Helped by the traffic boom, South Africa's domestic carriers are expanding into regional markets. By Sara Guild.Like most South African businesses in the post-apartheid, post-general election period, the domestic airlines are looking for opportunities - outside South Africa. Although international foreign tourist arrivals to South Africa should rise 30 per cent in 1995, bumping domestic travel up by more than 20 per cent, yields in the neighbouring countries are better.

'The real money is in the regional market. The yields are 30 per cent higher than they are in the South African domestic market,' says Don Wallace, chief operating officer of SA Express. This was what prompted SAX to launch Zambia Express, following the collapse of Zambia Airways last December. Just completing its own first year, the foray into Zambia was quite an experience for the Canadians at the helm of SAX. 'To say politics has played a role in the Zambian operation is like saying the Rockie Mountains are large hills,' chuckles Wallace.

However the off-again, on-again permission from the Zambian government has been in SAX's favour recently. Zamex now flies from Johannesburg to Livingstone in the morning, then goes on to run a Lusaka-Ndola service during the day, and returns from Livingstone to Johannesburg in the evening. Currently, load factors are under the 45 per cent break even point but Wallace is confident this will be reached soon. The Zambian operation has authorisation to serve Lilongwe in Malawi, but Wallace says SAX wants to stabilise the one-aircraft service first.

Regional operations are also becoming more important for SAA's two main domestic competitors, Commercial Airways and Sun Air. Sun Air flies a single route out of South Africa, which is a continuation from Cape Town-Sun City on to Livingstone. Linking three major tourist attractions means the route accounted for 25 per cent of the carrier's revenue of $116 million in the year to 31 March 1995.

Comair has the largest presence in the region, serving Windhoek in Namibia, Harare in Zimbabwe, Gaborone in Botswana and Manzini in Swaziland, from Johannesburg. It has authority to serve Victoria Falls twice a week from 1996, and has applied to increase Harare frequencies from two to five a week. It will add a third weekly service to Windhoek in November and plans to apply for two further flights in 1996.

Comair's managing director Pieter van Hoven, says the relationships South Africa is now forming with its neighbours are based on the marketplace and not on political expediency. 'I believe most carriers will look at all the opportunities. Part of the market growth is foreign tourism, which does not restrict itself to South African borders. Tourists travel to Victoria Falls, the Okavango Delta in Botswana, to Namibia and Mozambique,' he says.

As chairman of South Africa's Tourism Board, van Hoven knows the predictions of the tourists' potential for the South African economy. Currently the industry accounts for 2.5 per cent of the country's GDP. By the year 2000 this is expected to reach 6 per cent, says van Hoven. The current figure of 750,000 overseas tourists will double by the turn of the century.

This influx will certainly swell the domestic market, which currently consists of 6 million passengers annually. To take full advantage of this, the carriers say fares must go up. Wallace compares South Africa with the Canadian regional market where he worked previously. 'Fares here are well below world average,' he says. Sun Air managing director Johan Borstlap agrees. 'Following deregulation we have the same thing that happened in the US. The economic forces have taken their toll, and air fares are too low. On Johannesburg-Cape Town the fare should be about R100 (US$27) higher,' Borstlap says.

Both Sun Air and Comair undercut South African Airways by 30 per cent, but both call themselves niche players - neither would take SAA on head to head. 'Survival depends on not taking on SAA,' he says.

Instead, Borstlap says that Sun Air is trying to position itself between Comair and SAA. It flies a two class service with five DC-9s, having sold its turboprop fleet - two Brasilias, two Bandeirantes and a Gulfstream - purchased by the previous owners, the homeland of Bophuthatswana. Its primary focus is the trunk routes from Johannesburg to Cape Town and Cape Town to Durban, to which it hopes to add Johannesburg-Durban in the first half of 1996. Bostlap says the carrier has an average load factor of 77 per cent, well above the break even of 43 per cent. In the year ending 31 March Sun Air carried 330,000 passengers, up from 16,000 the previous year. This leap, along with revenues rocketing from $6 million to $116 million, are attributed to the DC-9s. Borstlap bought three for $3-$4 million each, and took financial leases on the remaining two.

Following the homelands' reinstatement to the South African government, Sun Air, formerly Bop Air, is now a parastatal company. Nelson Mandela's government is forming task forces to examine the possible restructuring of all state-owned entities. Sun Air feels its best outcome will be as a private entity. Its chairman, Dirk Ackerman, says: 'This organisation will best serve the country and the people by being private'.

Comair was the first to expand in the newly deregulated domestic market in 1991. The lower fares helped to grow the market, with van Hoven estimating 5 per cent growth. The carrier serves the Johannesburg-Cape Town-Durban triangle, as well as from Johannesburg to Richards Bay, and to Skukuza in Kruger National Park. In 1995 van Hoven predicts the systemwide load factor will average 75 per cent, with traffic reaching 750,000 passengers, up 30 per cent from 1994.

