Global reasons for keeping SAA grounded and adopting open skies policy
I have not always seen eye to eye with finance minister Tito Mboweni — we have had our differences about the appropriateness of inflation targeting as a monetary policy philosophy sanctioned by the Treasury to be implemented by the Reserve Bank. But I cannot agree with him more about asking the valid question about whether SA should have a national airline.
Here are the global reasons I think he is right to imply that the answer might be no. And I have a further proposal that could turn what has thus far been a commercial disaster into a trendsetting triumph: SA should instead adopt a genuinely “open skies” policy so that, with the necessary health and safety protocols in place, whoever wants to fly to SA can.
When considering any economic policy in our increasingly interconnected world, it helps to understand the international context in which that policy would operate. In recent decades the global air travel industry has become an extraordinarily complex and competitive one. If there is one reason above many for this, it would be that it is made up of an uneasy mix of players from the private sector trying to make a profit and players backed by their public sector whose primary motives are not always driven by hard-nosed commercial considerations. We know the latter example all too well.
This dichotomy has been doubly reinforced in the era of Covid-19, not least because most of the major previously private sector airlines have only survived by receiving grants or very soft loans from their home governments. What will emerge in 2021 is an industry that is far less private sector in its mix and far more dominated by airlines that are state or quasistate carriers.
It is into this new competitive setting that a new SAA would venture. And it would also be venturing into an operational time zone where “there be dragons”. As even US airlines admit, the superconnectors of the Arabian Gulf — Emirates out of Dubai, Qatar out of Doha and Etihad out of Abu Dhabi — with Turkish out of Istanbul, have redefined the economics of global air travel. And lest I create a false impression, even these four category killers have suffered mightily under the weight of the 2020 Covid-driven collapse in passenger air transport.
Before 2020, the Gulf trio were particularly disruptive. Combining access to the world’s cheapest avgas, tax-free environments for their employees and operational hubs at the crossroads between Asia, Australia, Europe and Africa with connections to both North and South America, they redefined global aviation. That they are also owned by governments with deep pockets, operating the world’s most fuel-efficient fleets and centred on ultra-modern airports, only triple underlined their status.
Then there is the profound advantage all these factors combined gives them in determining the pricing algorithm that governs every seat on every flight. Given the sheer size of their fleets and the comprehensiveness of their route maps, they can price their marginal seats at a low level few airlines can match: it is hard to find a cheaper flight from Bali to Johannesburg that does not result in travelling with one of this trio via the Gulf hub. And then — as if very low prices were not enough — there is their extraordinarily high quality on-board experience: service, food, entertainment and comfort.
In the year ahead, as air travel returns to normal, expect the airline industry to be hypercompetitive, with ultra-low fares offered as players fight to rebuild market shares.
One of these three, Qatar Airways, upped its game recently. A critical development took place in Africa just before the lockdowns set in: Qatar bought a 60% stake in Rwanda’s new Bugesera International Airport at Kigali and a 49% stake in RwandAir. Qatar’s vision is to turn Kigali into its African hub, thus putting enormous pressure on any airline operating a similar strategy. It may even force Addis Ababa-based Ethiopian Airlines to scale back its vision of being Africa’s regional airline. Furthermore, OR Tambo International Airport’s claim to being Africa’s efficient transit hub is now moot: Kigali, Addis Ababa or even Nairobi are more centrally located to fulfil this role.
Qatar is a member of the Oneworld Alliance, the only airline of the Gulf trio in such an alliance. Throughout 2020 it has heavily supported its fellow alliance members. It increased its shareholding in IAG — owner of British Airways, Iberia and Aer Lingus — to 25%, loaned money to LatAm and offered to stand behind Cathay Pacific if asked. In both the latter airlines it already has a 10% shareholding. It also owns 5% in China Southern, now the world’s largest airline.
Qatar has, in the time of Covid-19, used this downtime to cement a global network that is arguably second to none. And here in SA, Qatar has the strongest partner: Comair-British Airways, a Oneworld affiliate. Comair — with a solid Southern Africa network — is resuming flights on December 9. (Qatar also has interline agreements with Safair and Airlink.) Any newcomer to the Southern African skies would therefore be taking on a very powerful global-cum-local incumbent.
In the year ahead, as air travel returns to normal, expect the airline industry to be hypercompetitive, with ultra-low fares offered as players fight to rebuild market shares. This is reason enough for the SA government not to rush into investing in a new airline: during the latter’s critical launch period, it would be very constrained regarding what flight routes it could operate profitably.
An alternative option is for SA to adopt an “open skies” policy with the express intention of repairing the domestic tourism industry. In the next two years, rebuilding our tourism footprint globally will be a far more important — far more job-rich — objective than reviving a national air carrier. A new carrier’s success could only be achieved if ticket prices to and from SA were high. Not only is that unlikely, but if achieved it would restrict tourist arrival numbers. Let a Qatar or Turkish deal with that complex pricing algorithm: the surest way to get air-ticket prices down and tourist arrivals up is to promote intense competition among those airlines flying to SA as part of an “open skies” policy.
And if the promotion of employment of SA aircrew was a sub-objective, one might set a quota for any crew of an aircraft flying to SA to be made up of a certain number of SA citizens. Emirates and Qatar probably meet such a requirement already.
Any new airline set up by the SA government would be like a baby springbok entering a cave full of hungry lions. It is a story that is unlikely to end well.
• Power is strategist at Ninety One.
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