LEARNING UNIT 2:

The low-cost passenger airline revolution

Review

The purpose of unit 2 is to enable you to comprehensively understand the low-cost passenger
industry. It highlights the revolution of the industry from a South African and global markets
perspective.

Unit Outcomes
On completion of this unit, you should be able to

• explain the low-cost carriers’ industry, from the South African perspective and a global
perspective
• understand the characteristic of low-cost carriers
• explain the impact of low-cost carriers on the air industry as a whole
• discuss the impact of COVID-19 on the low-cost carriers in the world and South Africa

2.1. INTRODUCTION

Air travel has generally been regarded as the fastest growing mode of transport during the 20th
century (Wensveen 2011). Two of the main reasons for the ongoing growth in air travel during the
latter half of the previous century were, firstly, the introduction of the low-cost passenger airlines
and, secondly, the use of secondary airports, as opposed to primary airports, by these airlines
(Vasigh, Fleming & Tacker 2008). According to Barbot (2006), low-cost passenger airlines and
their use of secondary airports are closely related. The most important event in the airline industry
in the 21st century is the influx of low-cost carriers (LCCs).

LCCs are found almost everywhere in the world (Visagh 2013). They have grown significantly in
airline industries across the globe and are expected to have a 34% share of the global airline
market by 2030 (Airbus, 2011). In India, for example, LCCs entered the market in 2003 with a
0.1% market share (CAPA 2015). By 2011, they had grown substantially and accounted for 67.4%
of the domestic market (CAPA 2015). In 2015, we saw the same trend continuing with IndiGo, a
local Indian LCC, dominating the domestic Indian aviation market with a 37.6% market share
(Economictimes.indiatimes.com 2015). As LCCs have proven their worth, many full-service
legacy airlines have either established LCC subsidiaries, or merged with or acquired LCCs in
order to tap into this market (Visagh 2013). However, the LCC market is exceptionally competitive
and many LCCs across the world have failed (Visagh 2013). In this learning unit we will critically
analyse the LCC market and how it has changed the airline industry.

We will discuss the South African and global markets, unpack the characteristics of LCCs and
discuss how the industry has adjusted to the new player. This analysis includes a case study on
1time Airlines, a South African LCC that failed to prosper in the market. We will relate the theory
of LCCs with this real-life example, identify the reasons behind its failure and consider why this is
so common in the industry. To further explain what a low-cost airline is, follow the below link:
https://www.youtube.com/watch?v=to5-gMs7hi4

NOTE

Full-Service Legacy Airlines – why are they called that?

Full-service is a term used to highlight the difference between a low-cost carrier and a carrier that
offers a more traditional airline service. “Full service” describes the service offered to the
passenger – i.e. airport lounges, business class seats, complimentary meal and beverage service
on board, generous baggage allowance and so on. This is contrasted with the less elaborate
service offered to passengers by an LCC. “Legacy” refers to the fact that most of these airlines
are mature airlines that were established at a time when passenger air travel was luxurious and
exclusive. They have a legacy attached to their brand. Therefore, full-service legacy airlines are
mature, established airlines that offer a traditional passenger service.

2.2. LOW-COST CARRIERS IN SOUTH AFRICA AND THE WORLD

2.2.1. International

Globally, LCCs account for anywhere between 1% and 65% of the domestic passenger airline
market in the country in which they operate (Econ.com 2013). The world leader in LCCs is Ryanair
(Williams 2012). Ryanair began in 1985 in Ireland, offering flights between Waterford Ireland and
London Gatwick airport (Ryanair.com 2016). Between 1985 and 1990, Ryanair made a €25 million
loss (R417 million at the current exchange rate of ZAR16.72/EUR), at which stage it decided to

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drop its business class section, frequent flyer club, complimentary meal and beverage service,
and moved to a single aircraft type across its entire fleet (Williams 2012). These changes
dramatically reduced its cost base and allowed it to offer the lowest fares in the market (Williams
2012). In 1992, its passenger numbers increased by 45% and have grown every year since then,
without exception, to over 81 million passengers in 2013 (Ryanair.com). Ryanair is currently the
largest international airline in terms of passenger numbers in the world, and dominates the
European LCC market (Williams 2012).

