SAA competitors could benefit from shift of flights to Mango - expert

Cape Town - The decision by South African Airways (SAA) to shift a number of its flights to low-cost subsidiary Mango, could actually benefit the state-owned airline's competitors if it results in a reduction of SAA's overall activity, according to transport economist Dr Joachim Vermooten.

Fin24 reported earlier that, according to SAA, despite changes to its flights between Johannesburg and Durban and Johannesburg and Cape Town, in practice this does not mean a reduction in flights from a group perspective.

Collectively, the two airline brands (SAA and Mango) continue to offer the same number of flights. SAA said its intention is to optimise the utilisation of its airline brands in a manner that promotes efficiencies to create financial sustainability."

Although the revenue of SAA has improved in the second quarter, its year-to-date revenue shortfall was still at R879m, Parliament's standing committee on finance heard in November last year.

Commenting on SAA's decision regarding shifting a number of flights to Mango, Vermooten told Fin24 that if these changes result in a reduction in overall activity by SAA, it will actually be to the benefit of its competitors due to capacity in the market being reduced.

In the view of Vermooten, if SAA reduces the use of wide-body aircraft between Johannesburg and Cape Town, it would improve SAA's results, because those kinds of aircraft are designed for long-haul operations. On short-haul operations the flight distance between the two cities is too short to recover the cost of take-off and landing.

"If there is no decrease in overall flights [within the group], it implies a shift of operations from SAA's domestic services to its low-cost subsidiary," explained Vermooten.

"SAA has to reduce its overall losses and secondly, there needs to be a settlement of the competition between SAA and its low-cost carrier [Mango], otherwise there is an uneconomical overlap."

He explained that in the US most of the full-service network carriers that started their own low-cost carrier subsidiaries have since closed them after adopting the low-cost airline methodologies in their main operations. The low-cost carrier was used as a proof of concept which was then rolled out to its main operations.

“Sustainable low-cost and full-service can work where different routes are operated - otherwise it is like having a little cannibal [in your midst]," said Vermooten.

SAA, on the other hand, is trying to operate in various markets.

"The key to success is to focus on something you are able to do well. It is rare to find an airline which flies all the different modes of intercontinental, domestic, African regional, regional airline and domestic low cost," said Vermooten.

"As a rule, in business it is better to focus on what you can do well and replicate success.”

He explained that most state-owned national carriers that are successful tend to focus only on long-haul operations and have agreements with other airlines for short-haul and regional connectivity.

"The most logical step for SAA would have been rather to learn lessons from Mango's success and apply it at SAA. Why not make any changes in the main airline [of the group - SAA]?" he asked.

In his view, there is a good case to be made for SAA to dispose of Mango and to have SAA's focus on something that it can do well. For Vermooten SAA would then have a few choices in that regard: it can look at only operating international, inter-continental services on routes where there is little competition if any.

Overall, he said SAA should look at what is in the interest of the SA public and tax payers.

"What benefit can the service via Ghana to the US have for the SA public?" asks Vermooten.

"I think SAA should strongly consider whether it should fly domestically at all. All their competitors are making money on long-haul. I am not so sure that SAA is actually making money domestically - especially if they are using wide-bodied aircraft on domestic routes."

* Sign up to Fin24's top news in your inbox: SUBSCRIBE TO FIN24 NEWSLETTER

Brent Crude
All Share
Top 40
Financial 15
Industrial 25
Resource 10
All JSE data delayed by at least 15 minutes morningstar logo
Company Snapshot
Voting Booth
Please select an option Oops! Something went wrong, please try again later.
I'm not really directly affected
18% - 1851 votes
I am taking a hit, but should be able to recover in the next year
23% - 2418 votes
My finances have been devastated
34% - 3599 votes
It's still too early to know what the full effect will be
25% - 2589 votes