Like Sun Air, van Hoven says Comair is not trying to compete with SAA. 'We have avoided a full service by pricing and by the product. We are a low cost carrier that is serving a niche in the marketplace,' he says. Van Hoven justifies the 'low cost' label by citing examples such as no free alcohol on board, and says one class means expensive business lounges at domestic airports are unnecessary. In the past four years Comair, with its six Boeing 737-200s, four F27s and two ATR42s, has knawed into South African Airways' once massive 95 per cent domestic share, to take 18 per cent itself. In the year to 30 June 1995 revenue was R200 million, and van Hoven says the carrier has never lost money in its 50 year history.

Stability is a key ingredient missing in the volatile South African market at present. The first year of Nelson Mandela's presidency has been uncertain for all South Africans. However, the aviation business has been particularly volatile, as demonstrated by the failure of Avia, the international operation from Johannesburg to London/ Gatwick, and the difficulties of tour operator Logans International, which led to the sale of domestic airline Phoenix. In October, Phoenix entered provisional liquidation and suspended its operations, further underlining the instability of the market place.

Phoenix, considered vulnerable, had been operating three Boeing 727s on routes such as Johannesburg to Cape Town and Durban. Its new owner, tiny regional carrier Atlantic Airways, had yet to clarify its strategy.

In a country where the SAA brand is known simply as 'Airways', the independent carriers are keen to distinguish themselves. Van Hoven explains Comair's decision to place R14 million in a trust fund, effectively meaning that passengers' payments do not clear the carrier's books until after the entire journey is completed. 'Despite 50 years in business the company's image with the broad public is not consistent with its age, and this initiative is to avoid the public's perception of us being negatively impacted by the recent events,' he says.

SAX is by far the largest start-up in South Africa's regional airline market, beginning services just prior to last April's general election, and is a copy of the regional air services associated with majors in North America. South African Airways gave SAX 10 per cent of its thinnest routes, which Wallace estimates brought in R130 million, or 54 per cent of its revenue last year. Both SAX and SAA operate some routes such as Bloemfontein, where SAA provides two daily services and SAX offers five.

Wallace says Bloemfontein, with a population of 500,000 plus 2 million people in the townships, is potentially one of the biggest domestic markets for SAX. SAX exists to compete with what Wallace calls the 'drive' markets. 'They have never had North American style frequencies here. It is generating traffic that otherwise would not go by air,' he says.

Using 12 Dash 8-300s, financed primarily by Canada's Economic Development Corporation, SAX also serves George, Upington, and East London from Cape Town; Maputo, Mozambique from Durban and Kimberley; and Richards Bay from Johannesburg. There are plans to fly from Johannesburg to Pietersburg and Phalaborwa and Cape Town to Alexander Bay.

Domestically SAX carries 600,000 passengers annually, with an average load factor of 53 per cent. The carrier broke even in the first year of operation and is forecast to make a modest profit this year. Wallace says this type of regional operation should be showing a 6-10 per cent return on sales, or a net profit of R20 million, but will not necessarily achieve that this year.

Like the North American connector operations, Wallace describes SAX as a 'branded premium regional air service'. This does not mean that SAA calls all the shots, however. 'SAA is the mother ship and we do what it lets us do, and we do the frequencies. But we are independent from SAA both financially and from the operational side,' he says.

The SAX operation has caused some consternation from the word go. First there was a slugging match between ATR and Bombardier for the contract to provide the aircraft. Then there was the question of whether SAA should be allowed to take a 20 per cent stake in order to keep South African interests above 51 per cent. Zamex taught Wallace and fellow Canadian chief executive Bill Deluce a thing or two about operating in Africa. But the carrier's next real challenge will be to continue once the Canadian contingent have flown north.

'This whole thing has been a turnkey operation,' says Wallace. 'Our job was to take it from concept to implementation and then leave it in South African hands.' The most likely candidate is Thebe Investments, which already holds 51 per cent of the airline. South African businessman Michael Grey holds a further 4 per cent and the Canadian contingent, South African Enterprises, holds 25 per cent. Wallace says the dream is to have a fleet of 18 Dash 8s, call the operation Southern African Express, and serve everything 'south of the Congo river'.

But despite all the talk of expansion, conservative is the word that best describes the participants in this market. SAX's bold entrance was done under the wing of SAA, with routes handed over on a silver platter.

Van Hoven says Comair's survival can be attributed to its ability to resist the temptation to 'throw conservatism overboard in the pursuit of marketshare'. Borstlap agrees that with all the small operators coming and going it is best to bide one's time. Conserva-

tism really pays off, especially here. It will take time for the big things to happen here,' he says.

Source: Airline Business