Competition leads to airfare price drop
He told Fin24 that this is thanks to new entrants entering the local airline market who are forcing competitors to lower airfares. While this may be good news for the consumer, it could possibly lead to airlines operating at a loss.
Kirsten King, the finance director of Comair, told Justmoney, that while she is not aware of the exact statistic, 25% “sounds reasonable for the industry average.”
In order to combat the price drop and survive, King revealed that “airlines would be making use of cash balances or other equity resources such as loans, all of which have a finite lifespan, so it depends how deep and for how long one can tap into such resources [to remain competitive.]”
There have been a number of new entrants into the local low-cost airline market over the past year or two. These include the most recent entrant Fly Blue Crane, Skywise and FlySafair.
Recently FlySafair conducted a R1 flight promotion to celebrate its first year of operation. Around 30,000 tickets were sold in a flash after the airline promoted the deal on social media. But it the promotion was problematic as the airline found that its website was unable to cope with the demand and popularity of the deal.
In a statement released by the airline, Kirby Gordon, vice president of sales and distribution, said: “In the short time that we’ve been in the air, we’ve seriously disrupted the low-cost carrier market and we wanted to go all out to celebrate our first birthday so that people can see that we’re serious about this business."
It’s not clear whether other competitors will retaliate with a similar offering to FlySafair.
However, Comair said: "Our business was not disrupted by the promotion, in fact, our sales picked up on the day quite nicely – but not for R1.
"This addresses a broader issue, as there is only so much capacity in the market when there is not actually revenue growth taking place simultaneously. When there is overcapacity the pricing comes down, and this stimulates extra volume, but not enough revenue to support these kind of prices in the market. Unfortunately this type of pricing is not sustainable for long term."
Meanwhile King relayed that Comair is currently following a volume based startegy: “[This] means lower fares with the hopes of increasing passenger volumes. Comair also looks for opportunities of extending air services to the broader consumer through regular sale days.”
Comair owns local low-cost airline Kulula, as well as British Airways. King added that over the past year, the total domestic market grew by about five percent with the additional capacity provided by the new entrants. However, “Comair passenger growth was stagnant.”
Kulula flights are generally 81% full, according to King, with the most popular routes being Cape Town to Johannesburg, Lanseria to Cape Town, and Durban to Johannesburg.
King noted that the general economic climate is having the most significant influence on passenger growth, “this directly influences consumer purchasing power and therefore passenger numbers.”