LEARNING UNIT 1:

Overview of the local and international aviation sectors

Review

The purpose of unit 1 is to introduce you to the aviation industry, which is the heart of this module
(Air Transport). It highlights the origins and development of the aviation industry, from an
international perspective as well as a South African perspective.

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

• analyse the factors that have led to changes in the aviation industry
• evaluate, by identifying the more and the less important, sources that have led to
volatility in the aviation industry
• apply the effect of these sources on specific airlines, both locally and internationally
• distinguish between low-cost and traditional airlines and how these characteristics affect
their profitability
• critically engage with relevant case studies of real low-cost airlines

1.1. INTRODUCTION

Aviation is a term that describes everything that has to do with aircraft, and includes flying and
manufacturing of aircraft, managing the airspace they occupy and so on. The aviation sector
encompasses all activities involved in air transport, be they military, commercial, private or
recreational.

Aviation is divided into two main categories: civil aviation and military aviation. As the name
suggests, military aviation refers to all aviation concerned with military and defence matters. Civil
aviation is everything else – all non-military aviation, including commercial and private aviation.
1.2. THE INTERNATION AVIATION INDUSTRY

The International Civil Aviation Organisation (ICAO) was established in terms of the 1944
International Convention on Civil Aviation (known as the Chicago Convention (South Africa
2015a:18). The ICAO is a specialised agency of the United Nations (UN) that governs, regulates
and coordinates international air travel (Skybrary 2016). It sets the rules and regulations for all
aspects of international air travel, such as those governing airspace, aircraft registrations, safety
and so on (Skybrary 2016). These regulations have been revised eight times, most recently in
2006.

Commercial aviation has grown significantly over the last few decades and, although there have
been many fluctuations, on the whole the industry has matured, through globalisation and the
entry of low-cost carriers (LCC), air travel has become more accessible and affordable to the
citizens of the world (Williams 2012).

The industry itself is one of minimal profit margins due to the high percentage of fixed costs, low
barriers to entry (meaning that it is relatively easy to enter the industry as a new entrant), high
barriers to exit (meaning that it is extremely difficult to exit the industry – the difficulty in selling
aircraft being a key reason for this ), the unique regulatory environment and the prevalence of
monopolies and oligopolies (Williams 2012). These thin profit margins make the industry sensitive
to economic changes (Vasigh 2013). As a result, the industry has been characterised by volatility
(Vasigh 2013).

For a better understanding of ‘monopolies’ and ‘oligopolies’, see the brief discussion that follows.
NOTE
What are monopolies and oligopolies?
Monopoly: a monopoly exists wen one seller is the sole provider of a good or service in a market
or a geographic area. For example, Boeing had a monopoly for over 30 years with their 747
aircraft. No one else was able to able to produce such a large aircraft until 2005 when the Airbus
A380 took its first flight. As a result, Boeing could price the aircraft without any significant
competition.

2
Oligopoly: an oligopoly exists when a few firms dominate a market or specific geographic area.
This type of market structure is most relevant and prevalent in the aviation industry. We find that
individual routes are dominated by a handful of airlines and that a strong interdependence exists
between these firms because changes made by one airline transport enterprise severely affect
the others. Both of these market structures will be discussed in learning unit 4 (Source: Vasigh
2013).

Perhaps the most influential and significant change in the airline industry over the last 20 years
has been the entry of low-cost carriers (LCC) into the passenger market. LCCs were created to
accommodate economic changes in the industry (which we will explore later on) (Vasigh 2013).
An in-depth analysis of LCCs appears in learning unit 2, but one of the most obvious characters
of LCCs is that they are “no frills” airlines that provide a service to their customers that is much
more basic than that of the traditional full-service airlines (Vasigh 2013). For example, historically,
a full-service airline such as South African Airways (SAA) provided passengers with a hot meal
or snack during flight (regardless of the length of the journey) and a free beverage service. LCCs,
such as Mango airline for an example, do not provide passengers with a hot meal or snack during
flight. They generally offer “buy on board” refreshment services, allowing passengers to purchase
meals and beverages (Vasigh 2013). Not only does this reduce their costs as they do not need to
supply food and beverages, but they are able to generate revenue from the sales as well.

The introduction of these LCCS, the deregulation of the industry, and the economic changes over
the years globally have all affected the international passenger aviation industry.

Let’s have a closer look at the deregulation of the market and the economic events that affected
the industry most profoundly.

1.2.1. Deregulation of the international aviation industry

When we talk about regulation or deregulation of an industry, we are talking about the structure
of the market. A regulated market structure is one in which restrictions and guidelines exist for
participants in the industry. Before 1978, almost all airlines were regulated by their respective
governments. These governments would set parameters for fares and routes and they would be
the “gatekeepers” of the industry in that they decided which firms were allowed to enter and exit
the market (Vasigh 2013). Regulated industries are largely inefficient, unproductive industries with
escalating costs that manifest themselves in high fares. These high fares mean that fewer people
travel and load factors decrease, thus perpetuating the problem (Williams 2012).

3
Deregulation is the process of liberalising, or freeing, a market. The market is restructured.
Government no longer controls the industry, and it therefore operates in a free market.

Firms are able to enter and exit freely, set their own fares and decide on their own routes.
Deregulation allows for competition between firms in the market and this results in an increased
level of productivity and service offering (Brits 2010:22). Think about the airline industry of today
– consumers have a choice as to which airline they fly, a choice based on price, routes, frequency
of the journeys, departure times and so on. This means that if airlines want to convince consumers
to choose their airline over others, they need to offer a great service at a competitive price.

