Up in the air
Direct comparisons are tricky but the low-cost sector is set to grow
With 1time, SA's fifth-largest airline in terms of market share, joining a lonely Comair on the JSE, the sector should be more carefully scrutinised.
Though 1time, and Comair's kulula, have similar, comparable, low-cost models which offer cheap flights, together with non passenger add-on businesses, Comair also operates the SA franchise for British Airways on a more traditional airline model.
Direct comparisons between Comair and 1time are therefore complicated, because Comair doesn't disclose profits for its two brands separately.
What is simple is that the market is competitive, with three state-owned airlines (SAA, SA Express and Mango), two privately owned ones (Nationwide and Airlink) and now two listed operators, 1time and Comair. (See market share graph "Airline market share".)
Prospects for the low-cost airline market seem good, which is one of the reasons SAA launched Mango last year. SAA had lost market share to low-cost carriers.
However, margins are small, so pricing has to be supported by high volumes and low costs. Mango's pricing is considered by competitors to be unprofitable. The winner will be the airline that sells the most seats at the lowest possible cost, and makes money at the same time.
A standard benchmark in the low-cost sector is the seat per mile cost. Kulula says its figure is US7,4c, 1time is at 8c and Mango is under 7c. 1time CE Glenn Orsmond says SAA's is 15c which the airline could not confirm or deny.
One of the ways Comair has reduced costs is by acquiring newer aircraft, which are cheaper to maintain and use less fuel.
"While the capital outlay is huge, maintenance costs are far lower," says Comair joint CE Gidon Novick.
By the end of the year, says Novick, Comair will operate only 737s, and its "fuel-inefficient" MD82s will be phased out. 1time, on the other hand, still has an older fleet, mostly of MD82s and MD83s, but they were bought at competitive prices when the airline industry was in a global decline after the September 11 2001 attack in New York.
Another way low-cost airlines can save is by not offering free on-flight food. Orsmond estimates that a standard meal costs around R50/passenger. Instead, 1time sells food and makes R4m/year profit from this service.
An Internet-based sales model also saves costs. Orsmond says 95% of 1time's bookings are made on the Internet, which is cost-effective. "About 20% of other traditional airlines' costs are from distribution," he says.
Both 1time and kulula are using the Internet to boost other areas of their business, such as accommodation and car rentals. "Though their contribution is small at the moment, this could make up half our profits in time," Orsmond says.
1time also has its own maintenance business, which already contributes 38% to its profits. Comair, on the other hand, has recently signed a maintenance contract with SAA. "We don't want those headaches," says Novick.
Novick expects growth opportunities in Africa, though mostly by flying the BA brand, as the Internet is not used as well in African markets as it is here.
The outlook for the airline sector, and particularly for low-cost carriers, is positive, with Comair recently publishing a trading update saying that earnings per share for the year to June 30 are expected to be 20%- 40% higher.
Passenger numbers in the local market have grown by around 14%/year over the past three years, according to the 1time prospectus, which also says the industry expects to transport 12,5m domestic passengers this year. 1time expects a 20% increase in passengers this year.
1time lists on AltX on August 14. It has used the impetus of current market conditions to drum up support for its R30m capital raising exercise.
Though Comair has warned about rising oil prices and unprofitable ticket pricing by Mango, it is known to be cautious, and the market is not expected to fall off in the near future.
1time's downside is its aged fleet, which is accompanied by growing maintenance costs. One market watcher is also suspicious as to the reasons for 1time's listing, saying he believes the owners want to sell out. The five founders' shareholdings will be reduced from almost 16% each to just under 11% after the private placement.
Both airlines have p:e ratios that are within international norms - Comair on 12 and 1time on 10.
According to a Deutsche Bank analysts' report on European airlines published earlier this year, low-cost airlines Air Berlin, easyJet and Ryan Air trade on p:es ranging between 11 and 20, and the report calls the first two a "buy" while raising Ryan Air from "sell" to "hold".
Global risks for the airline sector include the rising oil price and pressure from environmental bodies to reduce carbon dioxide emissions. Locally, rising airport taxes and airport congestion may put people off flying despite lower fares.
Comair will probably outperform 1time over time, mostly because of its newer fleet and more years of combined management expertise.