2.2.2. Local

The economic deregulation of the airline industry in South Africa in 1991 was a landmark event
and brought about various changes in the air transport market, both locally and internationally.
One important after-effect of deregulation was the entry of low-cost carriers (LCCs) in 2001, In
South Africa we currently have three operational LCCs, namely Kulula, Mango and FlySafair.
Kulula is a wholly owned subsidiary of Comair, which also holds the British Airways franchise in
South Africa (CAPA 2016). Mango is the low-cost subsidiary of South Africa Airways, and
FlySafair is owned by Safair, an independent air logistics company (flysafair.co.za 2016). Table
1 below lists the market share percentages of South Africa’s domestic airline market. As you can
see, Kulula and Mango are extremely competitive with 22% and 20% of the market respectively
(CAPA 2016).

Table 1: Share of South Africa’s domestic airline market (CAPA 2016)

Airline Domestic Market Share

South African Airways 36%

Kulula 22%

Mango 20%

British Airways 16%

FlySafair 6%

Skywise (Note: Skywise suspended operations in Dec 2%

2015)

Others 1%

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LCCs have gained market share by making air travel accessible to the mass market of South Africa
(Brinkman et al. 2013). When Kulula entered the market in 2001, it targeted passengers new to the
air travel industry. In other words, anyone who traditionally could not afford air travel, or who didn’t
have access to air travel, formed part of its target market (Brinkman et al. 2013). As the LCC market
has matured, this has changed slightly as almost all individuals now have access to air travel through
reduced airfares. LCCs are now targeting new and existing leisure and business travellers (Williams
2012). Cost leadership, operational simplicity and high productivity are the essential components of
a successful LCC, and have reshaped the competitive dynamics of short-haul air travel in South
Africa, and across the world. Williams (2012) puts it quite clearly by stating “LCCs have produced
the largest paradigm shift in airline history”.

Below are the characteristics of LCC airlines in more detail:

2.3. LOW-COST CARRIERS IN SOUTH AFRICA AND THE WORLD

As mentioned in section 2.1, there is a lot of demand for LCCs and, as a result, many have entered
the global market. Unfortunately, many have exited as well. A large number of LCCs have failed
(Vasigh 2013). A dominant reason for this is that many airlines adopt the LCC image per se, but
neglect to adapt their cost structures in order to accommodate the reduced fares (Vasigh 2013).
Let’s take a look at the characteristics of LCCs. These characteristics will help to highlight the
essence of LCC operations that is crucial in allowing for reduced fares.

2.3.1. Decreased labour costs

Labour costs make up a large portion of an airline’s (direct) costs and it is important for LCCs to
reduce these as much as possible so that they can offer reduced fares. An obvious way of reducing
labour costs is to decrease employee wages (Vasigh 2013). In some instances, LCCs adopt this
strategy and costs are reduced. However, it is a difficult decision because, in a competitive market,
employees may well move across to other airlines where wages are higher, and this can ultimately
reduce the calibre of employees. Another method of reducing labour costs is by improving the crew-
to-aircraft ratio (Williams 2012). Fewer crew members per flight equates to lower costs per flight. As
compared to full-service legacy airlines, LCCs often use the minimum number of crew members
required (Williams 2012). LCCs also tend to recruit crew locally and do their best to use local crew
on local flights (Williams 2012). For example, if an airline is flying between Johannesburg and Cape
Town for the day, the airline will do its best to begin and end its day’s flights in the same city and use
a crew that live in that city. That way they avoid costly overnight hotel stays for crew members. A

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subtler strategy for reducing labour costs is to create a corporate culture that encourages cost saving
(Williams 2012). If a firm instils the mentality of cost saving, personal expense claims will be reduced.
Although, on a claim-by-claim basis, these costs may appear insignificant, when accumulated across
an entire firm they can be substantial. Lower labour costs reduce the core of an LCC’s cost base.

