Domestic Airfares – Expect a Rollercoaster Ride

NEW entrants in the domestic market, a plummeting rand and rising operating costs will create an unstable environment for airfares in the coming few months, industry experts predict.

Increased competition in the market has already led to all-time low fares in the South African market, according to a recent study conducted by Travelstart. Hopping on a plane to Cape Town, Johannesburg, George and Port Elizabeth is cheaper now than it was in 2012.

However, these low fares could be detrimental to growth of the commercial aviation industry, analysts at Travelstart warn. “When you consider that most airlines need to be selling a seat for at least R900 to R1 000 one way and have a load factor of 70% to 80% on each flight that takes off just to make a marginal return, it stands to reason that the low ticket prices available at the moment will soon be a thing of the past,” says Russel Jarvis, Travelstart’s head of communications.

The first victim of the cutthroat competition in the market is Comair. The airline recently forecast an earnings decline of between 12% and 26% for the year ended June 2015. This is in sharp contrast to the previous two years, when the airline reported significant increases in revenue.

This forecast is not surprising,” says Chris Zweigenthal, Aasa ceo, explaining that most airlines’ costs are dollar-based. As the rand continues to decline against the US dollar, airlines face tough operating conditions.

South Africa has also seen three new entrants into the domestic market – Skywise, FlySafair and Fly Blue Crane – during a time that the market is relatively flat and showing little growth, Chris says. These new carriers have all come with launch fares that are not sustainable in the long-run. However, the competition will soon start to stabilise, he says. Whether airfares will drop as a result of increased competition or go up in an attempt to stabilise the market is hard to predict, Chris says. “It will be a rollercoaster time. All airlines will likely keep a very close eye on what the market is doing.”

Skywise co-chairperson, J Malik, admits that the current airfares in the market are unsustainably low and predicts they will rise soon. “Airline operators have the right to peg air ticket prices at the lowest levels they deem fit in a bid to attract a large pool of customers, however these prices are not viable,” he says, urging the industry to be bold enough to work with sustainable pricing structures that promote real growth development of domestic air travel.

FlySafair offers some of the lowest fares in the market, starting at around R499 for flights between Cape Town and Johannesburg. Kirby Gordon, vp of sales and distribution at FlySafair, believes these prices are sustainable if airlines can keep their aircraft full. “With increased competition, there is more capacity in the market than ever before. If the demand doesn’t rise, there will probably be some airlines falling short.”

Falling prices have stimulated demand, Kirby says. “With the 39% decrease in fares we brought about, we’ve seen a 132% increase in demand on some routes. What remains to be seen is just how much that demand will increase and if it will rise enough to make the supply sustainable.” Airline analyst, Joachim Vermooten, argues that the additional capacity created by the new entrants in the market is relatively small compared with the increase in seat capacity by the combination of SAA and Mango, with the addition of at least 10 narrowbody aircraft since the exit of 1time. “This increase is substantially in excess of market demand and restricts the opportunities for new entrants and existing private sector airlines,” he says.