Each week Travelwires pits industry opponents against each other so that readers can get a clearer picture of exactly how the industry under discussion functions as well as who might be slightly ahead in the running. We invite you to participate in the voting poll at the end where your vote will determine which of the two seems more able to inch slightly ahead of its opponent. This week we focus on budget airlines Kulula and 1Time.
Glenn Orsmond: CEO, 1time
How are you different from premium airlines?
If you look historically, the premium airlines have never made money. If the state owns an airline, it never makes money. South Africa’s got three state-owned airlines, all three are insolvent, all three lose money, and all three get help from government. Five privately owned airlines, we all make money, we’re all profitable. So the first distinction is make sure it’s privately owned, not state owned. The second distinction, the airlines that make the margins are the low-cost airlines. So I think what might have been true ten, fifteen years ago is no longer the case. Look at the low-cost airlines all achieving higher margins, higher growth.
Do budget airlines have a future in South Africa?
There are three low-cost, and three premiums. I think the right question is, will the premium guys survive, because they’re taking a big knock on market share right now. We’ve seen with Mango entering the market we’re still growing close to 25% year on year. The actual question is, is there room for three premium airlines?
How did the Flitestar, Sun Air and Nationwide disasters hit your market?
Well, they aren’t relevant for a few reasons. First, they were premium airlines, not low-cost airlines, and I’m not sure they failed. Perhaps they were closed down. It is an issue that we have a state-funded airline, trying to compete against us, relying on taxpayers’ money. But in our business we said, let’s focus on our own business, let’s not whinge and whine about Mango; we’re going to make ours work, and hopefully they make theirs work as well.
What is the impact of higher fuel costs?
If crude oil moves with $5, that impacts R15m a year on our costs, which translates to about R11 on an air ticket. So we’ve priced most of our business models on $65, $70. If we’re out by $5, we need to raise airfares by R11. What’s on our side is airfares are still about R300 lower than prior to 1time starting. So I believe there is scope for small increases in prices without it affecting demand.
We’ve worked out what we need on price increases to compensate for the oil price. What’s really nice is even with the price increases that need to be brought in – or have been brought in – fares will still be lower than three years ago so there still is an easy ride for the consumer.
The important thing is the competition. As soon as you have competition, prices come down and service gets better – so if you look at four years ago probably your average airfare from Johannesburg to Cape Town is R300 to R400 lower. If you have competition, it brings down the prices. What’s also important is the business model – we have a low fare business model so we sell all our tickets through the internet. That brings down our sales and distribution costs significantly.
Prices are determined by the consumer and not us. If we are forced to up fares by R150 and the consumer says, “We’re not paying that” we would be in trouble. The important thing here is the consumer determines the price – we need to operate at a low cost and offer the lowest prices possible.
And you’re also targeting certain routes?
We fly on all South Africa’s major routes. Those routes represent about 90% of the South African market. On the three main routes, we have a reasonable market share, and on some of the small routes, we have a significant market share. So we have targeted our market. And what we’ve seen is, if you enter a market where there was no low-fare airline, you can grow the market significantly. We grew the East London market by 50% when we entered it. It went from being South Africa’s most expensive route to being South Africa’s cheapest route overnight. So, once you offer cheap fares people will fly.
How about getting into Africa?
That’s a huge frustration. If you look at South African Airways, they lose thousands of millions in the domestic market and the international market. They only make money in Africa – nowhere else – and they won’t let us into Africa. If they let us into Africa, we’d grow that market 50%-70%, and drop airfares 50%-70%.
Related to that is the fact that there are alternatives for consumers and it’s a fairly tightly contested market. Can you tell us a bit more about that picture, and has that changed at all?
There’s a lot of competition – if you fly Johannesburg to Cape Town you’ve got six airlines to pick from with 75 flights a day so there’s a lot of choice. The important thing for the consumer is service and price – as long as the service is good and the price is good they are going to come back. In terms of unfair competition, there’s a lot of unfair competition out there. A few factors – the one thing is obviously the state subsidises SAA and Mango, and they lose a lot of money which is unfair – but we’re not going to whinge and whine about it as we are growing by 35% a year where the market is growing by 15%. So they are receiving the state subsidies – but without the service, they’re not going to grow. A few other things – it’s hard to get into Africa. We need to get into Africa for the high margins business – but unfortunately that market is closed off to us fixed by laws from the Department of Transport that prevent a free market into Africa. Once they open Africa up there will be a boom – you will see prices drop and volumes grow with expansion for business and tourism. The third element is the Lanseria arrangement – we would love to fly to Lanseria but there’s an exclusivity agreement there between Lanseria, Comair and Kulula so we’re not allowed in there. If all three things were opened up we would be seeing a lot more growth than what we’ve seen in the past four years.
What about alternative business?
We have the three businesses – right now, the airline makes just under half the profits, the maintenance company just under half. The charter company contributes about 10% profits. We need to grow the charter and maintenance businesses. What’s nice is they earn all their income in dollars – so as the rand weakens we will grow those businesses – and we are looking at acquiring Naturelink Aviation as well which is also US dollar income business.
How many aircraft in your fleet?
Our fleet now stands at twelve.
Gidon Novick: joint CEO Comair/Kulula
How are you different from premium airlines?
We were the only airline prepared to take the risk of signing a contract with Lanseria Airport as the airport was looking for a customer and there were no takers. At that stage, all the activities were being offered, but no one else was prepared for the risk such a new venture entails. All the airlines were offered a chance to sign the contract. Also, an exclusive contract between an airline and airport is common practice in business. But the fact remains, some chances present themselves only once and you’ve got to have the balls to take the risk offered. We did, and it’s paying off big time.
