Oct 2012 |
"Interviewer: Today is October the fourth 2012, I’m Addison Shonland and today I’m speaking with Mr Eric Venter who is CEO of Comair, an airline based in South Africa. Thank you so much for taking the call Mr Venter and could we start off by, could you perhaps give our listeners a sense of your company Comair, and the airlines it has and the markets it serves.
Eric: Yes, sure, Addison, thank you very much. Ah, Comair, has been in existence for 67 years now and ah, we’ve got the reputation of having 67 consecutive years of operating profits which I don’t know of too many carriers in the industry that have done that. We operate today two different brands, the one being a franchise of British Airways, it’s one of only two franchises remaining. At one stage British Airways was big on its franchising business and they had something like eleven franchises around Europe and ah well mainly Europe. I think that the reason we have survived is that we’re not on their doorstep. So we still operate a BA franchise, and at the same time we’re operating a low cost franchise as well and ah as you would expect, most people ask, can you operate a low cost and a traditional carrier in one portfolio, in one airline, and we think we’ve got it right so far ah, we’re servicing mainly the domestic market in South Africa, it’s still quite a small market, the population of South Africa is about 45 million people but the flying population is probably only about 2 and a half million people, obviously because of the big income difference in the country. The total number of domestic sectors flown in the market is in the region of about 12 million per annum and we’ve taken about 37% market share. The South Africa domestic industry was only deregulated in 1992 and prior to that the national carrier had exclusive rights to operate in the domestic market. So we got into this competitive environment in 1994 and then we took on the BA franchise in ’96, and we launched our low cost carrier called Kulula, which means easy in Zulu, in 2001. And, over that period we’ve grown to 37% market share.
Interviewer: What did Comair do before deregulation in South Africa? What were they, were they flying kind of inland?
Erik: Prior to deregulation we were in much more exciting industry of flying BC3’s and F27’s and all those real aeroplanes, that needed real pilots, to have the stick and pedal type flying. But we were confined to the very, the smaller routes, we were confined to charter type business, we were actually flying, a lot of the time we were flying the gold from the mining areas up to Johannesburg and it was a very different type of operation, but yes, the deregulation really allowed us to get into the jet, mainstream, aviation of the country.
Interviewer: I want to come back to the issue you described about having on the one hand what sounds like a certain type of franchise, probably equivalent to what we would understand as being a full service airline, and of course you’ve got the LCC. What kind of management skills does your team need to run two such different brands? Is there any special stuff that goes on, like cross pollination?
Erik: Yes, definitely, I think when we launched our low cost carrier in 2001 there was obviously great panic amongst the staff of the airline that this low cost carrier would result in them losing their jobs and all kinds of other things, but it certainly settled down fairly quickly after that and it really is a single factory producing juice in two different cartons, you know one being a glass bottle and the other being a paper carton, but in the background it’s still the same factory, so we actually run it as a single operation, you know it’s got single HR departments, single finance departments, single commercial departments, even a single marketing department, although we do have two separate heads of marketing for Kulula and BA because the brands are so different and because the customer proposition on the face of it is very different. On the operations side, single operating department, the same pilots. We do have a pool of cabin crew that’s crossed trained but we do also have a portion of cabin crew that are purely Kulula and a portion that are pure BA, so it really is one airline, I think, people say, well how can you operate a low cost carrier in a traditional airline environment but I don’t think we ever really were a traditional carrier, we were always a low cost carrier, even operating as British Airways. Our background and our history has always been a very tight-fisted and efficient type of operation so you know, people say couldn’t you have got lower pilot costs if you had started as a separate company for your low cost operations, but you know, not really, we’ve always been quote efficient in our operations, even as British Airways, so in that regard we’re actually achieving quote good economy scale by running the two airlines, or two brands, under a single airline.
Interviewer: And if I were a British Airways customer, landing in Johannesburg and connecting to one of your flights, how much difference do I notice in the product that I’m exposed to?
Erik: Well, the product on the British Airways in South Africa is supposed to be based on the European product of British Airways, but what we have noticed is that our product is quote often a little bit ahead of that offered in Europe. We still have a rather demanding market here in South Africa, people to a large extent haven’t got used the level of ruthless customer proposition that you see in the likes of a Ryan Air or see in a lot of American carriers. So, they are still fairly spoilt in the South African market and we’ve certainly put a lot of effort into positioning the British Airways brand into South Africa as an absolute premium brand, and so, ja, we’re even a little bit better than what you typically get on a BA flight in Europe.
