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Q&A: A bleak future for Nationwide?
29/04/2008 20:51 - (SA)
Cape Town - Nationwide Airline has ceased operations until further notice, the airline announced on Tuesday.
"Our cash-flow has become critical and as a result [we] have decided to voluntarily cease all flight operations until further notice," said chief executive Vernon Bricknell.
"We apologise to our loyal customers for any and all inconveniences experienced."
We chat to Linden Birns, an aviation industry expert to find out more about what this latest development means for the aviation industry and Nationwide customers.
News24: Does the suspension of operations at Nationwide come as a surprise?
Linden Birns: Yes, insofar as they had announced on 27 February 2008 that they were proceeding with the sale of 51% of the airline to Africa General Equity Group (PTY) Ltd, a BEE investment group.
In the joint statement issued on that day, AGE's CEO Reggie Naidoo, said that the transaction would "bring many new resources to the table - including amongst others, the recapitalisation of the company".
It appears that, for reasons which are unclear, the BEE transaction fell through this past weekend, leaving Nationwide with a cash crunch and no one to help it out.
News24: The CEO of Nationwide has highlighted several factors - the November engine incident, the grounding of its fleet, the rising costs of fuel, lower passenger numbers - but what do you feel is the most prominent reason for this latest development?
Linden Birns: Nationwide did extremely well to bounce back following the two big setbacks it suffered in November and early December last year. There is no doubt that its reputation and bank balance suffered as a result of these occurrences.
Nevertheless, it did not return its entire fleet to service and as a result, it was not operating as often as it would have liked to on its various routes. This allowed competitors to further increase their market shares.
News24: They also cited "cash flow" problems - what kind of cash flow is required for the daily running of an airline?
Linden Birns: The amount of cash required is influenced and determined by various factors, there is no rule of thumb. But given the rampant surge in the price of fuel combined with other inflationary pressures, I think it is fair to say that all airlines are feeling the heat - some more than others.
To put this into some context; the average price for jet fuel this week is $145.4 per barrel (according to the International Air Transport Association's fuel price tracker). In Africa, jet fuel is a little bit cheaper than the average. But the price in Africa has risen by 83.2% over the past year and by 0.8% in the past week (higher than the global increases).
We have reached a point where, for some airlines operating older, inefficient planes, fuel accounts for more than 35% of their total cost base, when it was less than 20% two years ago.
Also, unlike grocers, airlines sell perishable goods (seats on flights) up to a year in advance of delivery. With input and operational costs soaring as they have, this exposes airlines to significant cash flow risks. They cannot sell tickets today and go back to their customers in nine months time asking them to cough up some more because they miscalculated the actual cost of producing their seats.
News24: Have all airlines experiences a dip in passenger numbers in the last few months?
Linden Birns: On the contrary, the African air transport industry continues to experience growth in demand for seats at an average annual rate of around 5%. This is about 0.5% higher than the global average. It means that the size of the industry will double over the next 15 years and treble by 2028. This growth rate has been consistent, even in the face of major setbacks including both Gulf Wars, 9/11, SARS, etc.
What we are seeing though are moves towards consolidation in the industry, either by way of mergers and acquisitions, eg. Delta & Northwest announcing their engagement and possibly also United and Continental, or through by joining ever-expanding alliances, eg. Star Alliance (of which SAA is a member), oneworld and Skyteam.
That said, we have seen seven other airlines go out of business in the past month, including Swazi Express in our part of the world and ATA, Aloha, EOS, Skybus, Skyway and Frontier in the US.
News24: Are we likely to see other local airlines fold? Or at the very least, dramatically up their prices to cope with the factors Nationwide identified?
Linden Burns: Hopefully we won't see other local carriers go to the wall - that would not be good for competition of consumer confidence. We are seeing airlines announcing price increases - QANTAS in Australia put out an announcement earlier on Tuesday, Kenya Airways did so last week. Given the various inflationary cost increases, it is inevitable that the price we pay for travelling by air must go up.
News24: Did the boom in low-cost airlines also contribute to the "downfall" of Nationwide?
Linden Burns: Not really, as Nationwide never tried to sell itself as a low-cost airline in the mould of Ryanair, easyjet or kulula.com. It always pitched itself as a provider of a value-for-money full-service product. Pre-Nov 2007 it may have lost some market share to the low-cost carriers, but so did everybody else to a certain degree. But at the end of the day, everyone is competing in a growing - not shrinking - market.
News24: What is likely to happen now? Will there be refunds available?
Linden Birns: Ticket-holders, like travel agents and everyone else in the air travel chain, is trying to get clarity on what is happening at Nationwide. The airline has not been declared insolvent, it has voluntarily ceased operations. At this stage then, it cannot be ruled out that Nationwide could resume operations in future, although it would appear to be doubtful given the damage it has done to its reputation in taking this action.
Ticket-holders would be advised to check the terms and conditions of their tickets. If they booked online, they would have been asked to tick a box acknowledging that they familiarised themselves with those terms, so now is a good time to become re-acquainted with them. Different rules will apply to the various categories of air fare (there could be as many as 20 or more different fares for a single flight). If they booked through travel agents, they should check with the agent for their terms and conditions. The same applies if tickets were purchased by credit card or charge card (Amex or Diners).
News24: How healthy in general (security wise, safety wise, finances wise) is the local airline industry?
Linden Birns: South Africa has a robust air transport industry with an excellent reputation for safety. Generally speaking, security is not a crisis, although everyone is aware of the baggage theft problems at the major airports.
We are facing a major global skills crisis in the industry and it is being exacerbated by foreign carriers poaching skilled personnel from South Africa, among others. If this is not addressed by Government together with industry, it could have long term implications for the air transport sector and its ability to continue facilitating economic growth in the region. In particular there is a shortage of skilled artisans, technicians, engineering personnel and pilots.
In April, the International Air Transport Association (IATA) released figures indicating that the world's airlines need at least 19 000 new pilots a year to enter the industry. But the industry only has the capacity to produce 16 000. So we are facing the prospect of a shortfall in the magnitude of 54 000 pilots by 2026 unless action is taken now. Even greater numbers of technically skilled personnel are also needed.
News24: Are we likely to ever see Nationwide returning to operations?
Linden Birns: For the sake of healthy competition, let's hope so.
Thank you for your time Linden!
Linden Birns is the MD of Plane Talking, a company based in Noordhoek, Cape Town that advise clients in the aerospace and air transport sector. He specialising in reputation management, political and public affairs, market intelligence and industry affairs. He is also a former journalist, having worked as an aviation correspondent for Business Day and a contributor for a number of local and international magazines and journals. He continues his work as author, editor and co-publisher of the "AirReport" series of yearbooks on the South African aviation and aerospace industry.
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