2.3.2. Increased labour productivity

An alternative to reducing labour costs directly is to increase labour productivity – essentially

keeping wages at a market rate but encouraging employees to work harder (Visagh 2013).
Southwest Airlines, a mature LCC in the United States, provides a great example of this. They
pay their pilots exceptionally well and, as an LCC, they are well known for their high wages
(Visagh 2013). However, their pilots fly many more hours per month than pilots of full-service
airlines. In addition, there is a culture of “all hands on deck” – pilots help to clean up after their
flights and often help the cabin crew where they can (Visagh 2013). Higher labour productivity
increases LCCs’ competitive advantage by giving them increased performance per unit of labour.

ACTIVITY 1.1

With the knowledge acquired on LCCs, now go to Discussion Forum 1.1, and share why you
think pilots of legacy airlines fly less often than those of LCCs. Make reference to productivity as
well as your understanding of flight lengths.

2.3.3 Lower ticket distribution costs

Traditionally, full-service airlines use a Global Distribution System (GDS) for ticket distribution
(Visagh 2013). A GDS is a centralised computer system that books and sells tickets for multiple
airlines through various internet portals and travel agencies (Visagh 2013). For example, when
you go to a website that offers to search for cheap flights, and the search results give you prices
across various airlines, that website is using a GDS to find the tickets and prices. GDSs are used
across the world by almost all airlines. However, a GDS is much more expensive than selling
tickets directly via the airline’s website. A GDS charges a fee per ticket sold, which averages $12
per return ticket – equal to R178 at the current day exchange rate of ZAR14.82/USD (Ng 2015).
In fact, selling tickets indirectly is approximately 20 times more expensive than selling them
directly (Harteveldt 2012). But a GDS cannot be completely ignored by an LCC. If an airline’s
competitors’ flights are being shown on a GDS and theirs are not, it is extremely bad for that

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airline and is a significant competitive disadvantage (Ng 2015). Therefore, many LCCs use a
combination of GDSs and direct sales. LCCs focus much of their marketing on selling electronic
tickets (e-tickets) through their websites (Visagh 2013). All tickets can be printed (which
customers do themselves) or they can be scanned directly from a mobile device. Paper and
printing costs are significantly reduced, as are the costs of having staff man ticket desks at airports
or sales offices. As mentioned previously, this can reduce ticketing costs by as much as 20 times
(Harteveldt 2012). LCCs can achieve increased direct sales by employing certain marketing
techniques such as a well-functioning and user friendly website, providing customer incentives
for purchasing from their websites, and in some cases providing disincentives for purchases made
through a GDS, like an additional service charge (Ng 2015). All in all, ticket distribution creates a
significant opportunity for LCCs to reduce costs and, ultimately, charge lower airfares.

2.3.4 No frills service

No frills service is perhaps the most obvious and well-known characteristic of an LCC. No frills
service pertains to in-flight services as well as external services. Let’s explore each.

2.3.4.1 In-flight services

Full-service legacy airlines traditionally offer passengers a complimentary hot meal and beverage
service on all flights (Visagh 2013). Some airlines also offer free newspapers and reading
materials to their passengers (Williams 2012). LCCs have done away with complimentary “frills”
and offer a “buy-on-board” service – meaning that passengers can purchase meals and
beverages on board and that they do not receive any other “freebies” (Williams 2012). Not only
does this reduce costs for the LCC, but it provides an ancillary revenue stream for them as well –
this is mentioned in learning unit 1, section 1.2.2. In-flight changes also include seat configuration,
with LCCs offering only one seat class (economy) and often removing closets and toilets to create
more space in which they add extra rows of seats (Williams, 2012). The lack of complimentary in-
flight services, in addition to the ancillary revenue streams, increases overall profitability of an
LCC.

