Investigation Into Passenger Volumes and Financial Performance of the Low-Cost Carriers in the Southern African Development Community Region

Investigation into passenger volumes and financial performance of the low-cost carriers in the Southern African Development Community region

Michael E. Mononga University of Westminster January 2020

A dissertation submitted to the University of Westminster in partial fulfilment of the requirements of the degree of Masters of Science, Air Transport Planning and Management

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Abstract

Since the emergence of the first low cost carrier (LCC) back in 2002 on the African continent in the South African Development Community (SADC) region, LCC activity has been moderate. Compared to LCC activity, from other parts of the world, such as Europe, North America and South East Asia, LCC activity has increased to the extent it the market has neared maturity and has made a huge impact to the passenger market. As for Africa, industry experts still consider that the air transport market is yet to experience further growth, as, as of 2017, Africa only represented 2.2% of the global market share according to a report on passenger demand and load factors by the International Air Transport Association (IATA). The main objective of this research is to investigate passenger volumes and financial performance of the LCCs in the Southern African Development Community region. The existing literature for the LCC market has resulted in limited knowledge about the impact to the passenger market for this specific business model at regional economic bloc level. Analysis of secondary data; passenger traffic volumes, seat capacity and load factors and airline case studies were conducted to identify growth in passenger volumes from 2000 to 2017, and financial performance of two airlines against industry global levels. In addition, qualitative information was gathered from dissemination of a questionnaire via email interviews conducted among industry experts with substantial knowledge of the African air transport industry. The questionnaire was structured to source information on the factors influencing and affecting LCC activity in the economic bloc. The results of the secondary data indicate that LCCs stimulated passenger numbers between 2002 and 2017 to the air transport market, adding passenger volumes to the volumes carried by the Full-Service Network Carriers (FSNCs). Furthermore, the results indicated that financial performances of the two airlines selected for the case studies, between 2012 and 2017 performed positively recording net profit levels above the industry global levels. The industry experts expressed opinion that the commercial viability and competitiveness of LCCs in the economic bloc could be dependent on several factors such as regional policy on air transport and strategy and management model, and not entirely on LCCs being government subsided or privately owned.

Acknowledgements

I would like to thank my supervisor, Frances Kremarik, for her endless support and academic guidance during the time I spent working on this research, as well as Dr Nigel Dennis for his support during the process of searching for a topic. I also wish to thank Professor Rigas Doganis, for the monumental input, advise and information provided whilst undertaking this research.

For the industry experts, Mr James Chakwera and Mr Bernard Dzawanda, I also wish to thank them in participating in the primary research and their motivation to me that has led to inspiring me to continue my professional journey in policy and planning of air transport, in a bid towards contributing in shaping a conducive African air transport environment.

Lastly but not least I would like to express my gratitude towards the Malawi Government for sponsoring my undertaking of this research and MSc degree programme in Air Transport Management and Planning at the University of Westminster, London – United Kingdom.

Whole document: 19,440 Main text: 16,176 words, including tables and diagrams, excluding list of acknowledgements, appendices and references

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Contents 1. Chapter One: Background ...... 1 1.1 Introduction ...... 1 1.1.1 Aims and Objectives ...... 1 1.1.2 Area of Focus: Southern African Development Community (SADC) ...... 1 1.2 Definition of key concepts ...... 5 1.3 Overview of the Airline Industry ...... 5 1.3.1 Global/International Airlines ...... 5 1.3.2 African Airlines ...... 9 2. Chapter Two: Literature Review ...... 12 2.1 Air Transport in Southern African Development Community (SADC) ...... 12 2.1.1 LCCs ...... 12 2.1.2 Air Transport Policy ...... 15 3. 3.Chapter Three: SADC Air Transport Market ...... 18 3.1 SADC’s Air Transport Policy: Protocol on Transport, Communication and Meteorology ...... 18 3.2 Current Status ...... 18 3.3 Regulatory and Economic challenges ...... 19 3.4 International Tourism ...... 20 3.4.1 Global perspective ...... 20 3.4.2 Africa perspective ...... 22 3.5 GDP trend in SADC ...... 24 3.6 Low Cost Carrier business model ...... 26 4. Chapter Four: Methodology ...... 28 4.1 Introduction ...... 28 4.2 Possible methodologies ...... 28 4.2.1 Route traffic ...... 28 4.3 Possible case studies ...... 28 4.4 Methodologies used ...... 28 4.5 Case studies of airlines ...... 29 4.6 Primary research ...... 29 4.7 Purpose of primary research ...... 29 4.8 Sample of industry experts ...... 29

5. Chapter Five: Research Findings and Analysis Results ...... 30 5.1 Passenger traffic overview in the Region ...... 30 5.2 LCC passenger traffic overview of in the region ...... 33 6. Chapter Six: Comparative Analysis between Kulula and Mango ...... 40 6.1 Introduction ...... 40 6.2 Operations Analysis ...... 41 6.2.1 Passenger Load Factor, Available Seat per Kilometre and Revenue Passenger per Kilometres ...... 41 6.2.2 Route network ...... 44 6.2.3 Aircraft fleet and utilisation ...... 46 6.3 Financial Performance ...... 48 6.3.1 Introduction ...... 48 6.3.2 Net profit margin analysis ...... 48 6.3.3 Commercial arrangement ...... 50 7. Chapter Seven: Summary of Results (Period: 2013-2018) ...... 52 8. 8...... Chapter Eight: Factors influencing future airline performance and passenger traffic stimulation in the SADC region ...... 54 9. Chapter Nine: Conclusion and Recommendations ...... 57 9.1 Overall conclusion ...... 57 10. Appendices ...... 59 11. References ...... 71

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List of figures

Figure 1: Member states of Regional Economic Bloc of Southern African Development Community (SADC) ...... 2 Figure 2: GDP growth rate in SADC region ...... 3 Figure 3: Total Mid-Year Population of SADC Member states, 2017 ...... 3 Figure 4: Total Mid-Year Population in SADC, 2017 ...... 4 Figure 5: Population share (%) of SADC region by Country ...... 4 Figure 6: Passenger Traffic, (RPK), % Year on Year ...... 6 Figure 7: Passenger Capacity (ASK), % Year on Year ...... 7 Figure 8: Improvement in economic development and connectivity ...... 8 Figure 9: Weighted Average Cost of Capital ...... 8 Figure 10: Global international Tourist Arrivals ...... 21 Figure 11: International Tourist Arrivals by country in sub-Sahara Africa ...... 22 Figure 12: International Tourist Arrival by country in sub-Sahara Africa (Continued) ...... 23 Figure 13: International Tourist Arrivals in SADC bloc ...... 23 Figure 14: Gross Domestic Product in SADC, (US $ billion), 2008-2018 ...... 24 Figure 15: Gross Domestic Product in SADC, (US $ billion), 2008-2018 ...... 25 Figure 16: Gross Domestic Product in SADC, (US $ billion), 2008-2018 ...... 25 Figure 17: Total passengers carried per country in SADC bloc, 2000-2018...... 30 Figure 18: Share per country (%) of total passengers carried in SADC bloc, 2000-2018. .... 31 Figure 19: Total passenger traffic per country, 2000-2018 ...... 33 Figure 20: Total share (%) of passengers carried between LCCs and other carrier types in SADC bloc ...... 34 Figure 21: Share (%) of total passengers carried by LCCs ...... 35 Figure 22: Number of passengers carried by airline ...... 36 Figure 23: Passenger Nos trend between LCCs and legacy/regional carriers ...... 37 Figure 24: SADC proportion of LCC/FSNC passengers ...... 38 Figure 25: SADC proportion (%) of LCC/FSNC passengers ...... 38 Figure 26: Total number of passengers carried by LCCs and FSNCs in the SADC region .. 39 Figure 27: Kulula and Mango branding ...... 40 Figure 28: Average passengers load factors (PLF, %) between 2013 and 2017 ...... 41 Figure 29: Available Seat Kilometres (ASK) per year, in millions, between 2013 and 201742 Figure 30: Revenue passenger kilometre (RPK) between 2013 and 2017 ...... 43 Figure 31: Kulula operated route network ...... 44 Figure 32: Mango operated route network ...... 45 Figure 33: Number of aircraft departures per week ...... 46 Figure 34: Total fleet aircraft utilisation (hrs) per day ...... 47 Figure 35: Net profit margin against industry average per year basis ...... 49 Figure 37: Earning per share in $ ...... 50 Figure 38: Code share itinerary between American Airways and British Airways ...... 51

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List of tables

Table 1: List of Low-Cost Carriers in Africa, as of 2017 ...... 13 Table 2: LCCs in Africa (2017) ...... 14 Table 3: Traffic rights by freedoms of the air ...... 16 Table 4: Characteristics of Low-Cost Carriers (LCCs) ...... 26 Table 5: List of airlines per country ...... 32 Table 6: Passenger totals by Stage type, (‘000 000), in order of hierarchy...... 33 Table 7: Annual average aircraft utilisation (hr) per day ...... 48

List of Abbreviations

AASA Airlines Association of Southern Africa ACI Airports Council International AFCAC African Civil Aviation Commission AOC Air Operator Certificate ASA Air Service Agreement ASK Available Seat Kilometre ATAG Air Transport Action Group AU African Union CANSO Civil Air Navigation Services Organisation CEO Chief Executive Officer CNN Cable News Network FDI Foreign Direct Investment FSNC Full-Service Network Carrier GDP Gross Domestic Product IATA International Air Transport Association ICAO International Civil Aviation Organisation IMF International Monetary Fund LCC Low Cost Carrier PLF Passenger Load Factor ROIC Return on Invested Capital RPK Revenue Passenger Kilometre RTK Revenue Tonne Kilometre SAATM Single African Air Transport Market SADC South African Development Community SARPS Standards and Recommended Practices UNWTO United Nations World Tourism Organisation WACC Weighted Average Cost of Capital YD Yamoussoukro Decision

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1. Chapter One: Background

1.1 Introduction

1.1.1 Aims and Objectives

The aim of the study is to determine demand stimulation, by the entrance of low-cost carriers (LCCs) on the African continent. Furthermore, the study aims to determine performance of LCCs on the continent. The study will focus on one of the regional economic blocs, namely; Southern African Development Community (SADC) which has a good representation of LCCs from the total LCCs established in sub-Saharan Africa. The assessment will entail competitive benchmarking and comparing operational performance between two LCCs in the economic region and their financial performance against global industry levels. The objectives of the study are as follows: a) To assess passenger traffic carried by LCCs in sub-Saharan Africa b) To determine portion of LCCs occupying the air transport market in the SADC region. c) To assess the financial performance of LCCs in the region, d) To investigate any operational arrangements, such as lease and franchising, that LCCs may be involved in, and e) To determine whether government participation, public and private institutions and foreign strategic investors in LCC ownership has any influence on the commercial viability and competitiveness of regional air services.

In this study, monetary figures are quoted in United States Dollars ($) currency and where figures have been converted to $, the exchange rate will be based on that provided by the International Monetary Fund (IMF) at that given point in time or its calculated average over that specific period.

1.1.2 Area of Focus: Southern African Development Community (SADC)

SADC is an inter-governmental organisation whose goal is to promote;

• Sustainable and equitable economic growth, and • Socio-economic growth.

Figure 1: Member states of Regional Economic Bloc of Southern African Development Community (SADC)

Africa Overview SADC Overview

Source: SADC.int SADC aims to achieve its goals through efficient productive systems, deeper cooperation, integration, good governance, peace and security among the sixteen southern African member states1. Established in 1992, the SADC region consists of 556 781 km2 surface area and has an estimated total population of 345 million (SADC, 2019). Further facts and figures have are provided as part of this study (see under appendix 1).

Note: The Union of the Comoros has not been included in this study as it was admitted to SADC in August 2017, then became a full member in August 2018, and as such the study period does not include it.

Gross Domestic Product in SADC

The Gross Domestic Product (GDP) for the SADC region, from 2008 to 2018, has been analysed (see figure 2 below). In 2008 the GDP was recorded to be its highest growth rate, 5.1%, of which the growth rate dropped to 0.2% in the following year recording the lowest economic growth in the region attributed to the so-called credit crunch and fall of bank lending resulting in reduced public confidence and financial instability within the economic region. Decline in export of goods attributed by the global recession affected the region even harder as trade activity reduced. In addition, demand for air travel declined in the region due to the high transport costs that resulted from the spike in oil prices in 2018. Although the region’s economy recovered in 2010, 4.5%, the economic growth from 2010 to 2012 fluctuated before it declined steadily to the year 2018.

1 Angola, Botswana, Comoros, DR Congo, Eswatini (formerly Swaziland) Lesotho, Madagascar, Malawi, Mauritius, Mozambique, Namibia, Seychelles, South Africa, United Republic of Tanzania, Zambia, Zimbabwe 2

Figure 2: GDP growth rate in SADC region

6.0 5.1 4.5 4.2 4.5 5.0 4.0 3.5 4.0

2.2 3.0 2.1 1.8 1.5 2.0 0.2 Growth rate (%)

1.0

0.0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Year

Source: (SADC, 2018)

Demographics

The region experienced population growth between 2016 and 2017, from an estimated population of 327.5 million to 337.1 million, respectively, an annual growth rate of 2.9%.

Figure 3: Total Mid-Year Population of SADC Member states, 2017

Population (000s)

ANGOLA 28,674 BOTSWANA 2,254 DRC 88,806 ESWATINI 1,146 LESOTHO 1,953 MADAGASCAR 24,320 MALAWI 17,373 MAURITIUS 1,265 MOZAMBIQUE 28,862 NAMIBIA 2,369 Member State Member SEYCHELLES 96 SOUTH AFRICA 56,521 TANZANIA 52,555 ZAMBIA 16,405 ZIMBABWE 14,516 0 10,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000 90,000 100,000 Number

Source: (SADC, 2017)

Figure 4: Total Mid-Year Population in SADC, 2017

Population (000s) 400,000 311,800 280,204 327,507 350,000 295,103 265,750 300,000

250,000 303,350 319,452 337,115 200,000 272,762 288,058 Number 150,000

100,000

50,000

0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Year Source: (SADC, 2017)

The largest member states, by population share of the bloc, are; Democratic Republic of Congo (DRC), South Africa and Tanzania followed by Angola, Madagascar and Mozambique in what can be considered as large sized member states, then, followed by Malawi, Zambia and Zimbabwe as medium sized member states. Considered as smallest sized states, by population, are Botswana, Eswatini, Lesotho, Mauritius, Namibia and Seychelles.

Figure 5: Population share (%) of SADC region by Country

Zambia, 4.9 Angola, 8.5 Zimbabwe, 4.3 Botswana, 0.7 Tanzania, 15.6 DRC, 26.3

South Africa, 16.8 Eswatini, 0.3

Lesotho, 0.6 Seychelles, 0.03

Namibia, 0.7 Malawi, 5.2 Madagascar, 7.2 Mauritius, 0.4 Mozambique, 8.6 Source: (SADC, 2017)

The SADC bloc has numerous protocols on various social and economic sectors such as, but not limited to, Agriculture, Education and Health. This Study will look at the Protocol on Transport and specifically on air transport which sets out goals and targets for the economic bloc to achieve in the air transport sub sector in contribution to economic prosperity of the bloc.

1.2 Definition of key concepts

The key concepts used in this Study are briefly defined below; a) Full-Service Network Carrier (FSNC)

According to DLR, Germany’s national research centre for aeronautics and space, it provides a definition (DLR, 2008) on FSNC, also known as legacy carrier, as “an airline that focuses on providing a wide range of pre-flight and onboard services, including different service classes, and connecting flights.” b) Low Cost Carriers

In accordance to, International Civil Aviation Organisation (ICAO) Chapter 5.1 of the Manual on Regulation of International Air Transport, ICAO Doc 9626, a Low-Cost Carrier (LCC) is defined as the following;

“An air carrier that has a relatively low-cost structure in comparison with other comparable carriers and offers low fares and rates. Such an airline may be independent, the division or subsidiary of a major network airline or, in some instances, the ex-charter arm of an airline group”.

1.3 Overview of the Airline Industry

1.3.1 Global/International Airlines

The status of the international airline industry is equally important. The international airline industry, brings economic and social benefits to states through creation of jobs, facilitates tourism, aids trade activity at international and regional level, and facilitates the movement of people within and across borders.

According to the Air Transport Action Group2 (ATAG, 2018) the industry transported 4.4 billion passengers, carried by the world’s airlines with over 65 million jobs supported worldwide in aviation and tourism, of which 10.2 million people were directly employed in the aviation industry. While 0.5% of the volume of world trade shipments are by air transport, it accounts for over 35% of the value; this is because goods carried by air are often high value commodities that can be perishable and/or time sensitive. Special acknowledgement was made, by ATAG, towards trade activity specifically from Africa. It noted that deliveries of fresh produce from Africa to the United Kingdom (UK) alone supports the livelihoods of 1.5 million people.

The traffic performance for the system wide global commercial airline, that includes domestic and international traffic, and all commercial airlines portrait an outlook that indicates the global passenger traffic, revenue passenger kilometre (RPK), and passenger capacity, available seat kilometre (ASK), has steadily been on the increase on year on year basis as depicted below (see figure 6 and 7).

Figure 6: Passenger Traffic, (RPK), % Year on Year

14 12 10 8 % 6 4 2 0 2013 2014 2015 2016 2017 2018 Year Global N.America Europe Asia-Pacific Middle East L.America Africa

Source: IATA

2 The global industry-wide body to bring together all aviation industry players so that they can speak with one voice – and to promote aviation’s sustainable growth for the benefit the global society 6

Figure 7: Passenger Capacity (ASK), % Year on Year

14 12 10 8 % 6 4 2 0 2013 2014 2015 2016 2017 2018 Year

Global N.America Europe Asia-Pacific Middle East L.America Africa

Source: IATA The positive trend in demand from most of the regions has been attributed to the airlines in emerging markets such as Asian-Pacific and Middle East with domestic market growth playing a vital contributory role towards global growth. However, the African continent experienced negative growth between 2013 and 2014, a period that experienced the Ebola outbreak and may have had an impact on the regional carriers with weak demand from passengers for air travel. The impact may have been minor as the outbreak was restricted to Guinea, Liberia and Sierra Leone, which account for a small proportion of air traffic.

The increase of unique city pairs which has led to improvement in connectivity, over the past twenty years, has enabled the flow of goods, people and capital, technology and ideas whilst over the same period air transport costs have fallen. The number of city pairs have doubled from an estimated 10,000 to 21,000 between 1998 and 2018. Real travel costs have halved over the same period from about $2.40/Revenue Tonne Kilometre (RTK) to $0.70/RTK resulting in improvement of trade flows. This has led to stimulation of economic development whereby consumers have benefitted from lower real travel costs; more routes and airlines have had the ability to generate free cashflow although it is not the same case from an industry wide perspective. Governments, have also benefitted from the good performance of the aviation industry with airlines generating tax revenues totalling $120 and $125 billion in 2017 and 2018, respectively, and employment growth in the industry has shown to be on the incline over the past twenty years

Figure 8: Improvement in economic development and connectivity

Source: (IATA, 2018) As the airline industry endures challenges emanating from the rising costs of fuel and the ability to recover those costs, airlines have been able to create value for its investors with Return on Invested Capital (ROIC) increasing year on year between 2013 and 2017.However ROIC was recorded to have declined in 2018, above the weighted average cost of capital (WACC).

Figure 9: Weighted Average Cost of Capital

Source: (IATA, 2018)

Rewards for investors have not been adequate against risking their capital into the airline business since the period before 2015. According to IATA in its report on economic performance of the airline industry (IATA, 2018), the aforementioned is due to intense competition and the challenges associated with doing business, in general. Returns have rarely surpassed the WACC until 2015 when investors earned well, above the WACC, attributed to

8 structural improvements and low fuel prices. Since 2016, the performance of ROIC has been on the decline resulting in weak airline margins and ROIC of which is expected to continue performing poorly in 2019 due to weak growth of the industry and expected higher fuel and oil prices.

1.3.2 African Airlines

The African aviation industry has undergone rapid growth since the year 2000 especially in intra Africa air travel owing to regional trade and cross border investment (Njoya, 2016). According to (Njoya, 2016), the industry over the past two decades may be characterised by four developments: route consolidation, numerous airline collapses, market entry and low- cost sector development.

Pattern in routes flown in the intra Africa air transport sector indicate that the industry has shrunk in terms of number of routes. Between 1994 and 2013, number of routes decreased from 1088 to 719, representing a 34% drop. This drop comes in light of numerous low frequency and small aircraft routes abandoned and following the emergence of hubs developed by five carriers namely; Egypt Air (MS), Ethiopian Airlines (ET), Kenya Airways (KQ), Royal Air Maroc (AT) and South African Airways (SA) which has arguably led to regional imbalance of distribution of air traffic. On the other hand, this imbalance has led to the successful establishment of an air transport industry in eastern and southern region of the continent whilst the central and western regions, have a less successful and weak hub system making the prospects of multilateral air transport policy implementation quite challenging.

Numerous airlines have collapsed over the past twenty years including notable airlines such as Air Afrique in 2002, Cameroon Airlines in 2008, Ghana Airways and Nigeria Airways in 2004 with reasons pertaining to mismanagement. In addition, (Doganis, 2010) asserts that the acceleration of the trend towards liberalisation of international air services in the early and mid-2000s in many parts of the world contributed to these failures. Other airlines have ceased operations or reorganised under bankruptcy protection. The number of airlines established on the continent had risen between 1994 and 2013 with the number of carriers doubling to 70 despite market consolidation by the airlines and collapse of some airlines (Njoya, 2016).

Lastly, the industry has experienced the emergence of LCCs over the past years and have been exploiting the opportunities created by the inefficiencies of the traditional airlines (Amankwah-Amoah & Yaw, 2009). This characteristic arises as most traditional airlines are state owned and thus are seen as political and national pride symbols.

The aviation industry faces numerous challenges that has continuously impacted the prosperity of airline businesses. High fuel cost, distribution, aircraft fleet and sparse demand are amongst the numerous challenges that fall upon the airlines making the airline business tough. High fuel costs across the continent is partly due to needs for fuel to be transported over long distances as a quarter of countries on the continent are land-linked, - a problem worsened by limited provision and poor quality of infrastructure. One may say that, this has contributed to the existence of high fares set by airlines which primarily are afforded by few multitudes of people from the middle- and high-class categories. Most African carriers are also unable to negotiate favourable rates with fuel suppliers as the size of their fleets is not large enough to negotiate favourable rates, and the practice of fuel hedging is not common, leaving African airlines exposed to volatile price fluctuations. This has resulted in varying margins and operational performance of airlines in Africa. Lower jet fuel prices and improved aircraft fuel efficiency contribute to the efficiency gains (Cederholm, 2014) and according to IATA in 2004, 65 billion gallons of fuel were consumed for 2 billion passengers and 38 million tonnes of cargo. In 2014, an estimated 76 billion gallons were projected to be used in the transportation of 3.3 billion passengers and 52 million tonnes of cargo.

Distribution, another constraint due to low internet usage (and associated applications) and credit card systems, has in turn driven airlines to use travel agents which usually comes with an associated cost to the airlines in the form of commissions. African carriers had some of the oldest fleets in the world with 80% of all aircraft registered being 10 years or older (Amankwah-Amoah & Yaw, 2009). This in turn triggers higher associated maintenance costs, increased fuel consumption, poor reliability and increased downtime. However, amongst the four major airlines in Africa, ET has an average fleet age of only 5.4 years, compared to 13.5 for British Airways (BA), 15 years for United Airlines (UA) and 10.7 years for American Airlines (AA) according to BBC News (BBC News, 2019). The other three African carriers, Egypt Air, Kenya Airways and South African Airways have an average fleet age of 10.4, 7.5 and 11.0 years, respectively; South African Airways is the only carrier from the SADC bloc. Amankwah-Amoah and Yaw further highlight that Aircraft utilisation rates in Africa remains among the lowest in the world with rates averaging just 6.9 hours per day compared to Europe with 9.9. Poor scheduling, night flying restrictions, extended downtime of aging aircraft and a shortage of flight and maintenance personnel are amongst the contributing factors to low aircraft utilisation.

Another challenge that African airlines face, is sparse demand specifically on intra-African routes. The average passenger load factor (PLF), defined as the percentage of available seat kilometres (ASK) used, was 72.1% in 2017 against 71.6% in 2016. However, this may be considered low PLF when compared to the rest of the regions such as Asia, Europe and North America which recorded, 81.1%, 81.5% and 82.7% respectively. High airfares are considered as the main contributing factor on the continent, which are an indication of the lack of

10 competition on intra-African routes. Inequality of income across the continent, as well has been a contributing factor making air travel seem as a luxury means for travel.

In light of the challenges, the carriers on the continent continue to struggle to tap into the industry’s vast potential, despite an estimated population in excess of 1 billion and poor surface transport network. One would believe that air transport should indeed be prospering on the continent in light of the many surface transport and integration challenges it experiences, as air transport would bridge the gaps in communication, intra-connectivity, investment opportunity and social spheres. As such, for airlines to develop and maintain networks suitable to the high costs and sparse demand in the African market, it continues to be labour for airlines in developing an overall sustainable business model.

2. Chapter Two: Literature Review

2.1 Air Transport in Southern African Development Community (SADC)

Research on impact of Low-cost airlines on air transport market has been more focused to developed countries than developing countries due to limited required data available resulting from the recent emergence of low-cost airlines in developing countries (Schlumberger & Weisskopf, 2014). It is with the foregoing that this study and the literature review aims to address the gap by looking at the emergence of LCCs and traffic stimulation in developing countries, namely, the SADC region.

The literature review is on LCCs in the SADC region, an economic bloc made up of countries with varying levels of infrastructure, social and economic status. This section looks at the air transport industry in the SADC region highlighting the establishment and presence of LCCs, over the past timeline. It further identifies the air transport policy(s) set by the continental union, African Union (AU), policies which are subsequently adopted by the various regional economic blocs, amongst them the SADC bloc and enshrined within their regional economic bloc air transport policies. A scan on the status of air transport in the region is also conducted including the economic and regulatory challenges faced within the region’s air transport industry. International tourism is also looked at in this section as tourism, globally, is known to have an impact on air transport especially on LCCs and their ability to provide air services in markets.

2.1.1 LCCs

LCCs in Africa have made a positive impact to the overall air transport environment in the provision of passenger air services. ICAO, as of 13th June 2017, lists 16 airlines with valid air operator certificates (AOC) from the countries they are domiciled in as LCCs in the African region. (See table 1 below)

Table 1: List of Low-Cost Carriers in Africa, as of 2017

No. Country Airline ICAO IATA Beginning of AOC name Code Code of Operation 1 Egypt Aviator AVV T9 2016 Aviation 2 Egypt Air Leisure ALD AL 2015 3 Egypt Air Arabia RBG E5 2010 Egypt 4 Kenya Air Peace APK P4 2016 5 Kenya Jambojet JMA JX 2014 6 Kenya Five Forty FFV 5H 2009 Aviation 7 Morocco Air Arabia MAC 3O 2009 Maroc 8 Morocco Atlas Blue BMM 8A 2004 9 Morocco Jet4you JFU 8J 2006 10 South Namibia NMD N6 2015 Africa Flyafrica 11 South Skywise SWZ C9 2015 Africa Airline 12 South Safair SFR FA 2014 Africa 13 South Mango MNO JE 2006 Africa 14 South 1time RNX T6 2004 Africa Airline 15 South kulula CAW MN 2001 Africa 16 Tanzania Fastjet FTZ FN 2012 Source: (ICAO, 2017)

As of 2017, LCCs continued to emerge in the market serving routes that cater to the continent’s growing middle class. In particular, ten (10) LCCs (see Table 2 below) are considered to have made a noticeable impact on the continent (Shea, 2017).

Table 2: LCCs in Africa (2017)

No Airline Country 1 Fly540 Kenya 2 Jambo Jet Kenya 3 Dana Air Nigeria 4 FlySafair South Africa 5 Kulula South Africa 6 Mango South Africa 7 Skywise South Africa 8 Fastjet Tanzania Tanzania 9 Flydubai United Arab Emirates 10 Flyafrica3 Zimbabwe Source: (Shea, 2017)

As seen in Table 2, six (6) of the ten (10) LCCs are registered within member states of the SADC bloc, three airlines from rest of Africa and one airline from United Arab Emirates (UAE). Although flydubai is not based in Africa, it currently connects 11 African cities4 via the Gulf region. Of the six (6) airlines within the SADC bloc, four (4) airlines are from Republic of South Africa, and one (1) airline from United Republic of Tanzania and Republic of Zimbabwe each. However, LCCs have encountered challenges in striving to sustain operations and prosper.

As of 2019, the SADC region has had a number of LCCs that have operated successfully, whilst other LCCs have not been so successful and have suspended or ceased operations. Fastjet Ltd Tanzania (Fastjet), as of early 2019, was reported as the latest LCCs to have encountered operation challenges and led to its suspension by the aviation authorities of Tanzania. According to Fastjet Head Office, in its circular letter dated 19th December 2018 (Appendix 2), it communicated to its customers that Fastjet an independent airline and not associated with the Fastjet PLC Group had been temporarily suspended following a 28-day notice from the Tanzania Civil Aviation Authority (TCAA) which requested reassurances from Fastjet that its air services would continue to meet TCAA requirements of which, failure to meet the requirements would result in the Authority to take further action and revoke its Tanzanian license. At the time of this research, Fastjet operations has been suspended by the Tanzanian authorities responsible for civil aviation.

1time and Velvet Sky, two South African based LCCs went into bankruptcy in 2012 despite the continent possessing favourable conditions for low cost carriers. Average GDP was around 6% in 2012/13, there was a record number of school goers, increasing foreign direct

3 Ceased 4 Addis Ababa, Asmara, Dar es Salaam, Djibouti, Entebbe, Hargeisa, Juba, Khartoum, Kilimanjaro, Port Sudan and Zanzibar 14 investment (FDI) and sufficient demand on most routes. The struggle for sustainability that LCCs in sub-Saharan Africa have encountered has been attributed due to costs not being as low compared to other parts of the world, emanating from high government taxes on fuel and tickets. According to an article that explains the reasons as to what is holding back Africa’s low cost airlines (The Economist, 2013) explained that poor safety records has resulted in raised leasing costs for African carriers to the extent that it may cost a Nigerian airline $ 400,000 to lease a B737 on a monthly basis whilst it may only cost a European carrier $180 000. The LCC boom in Africa appears to be possible by an “open sky” agreement like that of Europe from the 1990s. Sadly, a similar treaty has existed in Africa but has yet to be enforced despite Governments wary of the resultant effects the Treaty would have on national carriers, if enforced. As a result, LCCs in Africa have been limited in number and concentrated to small geographical locations and network coverage whilst the FSNCs continue to dominate the air transport market on the continent.

2.1.2 Air Transport Policy

The International Air Transport Association (IATA) has continuously called for African governments to work towards improving aviation connectivity and infrastructure development in Africa to facilitate the economic and social development of the continent. It can be said that the air transport network in Africa is not well integrated to facilitate a well- connected and seamless air transport system for the people living on the continent to travel easily and in shortest time possible. An article published by CNN Travel (Shea, 2017) highlights a challenge associated with connectivity that not long ago, getting from one city to another often meant a connection in Europe. This can be attributed due to the fact that most airlines operated point to point between European and African cities at greater frequency whilst the frequencies between two or more nearing African states was limited or even non- existent. However, it further goes on to state that this is changing as LCCs are establishing themselves across the continent and serving routes that cater to the continent’s growing middle class. It was noted by the Chief Executive Officer (CEO) of Fastjet, Ed Winter, that whilst there are one billion people on the African continent, Africa represents just 3% of the world’s aviation business and as such the continent remains in dire need of an improved and affordable aviation connectivity. Unfortunately, people on the continent have been unable to fly frequently due to high costs associated with travelling on the traditional FSNC and as such, the emergence of LCCs should be able to facilitate the stimulation of higher passenger volumes to travel on the continent. However, for this to materialise, constraints of small national markets, restrictions and the small size of some airlines in SADC needs to be overcome. Furthermore, to ensure competitiveness of regional air services there is a need for cooperation amongst member states of SADC with regards to regional air transport market.

The fundamental policy framework is to liberalise the intra-African air transport services by eliminating non-physical barriers and restrictions on market access, frequencies, capacity and traffic; provide full exercise of traffic rights for passenger services and unlimited traffic rights

15 for freight air services; ensure fair competition and comply with international safety standards. The table below (see Table 3) provides a description of the various traffic rights (for illustration see appendix 3).

Table 3: Traffic rights by freedoms of the air

Freedom Description Example 1st the right to fly over a foreign country London - Mexico City by a British without landing carrier, overflying the USA 2nd the right to refuel or carry out London - Tokyo by a British maintenance in a foreign country carrier company, stopping for without embarking or disembarking fuel in Anchorage passengers or cargo 3rd the right to fly from one's own Berlin - Singapore by a German country to another carrier 4th the right to fly from another country Berlin - London by a British to one's own carrier 5th the right to fly between two foreign Dubai - Singapore - Melbourne countries on a flight originating or by a UAE carrier ending in one's own country 6th the right to fly from a foreign country Hong Kong - Jakarta - Perth by to another while stopping in one's an Indonesian carrier own country for non-technical reasons 7th the right to fly between two foreign Amsterdam - Berlin by a British countries while not offering flights to carrier one's own country 8th the right to fly inside a foreign Beijing - Shanghai - Bangkok by country, continuing to one's own a Thai carrier country 9th the right to fly inside a foreign Beijing - Shanghai, by a country without continuing to one's Singapore carrier own country (also known as “cabotage”)

Source: (ICAO, n.d.) The implementation of the Yamoussoukro Decision (YD) by some member states has had a positive impact to their respective aviation markets that has resulted in; increase in number of destinations served, frequencies and passenger traffic. In addition, an article; background experiences of liberalisation in Africa (ICAO, 2003) observed an improvement in private sector participation in the air transport sub sector through capital and/or establishment of new airlines and increase in partnership/alliance between African airlines. As earlier mentioned, a new initiative progressively building on the YD, namely SAATM, was launched during the 30th Ordinary Summit of the African Union Assembly of Heads of States and Governments in Ethiopia that took place on the 28th and 29th January 2018. Details of this initiative are covered below together with SADC’s initiative on air transport liberalisation, considering that this study dwells on the SADC regional economic bloc.

2.1.2.1 Single African Air Transport Market (SAATM)

The establishment of SAATM follows the 2015 Declaration of African Heads of State and Government in which they reaffirmed their commitment to realise the 1999 Yamoussoukro Decision on the liberalisation of civil aviation (Economic commission for Africa, n.d.). According to the AU: Single Africa Air Transport Market regulatory text, twenty-six member states are subscribed to the Solemn Commitment. An update on SAATM made by IATA at the International Civil Aviation Negotiations, 2018, presented that SAATM intends to fully promote the free exercise of the first five freedoms of the air and once fully operational, it would enable “eligible” airlines or air carriers from one African country to fly into another African country’s airspace and land in its territory using only a simple prior notification procedure. Furthermore, Tayo Ojuri, an aviation analyst from TVC News Nigeria, Business Tonight (Ojuri, 2018) stated that SAATM is expected to offer opportunity for new routes and frequencies amongst the participating states including the opportunity for the emergence of new airlines in the air transport environment. The initiative aims to address connectivity challenges that have hindered travellers to travel between African states in shortest time possible. In some parts of the continent, travellers are subjected to travel via Europe, from one African country to another due to limited air services provided by African carriers. The limited air services may be attributed due to high costs and the regime of traditional air service agreements (ASA) which are restrictive to some degree.

3. Chapter Three: SADC Air Transport Market

3.1 SADC’s Air Transport Policy: Protocol on Transport, Communication and Meteorology

The Protocol is the official procedures, for member states, on promotion of an integrated, multimodal transport system throughout southern Africa. It acts as an advisory tool to achieve an efficient, reliable, economically viable and environmentally responsible transport system. It was passed in 1996 as a policy framework with agreements from member states on sustaining a safe, secure, and reliable transport system in the region that enables increased development into the future. In signing the Protocol, member states acknowledge the importance of air transport in serving the interests of the region and agree to support a safe, reliable and efficient industry hinged on ICAO’s Standards and Recommended Practices.

3.2 Current Status

SADC recognises that as industries and economies develop throughout the region, use of transport network will exceed its current capacity. As such, SADC in 2012 projected the following increases: a. OR Tambo International Airport, in Ekurhuleni, South Africa (JNB) near Johannesburg is expected to handle an additional two million passengers a year by 2030 and three million a year by 2040; and

b. Kenneth Kaunda International Airport in Lusaka, Zambia and N’djili International Airport in Kinshasa, Democratic Republic of Congo, is expected to experience capacity expansion well over 100% by 2020 from the current capacity estimated to be at 70%. Airports in the region are burdened by infrastructure deficiencies, hence the regional initiative for member states to provide sufficient airport infrastructure by upgrading their respective airports. Most airports in the region operate sufficiently with low capacity5 and less frequent maintenance activity to the aeronautical and non-aeronautical infrastructure. Air transportation in the SADC region has most of its traffic flows channelled through a central hub, JNB6. Published statistics of 2018/197 (Airports Company of South Africa, 2019) indicate that JNB had 446,338 regional passenger departures, 9,886 regional departing aircraft movements and 19,735 regional total aircraft movements (Airports Company of South Africa, 2019). The airport has a handling capacity of 28 million passengers per annum and has facilitated an average throughput of 20 million passengers over the past 5 years. On the other

5 Runway and terminal building 6 IATA 3-letter airport code for OR Tambo International Airport 7 April to March. 18 hand, Zambia’s Kenneth Kaunda International Airport, experienced a 6.7% growth in passenger traffic between 2016 and 2017 with 1,224,163 passengers in 2017 (Zambia Airports Company Limited , 2017) . The region is primarily served by regional airlines and FSNC usually operating to and from JNB as it is the main hub for transfer traffic for both inter and intra continental flights. The most notable FSNC from the SADC region are, Air Namibia, Air Botswana, Air Zimbabwe, Malawi Airlines, and South African Airways. However, their ownership status varies between being state-owned and private/independent. LCCs have not yet made a huge footprint on the regional bloc with only six (6) operating as of 2017, and domiciled in only three (3) States, namely South Africa, Tanzania and Zimbabwe.

3.3 Regulatory and Economic challenges

As air transport is a global enterprise and requires adherence to international standards, conventions and recommended practices, the regional bloc officially ascribes to ICAO’s Standards and Recommended practices (SARPS) although domestic airlines within member states may follow other standards. There are numerous industry organisations that create these necessary frameworks such as the Airlines Association of Southern Africa (AASA)8, Airports Council International (ACI)9 and Civil Aviation Navigation Service Organisation (CANSO)10 however there is no regional body and policy framework specific to civil aviation other than the African Civil Aviation Commission (AFCAC) which its function is to promote harmonised aviation policies in line with those of ICAO to African states. However, AFCAC has no decision-making capabilities.

The regional economic bloc provides economic regulation presently with airlines and other aviation infrastructure within member states. This comes with the background that most services are deemed as state-owned services which do not consider commercial interests and maintain a system that is economically unsustainable. SADC recognises the need for less regulation from an economic perspective hence efforts to liberalise the air transport market through the YD developed by the AU. However, progress has been slow at state level which SADC identifies as the root cause, being due to member state’s concerns that competition will undermine the viability of their national carriers.

8 Represents the mutual interests of member airlines (Southern Africa) on matters of policy, legislation, regulation, planning, operational efficiency, safety, security and finance, affecting the overall profitability of the airlines and their continued sustainability. 9 Represents airports interests with Governments and international organisations such as ICAO, develops standards, policies and recommended practices for airports 10 Global voice of air traffic management (ATM). CANSO brings the world’s air navigation service providers, leading industry innovators and air traffic management specialists together with Governments, regulators and key stakeholders to share knowledge, develop best practice and shape the future for secure and seamless airspace. 19

3.4 International Tourism

Transport has been acknowledged as one of the most important factors to have contributed to tourism. There is suggestion by Page that without transport and its associated infrastructure, it would have not been possible for humans to engage and/or undertake tourist activities without mobility capability on the massive scale which is documented to date from current statistics and reviews of tourism performance (Page, 2009). Tourism is a global occurrence that involves the movement of people and is not confined to a regional part of the world, it is a part of globalisation as highlighted by Page and Connell (Page & Connelle, 2014). Page and Connell further go on to provide a definition, of Tourism, originated in 1991 by the World Tourism Organisation (WTO) as “the activities of a person travelling outside his or her usual environment for less than a specified of time and whose main purpose of travel is other than the exercise of an activity remunerated from the place visited. Technical terms exist that describe international and domestic tourism as travel between countries for purposes of tourism and travel within a country for purposes of tourism, respectively. For purposes of this Study, Tourism will be viewed in this Chapter from the global and African continent perspective to provide a contrasting context on the area of Tourism and air transport.

3.4.1 Global perspective

In 2018 the tourism sector experienced a growth of 5% reaching 1.4 billion total international tourist arrivals and a growth of 4% for total international tourism receipts, reaching $1.7 trillion (UNWTO, 2018). Air transport mode dominated international tourism which accounted for 58% (share), whilst road, water and train accounted for 37%, 4% and 2%, respectively. The share of air travel has increased from 46% to 58%, while land transport has decreased from 49% to 39% between 2000 and 2018. Main purpose of travel was leisure in all world regions except the Middle East, where visiting friends and relatives (VFR), or for health or religious purposes dominated. The top 5 destinations for worldwide arrivals in terms of popularity were France, Spain, USA, China and Italy whilst the top revenue earners were USA, Spain, France, Thailand and UK. It goes to say that it is not without a doubt that tourism complements the international airline industry as the Secretary General for the UNWTO, Mr Zurab Pololikashvil, is quoted to saying that “it makes the sector a true global force for economic growth and development driving the creation of more and better jobs and serving as a catalyst for innovation and entrepreneurship”. As the world continually experienced eight (8) years of consecutive growth in international tourism, sub-Saharan Africa also experienced robust growth in 2018. International tourist arrivals reached 67 million accounting for 5% of the world share, and representing a 7% growth from 2017. International tourism receipts for 2018 in sub-Saharan Africa reached $38 million. This represented a 2% growth from the previous year and accounted for 3% of the world share. The island States, namely Reunion, Cabo Verde, Mauritius and Seychelles

20 benefitted from positive tourism activity whilst Kenya, Togo, Uganda, Côte d’Ivoire and Zimbabwe also benefitted from improved security and more connectivity. Although South Africa was the most visited destination, it reported moderate growth attributed by consistent economic stability despite experiencing the drought crisis in Cape Town in 2018.

Figure 10: Global international Tourist Arrivals

International tourist arrivals change, % International tourist arrivals (millions)

International toursit arrivals, by region World share (%) 2017, (%)

Source: (World Tourism Organization, 2018) Growth in number of international tourist arrivals experienced decline in 2002/3 and 2008/09 due to the terror attacks that occurred in September 2001 in the USA and the global economic crisis respectively, which, both events led to reduced passenger confidence in air travel and sparse demand for tourism activity. Africa and Europe exceeded growth above the world average level, 7%, and by sub region, North Africa & Southern Mediterranean Europe recorded growth due to strong demand for destinations along the Mediterranean.

3.4.2 Africa perspective

Tourism development in Africa has been recognised as a key driver for economic and social advancement and air transport identified as a key factor. As such the UNWTO has listed air transport as a priority area in its agenda towards sustainable tourism in Africa for the coming years. In its efforts, the organisation collaborates with the African Union (AU) and the launch of the SAATM is seen as a milestone achievement toward the open skies policies and the implementation of the YD.

Tourism, in 2017 in the region, experienced strong recovery from previous years and performance. International arrivals in Africa are estimated to have increased by 9% and receipts by 8%. North Africa experienced a positive recovery following the political instability in the previous years with Tunisia and Morocco rebounding strongly from growing demand from Europeans. Tourism in the sub-Saharan Africa has continued to perform positively from destinations such as Côte d’Ivoire, Kenya, Mauritius and Zimbabwe whilst South Africa recorded slow growth but experienced increase in receipts. The island destinations; Seychelles, Cape Verde, and Reunion, are reported to have recorded double-digit growth in arrivals due to increased air connectivity. Figure 11: International Tourist Arrivals by country in sub-Sahara Africa

2010 2016 2017 2,500

2,000

1,500

1,000 No. /'000 No. 500

Country Source: (UNWTO, 2018)

Figure 12: International Tourist Arrival by country in sub-Sahara Africa (Continued)

12000 2010 2016 2017 10000 8000 6000

No. /'000 No. 4000 2000 0

Country

Source: (UNWTO, 2018) Figure 11 and 12 show the Republic of South Africa recorded the highest number of international tourist arrivals in 2017, in the region. Côte d'Ivoire and Republic of Kenya were second with an average estimation of 1.5 million arrivals in 2017. All three countries experienced increase in tourist arrivals from 2016, in 2017. Figure 13 (see below) depicts international tourist arrivals in the SADC bloc.

Figure 13: International Tourist Arrivals in SADC bloc

2010 2016 2017* 12,000 10,000 8,000 6,000 4,000 Number /000s Number 2,000 0

Country

Source: (UNWTO, 2018)

The regional bloc has experienced a steady influx of tourists from 2010 to 2017 with the majority of the countries receiving less than 2 million inbound international tourists; the exceptions were the Republics of South Africa and Zimbabwe, with over 10 million and 2 million inbound international tourist arrivals, respectively. This is due to the well-established connectivity network to South Africa that is able to link passengers from Asia, Europe and the USA and the country offers an array of tourism activities based on water to wildlife. Whereas for Zimbabwe, tour packages have been patronised by tourists from Asia and Europe, as its main attractive feature are the Victoria Falls.

3.5 GDP trend in SADC

The GDP at country level has varied from country to country due to the different capabilities of each country to accumulate wealth. Member states rely on different economic sectors to accumulate wealth, respectively. The majority of the countries in the SADC region are heavily reliant on the following economic sectors which provides substantial contribution to the countries, respectively; Agriculture, Tourism, Trade, Manufacturing and Mining sectors. The level of GDP per country (see Figures 14 and 15 below) have been compiled to show the top 5, middle 5 and bottom 5 countries in the SADC region, based on the accumulative annual GDP totals over the period 2008 – 2018.

Figure 14: Gross Domestic Product in SADC, (US $ billion), 2008-2018

Top 5 member states 450 400 350 300 250 200

USD USD / billion 150 100 50 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Year South Africa Angola Tanzania DRC Zambia

Source: (SADC, 2018)

Figure 15: Gross Domestic Product in SADC, (US $ billion), 2008-2018

Middle 5 member states

10 USD USD / billion

0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Year Zimbabwe Botswana Mozambique Namibia Mauritius

Source: (SADC, 2018)

Figure 16: Gross Domestic Product in SADC, (US $ billion), 2008-2018

Bottom 5 member states

16 14 12 10 8 6 USD USD / billions 4 2 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Year Madagascar Malawi Eswatini Lesotho Seychelles

Source: (SADC, 2018)

3.6 Low Cost Carrier business model

Low Cost Carriers (LCCs) have had a significant impact on the global air transport market particularly in terms of airline competition, airline business models and air travel in general. Their establishment trend may be associated with the periods where the US and Europe deregulated their airline markets, which brought about the liberalisation of the air transport market in 1978 and in the 1990s, respectively. The ICAO definition of LCCs focuses on two aspects namely cost and fares. As such, one definition as above (see Chapter 1.2 (b)) and another by distinguishing LCCs, based on business characteristics as summarised below in Table 3.

Table 4: Characteristics of Low-Cost Carriers (LCCs)

Item Attribute Characteristic

Class High density single class

Distribution Intense use of E-commerce

Product Fare Low, Simple fare structure

Frequency High

Food No meals or alcoholic beverages

Network Point to point service

Aircraft Fleet Single type

Aircraft Use High

Operations Airports served Secondary

Airports Turnaround 30-40 minutes

Sector length Short haul

Staff Minimal, High labour intensive

To sustain low cost structures, LCCs usually operate a single high-density cabin configuration such as Airbus 320 (A320) or Boeing 737 (B737) variant and will operate on a point to point short haul route at high frequency with quick turnarounds. The inflight services do not have meals and beverages included, which further drives the overall cost downwards, but in some instances are available at an extra cost to the passengers resulting in higher revenues. Standardisation of aircraft fleet is very common amongst LCCs as this keeps maintenance activities less complex and less costly. They often use secondary airports which are primarily less congested to ensure the quick turnaround times and high punctuality and to save airport- related aeronautical costs resulting in low operating costs that enables LCCs to allocate large portions of their seats to low fares. The above-mentioned characteristics of LCCs, is referenced by Gardener-Brown (Gardener-Brown, 2018), and further indicates that Southwest Airlines, in the United States, is the most notable and exceptional case of an LCC business

26 model entity that has managed to operate over thirty-five years and the only carrier to have done so consistently in making profits. LCCs are known to be capable to enter under-served markets or thin routes that have not been previously accommodated by large traffic flow into an area. In some countries that pursue economic prosperity from tourism activity have tended to have some of its regional and domestic airports offer low charges and concessions to LCCs but not limited to, operating into their airport for the purpose to stimulate passenger and aircraft movement. According to Njoya (2018), he accredits the emergence of LCCs in Africa to have had a positive impact on Africa’s air transport market by helping the domestic and regional markets. This is as with the case of Victoria Falls, Zimbabwe, when the Managing Director’s report in the Annual Report of Zambia Airports Corporate Limited (ZACL) mentions that, the Zambia airports after Zimbabwe Government made deliberate policy reducing fees at the Victoria Falls International Airport (VFA), it resulted in increased competition from VFA with the increase of activity of air transport services by the likes of British Airways operated under Comair Ltd (ZACL, 2017). It can be concluded that there is a limited number of LCCs in Africa, sixteen (16) according to ICAO as of 2017, of which ten (10) of the LCCs are considered to have made an impact on the African market according to CNN. Of these ten (10), six (6) LCCs were established in the SADC region and furthermore with four (4) of these domiciled in South Africa suggesting that the South African market was more conducive for LCC operation owing to the healthy GDP performance and tourism activity the country experienced, and being ranked No1 for GDP and tourism activity in SADC region. However, current regional air transport policy has appeared to limit the growth of air transport reaching all over the region but efforts towards a more liberalised air transport industry are still under way with SAATM initiative, where exercise of 5th freedom is amongst the principle of the endeavour, across the SADC region and continent.

4. Chapter Four: Methodology

4.1 Introduction

For purposes of this study, a combination of primary and secondary research has been carried out to obtain and in depth understanding of LCCs in the SADC region regarding their current and historic situation.

4.2 Possible methodologies

A selection of possible methodologies could have been used for this study but due to time constraints and limited availability and access to data, on LCCs, other methods have been adopted.

4.2.1 Route traffic

For this method, examining route passenger traffic would provide insight on the impact LCCs have made on a “micro-level” and also deduce the market share LCCs have in comparison to Full-Service Network Carriers (FSNC) on the short haul and regional routes offered by examining seat capacity data. Furthermore, LCC activity could have also been examined on specific routes such as Johannesburg – Cape Town, which was amongst the busiest passenger traffic routes in 2011 (The Economist, 2014).

4.3 Possible case studies

A case study of each LCCs in the region could have been conducted to assess the impact to the passenger market however this method would require great deal of time. Examining one LCC on the other hand would not be a wholistic representation of the LCCs on the extent they have made the impact to the passenger market.

4.4 Methodologies used

The secondary research methodologies for this research used, takes the form of case studies of two LCCs. Passenger traffic carried and load factors by LCCs were studied as well their basic capacity information and aircraft fleet utilisation. Furthermore, there financial data were analysed obtained from their respective annual reports. The sources of data include:

• COMAIR LTD • IATA 28

• ICAO data + • Kulula • Mango • SAA Group • SADC • UN World Tourism Organisation

The secondary research has been complemented by primary research in the form of interviews comprising of seven (7) questions in order to provide further information on the study area.

4.5 Case studies of airlines

The airlines researched in the case studies of the SADC region are LCCs from South Africa, Kulula and Mango. Although there are other LCCs in the region that could have been selected as case studies, Kulula and Mango are the top LCCs in terms of traffic numbers and brand recognition as well as availability of data.

4.6 Primary research

Following a review of the market developments and the analysis of data, primary research was gathered in order to gather qualitative information. The primary research was conducted in the form of an email interview through transmission of a questionnaire11. The respondents are a selected group of individuals from the air transport industry with adequate vast of years of experience in the field.

4.7 Purpose of primary research

The purpose of the primary research was to gather information and insight on the factors currently dictating the current situation of LCCs in the SADC region and the potential factors that would see the LCC market transform with expansion and provide better intra-connectivity and at the same time stimulate passenger traffic in the region.

4.8 Sample of industry experts

The sample of industry experts invited to participate in the interview were carefully considered in respect to the subject area and context, and as such amongst them were, consultants, government senior officials and senior officials from regional economic blocs and airline member association. Out of four invitations sent, there was a 50% response rate.

11 Completed questionnaires: appendices 4 and 5 29

5. Chapter Five: Research Findings and Analysis Results

5.1 Passenger traffic overview in the Region

In the SADC bloc each state has at least one airline providing air services on domestic and international routes with the exception of Eswatini and Lesotho where data is unavailable for air carriers from the two States, respectively. Below (see Figure 17 and 18) are the total traffic and share of passenger traffic carried by airlines per country in the regional bloc between 2000 and 2018.

Figure 17: Total passengers carried per country in SADC bloc, 2000-2018.

Passengers carried

SOUTH AFRICA 216.3 MAURITIUS 24.1 TANZANIA 12.5 ANGOLA 12.2 MADAGASCAR 9.8 MOZAMBIQUE 8.9 SEYCHELLES 5.2 NAMIBIA 4.0 ZIMBABWE 3.3 Country DRC 3.2 BOSTWANA 3.2 MALAWI 1.3 ZAMBIA 0.6 LESOTHO 0.0 ESWATINI 0.0 0 50 100 150 200 250

No. of Pax (million)

Source: ICAO data +

Figure 18: Share per country (%) of total passengers carried in SADC bloc, 2000-2018.

ANGOLA BOSTWANA ZIMBABWE 1% ESWATINI 4% DRC ZAMBIA 1% 0% 1% LESOTHO 0% 0% MADAGASCAR TANZANIA 3% 4% MALAWI 1%

MAURITIUS 8% MOZAMBIQUE 3% NAMIBIA 1%

SEYCHELLES 2%

SOUTH AFRICA 71%

Source: ICAO data +

Figure 17 and 1812, above, indicate that airlines from South Africa have carried the most passengers, accounting for 152 million passengers, between the periods of 2000 and 2018. Mauritius was next with 24 million passengers and then followed by Tanzania, Angola, Madagascar, and Mozambique with 12.5 million, 12 million 9.8 million, and 8.9 million passengers respectively. Airlines from Botswana, DRC, Namibia, Seychelles and Zimbabwe have carried 3-5 million passengers whilst Malawi and Zambia, 1.3 million and 0.6 million passengers. This equates to airlines in South Africa dominating the share of the SADC bloc of passenger travellers accounting for 71% whilst, Mauritius commanded 8% of the total share the rest of the countries only command 4% and below.

The level of passengers carried by airlines in their respective countries may be attributed to the number of the number of airlines domiciled in each respective country as well as the size of the country which may lead to limited domestic flights compared to larger countries. Below is a summary of the registered airlines from each country responsible for carrying passengers’ traffic as depicted in the above graphs.

12 Eswatini and Lesotho indicate 0 passengers during the period under study due to unavailability of such data, perhaps due to the fact the countries may not have airlines domiciled in their respective states. 31

Table 5: List of airlines per country

No. State Air carrier

1 ANGOLA TAAG Angola Airlines 2 BOTSWANA AIR BOTSWANA C.A.A

CONGO EXPRESS

3 DRC FLYCONGO CONGO EXPRESS CONGO AIRWAYS 4 MADAGASCAR AIR MADAGASCAR 5 MALAWI AIR MALAWI ULENDO AIRLINK 6 MAURITIUS AIR MAURITIUS 7 MOZAMBIQUE LAM KAYA AIRLINES 8 NAMIBIA AIR NAMIBIA 9 SEYCHELLES AIR SEYCHELLES CEMAIR

COMAIR LTD

INTER AIRLINES

10 SOUTH AFRICA MANGO SA AIRLINK SA AIRLINK REGIONAL SA EXPRESS AIRWAYS South African Airways SAFAIR AIR TANZANIA

AURIC AIR SERVICES 11 UNITED REPUBLIC OF TANZANIA FASTJET PRECISION AIR SERVICES 12 ZAMBIA STABO AIR PROFLIGHT COMMUTER SERVICE 13 ZIMBABWE AIR ZIMBABWE AVIENT AVIATION CENTRAL AIR Source: ICAO data +

Figures 17 and 18, above, illustrate the total passenger traffic (domestic and international) of each of the countries and below (see table 6) are total passenger traffic figures segregated by stage type, for each SADC member state.

Table 6: Passenger totals by Stage type, (‘000 000), in order of hierarchy.

No. State International Domestic Total 1 South Africa 63.8 152.6 216.3 2 Mauritius 21.9 2.2 24.1 3 Tanzania 3.8 8.7 12.5 4 Angola 6.3 5.9 12.2 5 Madagascar 3.6 6.2 9.8 6 Mozambique 2.7 6.2 8.9 7 Seychelles 2.9 2.3 5.2 8 Namibia 3.4 0.7 4.0 9 Zimbabwe 1.8 1.5 3.3 10 Botswana 2.3 0.9 3.2 11 DR Congo 0.1 3.1 3.2 12 Malawi 1 0.3 1.3 13 Zambia 0.5 0.2 0.6 14 Eswatini 0 0 0 15 Lesotho 0 0 0

All the countries except Eswatini and Lesotho have airlines operating as national airlines with their respective governments possessing majority share ownership.

5.2 LCC passenger traffic overview of in the region

Below, is data that shows the totals of passenger traffic carried by LCCs in the SADC region between 2000 and 2018. The data ought to provide an indication of the portion of passengers carried by LCCs with respect to the total passengers carried by all types of carriers in the region. Figure 19: Total passenger traffic per country, 2000-2018

100.0 90.0 80.0 70.0 75.2 60.0 50.0 40.0 No/ '000,000 No/ 30.0 20.0 10.0 3.5 0.3 2.7 0.0 SOUTH AFRICA TANZANIA Country International Domestic

As already highlighted previously, only two states within the SADC bloc have LCC activity. In other countries, commercial air transport activity consists of charters, regional carriers and the FSNC. Figure 19 (see above) shows that South Africa recorded the highest amount of passenger traffic compared to Tanzania, and that the domestic markets account for the majority of passengers travelling by air within the respective states.

With the foregoing, the total number of passengers carried by LCCs in South Africa and Tanzania was 75.2 million and 3 million, respectively, out of a total figure of 216.3 million and 12.5 million, respectively, accounting for, 36% and 24% over the 18-year period. In relation to the total passengers carried within the SADC bloc, LCCs may be accredited to have carried 81 million passengers out of a total of 304 million, whilst the other carrier types consisting of FSNC and charter airlines, carried 222 million passengers representing a split of 27% and 73%, respectively, over the period under Study.

Figure 20: Total share (%) of passengers carried between LCCs and other carrier types in SADC bloc

27%

73%

FSNC/Charter LCCs

As depicted by the graph above, this 27% consists of 4% and 96% representing the share between passengers carried by LCCs from the SADC bloc which are only from two States namely, Tanzania and South Africa, respectively.

Figure 21: Share (%) of total passengers carried by LCCs

96%

South Africa Tanzania

Figure 21, shows that South Africa has the major share of the LCC market compared to Tanzania. The first entrant of LCCs in the SADC bloc was Kulula in 2002 in the Republic of South Africa. In 2007/8 Mango and SAFAIR entered the South African market. In 2013 Fastjet entered the air transport market making the Republic of South Africa and United Republic of Tanzania the only two States with vibrant activity of LCCs. The above-mentioned LCCs have carried a total number of just over 78 million passengers with the carriers from South Africa dominating the passenger figures owing to the multiple number of carriers domiciled in the country.

Figure 22: Number of passengers carried by airline

70,000,000

60,000,000

50,000,000

40,000,000

No. of Pax 30,000,000

20,000,000

10,000,000

0 KULULA FASTJET MANGO SAFAIR International 0 333,942 82,253 8,864 Domestic 57,821,559 2,684,423 12,816,083 4,596,886

Airline

Source: ICAO Data+

The airlines appear to have more intensive operations in the domestic markets compared to the international markets. Having viewed the passenger volumes independently, from a regional and airline perspective, it would be ideal to view the change in passenger volumes at times when these LCCs entered the markets in their respective States.

It is said that the entrance of new carriers on the market may induce an increase in passenger traffic owing to reasons such as new routes offered, affordable fares or simply provision of superior product. Figure 23 (see below) illustrates the number of passengers carried between 2000 and 2018 with three key points in the timeline when a LCC entered the SADC market.

Figure 23: Passenger Nos trend between LCCs and legacy/regional carriers

20 Fastjet Tanzania SAFAIR, Mango Kulula 18 16 14 12 10

Pax no./Million 8 6 4 2 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Year

LCCs FSNC

Source: ICAO Data+

In 2002, Kulula entered the South African market which resulted in a spike in passenger totals, in totality, in the SADC region. In 2008 another two LCCs entered the market namely SAFAIR and Mango of which the total passenger numbers had reached 3 million, an increase by 2 million from that of 2002. Then in 2013 Fastjet entered the Tanzanian market by then the total number of passengers in the regional economic bloc had reached six (6) million passengers carried by the LCCs in the bloc. As from 2013 to 2017, the passenger growth rate of passengers carried by LCCs increased by a total average of 21% whilst the growth rate for the total passengers carried by FSNC increased by a total average of 8% resulting in the total number of passenger, in the bloc, to increase from 23.4 million to 28.7 million from 2013 to 2017, representing a total average passenger growth rate of 12%, accounting for the whole bloc.

Figure 24: SADC proportion of LCC/FSNC passengers

20 17.9 16.6 16.3 15 16.6 16.5

10 12.4 12.3 12.6 14.4 12.4 11.9 12.7

No of Pax in millions in of Pax No 11.1 10.1 10.3 5 2.9 2.3 9.1 9.5 10.4 10.8 6.8 7.7 4.4 2.3 2.8 2.9 3.0 3.2 3.3 4.0 4.0 0 0.0 0.0 1.1 1.8 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Year LCCs FSNC

Figure 24, above, shows the proportion of passengers carried between LCCs and FSNCs between 2000 and 2017. Both the LCCs and FSNCs experienced an increased growth in carriage of passengers with steady growth patterns. In 2002 when the first LCC entered the South African Market and represented the sole LCC in the SADC region, come year end, LCCs were responsible for 10% of the total passengers carried by all airlines in the SADC region and 17 years later, in 2017, after the emergence of more LCCs airlines, they were responsible for 38% of the total passengers carried by all airlines indicating that LCCs have been experiencing an increase in number of passengers carried over the 17 year period whilst the FSNC have been experiencing a decrease in number of passengers carried. This is shown in Figure 25 (see below). Figure 25: SADC proportion (%) of LCC/FSNC passengers

100% 90% 80% 70% 60% 50% 40% 30% 20%

Proportion Share (%) 10% 0% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Year LCCs FSNC

Figure 26 shows the total number of passengers carried by LCCs and FSNCs in the SADC regions from 2000 to 2017.

