Having been involved with Safair in various roles over the past ten years, Elmar Conradie was appointed CEO of the South African ACMI/charter specialist this year. Founded in 1969, Safair is a subsidiary of the Ireland-based airline group ASL Aviation. However, in 2013, Safair made the decision to enter the scheduled South African passenger market through its Low Cost Carrier unit, FlySafair. The LCC’s journey from drawing board to reality was not easy as just prior to its original October 2013 launch date, FlySafair was grounded by a court order following rival Comair’s concerns over its ownership structure. Over the course of the ensuing twelve months, FlySafair’s shareholding was revamped culminating in its eventual debut in October 2014.
ch-aviation’s Chief Commercial Officer Max Oldorf was in Johannesburg recently and had the chance to chat to Elmar Conradie about Safair’s current operations, challenges, and future plans.
Learn about Safair and FlySafair on ch-avation:
The first question is obviously about your history: Do you think it was worth waiting so long for your launch approval?
Oh yes, absolutely. I think the challenges that we had with the license just made us more determined to actually make it. Furthermore, I think the extra year that it took to go live with our website and start flying gave us a lot of time to rethink several matters before going to market – ‘Is this the right approach?’ ‘Is this the right business model?’. If you compare our product from when we tried to launch the first time with our current offering, quite a few things have changed. We made quite a number of revisions to the business model in the 12 months it took us to regroup.
Whom do you think profited the most from the long court battle?
Obviously the existing local carriers all benefited from it. It is difficult to say who benefited most because they all did. To put this into perspective, since FlySafair launched a year ago, we have saved South African consumers R614 million in airfares as the market adjusted pricing to compete.
What lead you to venture into the scheduled market?
We have been providing ACMI to scheduled airlines domestically and regionally for quite some time now. We also helped start up and maintain some of the local carriers by providing them with their initial aircraft, backup aircraft, training, pilots, etc. We’ve always operated on two principles: we don’t take risks with load factors and we don’t take risks with fuel. But what happened was that each time an airline went under, we were exposed – they owed us money in the form of outstanding ACMI bills that they couldn’t pay. Adding to that, actual ACMI contracts became harder to come by with airlines preferring to use theirown aircraft. So the next natural step for us was to say, ‘Listen, we take the risk anyway on these local airlines. We’ve been doing this for 48 years now and all we need to do is just to sell the ticket.’
The South African domestic market is a very tough one and carriers like 1Time and Velvet Sky have come and gone. So what is different this time round with Kulula, Mango, Skywise and FlySafair battling it out and Fastjet and FlyAfrica wanting to join in?
I think it’s difficult to isolate one particular reason as to why other airlines failed in the first place – it’s never just a single cause, it’s usually a combination of causes. It’s similar to when you succeed: it’s not just one factor but a whole list of things that allow you to succeed. Obviously the fact that we are not a start-up in the purest sense i.e. we don’t have to carry all the overheads and costs of establishing the business, helps. We all know that you aren’t going to start an airline and make a profit in the first year – that just doesn’t happen. But, if you start an airline with the support of an existing business, it makes it a lot easier to swallow the overheads and costs you have to incur, so that is definitely one benefit. Another aspect to consider is that early on, we took a long hard look at other cases and decided that if we do make a go of this, then we cannot do it halfheartedly. We aren’t just going to operate one or two aircraft and see if it works – No. We’re going to go full out and that is why we already operate five aircraft with a further three B737-800s to arrive by year-end. So we are really focusing on achieving economies of scale as quickly as possible so that we can get our cost per seat down.
You just mentioned the Boeing 737-800 is due to join your fleet shortly. Will they be replacing the 737-400s or are they there to enable more growth?
The immediate plan is to actually phase out the -400s and replace them with -800s in order to reduce our costs. I think we will keep a few of the -400s around as backup aircraft and maybe to cover seasonal demand – we have not yet decided on their future. For the two that we do own, we’re considering either selling them or converting them into freighters for use within the ASL Group. As I said, while we may keep the -400s around to cover seasonal/ACMI demand, you have to realise that the capital costs on the -400s are not that high anymore and the two that we own are paid off. It’s not like a leased -800, which absolutely has to fly.
Where do you want to be in five years’ time in terms of fleet size?
Fleet wise, I’d like to be where Kulula and Mango are, around that size. Ten to eleven aircraft domestically and if we then start flying regionally maybe some more
Do you think there will be a consolidation in the South African market? After all, it is one of the most competitive environments in the world.
It’s difficult to say if it’ll be a consolidation or someone simply falling out of the market. There is just too much capacity now. If you look at JNB-CPT – one of the busiest routes in the world – the capacity added since 2011/2012 has been tremendous. There are millions more seats in the market now on that route alone. If you look at the South African market as a whole, there was a period after 1time and VelvetSky collapsed when capacity was static. And it took a while for Mango and Kulula to increase their capacity. In retrospect, it would have been better for us to have launched operations a year earlier because the market was not as flooded with capacity as it is now.
So what do you think is the growth limit in terms of the domestic market?
I think growth at this stage is limited by the economic growth of the country and South Africa’s GDP growth has slowed down a little bit. Capacity in the market, at this stage, is growing much faster than demand so I see that as a real limiting factor. In all, I do not think growth in the South African market is limitless. Like I said, I don’t see us getting much bigger than a Kulula or Mango in the domestic market.
So you’re looking to take market share from them?