2.3.4.2 External services

Although removal of in-flight services is an obvious method for cost-cutting, external airport
services also provide a means for reducing an LCC’s cost base. LCCs generally do not have
airline lounges or frequent flyer programmes (Visagh 2013). These facilities add a huge cost to
airline operations and LCCs save tremendously by not offering them. LCCs also often have strict

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baggage restrictions. These restrictions help to lessen the load factor on the flight and therefore
reduce fuel consumption – another reduction in costs (Visagh 2013). In fact, some LCCs have
started charging for any baggage over and above cabin baggage, again creating an ancillary
revenue stream (Visagh 2013). These activities reduce costs incurred by the airline and help
LCCs to achieve a competitive cost advantage.

NOTE: What is cabin baggage?

Cabin baggage is sometimes referred to as hand luggage in South Africa. Traditionally, all airlines
allow passengers to carry a small amount of baggage with them on the aircraft. This baggage can
consist of any items of the passenger’s choosing, excluding those prohibited for safety reasons.
For example, a passenger may carry with them a handbag and a laptop – items that they may
need on board and do not need to check in. Cabin baggage usually has a weight and size
restriction that ensures that the baggage is able to fit in the overhead compartments on the
aircraft.

ACTIVITY 1.2

Now that you have been introduced to low-cost carriers, from a global and South African
perspective and knowing the operational challenges that this industry is facing, discuss with your
fellow students on Discussion Forum 1.2 what an e-ticket is and how it reduces ticketing costs,

2.3.5 Use of a common fleet type

A less well-known cost saving mechanism of LCCs is the use of a common aircraft across their
entire fleet (Visagh 2013). For example, Kulula operates a fleet of Boeing 737s (Kulula 2016).
These aircraft are much more fuel-efficient than their previous fleet of MD82s. Although they have
changed aircraft, they have remained with a common aircraft type across the entire fleet.

The benefits of a common fleet include:

• Reduction of spare parts inventory (Visagh 2013)

• Reduction in crew training costs (Visagh 2013)
• Opportunity to enter into bulk purchasing agreements with manufacturers (Visagh 2013)
• Opportunity to purchase replacement parts in bulk (Visagh 2013)

All of the points above are possible because of the economies of scale for which a common fleet
allows. By having 10 of the same type of aircraft, an airline can buy in bulk, receiving discounts
from manufacturers and maintenance companies, therefore reducing the costs associated with

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each individual aircraft. (We will discuss this in learning unit 4, section 4.5.2 – it is a tactic used
by alliances in a slightly different manner.) Similarly, staff and crew training programmes can be
tailored to the fleet type, reducing the types of training programmes needed (Visagh 2013). Each
advantage contributes to a reduction in costs for the airline as a whole.

An additional advantage of a common fleet is increased operational flexibility (Visagh 2013).

Essentially, what this means is that crew replacements and substitutions are easier. Consider
the impact of a pilot becoming ill – the airline needs to call up its reserve pilot. All pilots are trained
to fly the same aircraft and a simple swop is easy. The same applies to all crew members.

It must be noted, however, that a common fleet can limit the route options for an airline due to
flying distances (Visagh 2013). A possible solution to this is for an airline to have two common
fleet types – capitalising on economies of scale for two groups of fleets but also allowing for a
diversified route network.

2.3.6 Point-to-point service – Diverting from a hub-and-spoke network

Full-service legacy airlines traditionally use a hub-and-spoke network structure (Visagh 2013).
This type of network is organised around a central location, called the hub. All flights go via the
hub. LCCs tend to use a point-to-point route network instead. They do so because a hub is an
expensive operation (Visagh 2013). It requires staff at all airports at all times and involves a large
number of airport charges (Visagh 2013). A more spread out network allows the LCC to have staff
at fewer airports, reducing costs. No connecting tickets are issued, meaning that flights occur
between two points only. This reduces ticketing, staff, baggage and airport costs (Williams 2012).

NOTE: What is a hub-and-spoke route network?

The term “hub and spoke” is a literal comparison to the wheel of a bicycle. Traffic moves along
the SPOKES to a central HUB. For example, in international air travel, Emirates Airlines uses
Dubai International Airport as its hub. If you book a flight from Johannesburg to London on
Emirates Airlines, you will first fly from Johannesburg to Dubai and then catch a connecting flight
from Dubai to London. Geographically it seems crazy to fly there first, but that is how they operate.
Many airlines across the globe do the same thing, both internationally and domestically. LCCs
choose NOT to use this network structure they fly directly between the origin and destination
locations and do not use a central hub.

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 FIGURE 1:

Hub and Spoke Network

(Source: Microsoft UX Chit Chat 2012)

2.3.7 Low-cost carriers use secondary airports

Secondary airports are airports that are slightly more remote than primary airports, but are still
accessible (Visagh 2013). For example, in Johannesburg, OR Tambo International Airport is the
primary airport, Lanseria International Airport is a secondary airport, and Pilanesberg International
Airport is a remote airport. Lanseria is not in the city centre, but it is not as remote as Pilanesberg.

Primary airports are often extremely busy and this means that airlines are charged higher airport
fees and, in many cases, spend more time on the ground. Take-offs and landings take place on
congested runways and this means a longer turnaround time (Visagh 2013). Secondary airports
charge lower fees and are less busy, reducing time on the ground. Lanseria is an example of an
airport that has capitalised on the LCCs of South Africa. Kulula and Mango both fly in and out of
Lanseria and, in 2015, the airport handled an estimated 25% of domestic air traffic in South Africa
(South Africa 2015:7). Secondary airports provide a cheaper option for LCCs and an alignment
of goals as these airports benefit from LCC business as well (Visagh 2013). A reduction in airport
fees, coupled with quicker turn-around times, creates a more cost effective and operationally
efficient option for LCCs.

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2.3.8 Increased aircraft utilisation

As we mentioned above in section 2.3.7, airlines do not like to be on the ground – they earn
money only when they are in the sky. As such, LCCs need to have high aircraft utilisation levels
in order to make as much money per flight as possible. They achieve this in two ways: quicker
turn-around times, and flying more. The last-mentioned is achieved by flying longer routes or
scheduling more frequent flights (Visagh 2013). To decrease turn-around times, LCCs use
secondary airports (as discussed above in section 2.3.7), use point-to-point route networks
(discussed in section 2.3.6) and sometimes offer free seating – in other words, they do not allocate
a seat to a passenger (Williams 2012). Free seating quickens the process of embarkation and
disembarkation (Visagh 2013). Free seating has yet to be implemented in LCCs in South Africa.

ACTIVITY 1.3

With the knowledge that you have acquired on international aviation and management of
passenger demand, conduct your own research and share your thoughts with your fellow students
on Discussion Forum 1.3, advising on why you think Africa, being such a big continent, has such
a low percentage of air traffic.

2.4 How low-cost carriers have changed the game

LCCs have changed the airline industry significantly. Although it is historically a very competitive
industry, competition has become even fiercer and legacy carriers have had to adjust to the new
environment. These airlines have implemented four common strategies to maintain a competitive
advantage.

1. In many instances, legacy airlines have chosen to “fight fire with fire” and have created their
own LCCs – either creating a subsidiary company or by merging with or acquiring an existing
LCC (Visagh 2013). In South Africa we saw this when SAA launched Mango Airlines, a fully
owned subsidiary (flymango.com 2016). This is a unique example due to the fact that SAA is
owned by the South African government, which therefore owns Mango. Both airlines receive
government subsidies and bailouts when needed, and the competitive environment is
somewhat less fair. We will discuss the consequences of this for other LCCs in South Africa
in the case study in section 2.5 below.