Figure 26: Total number of passengers carried by LCCs and FSNCs in the SADC region

20 Pax no./Million 15

0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Year

For purposes of getting an acute understanding of the performance of LCCs from the regional economic bloc, a more refined analysis is required by conducting a comparative analysis based on passenger traffic, financial performance, route network and aircraft fleet. The comparative analysis is between Kulula and Mango, two LCCs domiciled in the Republic of South Africa. The following will be presented in Chapter 6 (see below).

6. Chapter Six: Comparative Analysis between Kulula and Mango

6.1 Introduction

The previous section dealt with passenger volumes from a regional and state perspective to provide an insight of the air transport market with regards to passenger volumes being carried. This sub section will look at two LCCs responsible for carriage of passengers in the SADC region and from the data presented in the previous sub section. A comparative analysis of Kulula and Mango, from the Republic of South Africa will make up this case study by looking at their operational and financial performances. Kulula, was launched in 2001/2 as a low-cost airline and is a subsidiary of COMAIR Limited, an independent company. COMAIR limited has Kulula as its airline brand that operates in the country and also operates under a franchise agreement with British Airways (BA) from Oliver Tambo (OR) International Airport and Lanseria Airport and primarily services the leisure market. As for Mango Airlines, the airline launched in 2006 as a low-cost airline and a subsidiary of the South African Airways (SAA) Group. Its network primarily catering for the domestic market. However, both airlines operate beyond the domestic market with Kulula operating to Nairobi under a cooperative arrangement with Kenya Airways and Mango airlines to Zanzibar.

Figure 27: Kulula and Mango branding

Image Source: Comair.co.za Image Source: Flymango.com

6.2 Operations Analysis

6.2.1 Passenger Load Factor, Available Seat per Kilometre and Revenue Passenger per Kilometres

The passenger load factor (PLF) levels, an indicator that measures the percentage of available seating capacity that is filled with revenue passengers, are quite close between the two airlines as PLF lies between 76% and 83% (see below Figure 28).

Figure 28: Average passengers load factors (PLF, %) between 2013 and 2017

100% 90% 80% 70% 60% 50%

PLF (%) 40% 30% 20% 10% 0% 2013 2014 2015 2016 2017 Year

Kulula Mango

Source: ICAO Data+

The trend over the five year period shows that Kulula experienced a decline from 2014 to 2016 until in 2015 it increased only to decline again in 2017 whilst the PLF for Mango only experienced a decline in 2014 before it picked up again in 2015 to 2017 and maintain an average LF of 80% between the three year period. The reason for the decline in PLF for Kulula and increases from Mango may be attributed to fare discounting where fares offered by Mango airlines may have been lower than its competitor’s fares could sustain it such fares over the 3-year long period. Its ability to sustain low fares comes against the fact that Mango airlines is owed by the State airline, South African Airways and may have access to unlimited financial resources for its operations. Average PLF over the five-year period of Kulula and

Mango airlines was 78% and 82%, respectively, translating to that, Mango out performed Kulula when it comes to PLF.

Figure 29: Available Seat Kilometres (ASK) per year, in millions, between 2013 and 2017

8,000

7,000

6,000

5,000

4,000

3,000 ASK ASK in millions 2,000

1,000

0 2013 2014 2015 2016 2017 Year

Kulula Mango

Source: ICAO Data+

Above (see Figure 29) is a depiction of available seat kilometres (ASK) of the two airlines which illustrates the capacity deployed by the respective airlines in course of the 5-year period during their operations. ASK also provides an indication of the market share an airline may possess and from the graph above, it can be deduced that Kulula has had some degree of dominance in the South African market. It is not expected to be challenged by Mango in the near future as both airlines seem to have been growing at a conservative but consistent growth rate over the last few years, and future growth is likely to continue along this trend. Having looked at the PLF and ASK, an assessment of the total number of passengers flown over the distance carried is essential in analysing performance of the airlines. The revenue passenger kilometre is calculated as the number of paying passengers flown multiplied by the stage length in kilometres.

Figure 30: Revenue passenger kilometre (RPK) between 2013 and 2017

6,000

5,000

4,000

3,000

RPK in millions 2,000

1,000

0 2013 2014 2015 2016 2017 Year

Kulula Mango

Source: ICAO Data+

The trend for the two airlines is similar to that of the ASK trend which suggests that both airlines have managed to maintain their share of the market, respectively. Both airlines between 2013 and 2015 experienced growth with Kulula experiencing growth between 2013 and 2014 and then levelled off between 2014 and 2015. Mango on the other hand experienced growth for the entire two-year period between 2013 and 2015 owing to introduction of Johannesburg - Port Elizabeth and Cape Town - Port Elizabeth routes, back in December 2012. From 2015 to 2017, RPK trend of Kulula shows to have steadily increased by 4% year on year whilst Mango airlines experienced growth in 2016 of 2% and then a decline in RPK in 2017 of 3% from the previous year, 2016. This may be attributed to the emergence of Cape Town and Durban as secondary gateways resulting in decline of passenger demand in the domestic market. Additionally, slow economic growth and activity in the country influenced business companies to be more stringent with their budget allocations and possibly affected travel prospects, again resulting in declining passenger demand, although, Kulula experienced reverse in fortune.

6.2.2 Route network

Kulula primarily operates within the South African domestic market offering air services to most of the country’s popular cities. It targets travellers in leisure markets primarily but also strategically targets the business traveller, providing them with the option to travel to the main business and leisure destinations. Cape Town and Durban are very popular destinations for leisure travellers as they are coastal cities with beaches able to accommodate people for some leisure activities. Figure 31: Kulula operated route network

Source: Kulula.com

• Johannesburg (OR Tambo) – Cape Town • Johannesburg (OR Tambo) – Durban • Johannesburg (OR Tambo) – East London • Johannesburg (OR Tambo) – George Town • Johannesburg (Lanseria) – Cape Town • Johannesburg (Lanseria) – Durban • Cape Town – Durban

Kulula operates primarily from two bases, namely Johannesburg’s OR Tambo and Lanseria providing air services to majority of the major cities in South Africa. Kulula also operates beyond domestic boundaries to Nairobi, Kenya, a route served through a codeshare bilateral agreement between Kulula (MN) and Kenya Airways (KQ). The

Agreement came into effect as off April 2014 with Kulula and Kenya Airways placing their operator codes, MN and KQ, on the Johannesburg – Nairobi route and South African domestic routes operated by Kulula, respectively. The agreement provides a seamless connection between the carrier’s network via OR Tambo International Airport. Mango airlines serves the leisure and business market targeting leisure travellers and price sensitive business travellers. According to their annual report (2017), Mango airlines has been the preferred low-cost carrier for domestic travellers in South Africa having transported over 20 million passengers over the past 10 years whilst at the same time achieving an 87.5% departure on time performance (OTP).

Figure 32: Mango operated route network

Source: flymango.com

• Johannesburg (OR Tambo) and Cape Town (CPT) • Johannesburg (Lanseria-HLA) and Cape Town • Johannesburg and Durban (DUR) • Johannesburg (Lanseria) and Durban • Cape Town and Durban • Bloemfontein (BFN) and Cape Town • Johannesburg (OR Tambo) and Port Elizabeth (PLZ) • Johannesburg (OR Tambo) and George (GRJ)

Mango primarily offers air services on domestic routes but has regional air services between Johannesburg and Zanzibar which as part of its route network.

Figure 33: Number of aircraft departures per week

The above illustration shows the number of aircraft departures, per week, recorded by the two airlines within their route network operations during the five-year period between 2013 and 2017. It is clear that operations by Kulula, maintained high aircraft departures compared to Mango over the period with an average aircraft departure rate of just over 800 per week for Kulula; in contrast, Mango had around 380 aircraft departures per week. Kulula appears to have maintained a consistent number of aircraft departures between 2014 and 2017 which suggests no significant change whilst Mango, its number of aircraft departures increased at an average rate of 6% for the period between 2014 and 2016, and levelled off indicating no significant change in the number of aircraft departures between 2016 and 2017. This can be interpreted that during this five-year period demand for travel may have increased on Mango’s route network likely from the introduction of new air services on the Johannesburg - Port Elizabeth and Cape Town - Port Elizabeth.

6.2.3 Aircraft fleet and utilisation

The aircraft fleet of an airline has a major impact on its performance as it determines the cost structure and subsequently highlights the areas likely to be main drivers of cost. Fuel and maintenance are mainly the leaders with other aspects included such as training (cabin crew, engineers and pilots). In addition to the composition of its fleet, aircraft fleet utilisation is

46 critical for an airline as this enables the airline to generate enough revenue to cover the costs and with the right individual aircraft utilisation levels, the likelihood of airlines making profits are greater than the latter, when aircraft utilisation levels are poor. The above-mentioned costs are operational related but administrative costs also exist such as aircraft leasing and insurance. Optimal aircraft fleet utilisation levels normally translate to lower operating cost per hour of aircraft ownership which in turn provides better prospects for fast returns on investment. Figure 34 (see below), shows the average total fleet aircraft utilisation per day for the period 2013-2017.

Figure 34: Total fleet aircraft utilisation (hrs) per day

250

200

150 Hours 100

0 2013 2014 2015 2016 2017 Year

Kulula Mango

Mango’s fleet comprised 10 aircraft (B737-800-168-Seater), leased and owned which are used to serve eight domestic destinations and one regional destination. Kulula similarly possessed 10 aircraft (B737-400 and 800), owned and leased as well indicating that the two airline’s fleet composition share similar characteristics, however, the utilisation is very different as clearly seen in the graph above. Kulula appears to have a higher average aircraft fleet utilisation rate than Mango over the time period, which tallies with the trend of number of aircraft departures as earlier presented. Both carriers operated on similar route networks with little difference in stage lengths as both carriers mostly serve same destinations. With ten aircraft making up their fleets respectively, one can deduce that the average aircraft utilisation per day is as follows:

Table 7: Annual average aircraft utilisation (hr) per day

2013 2014 2015 2016 2017 Kulula 14.8 17.8 19.2 18.5 18.5 Mango 7.6 8.4 7.4 7.6 7.3

Kulula’s average daily aircraft utilisation rate is double than that of Mango airlines which may suggest that the airline’s aircraft are in the air more frequently due to higher frequencies than Mango airlines as one may deduce from the pattern of number of aircraft departures.

6.3 Financial Performance

6.3.1 Introduction

Having conducted a comparative operational analysis of the two airlines to assess their performance when pitted against each other, it would be ideal to conduct a comparative financial performance of the two airlines as well for the period 2013 – 2017. Financial analysis is also a commonly used method and useful application in understanding numerous performance aspects of an airline. In this study the performance evaluation for the two airlines will involve the consideration of profitability and look at the net income ratio and subsequently presented as net profit margins against the industry’s average for years 2013 – 2017. The net profit margins of the two airlines, respectively, will be compared with their previous year’s ratio to see whether the airlines have constantly been improving its profitability or not.

6.3.2 Net profit margin analysis

Kulula appears to have recorded profits over the period 2013 – 2017 with profit margins above 3.2% during the five-year period. The airline managed to perform above the global industry average13, with the exception in 2015 and 2016 when the airline made substantial commitments towards hedging of fuel and the industry experienced drop in fuel prices which resulted in its profit margin shrinking.

13 calculated by IATA for each year respectively 48

Figure 35: Net profit margin against industry average per year basis

6.0%

5.0% 5.1% 4.9% 4.5% 4.6% 4.0% 4.2% 4.1% 3.7% 3.0% 3.2% 2.6% 2.0% 1.8% 1.0% 0.0% 2013 2014 2015 2016 2017 Year

Kulula Industry Average

Source: COMAIR Ltd Annual Reports; 2013-2017 & IATA Airline Economic Industry Performance

On the other hand, Mango’s profitability performance has been below the global industry average, however, recorded positive net profit margins of 0.6%, 2.3% and 0.6% in 2013, 2015 and 2017, respectively. Only in 2014 did Mango report a loss equivalent to $1,087,580.44 translating to a -0.8% net profit margin against a global industry average of 2.6%. The airline stated the main reason for the poor performance was attributed by weakening currency and flat passenger traffic growth in the domestic market. The net profit margin for year 2016 was not calculated due to limited information on profits, provided in the airlines annual report and as such was recorded as zero (0). Earnings per share analysis

The measure of the two airlines on how much profit they generated would provide additional insight into their financial performance, however, Mango in its annual reports have had their information on earnings per share omitted unlike Kulula who have provided the information over the five-year period under study. Mango, as part of the SAA Group and known to be a beneficiary to State funding, may not necessarily be obliged to do so on a regular basis and with the foregoing Kulula and Mango have not been comparatively analysed. The performance of earnings per share took up a similar trend pattern as the performance on net profit margins as shown below (see Figure 37).