North America is historically the most dominant player in the global aviation industry, and as a
result, the deregulation of the US airline industry in 1978 had a large impact on many other
countries (Vasigh 2013). It spurred the deregulation of the aviation industries in almost all other
countries – New Zealand in 1986, Europe between 1988 and 1997, Canada in 1987 and Australia
in 1990. Because it was now largely a competitive and free market, the industry became cyclical
in nature, a cycle which generally followed that of the global economy (Vasigh 2013).

ACTIVITY 1.1

Having been introduced to how the aviation industry was deregulated, now go to Discussion
Forum 1.1 and share your understanding of the benefit of a deregulated airline for passengers.
While you at it, also highlight the firms that you think make up an oligopoly in the South African
Civil aviation industry.

1.2.2. The fluctuations (ups and downs) of the international aviation industry

Between 1995 and 2000, most airlines were profitable. The restructuring of many countries’
aviation industries into deregulated markets contributed to this profitability, as did the growth of
the global economy, the high employment rate, the dotcom boom (technological progress), and
global stability – all of which increased demand for air travel (Williams 2012). How so? Higher
levels of employment – as well as phenomena such as the dotcom boom – manifest in more
business trips being taken. Greater demand for business trips increases demand for business air
travel and, notably, for business class travel, a sector of commercial aviation that is much more
lucrative for airlines than economy class travel. Higher levels of employment and growth of

4
economies also mean that disposable income levels rise, allowing more people to go on holidays,
which implies increased demand for leisure air travel. In addition to these external influences,
airlines were also becoming more technologically advanced and the introduction of in-flight
entertainment, flat beds in business and first class cabins, ticketless travel and frequent flyer
programmes contributed to the profitability of the industry as a whole and assisted in airlines
retaining valuable customers (Williams 2012). As demand was growing, airlines were becoming
more focused on cost savings as well. Technological improvements to the design and
construction of aircraft themselves reduced costs and increased revenues. For example, cockpit
designs were simplified, reducing the size of the crew required to fly the planes, and engine
designs were improved, meaning that fewer engines were needed for longer trips. In addition,
engines were becoming more fuel efficient, thus reducing fuel costs (Vasigh 2013). All of these
measures contributed to a stable and profitable period for aviation globally.

Sadly, the events of 11 September 2001, when the World Trade Centre in New York City was
attacked, had a catastrophic effect on the airline industry, both globally and within the US
especially. Overnight, airline security became the most important aspect of air travel
(Williams2012). Demand for air travel dropped significantly over the next few years and, between
2001 and 2005, losses were felt across the entire industry (Vasigh 2013). From 2006 the crisis
appeared to be over and airlines began to claw their way back, slowly starting to regain their
profitability into 2007 (Williams 2012). This was helped by an improvement in the global economy,
an increase in aircraft utilisation and an increase in labour productivity as a result of restructuring
programmes (Williams 2012). Unfortunately, however, the respite was short-lived. In 2008 the US
housing market crashed and a global recession began. The recession had an immense impact
on business travel, with companies across the globe cutting costs by either cancelling travel
altogether or substituting business class with economy class tickets (Williams 2012). Declining
revenues for businesses manifested in an overall decline in disposable income for families and
individuals, reducing the amount of leisure travel they consumed (Williams 2012). To make
matters worse, the crude oil price doubled in 2008, sending fuel prices through the roof – a cost
that is directly passed on to the consumer by increasing ticket prices (Vasigh 2013). All in all it
was a terrible year for aviation – in fact, it has gone down as the worst year ever in aviation history
(Williams 2012).

As with all things, the bad times required that firms be innovative in order to survive. 2009 saw an
upward trend in revenues as a result of restructuring, cost cutting and increased production – but
also, most interestingly, through the adoption of ancillary revenue streams (Williams 2012).

5
Airlines started to charge for all sorts of services previously included in ticket prices. For example,
they started charging for meals and baggage (allowing only hand luggage to be carried free of
charge). Many also employed “dynamic packaging” through their web applications, by upselling
hotels, car rentals and tour packages (Williams 2012). All these initiatives helped to revive the
industry.

SNAPSHOT RECAP

What factors affect air traffic growth rates?

• Traffic growth is very dependent on the economic and political state of the area, i.e. some
countries can be growing whilst others are shrinking.
• Higher employment levels = increased demand for business and cargo travel.
• Decreases in unemployment = increased household income = increased leisure travel.
• LCCs have decreased costs = decreased fares = increased travel across the board.
• Growing populations = more people = increased demand (e.g. China and India).
• Political stability = safety =increased demand in the tourism industry.
(Source: Vasigh 2013)

1.2.3. The current state of the international aviation industry

In 2014 the world fleet consisted of 17 354 passenger aircraft and 1 633 dedicated freighter
aircraft (Airbus 2015:2). It is predicted that, by 2034, these figures will have reached 35 749 and
2 687 respectively, increases of 106% and 65% (Airbus 2015:2). These estimates are based on
the resilience of the industry, which has experienced steady growth since 2009 (Airbus 2015:12).
Between 2013 and 2014 the industry traffic grew by 6%, which made it the fourth year in a row in
which growth was above 5% (Boeing 2015). As of 2014, the distribution of air traffic was as follows
(percentage of total world air traffic per region):

6
 TABLE 1:

Air traffic by region (Airbus 2015:14)

• Asia-Pacific 29%
• Europe 25%
• North America 25%
• Middle East 9%
• Latin America 5%
• Commonwealth of Independent States 4%
• Africa 3%

International freight transport (referred to in air transport as cargo) makes up a large part of the
air transport industry. Although many cargo-specific firms exist, the majority of global cargo is
transported in traditional passenger planes. In fact, in 2009, three-quarters of cargo transported
globally was in passenger planes (Williams 2012). In the same year, British Airways reported that
7% of their revenue came from cargo, and Swiss International Air Lines reported 10% (Williams
2012). As in table 1 above, the Asia-Pacific region is also dominant in the cargo industry, with
40% of all international cargo transported in that region (Vasigh 2013). It is no surprise, therefore,
that Hong Kong is the busiest cargo airport in the world (Vasigh 2013).