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2. Legacy airlines have, in many instances, implemented cost-cutting strategies similar to those
employed by LCCs in order to reduce their fares and maintain a competitive advantage
(Visagh 2013). Measures include reducing on-board food and beverage services – on shorter
domestic flights many airlines offer only a snack when previously they offered a full meal.
Legacy airlines have also attempted to increase cabin crew productivity levels by reducing
crew sizes and increasing role responsibilities (Visagh 2013).
3. In some cases, legacy airlines have become stricter on ticket changes. They have increased
administration costs and cancellation fees for any alterations to flight bookings (Visagh 2013).
4. Many legacy airlines have adopted the strategy of focusing on international flights, an area in
which many LCCs cannot compete due to longer flight lengths and airspace regulations
(Visagh 2013). This strategy is more relevant to countries in which international flight
distances are much longer than domestic flight distances. In South Africa, for example,
international flights to Europe and the USA are substantially further than flights within the
country. But international travel within Europe, for example, is not as far and LCCs are often
very competitive in these markets.

As the airline industry changes to accommodate the competition brought on by LCCs, many LCCs
themselves have failed to remain competitive and we have seen many cease operations (Visagh
2013). At the crux of it, the key to success seems to be the commitment to the core value of
keeping costs down. Any deviation from this reduces their ability to offer significantly reduced
fares, and ultimately destroys any competitive advantage that the LCC may have.

2.5 COVID-19’s impact on the LCCs

The 2019 coronavirus (COVID-19) pandemic as the newest global risk has disrupted business
operations in all industries (Maneenop & Kotcharin 2020). The airline industry is one of the first
industries that was affected from the pandemic because the disease is easily passed among
people. The contraction of the air transport sector globally (ICAO 2020) is the result of the
restrictions on people’s movement and the closure of many international boarders (IATA 2020).
A change in consumer spending patterns and reduced demand for most goods, barring the
essentials (Accenture 2020), have implied lower levels of movement for the luxury items generally
moved by air (D’Arpizio et al. 2020). On the contrary, the increasing demand for medicines (IANS
2020) and computer and related equipment (Kan, 2020) has implied that the air freight market
has not declined completely, although supply chains have struggled to keep up (Kan 2020).

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In South Africa, the upheavals in the air transport industry were more severe than elsewhere
because of the impact of COVID-19. With South African Airways (SAAs) tumultuous past,
resulting in continuous losses and bailouts, business rescue became a reality in December 2019
(Smith 2019, ‘SAA business rescue: Creditors have first meeting’). Soon Kulula followed suit,
going to business rescue in May 2020 (Comair Limited 2020), leaving a major gap in the industry.
Whilst the contradiction of the sector resulting from COVID-19 regulations has meant that this has
not led to capacity constraints in the short term, the real question is, what now? With government
proposing a new airline (Skiti, 2020), Kulula anticipating a return to the air in November 2020 and
former Kulula chief executive officer Gidon Novick announcing a possible venture with Global
Aviation to create a new airline (African Aerospace 2020), on the surface, the future of the airline
industry appears promising. Current survivors in the domestic market include companies such as
FlySafair and Airlink (IATA 2020; Smit 2020).

The impact of COVID-19 on African aviation was worse than initially estimated in the short term,
although the contradiction of the economy may have changed the demand for domestic services
for years to come. With the proposed new and renewed capacity entering the market, the question
is really whether the market will continue to exist in its current form, especially given the
contradiction in demand. Ongoing restrictions on international travel and tourism and changes in
the way of doing business (Bell 2020) also imply, however, that the future of international air travel
may have changed forever (Bilotkach 2020).

Activity 1.4

COVID-19 has impacted the global economy negatively, and the aviation industry was one of the
most affected industries due to flight bans and cancellation of flights. Go to Discussion Forum
1.4 and discuss with your fellow student how this pandemic has affected the air passengers and
operators in general.

The case study below is an article written in 2012 about 1time Airlines, an LCC that entered the
South African airline industry in 2004 and left it in 2012.

