack of Profitability - High charges, taxes and fees
 Response by DOT and key strategic interventions for
consideration

3. DEFINITION OF LOW COST
CARRIERS
 A low cost carrier or low cost airline (also know as a no
frills, discount or budget carrier or airline or cheap
flight)is and airline that should generally have lower
fares and fewer comforts
 The term originated within the airline industry referring
to airlines established with a lower overhead cost base
and a lower cost structure than their competitors. The
term is often applied to any carrier with low ticket prices
and a limited product, regardless of their operating
models

4. CHALLENGES
 Low cost Airlines and full service airlines operate in the
same environment and are exposed to the same cost
drivers.
 Collusion by major Airlines operators.
 Competition from SAA (and Mango) which continue to
access funding from government.

5. CHALLENGES
 High Airport charges by Airports Company South Africa
(ACSA)
 Closure and liquidation of various low cost airlines such
as Velvet Sky, Nationwide Airlines to mention but a few
has dented the credibility of low cost carriers

6. LACK OF PROFITABILITY – JET FUEL
PRICE VOLATILIY
Fuel price volatility since 2007
Source : IATA

7. Charges additional to the airfare are included on an Airline
ticket to make up the total cost of the airline ticket. They are
divided into six categories as follows :
 South African Civil Aviation Authority Charge
 Airports Company Charges
 Airline Parking and Landing Charges Conti…
 Landing Charges - These are the charges levied on an aircraft
which lands at an airport.
 Parking Charges - These are the charges levied on an aircraft
which parks for an extended period (normally longer than 4 hours)
at an airport.
LACK OF PROFITABILITY – HIGH CHARGES,
TAXES AND FEES

8. LACK OF PROFITABILITY
CONTI…
Aviation Co-ordination Services Charge
 Aviation Co-ordination Services is a not for profit company owned
through the Airlines Association of Southern Africa (AASA) and
Board of Airline Representatives of South Africa (BARSA) by all
airlines flying within and to SA.
 The charge was set up to handle services such as hold baggage
screening (R10 per passenger), and baggage reconciliation (R3
per passenger) as well as the managing of common-use systems
(R7 per passenger) in the airport. The total charge is currently
sitting at R20 per passenger where all services are provided but is
charged on a per service basis.

9. LACK OF PROFITABILITY
CONTI…
Airline Aviation Insurance Premium
 The airline aviation insurance premium is a levy charged to
passengers applied by the individual airlines. The charge varies
from airline to airline. This premium was introduced after the 9/11
attack after which insurance premiums were significantly increased.
Airline Fuel Surcharges
 Airline fuel surcharges were introduced by airlines on a world wide
basis in 2004 due to a very volatile fuel price which escalated
beyond expectation (oil price has varied between US$30 and
US$147 per barrel from 2004 to date). The surcharges vary from
airline to airline depending on their own circumstances.

10. LACK OF PROFITABILITY CONTI…
The South African Revenue Service Air Passenger Tax
 The air passenger tax levied by SARS is currently R190 on
international flights and R100 for flights to Southern African
Customs Union countries.
General Cost Structure
 Low cost airline and full service airline are operating and effectively
competing in the same market often for the same business
 Low cost carriers in South Africa all commenced operations
competing on the traditional Golden Triangle routes and then
moved to other routes.
 Low cost airlines may have cost benefits in respect of lower
overheads, lower unit labour costs

11. LACK OF PROFITABILITY
CONTI…
General Cost Structure Conti...
 Low cost carrier benefits from setting up “greenfields” airline with
taking account of lessons learnt from full service airlines, removal of
any inefficiencies etc.
 Issue is whether low cost airlines are able to generate sufficient
revenue with lower fares to cover a slightly lower cost base.
 Low cost airlines and full service airlines have a common operating
cost base in respect of :
– Jet fuel cost : price of jet is based on negotiation with oil
industry and based on volume – no discount for low cost airline.
– Airport charges and taxes – all airlines pay the same charges
and taxes if they operate to a specific airport – no discrimination
permitted between airlines.
– Costs for safety and security

12. LACK OF PROFITABILITY
CONT…
General Cost Structure Conti...
 Low cost airlines and full service airlines have a common
operating cost base in respect of: Conti...
 Aircraft ownership costs – depending on fleet choice
 Low ownership cost of old aircraft offset by higher
operating costs in respect of jet fuel and maintenance.
 Higher ownership cost for new aircraft - Low cost carriers
buy aircraft from same aircraft manufacturers as full
service airlines – no benefit given to low cost carriers

13. LACK OF PROFITABILITY
CONTI…
Low passenger growth and low yields
 Current challenging worldwide economic environment
 Impact reflected in lower passenger growth than expected
(currently no growth year on year of 2012 vs 2011)
 High competition and expectation of low fares results in low yields
and lower than expected revenue whilst cost base is not decreasing

14. STRATEGIC INTERVENTIONS
 DOT, through the Director General convened a
forum for discussion with low cost airlines.
 Low cost airlines currently working on
proposals that identify the various scenarios
and options for low cost airline industry.
 Low cost airlines to present proposals to DOT
by December 2012

15. STRATEGIC INTERVENTIONS
 A need to unlock the benefits of Aviation and
create space for a new model of low cost
airlines.
 Provision of support programmes to low cost
airlines.
 Provision of dedicated infrastructure that will
complement the “ no frills” model e.g. use of
secondary airports.

16. STRATEGIC INTERVENTIONS
 Government recognizes the need for a
sustainable airline industry in South Africa.
 Advance competition in the airline industry and
offer the public decent airfares and convenient
air access.

17. STRATEGIC INTERVENTIONS
 Government policy to be considered to cater for
low cost airlines and the provision of access of
such services to the poor, this needs to be
considered on the basis of creating level
playing fields whereby existing airlines (whether
State Owned or Private) are able to compete.
 Need to re-look at the model for SAA funding.

18. STRATEGIC INTERVENTIONS
 A review of the current policies, strategies
and dynamics of the airline industry
considering the strategic imperatives for
South Africa is necessary.

19. THANK YOU