The Asia-Pacific region is an area in which economic growth is occurring. The region exports
large amounts of merchandise and population numbers are growing rapidly – and, as discussed
earlier, the airline industry often mimics the cycle of the economic conditions of the area in which
it operates (Vasigh 2013). As demand for air travel increases in this region, the air transport
industry needs to be able to manage, i.e. it needs to have the capacity to deal with the increased
number of passengers and increased volumes of cargo. This capacity includes airport building
sizes, air traffic management services, ground staff, communication devices to coordinate
landings and take-offs, and so on. As capacity is reached, delays often begin to occur as the
organisational needs increase (Vasigh 2013). An increase in delays results in a decrease in
demand. Let’s explore this concept a little more.

In airline passenger transport, passengers are generally either leisure travellers or business
travellers. We will now discuss the differences between these two types of travellers with regard
to elasticity of demand and opportunity cost.

1.2.3.1. Elasticity of demand

Transportation is a derived demand, i.e. the demand for transportation exists only as a
consequence of an individual’s (or firm’s) demand for something else (Nesavumi, 2012:3). In the

7
case of a leisure traveller, the demand for a flight is derived from the demand to go on holiday.
The demand to get to a holiday destination is elastic – it fluctuates due to the price of the ticket,
date and time of the flight, length of the journey and so on. Travellers will choose an airline based
on a number of these factors. If airline ticket fares increase, demand will decrease
(Nesavumi 2012:3). For a business traveller, the demand for a flight is derived from the demand
to get to a destination at which they will be conducting business; i.e., they need to get to work.
The need to get to work is essential, and therefore the demand for the flight is inelastic (Nesavumi
2012:3). It will not change if the price of the flight increases, or if the date and time change.
However, both travellers may change their choice of carrier depending on price, time, date and
similar factors. The demand for the flight for the business traveller is thus inelastic, but the demand
for the carrier as well as for the leisure traveller is elastic.

1.2.3.2. Opportunity cost

Leisure travellers are less time sensitive than business travellers. Business travellers often leave
town for short periods of time, during which they want to maximise the time spent at their
destination and not spend the bulk of their time traveling. Passengers on their way to a holiday
destination are not in as much of a hurry – they are less time sensitive. Convenience levels are
therefore more important to business passengers. Business travellers have a higher opportunity
cost assigned to travel than leisure travellers do – if they are not able to work whilst they travel,
they are losing productivity. Delays at airports due to congestion are therefore more detrimental
to business travellers than to leisure travellers. Carriers who are prone to delays will see a drop
in demand for their services from business travellers. Airport capacity is therefore a very important
factor for carriers to consider.

From an environmental perspective, aviation has been playing its part in reducing emissions.
Through lower levels of fuel consumption – a drop of 33% between 2000 and 2014 – airlines have
been reducing their emissions, thereby helping to prevent harm to the environment (Airbus
2015:17).

On the whole, global aviation is in a very stable position and is expected to continue on its current
growth path, with predicted fleets of 35 749 passenger aircraft and 2 687 freight aircraft by 2034
(Airbus 2015:2). But, as mentioned, this will depend largely on the stability of the global economy,
The effects of a global pandemic (such as that caused by the Corona Virus) will fluctuate for each
country or region. In the next section we discuss aviation in South Africa. You will notice how it
mimics the global industry in some ways and how, in other ways, it is unique.

8
ACTIVITY 1.2

Based on 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 1.2, advising on why you think that Africa, being such a big continent, has
such a low percentage of air traffic.

1.3. SOUTH AFRICAN CIVIL AND MILITARY AVIATION

This section provides a detailed discussion on the South African aviation industry, looking at both
civil and military aviation, the history of the whole industry in South Africa, the guiding policies and
the current state of the industry. The discussion will begin by introducing you to the civil aviation
side of the industry, looking at its structure, guiding policies, stakeholders, and how the industry
came about and the current state of the industry. We will then conclude a discussion on military
aviation.

1.3.1. Civil aviation industry in SA

1.3.1.1. The structure of the civil aviation industry in SA: regulatory requirements and functions

The civil aviation industry in South Africa is governed by legislation, policies, and requirements.
These can be categorised into two broad groups:

• Safety, security and environment: these regulations and functions cover all aspects of safety
and security whether in flight or on the ground. They include regulations and policies on the
environmental impact of aviation and any restrictions associated herewith. They also include
requirements and policies for accidents and investigations involving drones (South Africa
2015:8).
• Wider policies and regulations: essentially all aspects that are not covered by the above form
part of this category. For example, all aspects relating to infrastructure, licensing of air
services, allocation of traffic rights, economic considerations and the monitoring of financial
practices and performance (South Africa 2015:8).

1.3.1.2. Policies

9
Since 1990, aviation policy and legislation in South Africa, drafted and implemented by the
Department of Transport, has governed the categories noted in section 1.3.1 above. There are
many Acts and policies relevant to the aviation industry, but the below list highlights the most
overarching and influential of these:

• Civil Aviation Act 13 of 2009 – policies and legislation governing the civil aviation industry of
South Africa as a whole, including safety and security regulations (South Africa 2015:11–14).
• Airports Company Act 44 of 1993 – governing all airports in South Africa. An example from
this Act is the establishment of a Regulating Committee for the Airports Company South Africa
(ACSA) and Air Traffic Navigation Services (ATNS) to regulate tariffs and service standards.
(South Africa 2015:11–14).
• Air Services Licensing Act 115 of 1990 –formalised the deregulation of the domestic airline
industry in South Africa (Brits 2010:23).
• International Air Services Act 60 of 1993 – governs the international aviation industry in South
Africa (Brits 2010:23).
• White Paper on National Civil Aviation Policy (2015) – an analysis, review and suggested
update to South Africa’s civil aviation policies.

