Muted battle for the region’s skies: competition in the airline industry

Anthea Paelo

The deregulation of the South African airline industry in 1991 paved the way for the entry of a number of low cost carriers (LCCs). However, of the eleven airlines to enter the industry between 1991 and 2012, only one is still in operation.1 Other privately owned airlines such as Nationwide, Velvet Sky and 1time operating from 1995 to 2008, 2011 to 2012 and 2004 to 2012, respectively, have exited even after remaining in the market for significant periods.2 The national carrier, South African Airways (SAA), has also suffered losses over the past decade requiring several government bailouts and guarantees, including one in January 2015.3 This suggests a harsh business environment for airlines in South Africa which does not seem to match the growth in demand and the number of participants in other countries in the region as we discuss below.

Given this history, it is interesting that in the past year two new LCCs, FlySafair and Skywise, have entered the industry in South Africa bringing the number of low cost domestic airlines to four including Comair’s Kulula and SAA affiliate Mango Airlines. However, relative to the size of demand and the centrality of South Africa as a regional economic hub, the industry in South Africa appears to be lagging behind countries such as Tanzania and Zimbabwe, particularly in terms of independent LCCs, not part of large multinational groups, operating on intra-regional routes (Table 1). 

In terms of LCCs, FlyAfrica and Fastjet have recently entered the market and are competing along regional routes. Fastjet, which is based in Tanzania, initially struggled to launch into the market due to financial losses and disputes between business partners.4 However, the airline has since managed to grow and expand and it now operates on routes to four other countries including South Africa, Uganda, Zambia and Zimbabwe.5 FlyAfrica which entered the market in July 2014 has also expanded into Namibia, South Africa and Zambia.6 Other new airlines in the continent include Precision Air which flies to destinations in Kenya and Tanzania, Fly540 which flies to destinations in Kenya and to Juba in South Sudan as well as Proflight that travels to destinations in Zambia and to Johannesburg (via code share), and most recently Malawi and DRC. This suggests that profit margins and demand in the provision of passenger airline services are sufficient to encourage entry and the experiences of domestic operators in South Africa may not be representative of the market environment which some regional LCCs face.

LCCs are generally seen as being in the same market with full service carriers and face the same exogenous cost factors such as the fuel price.7 However, the ability of LCCs to survive in a harsh business environment may also have to do with their low-cost nature including minimising the availability of free services such as free in-flight meals, fare flexibility, connecting flights or loyalty programmes and restricting the classes of travel. Furthermore, tickets can only be booked directly through the airline’s website and not through travel agents to reduce the cost base.8

he benefits of entry

Entry and rivalry regionally in the airline industry is especially important because of current and expected increases in the volumes of air travel between countries in the region. This is likely to be directly linked to growth in mining sectors and increased demand from related service sectors such as finance, construction and engineering stemming from rapid urbanisation and high, sustained levels of economic growth in several countries in the past decade.9 The International Air Transport Association (IATA) estimates that the airline industry in Africa will grow in passenger numbers at an annual average rate of 4.7% by 2034, faster than regional markets in North America and Europe whose growth is forecast at 3.3% and 2.7%, respectively.10

In this context, increased and sustainable entry is important because it leads to reduced prices, higher levels of innovation and thus improved consumer welfare especially when considering that the cost of intra-regional travel in Africa is relatively higher than in other regions such as the European Union.11 This has certainly been the experience in the South African domestic market following the entry of FlySafair where there has been a decline in prices along each of the ten routes on which the airline has entered although this effect has seemingly been greater on certain routes over others.12 While it is likely that there may be other factors also underlying this decrease in average rates, considering that fares on four other routes have also decreased marginally on average, we consider that the entry of a rival on those routes where FlySafair now operates would have contributed significantly. This decline in prices is despite the impact of several cost drivers including high fuel and maintenance costs exacerbated by a weakening currency.13 The entry of Kulula on the Johannesburg-Lusaka route-pairing contributed to a 33-38% decrease in fares and 38% increase in the number of passengers, while Fastjet’s entry into the southern African market has contributed to a 20% increase in the size of the market, and an even higher increase in the number of first time flyers in the Tanzanian domestic market.14

The marked differential in South African prices from 2014 to 2015 suggests that it is certainly possible for increased rivalry to result in lower prices for consumers in air travel despite the challenges presented by the volatility in key cost drivers such as fuel.15 This is consistent with the findings in terms of the entry of Fastjet and Kulula along regional routes as well.