Interviewer: That’s good. Now, you’ve mentioned the fact that you’re competing against a state player and that brings to mind the kind of problems that we see in India, with Air India a perennial money loser and driving its private competition crazy. I would imagine in South Africa its sort of a similar situation?
Erik: Very much a similar situation, ah we’ve been facing a rather wild ride with our state carrier continuously being bailed out by the government, the airline industry in 1992 when it was deregulated only contained the one national carrier and since then we’ve actually added another two state funded carriers, one being the launch of a low cost carrier by South African Airways, called Mango, which is a little bit bizarre considering the low cost industry was quite competitive at the time already, so for the state to get involved in the low cost industry was a bit extreme, and they have also launched, or taken over a regional carrier into their state portfolio. So, yeah, it’s a real challenge, ah, obviously one of the biggest issues we have is there are continually big losses simply by not charging the kind of airfares that are financially viable, and then when it comes to replacing the fleet, they haven’t made any profits to fund their new fleets so they go straight to government to get bailed out to fund the new fleet of aircraft, whereas obviously the private carriers have to make enough profits to pay for their next fleet of aircraft, and it’s really hard to make a profit when you’re fighting against airfares that are not viable in the market in the first place. So, ja, that is our biggest challenge and it’s been a long term challenge and there’s just been another announcement of a 5 billion Rand bail out of South African Airways, that announcement came through two days ago, so it doesn’t look like this is something that’s going to be going away in the near future, and we are going to have to deal with that, it’s certainly going to keep us on our toes.
Interviewer: Are you able to out compete them? I mean in a value proposition.
Erik: I mean in terms of efficiency and in terms of value proposition and in terms to a larger extent of employee culture, I think we’ve managed to out-pace them quite substantially, I mean the fact that we’ve managed to secure a 37% market share over the years, tends to indicate that we must be doing something right. I think the biggest challenge that they really face is that every four years when we face a government election, they face the new shareholder being the latest minister of public enterprises, typically that also comes into the new board of directors, it comes with a new management team, so just no institutional history or knowledge that’s carried through into South African Airways, and consequently the leadership team they will start with one strategy, they’ll get half way through the implementation and it will get replaced with a new leadership team who will start on the next strategy and so they’ve sort of built up layer upon layer of semi implemented strategies, along with the obligations that come with those strategies, and they’ve now just gone through another board shake up, half of the board resigned and walked out because of a impass with the latest minster of public enterprises and so they’ve just appointed a new board once again, which will come in with its new strategy, but over the years, and we’re now looking at, since deregulation only, we’re looking at probably the sixth or the seventh generation of leadership at SAA. There’s a huge pile of legacy issues that have been piling up from generation after generation of leadership. So, they’ve got fleet issues that go back three or four generations, they’ve got employment issues that go back generations, they’ve got components, and spare parts and GDF issues and you know layer upon layer of things that have been initiated and where obligations have been created but they haven’t actually ever fulfilled these strategies because the next team has come in with a new approach. So that really is a big millstone around SAA’s neck, and you know if we look at what is probably the primary cause of the ongoing losses is the fact that they just never have a long enough term of any leadership team to carry them through a strategic process or a cleaning up process of the airline.
Interviewer: Of course with a bottomless pit bank account you really don’t feel too much pressure to complete anything.
Erik: And I guess also the fact that your probability for staying on four years as a board member or as a management team member is pretty limited so, you know if something is not looking good, well , run out the balance of your four year term and then you’re going to be out of there anyway so it’s not as though you are being held accountable for your term.
Interviewer: Let’s get back to your business, if you look ahead, where are the opportunities and challenges to keep your business growing profitably, let’s start off with route structure. Are you in a position, do you think the government will allow your airline to start flying beyond the borders, further and further?