1.3.1.3. Stakeholders
Stakeholders refer to all parties that are involved or have an interest in an industry. In this case,
a stakeholder is any entity that can affect or be affected by the civil aviation industry. These
stakeholders can be classified into four categories:

1) Governance stakeholders:
Governance stakeholders include all of the parties responsible for the policies and legislation
mentioned in section 1.3.1.2. They create the regulatory legal instruments for civil aviation and
ensure that they carry out the requirements set in the Chicago Convention of 1944. These
stakeholders include:

• Department of Transport – responsible for all aviation policy, strategies and objectives
at a government level (South Africa 2015:11–14).
• South African Civil Aviation Authority (SACAA) – created by the Civil Aviation Act as a
regulatory body for the industry. It is a self-financing, non-profit government agency
(South Africa 2015:11–14).
• Competition authorities – legal authorities that monitor competition across all industries
in SA, ensuring that free and fair markets exist.

10
 • Economic regulators such as the International Air Services Council (IASC) and Air
Services Licensing Council (ASLC) – councils funded by the Department of Transport
(DoT) that regulate the economic activity of airlines, for example by issuing licenses to
fly (South Africa 2015:11–14).
• Provincial and municipal governments responsible for the management of regional
airports and airlines (South Africa 2015:11–14).

2. Commercial stakeholders:

Any entity that has a direct economic impact on, or is directly affected by, the airline
industry, for example, by being involved in the buying or selling of goods or services such
as aircraft, maintenance, fuel and the like. These include (amongst many others):
• All air carriers
• Air service licenses and licensing departments
• Airports
• Aircraft manufacturers
• Employees of the airlines and airports (South Africa, 2015:8)

3. Support stakeholders (indirectly impacted by air transport industry) :

Support stakeholders are involved in the facilitation of the operations aspects of air transport
(South Africa, 2015:8). These support stakeholders have an indirect economic impact on, or
are indirectly impacted by, the air transport industry. Support stakeholders are involved in off-
site economic activities strongly related to the industry (Vasigh, 2013). For example:

• Travel agents
• Insurance companies
• Hotels (Vasigh 2013)

4. Support stakeholders: (don’t have direct connection but affected by airline operations)

Any parties that do not have any business connection with the aviation industry, but who have
a direct interest in the aviation industry (at a particular point in time) are considered to be
society stakeholders, e.g. passengers. They have a direct, although not vested, interest in
the industry. Other examples include:

• Users of freight services

• Civil society
• Environmental groups
• Residents living in close proximity to an airport (South Africa, 2015:8)

11
NOTE:
What is the Chicago Convention of 1944?

The Convention on International Civil Aviation (also known as the Chicago Convention),
was signed on 7 December 1944 by 52 states. Pending ratification of the Convention by
26 states, the Provisional International Civil Aviation Organization (PICAO) was
established. It functioned from 6 June 1945 until 4 April 1947. By 5 March 1947 the 26th
ratification was received. ICAO came into being on 4 April 1947. In October of the same
year, ICAO became a specialised agency of the United Nations linked to the Economic
and Social Council (ECOSOC). The Convention on International Civil Aviation set forth
the purpose of ICAO:

"WHEREAS the future development of international civil aviation can greatly help to create
and preserve friendship and understanding among the nations and peoples of the world,
yet its abuse can become a threat to the general security; and WHEREAS it is desirable
to avoid friction and to promote that co-operation between nations and peoples upon which
the peace of the world depends;

THEREFORE, the undersigned governments having agreed on certain principles and

arrangements in order that international civil aviation may be developed in a safe and
orderly manner and that international air transport services may be established on the
basis of equality of opportunity and operated soundly and economically;

Have accordingly concluded this Convention to that end."

Source: https://www.icao.int/publications/pages/doc7300.aspx

ACTIVITY 1.3
Having learnt in section 1.3.1.2 that policies are very important for an industry as they provide a
strategic direction and focus, now go to Discussion Forum 1.3 and discuss with your fellow
students the core concepts governed by SA aviation policy.

1.3.2. South Africa’s history and important events

1.3.2.1. South Africa’s turbulent past

12
South Africa has a unique and interesting history due to the political turmoil that existed under the
apartheid government. This is also evident in the history of the civil aviation industry. It is important
to be aware of and to understand this history as it laid the foundation for the industry as it is today.

In 1910, the British and Dutch colonies and republics within South Africa joined to form the Union
of South Africa (Fourie & Herranz-Loncan 2015:2). During this time, the national airline carrier
was Union Airways. By 1931, Union Airways and British Airways were operating regular
international air services to and from South Africa (Pirie 1990:232) and the trans-African route
was established between Johannesburg and London, via Cairo (Burchall 1933; McCormack
1974). On 1 February 1934, the government of the Union took over the assets of Union Airways
and established the new South African Airways – SAA (Smith 1998). Aviation slowed down across
the globe in 1939 with the start of World War II, but SAA was still able to fly to Nairobi, Kinshasa
and Luanda (Pirie 1990:232). In 1945, when the war ended, SAA resumed its trans-African route
and formed new international agreements, allowing the airline to grow. Within 15 years, SAA’s
network within Africa was extensive, and linked South Africa to Europe and the United States
(Pirie 1990:232).