Figure 36: Earning per share in $

50 45 $43.0 $39.2 40 35 $31.7 $32.3 30 $28.0 25

USD ($)USD 20 15 10 5 - 2013 2014 2015 2016 2017 YEAR

Source: COMAIR Ltd Annual Report; 2013-2017

Figure 37 above shows the earnings per share of Kulula for 2013 up to 2017 and shows that the company’s profit that is allocated to every individual share of the stock increased from the initial value it was at 2013 to the final value in 2017 which suggests that the company’s profitability was good and likely to have attracted investors who traded in the stock market. But due to the absence of similar information for Mango, it is difficult to make an informed decision as to which airline outperformed the other and as such can only conclude on the performance of Kulula during the five-year period as a positive financial performance.

6.3.3 Commercial arrangement

Airlines utilise various commercial arrangements in the air transport industry, primarily, in a bid to expand their presence in a market and improve their businesses respectively. The common agreements amongst airlines are; a. interline, commercial arrangement between airlines to handle passengers and their baggage when travelling on multiple airlines but the airline ticket is the same.

b. codeshare, airlines place their airline codes on another’s flight, where one airline operates the flight and the other issues the tickets as if they were operating the flight themselves.

Figure 37: Code share itinerary between American Airways and British Airways

Source: (American Airlines, 2019)

c. alliances, airlines pay dues to belong to one of the three big airline alliances and deliver certain benefits to passengers on a reciprocal basis. An example being where airlines belonging to one alliance group permitting passengers accessing their airport lounges regardless which airline passengers has flown on that specific flight. (passengers flown on Kenya airways accessing the Air France lounges). The current alliance groups are; Sky team, Star alliance and One world.

d. joint venture, airlines enter into a cooperative agreement normally approved by governments for airlines to operate as one business entity. It normally occurs between specific regions and it not the same as an outright merger. Examples include, British airways and Japan Airlines on the transpacific route,

With the brief background on airline commercial arrangements, South African Airways and Mango entered into a codeshare arrangement on the coastal routes between CPT and DUR an arrangement said to provide opportunity for greater flexibility and continuity of SAA’s presence on this route, according to an article by Domestic flights- South Africa (Deon, 2013). Kulula is under codeshare partnerships with Air France, British Airways, Kenya Airways and Etihad with the aim of its passengers experiencing a seamless travel experience. Therefore, both airlines are seen to be in partnerships with other airlines which suggests such partnerships are beneficial to the LCCs, and specifically these two LCCs towards their operations.

7. Chapter Seven: Summary of Results (Period: 2013-2018)

PLF and RPK

If only half of the seats on a flight are occupied, the airline is not generating as much revenue as it could by flying a full plane. Load factor may help investors understand how the airline covers expenses and generates a profit. A low load factor may be a cause for concern and may indicate an unprofitable airline.

Between Mango airlines and Kulula, Mango had recorded a higher average PLF over the five- year period, 82% compared to Kulula, 78% and five-year average RPK of 2,823,000,000 and 4,873,000,000, respectively despite Mango airlines carrying almost half the number of passengers compared as Kulula.

ASK

The average ASK for the entire period (2013-2017), between the two airlines, shows a big difference with Mango recording an average of 3,454,000,000 and Kulula recording an average of 6,289,000,000 available seats indicating that Kulula deployed more seats across its route network than Mango Airline on an annual basis. With both airlines experiencing conservative growth between 2015 and 2017, it suggests that the market competition has reached maturity and further growth is unlikely in the coming years on the existing route networks between the two airlines.

Route network

The route network of the two airlines are, to some extent, similar as they both serve many of the same routes and destinations with the exception of Bloemfontein and East London (Mango) and George (Kulula) from JNB.

Judging by the route network, the indication is that both airlines’ route network is dominated by domestic air services with no international air services during the period between 2013 and 2018. Potential conclusion to this observation could be due to the nature of the two airline’s ownership status as Kulula and Mango airlines are part of a Group, namely COMAIR Ltd and South African Airways Group, respectively. This may translate to the fact that both airlines operate domestically to feed passenger traffic to British Airways and South African Airways, the airline partners of Kulula and Mango airlines, respectively, onto their respective long-haul route network from Johannesburg.

Aircraft fleet and utilisation

Both airlines utilised the Boeing 737 (168 seat capacity) of fleet size 10 aircraft with Kulula having to record an average 800 departures per week during the 5-year period whilst Mango recorded an average 380 departures per week. This refers to the total departures of its fleet, on the route network of the airlines, respectively. The aircraft departures may provide some insight into the number of daily return frequencies per air craft, and suggests that Kulula operates with more frequencies per day or/and week than Mango airlines, further suggesting that Kulula experiences more demand for travel from passengers from the market than Mango, within the domestic market and beyond onto its partner airlines.

Commercial arrangements Both airlines are seen to be in partnerships with other airlines which suggests that the various airline partnerships entered by the Kulula and Mango, respectively, are beneficial to the LCCs. It may also provide some incentive to the passenger with better pricing and easy connectivity options on the routes operated by the LCCs and their commercial airline partners.

8. Chapter Eight: Factors influencing future airline performance and passenger traffic stimulation in the SADC region

For future prospects with regards to airline performance and passenger traffic stimulation in the region, numerous areas have to be considered. Political and Economic stability

The region’s political and economic environment should remain stable as conflicts or financial slowdowns are likely to have an adverse effect on the region’s overall economic performance negatively impacting airline business performance. This was somewhat evident in South Africa in the 1990s (political instability) or following the 2009 financial crisis. According to Dumitru and Hayat (2015), sub-Saharan African has made significant strides to maintain political stability over the past 20 years although its stability may be fragile due to the region’s member countries dependency on resources, of which, there may be a link towards cause of conflicts in rich resource countries, in the event governance is poor. The southern and eastern parts of Africa, as well as Mauritius and Cape Verde, are the areas that stand out as being more politically stable.

Safety and Security

The continent has undergone numerous phases of internal conflicts that have varied in duration although in the last 5 years the amount of on-going conflicts has been lower than the period prior. In the SADC region, the majority of the countries have witnessed improved safety and security with growing business activity in various economic sectors. Example being South Africa, since 1993, it has improved and thus has managed to bolster its tourism industry. The improvement of safety and security, including health safety are one of the areas that if improved and maintained at acceptable levels would enable the future performance of airlines and stimulation of traffic.

Tourism Air transport activity in sub-Saharan Africa has benefitted mostly from international tourism with arrival numbers on the increase since the 1990s. South Africa has been the major benefactor of tourism and subsequently seen the air transport industry grow along with international tourism activity. This is in comparison to the other countries in the SADC region where Kenya despite also good international tourism activity has been good, as similarly as Zimbabwe as it hosts one of the wonders of the world, namely Victoria Falls. However, at some point these three States have been marred with politically motivated factors and affected their respective economic performance and ability to attract international tourism which suggests that for airlines to perform well in the future it shall be dependent on the political and economic stability of the countries in the region. In the past years, although with recent reports from UNWTO (World Tourism Organization, 2018), the region experienced been

Political and economic stability (sanctions etc.), infrastructure development and implementation of the Single African Air Transport Market initiative. Passengers demographics

One indication of affluence is passengers with sufficient disposable incomes that enable them to undertake various types of travel i.e. leisure or visiting Friends and Relatives. This is subsequently dependent on the economic performance of the member states, respectively as positive economic performance translates to good GDP. Elasticity dictates that with GDP increasing by 1% this leads to demand increasing by 1% - 2%.

Economic regulations

The African Union (AU) argues that the continuing existence and implementation of traditional bilateral air service agreements (BASA) between African states limits the potential for future airline performance, as airlines are limited to destinations indicated in the BASAs. With the foregoing, AU has launched the Single African Air Transport Market (SAATM) which is expected to bring benefits such as making air transport available to at least 5 million additional people and 75% increase in direct flights. The implementation of the SAATM is one critical area that in principle would lead to airlines performing with excellence and the passenger traffic to be stimulated. Implementation of SAATM, unfortunately, is dependent on how swiftly the respective States in the SADC and rest of the African continent adopt the initiative considering that the idea of a single continental “free” sky dates back to 1988 with the Yamoussoukro Decision.

Technical developments

New aircraft models have been influential towards airline performance and expanse of route coverage in a network of an airline, with aircraft becoming more fuel and operational efficient. In the SADC region, the average aircraft block time between two neighbouring states, from one capital city to another capital, ranges between 1 to 2 hours on relatively thin markets thus making the use of large aircraft almost a non-starter due to viability purposes. Smaller “work- horse” aircraft have been the ideal aircraft for these shorter routes, especially the Airbus A320 (A 320) and Boeing 737 (B737) models. The recent B737 max series has been utilised on the continent due to its favourable performance specifications and has been on many African airline’s order list.

Low Cost Carrier Product

The region may experience passenger stimulation with the entry of more LCCs and available on numerous domestic and international routes. During the study period, LCCs in the SADC region are seen to be concentrated to the domestic markets and in South Africa. More of them established in other countries experiencing good economic performance may stimulate passenger travel especially those countries that have a good performing tourism industry. 55

Taxes and charges imposed by governments

Further government fees are seen to have an impact on the potential prospects of LCCs growing on the continent. As much as such imposed fees are largely intended to promote aviation development, it has resulted in the ceiling of ticket prices increasing making air travel expensive which is against one of the continental’s goals on air transport that is, being affordable as articulated in the SAATM initiative. A change in direction by governments on imposing furthermore taxes would limit the growth of LCCs and reduce their ability to stimulate passenger traffic by maintaining affordable air ticket prices.

Secondary Airports

Availability of secondary airports which may serve as low cost airport alternatives is critical to the LCC business model and LCCs eye to use such airports to lower their aeronautical charges incurred for operating into airports. Unfortunately, due to the limited number of secondary airports, LCCs are subjected to incurring the same charges as legacy carriers incur from using the same airports. According to an article on why Africa is challenging for the LCC model, (Hayden-Lefebvre, 2019) in 2013 the African Airlines Association (AFRAA) and ICAO publication, reported that airport charges in Africa are generally much higher than the global average, with more than 12 major African airports charging at least $10 more per passenger than Europe’s second most expensive airport at the time, Frankfurt.

9. Chapter Nine: Conclusion and Recommendations

9.1 Overall conclusion

Supported by the data collected from various sources, and analysed in this study, it appears that LCCs have had an impact on the passenger market since the first entrant back in 2002 in the SADC region. In that first year, 2002, 1.1 million passengers were carried, followed by an increase to 3 million passengers in 2007 representing an increase in passenger numbers of 183%. In 2017, passenger numbers increased to 10.8 million representing an increase in passenger numbers by 254% from 2007 to 2017. The figures mentioned above are of passengers carried on domestic and regional routes by LCCs in the SADC region. As of 2017, ICAO listed sixteen (16) LCCs established on the continent, in the following countries; Egypt, Kenya, Morocco, South Africa and Tanzania. Ten (10) of the 16 LCCs are established in the SADC region, representing 62% of LCCs domiciled in the economic bloc. Of the 10 LCCs in SADC, it is only in South Africa and Tanzania where they are established. It can be said that, there is a relationship between a country’s GDP performance and passenger demand for air travel. Egypt, Kenya, Morocco, South Africa and Tanzania are considered to be economically stable countries with positive past historic GDP performance. It can be said that, from this study, there is a correlation between where LCCs have established air services and the GDP status of the countries, respectively. In the SADC region, LCCs have emerged in South Africa and Tanzania, two countries that are amongst the top 5 in SADC with regards to GDP and population size, which suggests that LCCs have been motivated to emerge in markets where disposable income may be adequate and the population size is great leading to stimulation for air travel demand within the region. In addition, the vibrant tourism activity within the region suggests that it is a factor contributory stimulation of demand for air travel and influential to the emergence of LCCs in the SADC region.