Erik: Ah, we do have a few routes into Africa already, we’re flying into Zimbabwe, into Zambia, into Namibia, but the challenge here is that most of the African countries have got their own national carriers and their governments are very protective of their national carriers, so all the routes into Africa are usually protected by lateral agreements between governments and so if we want to get onto these routes where South African Airways has typically has grandfather rights, we have to first of all try and get the governments to agree to increase the capacity and then secondly we have to apply to our government to actually obtain that capacity if it has been approved. So, it’s a very lengthy process to get any kind of meaningful frequency into Africa. There are a few countries that have opened up and implemented open skies between countries, but typically in those kind of scenarios, you have a big national carrier on the other end of the route, and you have SAA on this end of the route, so if you come is as a third carrier you’re competing against two quite strong national carriers from the word go and because these markets are actually quite small in size and the national carriers are generally quite protective of keeping their monopolies on these routes, you typically find you’re in for one hell of a price war and the moment you pull off the route you see the prices rocket again to really spectacular levels. So it’s quite a challenge getting into Africa. What’s more of an opportunity at the moment in the short term is the implementation of new ikey systems, we’ve just transferred our entire Kulula business onto a safer platform, and we’ve actually implemented sabre as a enterprise system across the organisation, so not only the commercial suite of sabre modules, but also the operating suite as well, and with the evolution of low cost carriers into this sort of hybrid environment, we obviously now taking all the sort of opportunities that come with the IT functionality and the market forces around pushing us toward a hybrid product. So we’ll be getting into things such as brand affairs, like interline agreements on low cost carriers, which globally a lot of low cost carriers is not a good thing to do, but where we’re sitting at the Southern tip of Africa and where there’re a lot of low cost carriers coming into this market with not a lot of alliance partners, it does give us a unique opportunity to form interline or codeshare alliances with the inbound operators, and ja, there are a lot of other ancillary type opportunities that are now on our doorstep, so there’s good opportunity for revenue growth within our existing operation still and then yes, we’re always looking at African opportunities, we might have to look at some less typical opportunities, for example, partnering with an operator in a foreign country to set up a hub outside of South Africa and then look at getting rights both from South Africa and from the other end of the route and thereby achieving the adequate frequency between South Africa and the other country and at the same time build a network from the other country, but that in itself also has some huge challenges from a political perspective, there’s a lot of political instability in Africa, there are a lot of infrastructure challenges in Africa and then there’s always the issue of corruption and bribery that we need to try and avoid as well, so there’s a challenge to do business here in the Southern tip, but I think there are opportunities to be taken but I think it takes time, it doesn’t happen that quickly down here, and we’ll get there, but it will be a challenging story.
Interviewer: One last question, it seems that your company is now trying to standardise on the 737-800 MG, um, that aeroplane has an amazing range and has you’ve just described, the idea of perhaps looking at another hub within Africa, you could with that aeroplane, have a one stop service all the way to Europe.
Erik: Yes, um, but really the opportunities of setting up a Central Africa hub for example, would provide that opportunity to then take the next step all the way to Europe as you say. The Southern tip of Africa is really not a good place to be in terms of feeding a broader market, all we can do is fly north. The Central African based carriers have obviously got a much better opportunity in terms of serving in all directions and so like you’ve mentioned, if we set something up in Central Africa it does give us that doorway, not only to the rest of Africa but also all the way to Europe.
Interviewer: Could you give me an idea of which part of central Africa you’re looking at?
Erik: Ja, look there’s a lot happening in Africa both around political issues and around safety oversight in airspace. The areas that look the most promising at the moment are the likes of Ghana in West Africa, you know a base like Accra, Nigeria still fairly dicey, there’s a lot of issues there that are really a bit more challenging than what it’s worth, um East Africa is heavily served already by the likes of Ethiopia and Kenyan Airways and then if you go really smack into the middle of Africa like the Democratic Republic of Congo that really is a challenging environment, there’s really very little infrastructure there at all so potentially you know probably going toward the equator, probably a place like Ghana is the best opportunity, but there are some other opportunities just a little further south in Southern Africa like Lusaka, possibly even Malawi, there’s a complete lack of infrastructure in a place like Mozambique, aviation infrastructure or services, even though it’s an incredibly long country and there are almost no roads whatsoever and there is a lot of development taking place there in terms of resource mining, gas, oil etc. so yes, there are opportunities around, so some natural balance in the wrist with some long term reward.
Interviewer: This has been a great interview, thank you for your time.
Erik: No, it’s a pleasure, thank you." |