In 1960, South Africa withdrew from the Commonwealth and the Union of South Africa became
the Republic of South Africa. It was at this time that other African nations became active in
initiating embargoes on air traffic and air space in an attempt to put an end to apartheid (Pirie
1990:231–239). In 1963, Kenya closed its airports and airspace to SAA, spurring on Algeria,
Egypt, Ethiopia, Libya, Sudan and the Ivory Coast to do the same. A major thorn in the side of
SAA was that they were no longer able to fly over these countries to get to Europe. Not only did
this pose a problem in terms of fuel and the technical capabilities of their aircraft, but civil aviation
safety regulations require that aircraft are able to perform emergency landings should they need
to. Restricted airspace does not allow for such landings. As a result, SAA had to fly via the Cape
Verde islands, Luanda and the Canary Islands on many of their international routes (Pirie
1990:231–239). Further embargoes were imposed by India, Mauritius, Indonesia, Gabon, and
Yugoslavia (present-day Croatia, Slovenia, Republic of Macedonia, Republic of Bosnia and
Herzegovina, Serbia, Montenegro and Kosovo). The pressure on the South African government
was increasing.

NOTE

What is an embargo?

13
An embargo is a legal barrier to trade. For example, when Kenya closed its airports and airspace
to SAA, it prohibited South Africa from entering into any type of aviation activities in Kenya. An
embargo is very similar to a trade sanction, where a country refuses to trade with another country.
An embargo is also used as a political tool – in this case Kenya was showing the world that it was
against apartheid and would not support the South African government.

A number of attempts, through riots and petitions, were made by anti-apartheid activists to close
the US routes over the years, but to no avail. It was not until 1986 that the USA barred access to
SAA – banning them from flying into the US and pulling all US airline services from South Africa
(Pirie 1990:231–239). One year later Australia did the same thing. Following this, the ICAO urged
all airlines to sever their links with South Africa and to isolate the country in the hope of forcing it
to drop the apartheid laws. Not only did these embargoes cause a substantial reduction in revenue
for SAA, they also tarnished the airline’s reputation across the globe. Pressure on apartheid was
starting to mount.

1.3.3. Things start to look up

During the years discussed above, the airline industry in South Africa was regulated by the Air
Services Act 51 of 1949, which required all airlines wishing to enter the market to prove that a
need existed, and to prove that SAA was not fulfilling this need adequately (Luke & Walters
2013:3). This was obviously very difficult to do, especially since the body governing the decision
was the body that owned and ran SAA. As such, SAA was protected from competition for over 40
years, and had a monopoly on high-density routes (Luke & Walters 2013:3).

Increasing pressure from embargoes, trade sanctions and political unrest, finally caused the
South African government to start the process of dismantling the apartheid regime, and
negotiations to remove the apartheid government began in 1990. Around the same time, the
Domestic Air Transport Policy 1990 was released, which formed the basis for the deregulation of
the domestic civil aviation industry (DoT 1990). The government published the Air Services
Licensing Act 115 of 1990, which was intended to officially deregulate the market and which was
enforced in July 1991. The market was thus fully deregulated, allowing free entry and exit from
the market and the deregulation of capacity and fares (ICAO Secretariat 2008). At this time, SAA
dominated the domestic market with 90% of the market share (Smith 1998).

14
 From 1991 onwards SAA continued to operate, although with new rivals – Flitestar entered the
market and Comair expanded its operations (Luke & Walters 2013:4). In 1993, SAA entered into
a three-tiered alliance with SA Express and SA Airlink, expanding their service offering (Smith
1995). As the industry matured over the years that followed, it became one of fierce local and
international competition (Potgieter 2014:2). The nature of a competitive market or industry is
such that it encourages innovation, and the aviation industry is a great example of this
(Potgieter 2014:3). An extremely important and influential innovation in this era was the
introduction of low-cost carriers.

The first LCC to enter the South African market was kulula.com in August 2001 (Flightsite, 2013a).
They were followed by 1time Airline in 2004 (Planespotters 2013), and Mango Airlines in 2006 –
a fully-owned subsidiary of SAA (Flightsite 2012a). Since then, numerous LCCs have entered and
exited the South African domestic market, with most of them focusing on the “Golden Triangle”
i.e. Johannesburg – Cape Town – Durban (Luke & Walters 2013:4). LCCs accounted for 65% of
the total domestic market in 2013 (econ.com 2013). These carriers have stimulated the market
by increasing passenger numbers and load factors. LCCs are discussed in detail in learning unit
2.

ACTIVITY 1.4

Go to Discussion Forum 1.4 and share your views on how an aviation embargo can affect a
country’s economy.

1.4. CIVIL AVIATION IN SOUTH AFRICAN: CURRENT STATE

South African aviation has come a long way from its humble beginnings and turbulent past. It has
grown into a vibrant industry that operates and competes with the same pride as its fellow citizens
of the Rainbow Nation. The Airports Company South Africa (ACSA) owns and operates nine
principal airports in South Africa, and many smaller, privately-owned airports exist in more remote
regions, serving both the domestic and international markets (Southafrica.info 2015). Seven major
domestic airlines serve the country alongside a number of smaller private airlines. The major
airlines currently include three LCCs – Mango, Kulula and FlySafair (Southafrica.info 2015).

1.4.1. South African Airways

15
South African Airways is fully owned by the South African government and has been in operation
since 1934 (Smith 1998). SAA owns the low-cost carrier Mango and is in a three-tiered alliance with
SA Express and SA Airlink (Smith 1995). SAA, as a government entity, has been fortunate to receive
financial assistance in periods during which they would otherwise have been crippled. In October
2020, Finance minister Tito Mboweni agreed to fund a revival plan that includes firing almost 80% of
SAA’s workforce. The revival plan was calculated by the administrators to cost about R10.5 billion
Minister Pravin Gordhan mentioned in his 2016 Budget Speech that a merger between SAA and SA
Express was being considered and that a private minority equity partner would be considered in the
deal. This is so that the airline can be exposed to private capital and expertise, and perhaps recover
some of the revenue losses it has experienced over the past few years (Sanchez 2016). The airline
has also come under severe scrutiny politically, with the former chairperson, Dudu Myeni, having
been accused of corruption involving former President Jacob Zuma in a scandal involving the
removal of then Minister of Finance, Nhlanhla Nene.

