Case 17 Kulula.com: Now anyone can fly Reprinted with the kind permission of Wits Business School It was January 2003, 17 months since kulula. current formula was sustainable or not. com had taken to the skies for the first time. Other competitors entering the market – This low-cost airline had survived almost two such as national carrier SAA with its own years in an extremely tough industry and, in low-cost airline – was a lurking threat. addition, claimed to have been profitable since Even the current relationship with kulula. its inaugural flight on 1 August 2001. com’s advertising agency needed some Gidon Novick, Comair Limited’s executive reconsideration. With this in mind he manager of marketing, was involved in started studying all the necessary support- kulula.com’s somewhat unusual communi- ing documentation that was lying on his cation strategy from day one and main- desk. tained a close relationship with the adver- tising agency, morrisjones&co. The brand had been very effectively established and the airline had received two awards: the Background to the low- Marketing Federation of Southern Africa’s prestigious 2002 Tusk ‘Service Launch of cost airline industry1 the Year’ award; and the Airports Company of South Africa’s (ACSA) ‘Domestic Airline Up until 1978 the global airline industry had of the Year’ annual customer survey award been controlled mainly by national govern- for 2002. ments that owned or subsidized the so- But despite the hugely successful cam- called national flag-carriers, which carried paign, which had required only a few minor the flag of their nation on the tail of the air- adjustments over the past 17 months, Novick craft. Following the deregulation of the did not feel comfortable. He realized that the domestic airline industry in the US in 1978 business might soon face a problem – the and in the UK in 1979, the market was sub- possibility that the hype in the market had sequently freed up for the entry of other declined to a certain extent or could do so in competitors. The terrorist attacks on the the near future. He knew that in the fiercely World Trade Centre on 11 September 2001, competitive airline industry – an industry that however, left many of the world’s already had become even more competitive since the ailing airlines in a state of crisis, with Swis- September 11 terrorist attacks – one could sair,Belgium’sSabena,Australia’sAnsett never sit back and relax. and US Airways going bankrupt. The health- It was time to rethink kulula.com’s strat- ier airlines – British Airways and Lufthansa – egy. Novick could not afford to miss a single experienced a significant drop in passenger significant fact in establishing whether the numbers.2 1 2 Part four Cases Excluding Ryanair, the European low-cost Airways (a three-year-old that served 20 cities, segment accumulated losses of almost $300 claiming to be low-fare, but offering luxuries million between 1996 and 2001, and AB Air- such as live satellite television), American lines, ColorAir and Debonair went bankrupt. Trans Air, Air Tran, and Spirit Airlines (privately Compared to the flag carriers, however, the owned). These airlines together accounted for low-cost carriers did very well after the Sep- some 30% of the US domestic air travel tember 11 attacks. Despite the seemingly market.5 crowded market in Europe and a 7% market In South Africa the Domestic Aviation Pol- share of the intra-European air travel mar- icy (accepted in parliament on 1 July 1990), in ket, discount airlines such as easyJet, Ryan- line with international trends, started the air, Buzz and Virgin Express had all grown process of deregulation in the South African stronger and had placed Europe’s traditional aviation industry. By December 2002 domes- flag carriers under severe threat.3 Between tic airline operations in South Africa were the two of them, Ryanair and easyJet primarily divided among four competitors. accounted for 88% of the scheduled low-cost These were national carrier SAA (60% mar- market in Europe. A 2002 McKinsey Quarterly ket share on average across routes) with its survey found a pattern that suggested that partners SA Express (also owned by Trans- the first entrants to this market seemed to net) and SA Airlink (10% owned by SAA); be the winners. Entrants that came on board British Airways Comair (about 22% market later with the same costs and prices had a share) with its local BA franchise and its no- harder time generating the traffic needed to frills arm, kulula.com (about 10% market fill their planes. The survey further predicted share); and the independent operator, Nation- that, given the saturated market, consolida- wide Airlines (8% market share). Intensive Air, tion would surely follow.4 another low-cost airline, became operational The operations strategy