Do budget airlines have a future in South Africa?
The distinction between budget and normal airlines are disappearing. Airlines have to adapt or if they don’t, they run the risk of going under. Great customer service will be successful. And upgrading their fleets is of the utmost importance as the world focuses on a seemingly declining safety risk. The high fuel costs are a huge problem. Prices will inevitably go up. On Kulula’s side, we are still trying to restrict any drastic increases and we have implemented a fuel-efficient fleet, which uses 26% less fuel burnt. This means that because our fleet is more fuel-efficient and the aircraft bigger they can carry more passengers, and we are reaping a double benefit.
How did the Flitestar, Sun Air and Nationwide disasters hit your market?
Not really very much. The market is declining in any case with the high fuel costs and interest rates and declining economy. Understandably, there is quite a lot of pressure on the market and some of the airlines – even worldwide – will not be able to see the apparent crisis through.
What is the impact of higher fuel costs?
Of course it will have an impact. We are competing with three other state-run airlines in SAA, SA Express and Mango, which is very unfair, but we are hopeful that government will eventually realise that they don’t have to be in competition with themselves, which is what it really boils down to. But it distorts the industry, like with Mango, which is actually bankrolled by taxpayers’ money.
The biggest issue for us in terms of fuel and dealing with it is our newer aircraft. The newer aircraft that we are getting in are much more fuel efficient by burning about 15% less fuel. That’s really the way that we are going to deal with the fuel price. Obviously new aircraft are nice from a customer point of view, and there are a lot of other benefits – but the single biggest benefit of the new fleet is they burn less fuel.
If fuel keeps going the way that it’s going it will certainly have an impact. Remember it’s not only fuel it’s also the rand-dollar – so that is something we have to watch as well. We’ve got some hedging in place fortunately, but we’re never fully hedged. Ultimately, it is a guess – is the currency going to get a lot worse, is the oil price going to go beyond $100? We certainly don’t know. We will wait and see.
And you’re also targeting certain routes?
We fly all the major routes in South Africa.
How about getting into Africa?
We’re not really expanding that much, but if we see any opportunities in Africa we go for it. Hence the contract with Lanseria too. But there is no aggressive expansion and we don’t expect any more growth in the current economic climate. For many years we have shown a constant growth of 15% per annum. That includes Kulula, which is in its eighth year now. But the growth will slow down soon as fuel costs will be doubled in a year or so.
We’re in the process of launching the Kulula reward programme. And our Jetsetters initiative is also very successful. The Botswana Air management contract is also another huge development.
Related to that is the fact that there are alternatives for consumers and it’s a fairly tightly contested market. Can you tell us a bit more about that picture, and has that changed at all?
Yes, it is still happening – there is still subsidisation – but the market has been growing so that’s been a good thing as there’s been room for other players. The challenge is to make it profitable, and even with the economic slow-down that we are seeing in the country we are still seeing reasonable growth on the air travel side.
What about alternative business?
We have quite a few. We’ve found that what we have has enabled us to grow new businesses – one is obviously our travel business on Kulula. Kulula is a very strong brand and has a very high level of traffic. We have at least 250,000 monthly visitors to our website, so of course we’re always looking for other opportunities to branch out and extend the brand. The partnerships we currently have also links into the travel business, bearing in mind that we are a travel provider and not just an airline. We offer complete packages including hotel accommodation, package holidays, car rentals, and we’re growing all the time.
On the ground side, we’ve got the joint venture with BidAir, which is the ground handling company that’s now got a licence to operate within the airports in South Africa. From 1 March 2008 we took on quite a few international carriers – which is a nice business. Then on the freight side, we’ve got the joint venture with Imperial Air Cargo – so we have become quite a decent player in the domestic and soon to be regional air cargo business.
How many aircraft do you have?
A total of 22 aircraft in our fleet.
Please feel free to suggest any industry players or leaders in their field to be included in our Industry Face-Off.
They are both great airlines. This article was a bit dissapointing, in that it didn’t leave me with a sense of what the differences are between the airlines.
In my opinion, the key differentiating factors are that Kulula have better planes and a superior check-in service; whilst 1time are better if you’ve got kids (free kiddies pack) and don’t cancel their flights as much as Kulula. Both are novices at affiliate marketing.
I think the main difference is how they launched and the kind of backing they got. Kulula is owned by Comair (BA) so has tons of financial backing, while 1time is privately held and launched by 4 individual entrpreneurs
I am utterly disappointed and disgusted by Kulula. I was booking (and paying) for tickets for 10 tickets from Jo'burg to Cape Town for my wedding. I spoke to a Dineshree Naidoo whom I asked REPEATEDLY about making changes and what costs if any would apply since this was very important as my guests were not flying the same time. She did not say anything only that yes I would be able to AFTER i make payment. Only for me to pay almost 15000 and then get an email from her that each change would cost R880 per person!!!! Then what in the world is the point of group booking pray tell???? I ask to speak to supervisor Rita Platt who then goes on about how it's hard for her to believe that her Consultant would fail to inform me therefore I have no choice. Meaning of course she finds it EXTREMELY easy obviously to believe that I'm lying about the whole incident. I would NEVER EVER fly Kulula again and now repeat my mantra to everyone around me FRIENDS DON'T LET FRIENDS FLY KULULA. they give you incomplete information then expect you to pay for their error. I'd rather pay more for an airline who cares about my experience.
Hi there LolaT, I've forwarded your comments to Comair Ltd: Heidi Brauer (Executive Manager: Group Marketing), hopefully you'll find JOY.