Unfortunately, years of losses, financial strain and increased infighting have led to the airline being
in a dire state and it remains to be seen what will become of it.

1.4.2. The industry as a whole

Deregulation in 1990 increased the productivity of the industry as a whole and, as a result, it grew
exponentially over the following years. Between 1994 and 2003 there was a 150% increase in
scheduled commercial passenger flights (Pirie 2006:5). This increase in passenger flights was very
beneficial for the country and this was evident in Gross Domestic Product (GDP) growth. GDP in
2012 was 77% larger than GDP in 1994 (Industrial Development Corporation 2013:1). In section
1.3.1.3 we discussed the concepts of direct, indirect and induced economic impact. Let’s use these
concepts to explain the effect that an increase in commercial passenger flights had on the economy.

1.4.2.1 Economic effects of a growing aviation industry

More flights means that more aircraft are in use, that more fuel is needed, that more licenses are
required and that more landing fees can be levied. Increases in flights also require more crew and
more ground staff – essentially an increase in jobs across the board. The increase has directly
affected the economic situation of the people and corporations involved in these activities (Vasigh
2013).

Similarly, an increase in flights would suggest an increase in business and leisure travel. Increases
here affect certain off-site economic activities such as hotel bookings, restaurant patronage, and
other retail activities. Again, this means that more money is spent in these industries – they are

16
indirectly affected by the increase in passenger flights. All parties involved in these industries benefit
from increases in capacity and productivity. Ultimately, the increased air traffic has indirectly affected
the economic situation of stakeholders in these off-site businesses (Vasigh 2013).

We can take this even further and consider the multiplier effect of this – the induced economic impact
of an increase in flights. Consider an employee at the airport who is hired because the airport needs
to increase its capacity and accommodate the increase in flights. This person – call her Ntombi –
receives a salary for her work. With her salary she decides to renovate her house by adding on a
second bedroom. In order to do so, she needs to employ a building contractor to do the work. She
needs to buy paint to paint the walls; she needs curtains for the windows, a bed, a carpet and so on.
Can you see that, through Ntombi becoming employed, the builder, paint store, carpet store and bed
store all benefit? One transaction – paying her salary – results in multiple transactions. This is the
multiplier effect. The increase in flights has had an induced economic impact on all of the parties
involved (Vasigh 2013).

The overall effect is that economic activity increases in the country as a whole, and the economy is
boosted.

In 2011, aviation contributed 2.1% to total GDP in South Africa and provided 227 000 direct jobs and
116 000 indirect jobs – most within the tourism industry (South Africa 2015:6). Although much of
South Africa’s air transport is centred on passenger transport, a lot is also made up of cargo, as we
have seen to be the case in the international industry as well. Air cargo processed through the
gateway in 2016 was 350,500 tons, about 10% down on the preceding year due to a fall in global
trade. According to SARS, cargo values for exports in 2014 amounted to R148 billion and to R179
billion for imports (South Africa 2015:7).

ACTIVITY 1.5

Read the case study below and then go to Discussion Forum 1.5 and participate in the discussion
on the case.

Case study 1: The economic impact of tourism at Minneapolis airport

A 2005 study explored the local and regional economic impacts of Minneapolis-St. Paul International
Airport and estimates that the airport generates 28,545 direct jobs in the air transport industry. Of these,
around 63% (18 000) are in airlines that use the airport. In addition, 3 000 people are employed by
freight airlines/freight forwarders and around 2 300 by ground transportation companies, such as taxis

17
 and car rental firms. Retail outlets at the airport terminal support 1 200 jobs with various other sectors
accounting for the remaining 4 045 jobs.

From this direct activity:

– 11 264 indirect jobs are generated as a result of the expenditure by firms located at the airport, on the
goods and services they buy from their suppliers; and
– 26 406 jobs are induced by the spending of those directly employed in the airport.

However, by far the biggest impact on the local economy is the visitor spending. The study estimates
that this supports a total of around 87 000 jobs (60 500 directly and the remainder from indirect and
induced effects of tourism). The tourism impact is, therefore, over 30% greater than the employment
generated by the combined direct-indirect-induced effects of air transport. Nearly 75% of these jobs are
within the hotel, restaurant, retail outlets and entertainment sectors.

Source: John C Martin Associates LLC, as cited in ATAG, 2011:18

1.5. MILITARY AVIATION AND REMOTE PILOTED AIRCRAFT SYSTEMS

Military aviation involves the flying of military aircraft for the purposes of warfare, as well as the
transportation of any equipment and personnel involved in military activities. Before the advent of
democracy in 1994, the South African government invested heavily in military and defence aviation
(Potgieter 2014:25).

As a peaceful nation, and one that has not been involved in many significant military conflicts in the
past few decades, military aviation has received little attention and, as a result, little literature exists
on this topic. Perhaps one of the most interesting and significant developments in military aviation in
recent years has been the increased use of Remote Piloted Aircraft Systems (RPAS), commonly
known as drones. From hereon they will be referred to as drones.

