Still flying high in a tough space

2011-09-10 13:05

kulula.com’s poster boy Gidon Novick has warned about escalating airport tariffs. The airline introduced low-cost air travel to South African travellers a decade ago.

He says: “If you look at the last 10 years, air travel became affordable and the number of people travelling by air grew three times.

“But in the last two years, air travel has become less affordable, mainly because of the cost of airports and the charges that are being passed on to the travellers for going through our local airports. This is the biggest threat to affordable air travel.”

Novick is one of kulula.com’s founders and is joint chief executive of both kulula and its parent company Comair, which also operates the British Airways franchise in South Africa.

kulula, which celebrated its 10th anniversary last month, became famous for undercutting its arch-rival and state-owned airline SA Airways (SAA).

Its aggressive pricing on fares also challenged bus operators as it sought to take full advantage of its “first-mover” status in the local market.

Since kulula’s emergence into the local aviation scene in 2001, the number of South Africans travelling by air has grown from 4% to 12% (13 million people) a year, of which 3.5 million are carried by kulula.

However, the local numbers are low compared to other countries where air travel is popular. Roughly 80% of people in Scandinavian countries travel by air, while 40% of Australia’s population gets around via airlines.

From October, Novick says airport taxes will increase by 70%. And over the next five years, they will be up 160%, making flying even less affordable. The industry has also warned that profits will be threatened as a result of the tariff hikes.

The Airports Company SA, which manages local airports, says the tariff increases are necessary to help refund the R17 billion it spent upgrading airports and building a new airport in Durban ahead of South Africa’s hosting of the Fifa World Cup last year.

Although Novick is concerned about tax increases, he says the massive infrastructure upgrade was necessary.

In the local airline industry, kulula is seen as a game-changer as it carved out a market that never existed before.

The airline was among the first companies in South Africa to intensively use the internet to do business and was not deterred by the so-called “dot-com bubble” or the collapse of many internet companies in the US in 2000.

kulula’s website became an instant hit with customers as it allowed them to book and pay for tickets online. Today the airline’s website is South Africa’s biggest online retailer, handling about R2.6 billion worth of transactions a year.

Although kulula started as an airline, its brand has diversified into financial services and the company now offers a credit card facility to its customers.
kulula has also moved into travel agents’ turf by using its website’s power to beat them at their own game.

Travellers use kulula and its associates’ websites to book flights and accommodation, rent cars or pay for holiday packages. These side businesses now contribute about 25% to the airline’s profits.

Despite kulula’s success over the past 10 years, Novick is non-committal when asked to predict the growth prospects of the local low-cost airline industry over the next decade.

“I am not good at predicting the future. The truth is we don’t know what is going to happen to the global economy and the oil price.

“The most important thing in our business is flexibility. You need to have the ability to adapt to whatever scenario that develops. You must be able to adapt to a good scenario with high growth or a bad scenario with negative growth,” he says.

His response goes a long way towards explaining the nature of the industry that kulula is operating in.

“The market is full of uncertainty and is largely dependent on the performance of the global economy, and the upswings and downswings in the oil price as well as competition, which could spell the end for ill-prepared airlines.

kulula has survived oil shocks, a devastating recession and stiff competition from fellow low-cost rival 1Time, as well as SAA and its subsidiaries Mango and SA Express.

Nationwide Airlines, another no-frills rival, was not as lucky and was liquidated in 2008.

“In my opinion, Nationwide could not compete with the state airlines. They were using old aircraft that were fuel-inefficient and more expensive to operate. In this industry you need new, fuel-efficient aircraft that are bigger with more seats,” says Novick.

Novick is renowned for hurling criticism at SAA for getting “undeserved” financial help from government.

“SAA is starting to be well run and has good leadership in the form of Siza Mzimela (the SAA chief executive). In my view, she is exceptional. In the past, SAA did not have leadership,” Novick argues.

He hopes SAA will not require bailouts in future under Mzimela’s tutelage.

“We don’t get bailouts, why should SAA get bailouts? We get taxed on our profits, our staff gets taxed on their salaries, and our customers get taxed on their tickets and that money goes to fund our competitors.

“This does not make sense,” says Novick.

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