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 ACTIVITY 1.5

Read the case study below and then go to myUnisa Discussion Forum 1.5 and participate
in the discussion with your fellow students.

Case Study 1: 1time’s fatal mistake behind its demise – an article by Sasha Planting
for moneyweb.co.za 5 November 2012

CAPE TOWN – A business decision made in 2009 may have been the root of 1time’s problems
and may ultimately have precipitated its demise.
The low-cost carrier operated a business model that saw it lease the oldest, cheapest fleet of
aircraft possible. 1time operated McDonnell Douglas MD-80 twin-engine jet airliners, which
are suited to short to medium range flights. The MD-80s were introduced in 1980 and were
discontinued by Boeing, which owned McDonnell Douglas, in 1999.
This strategy worked well initially. But in a world of high oil prices, 1time’s gas guzzlers became
a one-way cash drain. Airline companies that fly these craft will suffer a 25% to 35% loss in
fuel efficiency compared to newer midsize jets, says Chris Zweigenthal, the CE of the Airlines
Association of Southern Africa.
In addition, the MD-80s carry fewer passengers than the modern equivalent Boeing 737-800
flown by the likes of Mango and Comair as well as other low-cost carriers like RyanAir and
EasyJet. This means that when fuel costs and seats are combined, 1time revenue per seat
will be about 50% less than its peers in the industry.
“A lot of airlines are going with newer fleets. They bring an incredible reduction in fuel costs,”
says Zweigenthal. “In a market where African airlines are operating at break-even, this type of
differential is just massive.”
1time was launched in 2004, and was met by a furious price war from Kulula. This resulted in
ticket prices falling by as much as 35% – in some cases Kulula offered tickets at R199.
SunAir’s closure in 2004 was a consequence of this. But by 2006 1time reported profits of
more than R20m, it planned to list on the AltX and it had grown its fleet.
1time remained profitable through 2007. At its half year results presentation that year it
announced headline earnings per share up 91%, earnings per share up 27%, revenue growth
up 36% and passenger growth up 25%.
During 2007 fuel prices averaged US$60 p/barrel.
In 2008 the oil price jumped to US$147 p/barrel. At this time, 1time added three more aircraft
to its fleet and bought 72% of Safair Technical, an aircraft maintenance company which it
renamed Jetworx. Results continued to look healthy. The company reported revenue growth
of 56% for the year, 18% passenger growth and revenue exceeding R1bn at its half year.

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But the fuel-hungry fleet and a depreciating rand began to hurt. On the back of an R230m
increase in fuel cost and R18m in currency translation losses, 1time realized an R11m pre-tax
loss for 2008 and cash reserves dropped to R6m at year-end.
In 2009 Brent oil prices came down to about US$80 p/barrel and 1time’s profitability (R65m
pre-tax profit) and cash-flows (R50m year-end balance) improved, although revenue and
passenger growth started to slow.
At this stage, in 2010, rather than invest in new aircraft, 1time made a business decision to
use its free cash to pursue growth and expansion in anticipation of high FIFA 2010 demand
and third-party maintenance work for its JetWorx entity. Both these expectations proved to be
ambitious.
JetWorx failed to secure third party business, and declared an attributable loss of R22.6m in
2010. Overall the company realised a net loss for the year ending 2010, but executives
received handsome bonuses.
In 2011 the founding shareholders, including CEO Glenn Orsmond, exited the business. The
CEO of Mtha Aviation, Blacky Komani assumed the helm. Mtha was 1time’s BEE partner and
had acquired a 25% stake in the business for R65m.
During 2011 domestic aviation demand remained low and competition increased.
Nico Bezuidenhout, CEO of Mango, estimates that competition from new competitor Velvet
Sky would have removed about R300m to R400m of revenue from the other low-cost carriers
during the year it operated.
1Time remained aggressive with its expansion plans and realised a net loss of R156m for the
2011 year, including penalties and fines from the South African Revenue Service (SARS) due
to taxation transgressions.
“Due to the less efficient fleet it operated, the ultimate closure of 1time was inevitable,” Erik
Venter, CEO of Comair says.
However, he adds that without state-subsidised Mango, 1time could have made adequate
profits to upgrade its fleet and be sustainable over the long term.
“Based on the previously released financial statements of SAA, and recent parliamentary
comments, Mango made a loss of half a billion rand since its 2006 launch, due to undercutting
the viability of the private low-cost carriers,” he says.
This is something Bezuidenhout furiously denies. “We have been cash positive since day one.
We have made operating profits every year and have made bottom line profits in four out of
five fiscals.” It was only in the latest year to March that Mango did not make a profit, he says.
Cash flow for the rolling 12-month period ended in September is neutral. “So I am trading at
breakeven from a cash standpoint,” he says.
There are three places that SAA could subsidise Mango: it could provide cheap fuel; cheap
aircraft maintenance, or cheap aircraft leases (the original Boeings came from SAA). In every
case Mango negotiates its own contracts directly with the supplier and pays industry-related
rates, Bezuidenhout says.