The term “drone” is used to describe any and all aerial vehicles that are operated remotely, i.e. they
are unmanned and they do not have a pilot. Drones have only recently become available for civilian
use and are becoming increasingly popular and prevalent (South Africa 2015:123–125). Civilian uses
generally include recreational flying and photography. Although it may be a new term that seems to
have recently emerged, drones have in fact been around for decades, just in different shapes and
forms. Drones also have many obvious military uses and South Africa has developed drones for
military purposes such as surveillance and high-speed target practice (South Africa 2015:123–125).
Many other uses exist for drones in South Africa: marine and coastal surveillance, deliveries,
pollution monitoring and perhaps, most significantly, the ability to use them in anti-poaching missions
(South Africa 2015:123–125).

18
South Africa is at the forefront of drone policy development and is a member of the RPAS panel
established by the ICAO in 2014 (South Africa 2015:123–125). This panel is involved in the
development of standards and in recommending practices for drone use in airspaces, including
guidelines on safety and security (South Africa 2015:123–125). Drone policy is important for a
number of reasons. Firstly, major security risks exist with respect to the use of drones and, therefore,
sales need to be monitored and owners need to be licensed. Secondly, the flying of drones in existing
airspace poses many physical and practical risks such as collisions and accidents. SA is one of the
first countries to develop legal policies around the use of drones and this is something that South
African aviation can be extremely proud of.

1.6. STEERING AHEAD

Due to the Covid-19 pandemic, in South Africa, the upheavals in the air transport industry were more
severe than elsewhere. With South African Airways' (SAA's) 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 into business rescue
in May 2020 (Comair Limited 2020), leaving a major void in the industry. Whilst the contraction of
the sector resulting from COVID-19 regulations 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; Smith
2020; ‘Coronavirus impact on African aviation worse than initially estimated’) in the short term,
although the contraction 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 contraction in
demand. Ongoing restrictions on international travel and tourism and changes in the ways of doing
business (Bell 2020) also imply, however, that the future of international air travel may have changed
forever (Bilotkach 2020).

19
1.7. CONCLUSION

The aviation industry is considered a driver of innovation, and an industry that continues to push the
boundaries of technological and operational development (Potgieter, 2014:4). Civil aviation is crucial
for international trade and investment, tourism and domestic transport, sport and recreation (South
Africa, 2015:1). It is an industry that must be considered both regionally and globally, in order to
understand the economic activities that function within it, and the effect that it has on those outside
of it.

HOW MUCH DO YOU KNOW?

Go to the Self-Assessment tool on myUnisa and do the self-assessments for learning unit 1. The
purpose of the self-assessment questions is to provide you with an indication of your readiness to
proceed to the learning unit 2, that deals with the low-cost passenger airline revolution. 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. What is deregulation in the aviation space?
2. Explain what derived demand is.
3. What body governs the civil aviation industry in SA?
4. What is a support stakeholder?
5. LCCs are one of the most influential innovations of modern aviation. Explain what an LCC is.

1.8. BIBLIOGRAPHY
Airbus (2015) Global Market Forecast 2015–2034. [Online] Available at:
http://www.airbus.com/company/market/forecast/?eID=maglisting_push&tx_maglisting_pi1
%5BdocID%5D=86756 [23 March 2021].

Annelisa (2015) SAA financial crisis deepens. Herald Live. [Online] 19 November 2015.
Available at: http://www.heraldlive.co.za/saa-financial-crisis-deepens/ [24 March 2021].

Boeing (2015) Current Market Outlook 2015–2034. [Online] Available at:

http://www.boeing.com/commercial/market/long-term-market/traffic-and-market-
outlook/#/overview [23 March 2021].

20
Brits, A. (2010) A Liberalised South African Airline Industry: Measuring Airline Total-Factor
Productivity. [Online] Available at: http://www.jtscm.co.za/index.php/
jtscm/article/viewFile/7/81 [20 March 2021].

Burchal, L. (1933) In: Aviation, Apartheid and Sanctions: Air Transport to and from South Africa,
1945-1989. GeoJournal. Vol 22(3). [Online] Available at:
http://link.springer.com/article/10.1007%2FBF00711334 [20 March 2021].

Department of Transport (1990) In: LUKE, R., WALTERS, J. (2013) Overview of the
developments in the domestic airline industry in South Africa since market deregulation.
Journal of Transport and Supply Chain Management 7(1), Art. #117,
11 pages. [Online] Available at: http://dx.doi. org/10.4102/jtscm.v7i1.117
[20 March 2021].

Econ.Com (2013) In: Luke, R., Walters, J. (2013) Overview of the developments in the domestic
airline industry in South Africa since market deregulation. Journal of Transport and Supply
Chain Management 7(1), Art. #117, 11 pages. [Online] Available at: http://dx.doi.
org/10.4102/jtscm.v7i1.117 [20 March 2021].

Flightsite (2012a) In: Luke, R., Walters, J. (2013) Overview of the developments in the domestic
airline industry in South Africa since market deregulation. Journal of Transport and Supply
Chain Management 7(1), Art. #117, 11 pages. [Online] Available at: http://dx.doi.
org/10.4102/jtscm.v7i1.117 [20 March 2021].

Flightsite (2013a) In: Luke, R., Walters, J. (2013) Overview of the developments in the domestic
airline industry in South Africa since market deregulation. Journal of Transport and Supply
Chain Management 7(1), Art. #117, 11 pages. [Online] Available at: http://dx.doi.
org/10.4102/jtscm.v7i1.117 [20 March 2021].

ICAO Secretariat (2008) In: Luke, R., Walters, J. (2013) Overview of the developments in the
domestic airline industry in South Africa since market deregulation. Journal of Transport
and Supply Chain Management 7(1), Art. #117, 11 pages. [Online] Available at:
http://dx.doi. org/10.4102/jtscm.v7i1.117. [20 March 2021].

Industrial Development Corporation. (2013) South African economy: An overview of key trends
since 1994. [Online] Available at:
http://www.idc.co.za/reports/IDC%20R&I%20publication%20-%20Overview%20of
%20key%20trends%20in%20SA%20economy%20since%201994.pdf [23 March 2021].