Article from http://free.financialmail.co.za/
At www.southafrica-carhire.com we have Number 1 service
With 1time, SA's fifth-largest airline in terms of market share, joining a lonely Comair on the JSE, the sector should be more carefully scrutinised.
Though 1time, and Comair's kulula, have similar, comparable, low-cost models which offer cheap flights, together with non passenger add-on businesses, Comair also operates the SA franchise for British Airways on a more traditional airline model.
Direct comparisons between Comair and 1time are therefore complicated, because Comair doesn't disclose profits for its two brands separately.
What is simple is that the market is competitive, with three state-owned airlines (SAA, SA Express and Mango), two privately owned ones (Nationwide and Airlink) and now two listed operators, 1time and Comair. (See market share graph "Airline market share".)
Prospects for the low-cost airline market seem good, which is one of the reasons SAA launched Mango last year. SAA had lost market share to low-cost carriers.
However, margins are small, so pricing has to be supported by high volumes and low costs. Mango's pricing is considered by competitors to be unprofitable. The winner will be the airline that sells the most seats at the lowest possible cost, and makes money at the same time.
A standard benchmark in the low-cost sector is the seat per mile cost. Kulula says its figure is US7,4c, 1time is at 8c and Mango is under 7c. 1time CE Glenn Orsmond says SAA's is 15c which the airline could not confirm or deny.
One of the ways Comair has reduced costs is by acquiring newer aircraft, which are cheaper to maintain and use less fuel.
"While the capital outlay is huge, maintenance costs are far lower," says Comair joint CE Gidon Novick.
By the end of the year, says Novick, Comair will operate only 737s, and its "fuel-inefficient" MD82s will be phased out. 1time, on the other hand, still has an older fleet, mostly of MD82s and MD83s, but they were bought at competitive prices when the airline industry was in a global decline after the September 11 2001 attack in New York.
Another way low-cost airlines can save is by not offering free on-flight food. Orsmond estimates that a standard meal costs around R50/passenger. Instead, 1time sells food and makes R4m/year profit from this service.
An Internet-based sales model also saves costs. Orsmond says 95% of 1time's bookings are made on the Internet, which is cost-effective. "About 20% of other traditional airlines' costs are from distribution," he says.
Both 1time and kulula are using the Internet to boost other areas of their business, such as accommodation and car rentals. "Though their contribution is small at the moment, this could make up half our profits in time," Orsmond says.
1time also has its own maintenance business, which already contributes 38% to its profits. Comair, on the other hand, has recently signed a maintenance contract with SAA. "We don't want those headaches," says Novick.
Novick expects growth opportunities in Africa, though mostly by flying the BA brand, as the Internet is not used as well in African markets as it is here.
The outlook for the airline sector, and particularly for low-cost carriers, is positive, with Comair recently publishing a trading update saying that earnings per share for the year to June 30 are expected to be 20%- 40% higher.
Passenger numbers in the local market have grown by around 14%/year over the past three years, according to the 1time prospectus, which also says the industry expects to transport 12,5m domestic passengers this year. 1time expects a 20% increase in passengers this year.
1time lists on AltX on August 14. It has used the impetus of current market conditions to drum up support for its R30m capital raising exercise.
Though Comair has warned about rising oil prices and unprofitable ticket pricing by Mango, it is known to be cautious, and the market is not expected to fall off in the near future.
1time's downside is its aged fleet, which is accompanied by growing maintenance costs. One market watcher is also suspicious as to the reasons for 1time's listing, saying he believes the owners want to sell out. The five founders' shareholdings will be reduced from almost 16% each to just under 11% after the private placement.
Both airlines have p:e ratios that are within international norms - Comair on 12 and 1time on 10.
According to a Deutsche Bank analysts' report on European airlines published earlier this year, low-cost airlines Air Berlin, easyJet and Ryan Air trade on p:es ranging between 11 and 20, and the report calls the first two a "buy" while raising Ryan Air from "sell" to "hold".
Global risks for the airline sector include the rising oil price and pressure from environmental bodies to reduce carbon dioxide emissions. Locally, rising airport taxes and airport congestion may put people off flying despite lower fares.
Comair will probably outperform 1time over time, mostly because of its newer fleet and more years of combined management expertise.
Article from http://free.financialmail.co.za/
At www.southafrica-carhire.com we have Number 1 service
Labels: South Africa - Airlines