Constraints to regional rivalry

Regionally, low levels of rivalry were linked to the existence of bilateral service agreements and high costs. Bilateral service agreements in air transport are effectively contracts between governments that restrict travel. Despite the calls for liberalisation contained in the Yamoussoukro Declaration of 1988 and the Yamoussoukro Decision of 1999, as well as the demonstrable benefits of liberalising air travel markets,16 a majority of countries still maintain bilateral agreements aimed at protecting their national carriers. For instance, one such agreement between South Africa and Angola allowed for only one carrier from each country to travel to the other for only three flights a week.17 Around 2007, the route from Johannesburg to Luanda cost three times more than the route from Johannesburg to London although the latter is six times the distance travelled. Similarly, a bilateral agreement between South Africa and Nigeria restricted travel between the countries to three times a week until 2012 when a new agreement was signed increasing the number to twenty a week.18

Liberalising air travel markets in Africa has become a popular position of policymakers and incumbent operators,19 and removing agreements of this nature is an important step towards this. However, this needs to be coupled with efforts to reduce the regulatory barriers in the form of bureaucratic processes involved in entering airlines markets. Fastjet struggled to enter the South African market due to ‘red tape’ that caused several delays in the launch of the airline. The airline is yet to enter the Kenyan market, Tanzania’s neighbouring country for the same reason. The countries that Fastjet found relatively easier to enter were Tanzania and Zambia that, interestingly, do not have a national carrier of their own.

Costs have also been high relative to those in other regions. Airlines in Africa appear to pay particularly higher relative ticket and fuel taxes which significantly increases their expenses. The airlines are charged much higher taxes than established airlines in Europe.20 Globally, fuel accounts for about 36% of an airline’s operational costs however in Africa the range goes up to between 45% and 55%.21 Passenger taxes in Africa can average up to $66 while the average tax in other major cities is $10.22 Furthermore, it costs African airlines more to lease planes than airlines in other continents. For instance, while it might cost a European airline $180 000 per month to lease a 5-year old Boeing 737, it apparently costs a Nigerian airline $400 000 for the same plane.23 This is linked to the continent’s poor safety record and delays with regards to dealing with bankruptcies.24

Even as LCCs struggle to enter and successfully compete in this context, there are challenges in the form of strategic barriers created by the dominant incumbent national carriers as discussed by the Competition Tribunal of South Africa in Nationwide vs SAA.25 In this case, the national carrier was found guilty of engaging in exclusionary acts by putting in place an incentive scheme that encouraged travel agents to deal with SAA rather than the carrier’s rivals.26 Furthermore, in South Africa as in several other countries the national carrier is backed by state funding which grants the airline certain advantages over the other airlines including financial support and bailouts. This is exacerbated by the presence of airline alliances which are essentially cooperation agreements between airlines that allow them partner with one another on servicing particular routes, thus reducing their costs. They range from basic code sharing to sharing prices and even acquiring minority interest in an airline.27 While there may be efficiencies derived from being part of these alliances, the structure of the cooperation between airlines is potentially anticompetitive. In South Africa, SAA had to apply for exemptions from the Competition Act which were granted in the past.28 Cooperation between airlines may be important for achieving scale and improving air transport systems between carriers and country authorities.29 However, this should not be at the expense of ensuring effective rivalry between the major operators in the region.

Conclusion

To the extent that entry and exit of LCCs has been driven by fair, intense rivalry between airlines, particularly between LCCs and established national carriers, the competitive process will benefit consumers. However, where the entry and exit of rivals and LCCs in Africa’s airline industry has been restricted by regulatory and strategic barriers which favour incumbent national carriers, the competitive process has been undermined. In this context, liberalisation on paper is not likely to improve market outcomes and the prices of air travel in the region are likely to remain well above those in comparators countries and regions. The positive outcomes for consumers linked to the entry of Fastjet and FlyAfrica as well as LCCs in the South African market suggests that there is certainly scope for improved competitive outcomes in the sector. However, this cannot take place where national airlines are protected, and substantive conditions of operation of new airlines are not favourable due to bureaucratic process and a high tax and cost environment. 