John C Martin Associates LLC. (2005) The Local and Regional Impacts of the Minneapolis/St.
Paul International Airport, prepared for: The Metropolitan Airports Commission, In: AIR
TRANSPORT ACTION GROUP (2011) The economic and social benefits of air transport.
[Online] Available at:
http://www.icao.int/Meetings/wrdss2011/Documents/JointWorkshop2005/ATAG_SocialBe
nefitsAirTransport.pdf [8 April 2021].

21
Luke, R., Walters, J. (2013) Overview of the developments in the domestic airline industry in
South Africa since market deregulation. Journal of Transport and Supply Chain
Management 7(1), Art. #117, 11 pages. [Online] Available at: http://dx.doi.
org/10.4102/jtscm.v7i1.117 [20 March 2021].

McCormack (1974) In: Aviation, Apartheid and Sanctions: Air Transport to and from South
Africa, 1945–1989. GeoJournal. Vol 22(3). [Online] Available at:
http://link.springer.com/article/10.1007%2FBF00711334 [20 March 2021].

Nesamvuni, A.E. (2012) The Theories of Planned Behaviour As A Predictor Of Usage Of An

Interprovincial Passenger Rail Service: The Platinum Rail Project. Unpublished master’s
degree thesis. Tshwane University of Technology. [Online] Available from:
http://encore.tut.ac.za/iii/cpro/app?id=9830842136786123&itemId=1000326&lang=eng&se
rvice=blob&suite=def [7 March 2021].

Pirie (2006) In: Brits, A. (2010) A Liberalised South African Airline Industry: Measuring Airline
Total-Factor Productivity. [Online] Available at:
http://www.jtscm.co.za/index.php/jtscm/article/viewFile/7/81 [20 March 2021].

Pirie, G.H. (1990) Aviation, Apartheid and Sanctions: Air Transport to and from South Africa,
1945–1989. GeoJournal. Vol 22(3). [Online] Available at:
http://link.springer.com/article/10.1007%2FBF00711334 [20 March 2021].

Planespotters (2013) In: Luke, R., Walters, J. (2013) Overview of the developments in the
domestic airline industry in South Africa since market deregulation. Journal of Transport
and Supply Chain Management 7(1), Art. #117, 11 pages. [Online] Available at:
http://dx.doi. org/10.4102/jtscm.v7i1.117 [20 March 2021].

Potgieter, D. (2014) An analysis of a selected aviation company's competitive environment in

South Africa. [Online] Available at: http://dspace.nwu.ac.za/handle/10394/13407 [20
March 2021].

Sanchez, D. (2016) South African Airways Is Headed for Privatization with a New Board of
Directors. AFK Insider. [Online] 24 February 2016. Available at:
http://afkinsider.com/120118/south-african-airways-headed-privatization-new-board-
directors/ [24 March 2021].

Skybrary (2016) Chicago Convention. [Online] Available at:

http://www.skybrary.aero/index.php/Chicago_Convention [24 March 2021].

Smith, K. A. (1995). Identifying strategic groups in the US airline industry: an application of the
Porter model. Transportation Journal, 26-34.

Smith (1998) In: Luke, R., Walters, J. (2013) Overview of the developments in the domestic
airline industry in South Africa since market deregulation. Journal of Transport and Supply
Chain Management 7(1), Art. #117, 11 pages. [Online] Available at: http://dx.doi.
org/10.4102/jtscm.v7i1.117 [20 March 2021].

22
Smith (1998) In: Luke, R., Walters, J. (2013) Overview of the developments in the domestic
airline industry in South Africa since market deregulation. Journal of Transport and Supply
Chain Management 7(1), Art. #117, 11 pages. [Online] Available at: http://dx.doi.
org/10.4102/jtscm.v7i1.117 [20 March 2016].

Smith, C. (2019) SAA business rescue: Creditors have first meeting, viewed 14 September
2020, from https://www.news24.com/fin24/Companies/Industrial/ saa-business-rescue-
creditors-have-first-meeting-20191220.

Smith, C. (2020) Coronavirus impact on African aviation worse than initially estimated, says
IATA, viewed 01 September 2020, from https://www.news24.com/fin24/
companies/industrial/coronavirus-impact-on-african-aviation-worse-thaninitially-estimated-
says-iata-20200818.

South Africa (a). Department of Transport (2015) White Paper on National Civil Aviation Policy.
[Online] Available at:
http://www.transport.gov.za/Portals/0/Aviation/NewFolder/NCAP%20draft%20final
%203%20Sept_2015.pdf [19 March 2021].

South African Civil Aviation Authority (2015) Annual Report 2014/15. [Online] Available from:
http://www.caa.co.za/Corporate%20Publications/CAA%20Annual%20Report%20 2014-
2015.pdf [24 March 2021].

South Africa. department of Transport (2015) Strategic Plans 2015–2020. [Online] Available at:
http://www.transport.gov.za/Portals/0/Annual%20Reports/ 2015/DoT%20SP%202015-
2020.pdf [20 March 2021].

SouthAfrica.Info (2015) Domestic flights in South Africa. [Online] Available at:

http://www.southafrica.info/travel/advice/flights.htm#.VvSf4xIrLPA [23 March 2021].

Vasigh, B, Dr. (2013) Introduction to Air Transport Economics: From Theory to Applications, 2nd
edition. [Online] Available at: https://bookshelf.vitalsource.com/#books/9781472400246/
[20 March 2021].

Williams, G, Dr. (2012) Air Transport in the 21st Century: Key Strategic Developments. [Online]
Available at: https://bookshelf.vitalsource.com/3/books/9781409486732/ [19 March 2021].

23