Santaco will fly in the face of high taxes and fuel price

2012-03-24 11:40

Aspirant budget carrier Santaco Airlines is planning to take to the skies even though local airlines are in dire straits.

Santaco Airlines is owned by local black taxi owners.

The no-frills airline industry, pioneered by kulula.com a decade ago, is going through a difficult phase – to the point that some commentators are arguing that the sector is heading for extinction as a result of a weak economy, high airport taxes and escalating jet fuel prices.

But Nkululeko Buthelezi, business development officer at Santaco Airlines, says the budget carrier will launch before the end of the year even thought there is a risk of oil prices shooting through the roof because of the
Iran-US nuclear standoff.

He said: “We intend to launch before the end of the year, but right now we are taking a step back and monitoring the market.

“When we launch, we want to ensure that we will run a sustainable business.”

Respected aviation expert Linden Birns is adamant that if local airlines can focus on improving their operational efficiency and do away with flying old fuel-guzzling aircraft, they have a chance of weathering the current economic juggernaut.

Jet fuel is now hovering at $137 (R1 050) a barrel and is nearly 10% more expensive than 12 months ago.

Birns adds that the jump in the price of aviation fuel has added about $37 billion to the fuel bill of airlines around the world.

He says: “In Africa, we pay a premium for jet fuel. We have some of the world’s biggest producers of oil, such as Angola and Nigeria, yet jet fuel is very expensive in sub-Saharan Africa.”

Apart from battling ballooning fuel bills, local airlines have also been hit by rising airport taxes and air control tariffs. Last year, Airports Company South Africa (Acsa) raised airport tariffs by 70% and may hike tariffs by a further 8% this year.

The cost pressures have been too much for local carriers such as Comair, the operator of kulula.com and British Airways; state-owned South African Airways (SAA) and its budget subsidiary, Mango; SA Express and
low-fare airline 1time – which have all recorded losses. The airlines have been forced to pass on the costs to passengers by raising ticket prices.

Buthelezi wants the government to intervene to stop Acsa from further raising airport tariffs.

“The government must intervene and ask Acsa to delay the increases until the economy turns around.

“If the costs keep on rising, we may be in a situation where airlines will go out of business,” he says.

Acsa spokesperson Solomon Makgale, however, rejects the view that airport tariff hikes alone have been a profit killer.

He appears to suggest that bullish airlines oversupplied the market, expecting a boom after the 2010 Fifa World Cup. But that growth never arrived because of the weak economy and rising fuel prices.

Makgale says: “Following the hosting of major events such as the 2010 Fifa World Cup and, more recently, COP17, as well as an anticipated improved economic climate, local airlines had expected the market to grow and had made more seats available.

“With this anticipated growth taking longer than expected, the market has been in a state of oversupply, with demand lagging behind.”

Newcomer Velvet Sky avoided a liquidation attempt by a whisker two weeks ago after it allegedly failed to pay a R29 million outstanding jet fuel bill to supplier BP Southern Africa.

The budget carrier, which has been flying for 11 months, still owes its creditors R100 million and aviation industry observers say it is a matter of time before it folds. The airline is still grounded and has yet to take off despite fighting off BP’s liquidation application in the Pietermaritzburg High Court in KwaZulu-Natal.

Says Birns: “Velvet Sky is a victim of poor business planning. They came into the market at a wrong time with a wrong business model.

“They also chose old aeroplanes that are expensive to fly and maintain. Their aeroplanes consume 50% or 60% more fuel than modern aircraft, which are more reliable and fuel efficient.”

He maintains that if Velvet had come into the market six years ago, when fuel was a lot cheaper and the economy much more buoyant, the no-frills carrier would be in the same position as 1time.

Airlines have been so battered by rising operating costs that their cash resources have been severely drained.

SAA has gone back to its shareholder, the government, to ask for a R6 billion cash injection to bolster its balance sheet.

1time is seeking to raise R120 million to recapitalise its operations and acquire newer, fuel-efficient planes.

Blacky Komani, 1time chief executive, expects the market to remain “tough” going forward as fuel prices are expected stay at high levels.

He says the airline will focus on cutting costs and improving operational efficiency. “We are looking at our scheduling and we will terminate routes that are not profitable and focus on those that are profitable.”

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