A PDF copy of this article can be found here.

Notes

  1. Business Day. ‘1time failure raises questions’ (6 November 2012). Business Day. 
  2. Mncube, L. ‘Competition and regulatory issues in the civil aviation sector’ (4 November 2014). Presentation at the Aviation Industry Growth and Safety Conference.
  3. Ismael, Z. ‘SAA to get R6.5bn bailout’ (22 January 2015). iafrica.com.
  4. The Economist. ‘Airlines in Africa. Not ready for takeoff’ (8 June 2013). The Economist.
  5. Destinations. Fastjet.com.
  6. NewsDay. ‘Fly Africa to increase regional routes’ (6 January 2015). NewsDay.
  7. Federico, G. (2013). ‘SAA II: Abuse of Dominance in the South African Skies’. Journal of Competition Law and Economics, 9(3), p. 709–737; and Competition Tribunal of South Africa. (2010). ‘Nationwide Airlines (Proprietary) Limited and Comair Limited vs South African Airways (Proprietary) Limited’. Case No: 80/Cr/Sept06.
  8. See note 7. 
  9. African Development Bank. ‘Africa’s Aviation Industry: Challenges and Opportunities’ (20 November 2012). 
  10. International Air Transport Association (IATA). ‘New IATA Passenger Forecast Reveals Fast-Growing Markets of the Future’ (16 October 2014). IATA.
  11. Gleeve, S. D. (2014). ‘Opening up of Aviation Services in Africa – Phase I Review Report’. Infrastructure Consortium for Africa (ICA).
  12. Travelstart, ‘Local Flight Prices Nose Dive as Airline Competition Takes Off’ (18 March 2015); and Maqutu, A. ‘Budget airlines send prices plummeting’ (7 April 2015), Business Day; and Weavind, T. ‘South Africans flying high on cheap fares’ (22 March 2015), Business Day.
  13. Luke, R. and Walters, J. (2013). ‘Overview of the developments in the domestic airline industry in South Africa since market deregulation’. Journal of Transport and Supply Chain Management, 7(1), p. 117-128.
  14. See note 11.
  15. See note 12, Travelstart. 
  16. Amoah, J. Debrah, Y., Mmieh, F. and Ituma, A. N. (2007). ‘Liberalisation of the Airline Industry in Africa: Constraints, Challenges and Prospects’. Paper presented at the 8th Annual International Academy of African Business and Development (IAABD) Conference, London Metropolitan.
  17. See note 16. 
  18. See note 16. 
  19. Campbell, K. ‘Peters calls for greater air transport liberalisation in Africa’ (30 April 2015). Engineering News. 
  20. Fortin, J. ‘African Air Travel: Why Are Airlines In Africa So Expensive, Unsafe And Impossible To Navigate’ (4 May 2013). International Business Times.
  21. See note 20.
  22. The Economist. ‘What's holding back Africa's low-cost airlines?’ (11 June 2013). The Economist.
  23. See note 22.
  24. See note 22.
  25. See note 7.
  26. Walters, J. (2010). ‘An overview of developments in the aviation industry in South Africa with special reference to the role of low cost carriers’. Paper presented at the Leadership and Policy Seminar ITLS, University of Sydney, Australia; Oosthuizen, M. (2013). ‘SAA and the South African Airline Industry: The Next Ten Years - 2012-2020’. Cusp Consulting; and see note 7. 
  27. Amankwah-Amoah, J. and Debrah, Y. A. (2010). ‘The Evolution of Alliances in the Global Airline Industry: A Review of the African Experience’. Thunderbird International Business Review, 53(1), p. 37–50.
  28. See note 2.
  29. Campbell, K. ‘Cooperation important for African aviation’ (29 April 2015). Engineering News.