No. What I am hoping is that over the next decade the South African low-cost market will grow and there will be enough demand for maybe 30 aircraft. What is happening right now is that capacity is growing faster than demand so we will all have to wait for demand to catch up. Because of this, we aren’t planning to undertake any major expansion in the near future.
How have the established carriers reacted to your market entry? How have they tried to run you out of town?
A study done by an online travel agency showed competitors’ fares for routes where we operate have dropped by 39% since we entered the market. In addition, following our announcement of flights to East London and Durban in August, we have seen very, very aggressive pricing from both Kulula and Mango as we are all matching each other’s fares.
But the question to ask is will they keep on adding capacity? Well I guess it depends on how deep their pockets are as there is no demand for it right now. Obviously you can add capacity but you aren’t going to fill the airplanes right at the moment.
And how do you position yourself? Usually low cost carriers just go on a price differentiation.
Well while price is the key to any low-cost model, it can’t be the only thing you differentiate on. For example, if we drop our price, Mango matches it and they do it with any price we put on sale. So we really try to focus on other things such as on-time performance and this year we have been the most punctual airline out of Johannesburg and the second out of Cape Town. I think we’re considerably better than other LCCs in that respect. We also try to find ways to make travel more convenient by trying to smooth out the entire process of flying.
Low-cost carriers all over the world generate a lot of revenue through ancillaries. How far have you taken this?
Ancillary revenue is big for us. We were the first airline to completely unbundle our fares in that you pay for your bag, you pay for sports equipment, you pay for SMS confirmation, you pay for a preselected seat and you pay for insurance. You basically pay only for what you want. An interesting stat is that only about 50 percent of our passengers actually opt to take a bag.
So are you planning to go international?
Maybe regional. It’s something we’re looking at and I think it’s something that all airlines in Africa are looking at as well. I think anybody that says they aren’t looking at flying regionally is probably keeping something under wraps because everybody believes that is where the growth is. Everybody sees the potential for growth in Africa given the huge population and that is particularly appealing to a low cost business model. But I think one major issue is the lack of open skies agreements which curtail where you can fly to. You can’t just pick a destination and start flying there – you need to be allocated traffic rights.
Also, you need to pick your market carefully and establish where there is actually enough demand – a lot of regional flying works on business class seats and two- and three-class configurations. A Low Cost model on the other hand requires a route where there is high demand to generate the necessary minimum of 70-80% load factors. Also in southern Africa you have to pay more attention to distribution as there are far fewer internet users than say in Europe.
In other regions we have seen other Low Cost Carriers such as Nok Air and Spicejet venturing into the regional aircraft market with high-density Q400s capable of carrying 80 passengers. Do you have any plans to operate aircraft smaller than the B737?
Not at this stage. It is not something we’re looking at at this point in time but I can say we have looked at the ATR for our ACMI operations. In any case, there are actually several routes where smaller regional jets compete with a B737 with 189 seats but also routes where there are currently only smaller planes in service. Demand aside, on such routes we would rather fly our Boeing as opposed to using a regional aircraft as we can keep our unit cost down.
Regional budget operators such as Fly Africa and Fast Jet have been setting up joint ventures all around Africa in order to gain additional market access. Is that something Safair has considered?
We have considered it and we’re looking into it but we do not have any immediate plans to partner with any other companies at this time.
Are you planning to cooperate with other airlines and set up code-share and interline agreements? A lot of people transfer in JNB but they actually only have one airline to choose from if they want to have one ticket.
As a budget operator, you have to adhere to the confines of your business model and in our case, quick turnaround times are a critical component. However, that wouldn’t work with codeshare or interline deals as they rely more on convenient connection times. But that isn’t to say we aren’t open to the idea. While we would be open to co-operation, we would only invest in the necessary IT infrastructure and so on if we saw a real advantage for us. But for the moment, no.
Safair has been very active in other markets such as cargo, ACMI and special ops like flying for the United Nations. So which segments from your legacy business are still growing and what percentage do they contribute to your overall business?
Well our operations still make up half of our total business. In fact, in terms of fleet, it is the biggest because it has a total of nine aircraft. Unfortunately, it is very difficult to find suitable aircraft to meet our fleet expansion needs – the Lockheed Hercules is one example. We would like to grow our fleet with them but they are difficult to find. In fact, you might have seen the announcement that ASL is looking into the latest version of the Hercules – the L100J – but it still needs to be certified for commercial use and it is a much more expensive aircraft to operate. We actually did grow our “legacy” fleet recently by adding B737-400 Combis, which are working out very nicely for us in Africa. We have seen big demand for them there because you often have flights which require freight in one direction and passengers in another.
What are market conditions like for a capacity provider in Africa?
For us there’s a split – there’s the specialised work we do with the Hercules and the Combis, which still does very well. But the provision of back-up aircraft to other airlines or offering additional capacity on an ACMI basis to airlines is a very difficult niche to make work. Contracts in that segment are usually very short-term – when an airline has an aircraft undergoing a check or when they want to explore new route options – so it’s not easy. But on the other hand, for specialised aircraft you can find long-term ACMI contracts with organisations like the World Food Programme, the United Nations, and the Red Cross.
What are you future plans in terms of business diversification?
Basically we want to grow both businesses. We’re still looking at growing our legacy ACMI business but again difficulties in sourcing specialised aircraft like the Hercules and others are a limiting factor. In terms of FlySafair, I think the immediate desire is to settle down with the -800s. I don’t, however, think we’ll grow that fleet in the next year.
Overall, the game plan is to grow both businesses but if one should naturally overtake the other, well then so be it.
Thank you very much!
Learn about Safair and FlySafair on ch-avation: