Department of Transport PRESENTATION TO PORTFOLIO COMMITTEE ON

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

OUTLINE OF PRESENTATION Ø Ø Ø Ø 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

DEFINITION OF LOW COST CARRIERS Ø Ø 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

CHALLENGES Ø Ø Ø 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.

CHALLENGES Ø Ø 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

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

LACK OF PROFITABILITY – HIGH CHARGES, TAXES AND FEES Charges additional to the airfare included on an Airline ticket to make up the total cost of the airline ticket. They are divided into six categories as follows : Ø South African Civil Aviation Authority Charge Ø Airports Company Charges Ø Airline Parking and Landing Charges Conti… Ø Ø 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 CONTI… Aviation Co-ordination Services Charge Ø Ø 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 (R 10 per passenger), and baggage reconciliation (R 3 per passenger) as well as the managing of common-use systems (R 7 per passenger) in the airport. The total charge is currently sitting at R 20 per passenger where all services are provided but is charged on a per service basis.

LACK OF PROFITABILITY CONTI… Airline Aviation Insurance Premium Ø 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 Ø 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.

LACK OF PROFITABILITY CONTI… The South African Revenue Service Air Passenger Tax Ø The air passenger tax levied by SARS is currently R 190 on international flights and R 100 for flights to Southern African Customs Union countries. General Cost Structure Ø Ø Ø 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

LACK OF PROFITABILITY CONTI… General Cost Structure Conti. . . Ø Ø 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. Ø 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

LACK OF PROFITABILITY CONT… General Cost Structure Conti. . . Ø Low cost airlines and full service airlines have a common operating cost base in respect of: Conti. . . Ø Aircraft ownership costs – depending on fleet choice Ø Low ownership cost of old aircraft offset by higher operating costs in respect of jet fuel and maintenance. Ø 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

LACK OF PROFITABILITY CONTI… Low passenger growth and low yields Ø Ø Ø 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

STRATEGIC INTERVENTIONS Ø Ø Ø 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

STRATEGIC INTERVENTIONS Ø Ø Ø 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.

STRATEGIC INTERVENTIONS Ø Ø 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.

STRATEGIC INTERVENTIONS Ø Ø 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.

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

THANK YOU