Having thus far said that LCCs in the region have had a positive impact on the passenger market in relation on passenger traffic stimulation their financial performance cannot be generalised as, LCCs in the SADC region to have performed positively rather it has varied across the individual LCCs. Fastjet Tanzania has been in operational and financial woes for the last couple years. Due to low traffic levels on its routes one may conclude that, it is the reason they scaled down on their operations and almost remained operating domestic routes. One of the routes abandoned due to traffic levels was on the regional route to Malawi (see appendix 4). Furthermore, a report by (ch-aviation, 2019) of the carrier experiencing challenges towards meeting its financial obligations to its staff having just settled outstanding amounts to the Tanzanian Civil Aviation Authority (TCAA), other service providers, and assorted creditors. The airline as of 1st July 2019 has been under suspension from operating by the TCAA. On the other hand, Mango, experienced making net profits and losses over the period 2012-2017 and during this five-year period Mango performed below the global industry average whilst Kulula recorded profits over the same five period, however, only in 2015 and 2016, the LCC recorded net profit below the global industry average. This suggests

57 that LCCs in the region are able to make net profits, however, below the global industry average. This study has made findings that LCCs in the region have operated similar type of equipment (aircraft), the Boeing 737, either leased and owned. The type of lease, where the LCCs make payment for hire of the aircraft for an agreed specified period of time, is a dry lease as opposed to a wet lease. Dry lease entails the LCCs hiring the aircraft and providing its own fuel and crew to operate whilst a wet lease entails the hiring of the aircraft with the lessor providing maintenance, crew and insurance which in turn has a higher impact to the operating costs of the LCCs. The LCCs under this study, appear to be in varying operational arrangements. Mango has operated as an independent entity though it is a subsidiary of SAA to serve routes that would feed into its vast network. whilst Kulula, also operating independently, has operated, in part, under a franchise agreement with BA. The franchise arrangement is simply the brand of BA used on the routes operates by Kulula but in essence is operated by Kulula with the passenger revenues going to Kulula. However, Kulula as part of the franchise agreement obligations, pay BA for the use of the brand and aircraft livery.

Prior to the study, it was noted that LCCs in the SADC region were of different ownership setup, with participation from government or private entities. As such, one of the objectives of the study aimed to determine whether participation by government or private sector had an influence on the commercial viability and competitiveness of the LCCs in the region. Consensus, from experts within the industry interviewed, appear to be of the view that whether low cost carriers are owned privately or by governments, it has no influential bearing on the prospects of their commercial viability and competitiveness. However, operational arrangements such as subsidised, where LCCs riding on the back of a well-established carrier(s), could have better leverage than one that is purely private as it wouldn’t matter much if it were making losses. There could be many factors at play in the industry that would influence the commercial viability and competitiveness of LCCs in the region and to highlight a few, include; policy, strategy and management model, as the major determining factors irrespective of ownership.

10. Appendices

Appendix 1 Summary fact and figures of Southern African Development Community (SADC)

Source: (SADC, 2019)

Appendix 2 Communication from Fastjet Group on suspension of operations of Fastjet Tanzania.

Source: (Fastjet Tanzania Ltd, 2018)

Appendix 3

Illustration of the Nine freedoms of the air (“routes”), as defined by ICAO, where a carrier carries paying passengers between its home country to another country or countries.

Source: (Maertens & Grimme, 2013)

Appendix 4

Communication from Fastjet Tanzania on ceasing operations between Dar es Salaam and Lilongwe

Source: Malawi Department of Civil Aviation

Appendix 5

MSC AIR TRANSPORT PLANNING AND MANAGEMENT - DISSERTATION UNIVERSITY OF WESTMINISTER – LONDON, UNITED KINGDOM RESEARCH AREA : BUDGET AIRLINES IN SUBSAHARAN AFRICA- AN ASSESSMENT OF THE IMPACT ON THE PASSENGER MARKET IN SADC REGION

INTERVIEWER : Michael E. Mononga INTERVIEWEE : James Chakwera

POSITION : Acting Director, Malawi Department Civil Aviation

DATE: 17th December, 2019

Budget airlines (low cost carriers) have emerged on the African continent and have had differing impacts on the local markets where they are based including, amongst others, the establishment of new air services on routes and/or additional air services to existing routes and providing more affordable air travel. However, other impacts have been more difficult to assess, such as traffic stimulation on existing routes and markets within Africa. It is with the foregoing, that this questionnaire aims to provide further insight to the impact of budget airlines in the African air transport market. The responses to these questions will be utilised to explain the varying impacts across the different regional economic blocs in Africa and be included in the individual scholastic research study on the impact of budget airlines in the sub- Saharan African region. Your participation is greatly valued and is completely optional.

Thank you in advance for taking the time to answer the following seven questions.

1. How has the existence of budget airlines affected air traffic in sub-Saharan Africa? Have they improved or reduced connectivity, or has no change occurred? What are the factors contributing to this situation?

Budget airlines is a relatively new concept of airlines on the African market. Although the concept has been there for a while now, the real impact, save for a few selected locations and cases, has not been felt. In South Africa Mango and Kulula.com became household names hopping between the major cities. The most popular and busiest route being Johannesburg to Cape town. Reportedly these low-cost carriers managed to drive fares

down and enticed the populace to consider flying as an option. They offered convenience and a wider range of choice. Apart from South Africa other isolated cases have been in Kenya and Tanzania. As a sub-Saharan Africa the impact has been very little. Fares continue to be exorbitant and hence air transport remains for the sponsored travellers and the privileged few. There have not been any significant movements, positive or negative, except for the few isolated areas with the coming in of LCCs.

Perhaps one positive would be the fact that it is now a known fact that LCCs could actually be a viable option should one want to venture into the industry. It could also be an option for most of the regional carriers, reeling from high costs and marginal profits, to consider; to change their concept and start maximising on economies of scale when they have high passenger loads on LCCs.

2. Do you believe budget airlines have improved, or limited competition in regards to creating more choice for the traveller on domestic and international routes?

Wherever budget airlines have operated they have presented formidable competition to the existing traditional carriers and in most cases forced them to reduce costs. The unfortunate thing has been that they, the LCCs, have failed to sustain their operations themselves. A case in point is Fastjet in Tanzania which has now folded. (not sure if Kulula and Mango are still in existence).

3. Budget airlines in sub-Saharan Africa appear to be confined to providing domestic services in their own countries. Do you believe that budget airlines have remained in their domestic markets, out of cautiousness, to ensure financial and operational sustainability? Are there other market factors such as commercial airline arrangements (business strategies) influencing this status quo?

The concept of LCCs is ideally best suited for domestic and short regional flights (less than two hrs). On long haul flights the demands from passengers would be enormous, there will be amenities that they will demand, like meals. So, in my view its actually by design that these have been confined to short routes because that is where they would work well. Europe and America have a lot of LCCs because of the short distances between cities or trading places. Of course, the costing would be very different for long haul flight on the LCC concept. In a way one would really argue that they have been cautious indeed and been mostly on trial basis. Commercial airline arrangements would obviously play a role as these LCCs wouldn’t, in most cases, be able to match the requirements for the alliances. They would therefore mostly operate in isolation.

Governments have resulted in a conducive environment for budget airlines to enter and participate in the air transport market(s)? Are there any other factors?

Kenya and South Africa and relatively big markets on African standards with a lot of travellers for tourism and business. No wonder these are the places that have had the opportunity to experience the budget carriers. Budget Carriers obviously need numbers to thrive as the operational cost for the aircraft and crew would not be different from the traditional carriers. Of late we have seen States relaxing most of what used to be constraining provisions in the traditional BASAs. Most BASAs now would allow the entry of new carriers including budget carriers. So, yes, the environment is quite conducive. The region remains poor and therefore most of the population barely live and cannot begin to consider air transport as an option. There are still a lot of sponsored travellers and very few who dig in their own pockets. People do not just have disposable income.

5. There have been numerous budget airlines over the past 10-15 years that have started and subsequently ceased operations, such as 1time, Flyafrica and Skywise.

a. Do you believe that the major reason for budget airlines ceasing operations has been primarily due to the failure of satisfying national regulatory requirements (safety and economic)?

To some extent, yes. The costs of maintaining and satisfying the regulatory requirements of States would not be different for traditional and budget carriers. Obviously, most BCs have found it difficult to put up with these costs and maintaining the standards required for airline operations. They also had to put up with competition from the traditional carriers who were able to reduce fares while offering much better services on board than the BCs. Unlike the BCs most of the traditional carriers had well established footing on the market and some were even riding on the backs of their Governments.

b. Do you believe that the survival and successfulness of budget airlines in sub- Saharan Africa is dependent upon ownership type? Are budget airlines that are independent less likely to sustain operations in the long term compared to budget airlines that are subsidiaries of state-owned airlines or operating under an umbrella of a privately-owned entity/group?

Until now I can say that the concept of BCs has not been fully experimented in the region. Where they have operated the conditions prevailing are not necessarily as is elsewhere. I would think that a BC riding on the back of a well-established carrier would definitely have better leverage than one that is purely private. The former could

easily be cross subsidised and therefore wouldn’t matter much if it were making losses. But really there would be many factors at play in the industry.

6. It appears that the SADC14 region has more budget airlines registered compared to the COMESA15 and EAC16 regions. In light of the Single Air Transport Market (SAATM) initiative, SAATM is expected to bring benefits such as making air transport available to at least 5 million additional people and 75% increase in direct flights. Are you of the view that budget airlines will?

a. grow and expand their network(s) across the continent, or

With the few that ventured already facing difficulties and exiting, it is hard to predict any significant growth in the fold of BCs. SAATM is basically YD renamed and already it is suffering the same failure factors that YD suffered. There could be some growth but perhaps the projected numbers are so far, in my view, very ambitious.

b. limit their operations to their domestic market(s) or perhaps only to their regional blocs?

The domestic markets, and then short regional markets will continue to be the domain of these BCs. Major carriers are continuing to improve their services and add various amenities (like wi-fi) on long haul routes in order to survive the fierce competition. The airline alliances are almost making one big airline which would be hard to fight. BCs would find it hard to venture these markets and therefore they are likely to resign to domestic and regional routes.

Please feel free to provide any thoughts or rationale in regards to your views in answering this question.

7. Do you have any thoughts that you wish to contribute further on budget airlines in the sub-Saharan region of Africa?

If all worked well, budget carriers would have been the way to go for the region which is riddled with poverty. BCs should actually be encouraged because the worst enemy for now are the high air fares which continue to prevail in the region. A reduction of these fares would grow the air transport market and eventually make the BCs profitable.

14 South African Development Community 15 Common Market East and Southern Africa 16 East Africa Community 67

Appendix 6

INTERVIEWER : Michael E. Mononga

INTERVIEWEE : Bernard Dzawanda

POSITION : Senior Transport Economist, COMESA Secretariat

DATE: 16th December, 2019

Thank you in advance for taking the time to answer the following seven questions.

The impact has been limited because they are few. Where they exist, they have promoted connectivity and reduced air ticket costs. The have improved access to air transport

services due to affordability. Regional air transport costs (tickets) of traditional carriers are very high and connectivity is poor hence the positive impact of budget airlines.

2. Do you believe budget airlines have improved, or limited competition in regards to creating more choice for the traveller on domestic and international routes?

Yes, but mostly on domestic and regional routes.

Some are confined to their domestic markets but others have also gone regional. I think this is because of commercial airline arrangements/agreements and also budget airlines’ uncomfortable nature which works against them on longer routes. They have also tended to use old equipment which may have issues at international level.

4. There is a disparity of locality of budget airlines in the sub-Saharan region with eight (8) of the 14 listed budget airlines being domiciled in Kenya, South Africa and Tanzania. Do you believe that the Air Transport Policies set by the respective Governments have resulted in a conducive environment for budget airlines to enter and participate in the air transport market(s)? Are there any other factors?

Yes. The size of the market also has an impact. Attempts to introduce these in Zimbabwe (two) failed partly due to unfavourable government policy and small size of market.

5. There have been numerous budget airlines over the past 10-15 years that have started and subsequently ceased operations, such as 1time, Flyafrica and Skywise.

a. Do you believe that the major reason for budget airlines ceasing operations has been primarily due to the failure of satisfying national regulatory requirements (safety and economic)?

NO. It’s mostly due to business policy environment.

b. Do you believe that the survival and successfulness of budget airlines in sub- Saharan Africa is dependent upon ownership type?

NO.

Are budget airlines that are independent less likely to sustain operations in the long term compared to budget airlines that are subsidiaries of state-owned airlines or operating under an umbrella of a privately-owned entity/group?

Policy, strategy and management model are the major determining factors irrespective of ownership.

6. It appears that the SADC17 region has more budget airlines registered compared to the COMESA18 and EAC19 regions. In light of the Single Air Transport Market (SAATM) initiative, SAATM is expected to bring benefits such as making air transport available to at least 5 million additional people and 75% increase in direct flights. Are you of the view that budget airlines will?

a. grow and expand their network(s) across the continent, or

YES.

b. limit their operations to their domestic market(s) or perhaps only to their regional blocs?

NO.

Please feel free to provide any thoughts or rationale in regards to your views in answering this question.

7. Do you have any thoughts that you wish to contribute further on budget airlines in the sub-Saharan region of Africa?

They should provide the much-needed connectivity and improve frequencies where gaps currently exist. I think they should enter into partnerships with bigger airlines to provide feeder services and ride on the infrastructure. The must improve on the condition of their equipment.

17 South African Development Community 18 Common Market East and Southern Africa 19 East Africa Community 70

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