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 “I suppose you can argue that I get cheap capital. I notionally accept that a sovereign
guarantee will give you about 75 basis points off your cost of capital.”
But this comes at a price.
“I get penalised by a national industrial participation programme, which states that if you import
capital equipment to the value of $10m or more, the supplier has to invest in the country. Do
you think that suppliers swallow that cost? I know the law says that they cannot pass the cost
on. But we are all business people. The unintended consequence of this programme is that I
pay more for an aircraft lease than my private competitor.”
Rather than getting a cushy public sector ride, Bezuidenhout argues that Mango sweats its
assets better than its competitors. “We use our capital assets 25% more than other airlines in
this country. Our people are 30% more productive. Our distribution systems – which account
for 10% to 15% of costs – are efficient and innovative. We were doing with six aircraft what
1time was doing with 13.”
“My cost basis is substantially lower than 1time and that is because we run a tighter ship. I
have great people who work very hard. To suggest that we are to blame for 600 people being
out of a job just before Christmas is the lowest of low blows.”
That the airline industry in southern Africa is in crisis cannot be denied. What is needed, rather
than infighting, is an alignment of government policies and industry strategies, including
reforms to competition and ownership rules that would stimulate growth in the sector. “We
need to be working together at this stage in the industry,” Zweigenthal says.
The application to provisionally liquidate 1time was lodged on Monday. This followed the
failure of 1time and British low-cost airline FastJet Plc to conclude a deal that would see
FastJet acquire 1time.

(Planting 2012)

2.7 Conclusion

As with all industries, no matter what the sector, increased competition and the effects of
globalisation result in innovation and change. Low-cost carriers are an example of how innovation
in the airline industry has made air travel accessible to all global citizens – at least to the point
where it is affordable. Successful LCCs have been able to achieve substantial reductions in their
cost bases by restructuring the operations of their firms in order to provide more simplified air
travel with high levels of employee and aircraft efficiency. LCCs are a fantastic economic example
of how reduced costs and increased efficiencies can provide the competitive advantage
necessary to enter a market and operate sustainably.

15
 HOW MUCH DO YOU KNOW?

Go to the Self-Assessment tool on myUnisa and do the self-assessments for learning unit 2. The
purpose of the self-assessment questions is to provide you with an indication of your readiness
to proceed to learning unit 3, which deals with air cargo. If you have trouble answering these
questions, you must repeat this whole learning unit, then attempt the self-assessment questions
again.

SELF-ASSESSMENT QUESTIONS
1. Explain how recruiting locally can reduce airline costs.
2. Define a secondary airport and think of examples in Africa.
3. What are LCCs referring to when they say that they offer a “no frills” service?
4. Why are secondary airport fees less than primary airports fees?
5. Explain how economies of scale are achieved by using a common fleet
6. What is turn-around time and why is it important for LCCs?

16
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