of the low-cost car- in 2001 but liquidated in 2002. Sun Air was riers was simple: secondary airports were also relaunched in 2001. It offered only busi- used as their lower airport fees kept costs ness class flights between Johannesburg and down, and aircraft were of a single type. There Cape Town from Lanseria airport. were no business class and higher-density class divisions, no free refreshments, no frequent-flyer programmes, no connecting flights, and no possibility of rebooking to other Background airlines. In addition, direct bookings were pre- dominantly conducted through the internet. to kulula.com At the time of deregulation in the US, the major airlines had underestimated the Commercial Air Services (Pty) Ltd (Comair) potential of the low-cost airlines. Operators took to the sky for the first time on July 14, such as Southwest Airlines managed to cap- 1946, to operate as South Africa’s first pri- ture domestic market share within a short vate airline. Before the 1991 South African time but, although many budget operators deregulation, Comair competed on secon- sprang up after the deregulation, over 80% dary destinations, such as Margate, a popu- of them eventually went out of business. lar holiday resort on the Natal South Coast, Still, the low-cost airline industry in both and Skukuza in the Kruger National Park. In the US and Europe had shown excellent 1992, however, it entered the main domestic growth, with Southwest Airlines being the routes. On 27 October 1996 a British Airways market leader amongst the six largest low- franchise agreement came into effect and fare carriers. The others included JetBlue Comair became known as British Airways Case 17 Kulula.com: Now anyone can fly 3 Comair (BA). This turned Comair into a l no changes could be made to tickets once mainstream player in the corporate market. these had been purchased (policy Comair remained a South African controlled changed in January 2003); company and in 1998 was listed on the l no pre-assigned seating was available8; Johannesburg Stock Exchange (JSE). In l no frequent flyer programme was 1999 British Airways plc purchased 18% of available; Comair Ltd. The company was structured l no business-class seats were offered; and along the lines of the two brands indicated in the diagram below: l food and drink were sold on board rather than distributed freely.9 Comair also stripped as many costs from Comair Limited (the company) kulula.com’s business systems as it possibly could, including bypassing the expensive and proprietary electronic distribution networks, such as Amadeus and Galileo, used by travel BA (franchise) (brand) kulula.com (brand) agents around the world. These were replaced by a cost-saving internet reserva- tion engine that was used by both travel In 2002 BA had more than 380 departures agents and consumers with much success. per week to destinations around the country Customers could, in return, expect to pay and across the border.6 40% less than they would for a conventional Since 1999 the airline had realized that airline ticket, without having to compromise there was a growing need for affordable air on safety or service. travel due to the increasingly changing Research had found strong evidence to market, one that had become seriously suggest that independent players did better price sensitive. The economy was generally in the low-cost segment because they were weakened at the time and travelling not bogged down by the systems and culture expenses had been cut.7 This realization of the full-service airline. So, if kulula.com led to the launch of kulula.com in July were to succeed it would had to leverage the 2001 (see press release in Exhibit 2)asa benefits of belonging to the Comair group but separately branded Comair initiative: a also transformed its business model.While South African low-cost, no-frills airline Comair had always been very conservative in modelled on the successful European low- its culture (because decisions had to be taken cost airline, easyJet. The new airline had its involving enormous costs, such as spending inaugural flight on August 1, 2001. R750 million on three aircraft) and its senior Kulula.com offered return flights between management were almost all older than 55, Johannesburg and Cape Town for as little as the culture in kulula.com was chosen to be R800, three times a day (see Exhibit 2), and more youthful. This new airline was launched received 2 000 bookings on its first day of with a staff count of 40 (now 250) – all young or operation. In 2002 kulula.com’s capacity young at heart and enthusiastic. measured about 750 000 seats per annum Several local and global factors prevented (162 seats on each aircraft) and its target load kulula.com from following a typical overseas factor (occupancy) was above 80%.