Airlink’s Resilience Bucks The Trend In Southern Africa

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Mr. Rodger Foster, Airlink CEO In this exclusive interview with Aviation & Allied Business Journal on the sidelines of IATA AGA in Doha,  reviews the challenges facing African Airlines

 

Q: You are here at the 78 IATA AGM, what’s your impression of the recovery in the industry, especially for the African airlines and for Airlink?

A: This is a record attendance here in Qatar, I think it is an indication that the airlines are determined to participate in the recovery as best as they possibly can; and that in itself is a commitment.

 

I think the biggest concern amongst the airlines is what’s happening in the Russia-Ukraine geopolitical situation, which is obviously causing the price of oil and the price of jet A1 fuel to escalate beyond a manageable level. And I think if there is cause for optimism, it’s that we are post pandemic at the moment; and if there is a cause for caution, its the price of oil.

 

So, how that impacts us in South Africa is that obviously with the price of jet A1 at the moment, it’s changed the ratios of revenues to costs quite significantly. Whereas previously the price of fuel was approximately 25% of your total cost, what we now see is tending towards about 50% which is an unsustainable level.

 

We have to move forward with caution because we are aware that not all of that cost can be passed on to the consumer. It also cannot be absorbed by any airline; so we have to find a way to gradually increase to the consumer, recognizing that that could cause a market contraction.

 

Markets are elastic and we’re aware of that and we are also aware of what else has happened in the industry at the local and regional level with players like South African Airways having been in business rescue, coming out of business rescue with a fraction of its former footprints. And Mango is no longer in the business at the moment and not quite sure whether it’s coming back or not. SA Express is out of the business and Comair has been in business rescue and now gone into liquidation.

 

Obviously, these are all significant events; so there are some gaps in the market which is always very sad, especially in terms of the impact in the market. Clearly, their staff have been compromised, their livelihoods have been compromised and I think all of that is extremely sad. At the same time, we need to understand that the markets are not what they used to be.

 

You know, in Africa we haven’t reached recovery to the same extent as what’s happened in Europe and North America and possibly to some extent in East Asia. And I think that the recovery in Africa will take time. I think it also has to do with disposable income per capita and GDP per capita. You know, we’ve got a very big population in the whole of Africa, of 1.4 billion people; a continent which doesn’t really achieve the same GDP per capita as other continents.

 

So, I think we’re a bit behind economically and I think that there’s always a correlation, a direct correlation between GDP per capita disposable income and the ability to afford air transportation. Airlink has expanded its footprint in the subregion.

 

Q: Did Airlink get any formal support from the government in any way?

A: None whatsoever, not even any relief from any landing fees or air traffic navigation services contributions; there was zero support whatsoever.

 

Q: Did you make any representation to government through AASA or individually?

A: Yes, we did through AASA, and individually as well as through the ministry to say, you know, the airline industry needs assistance. But there hasn’t been any assistance, certainly not to the private sector. We know, obviously that there has been assistance to the state-owned enterprises, but nothing whatsoever to the private sector.

 

Q: So, you’ve entirely depended on your own strength to be able to bounce back and to continue; but were you involved at any point in any form of cargo movement because the COVID-19 gave opportunity for cargo operations?

A: The Airlink business model works on cargo in the belly space of passenger aircraft. We haven’t really had any dedicated cargo services. So no, we haven’t really benefited from dedicated cargo services. But as we’ve been in recovery on the passenger services that we’ve operated, we’ve filled bellies of our aircraft with belly space cargo on the routes that we were permitted to operate. There’s been a gradual recovery after the lockdown.

 

When the lockdown was relaxed to some extent, we were only able to operate on a few routes domestically in South Africa and then gradually, there were a few more routes added, and then overtime we were able to activate destinations across the sub region as well. Wherever we’ve operated passenger services, we’ve always been able to fill the bellies with loose bulk.

 

Q: Now, what’s your approach to Single African Air Transport Market (SAATM), is Airlink working with other airlines flying into new regions, connecting much better?

A: I think that SAATM is a great concept in essence. It does encourage airlines to work together to cooperate to avail of 3rd and 4th freedom traffic rights that are vested in each respective airline, and because of the third and fourth freedom traffic rights also to get access to 5th freedom traffic rights.

 

So, I think the concept is good. However, the practical implementation of it is problematic certainly from where we are because even getting third and fourth freedom traffic right is problematic. And as if you don’t have third and 4th you can’t get 5ths freedom traffic. So that’s the one challenge that we have been working on, together with our Ministry of Transport and the International Air Services Council, which is the judicial autonomous body that is responsible for the control of traffic rights.

 

In essence, traffic rights get controlled by bilateral Air Services Agreements. But from the South African point of view, the body that is responsible is the International Air Services Council. It was defunct for a period of time. It’s now been reinstated and we need to give them the opportunity to settle down, to understand the background, to assess the traffic rights which are dormant and unused, and then to reallocate those traffic rights to airlines which are eligible, such as for example, Airlink and so on and so forth.

 

The other impediment to the development of SAATM and the concept of liberalization of the African air skies is about inequalities between the various aeronautical authorities and their approach to the issuance of foreign operators permits. In some instances, it costs a fortune, in other instances it is quite affordable. For example, for a foreign airline to get a foreign operators permit to operate in and out of South Africa costs you merely 1000 Rand; but to operate in other jurisdictions costs a prohibitive amount of money sometimes in the millions just to get a foreign operators permit. And that becomes a barrier to entry and the other one aligned with that is that aeronautical authorities have allowed monopolist passenger handling, ramp handling, ground handling operations where there is extortion at play, and you know that straight away becomes a barrier to entry and as long as that prevails where airlines are not allowed to do self-handling.  This is a real life example that applies in quite a few jurisdictions throughout Africa, then straight away that is not going to encourage the propagation of the SAATM concept.

 

Q: You are not just the only airline; so, in this kind of situation do you think you need to make a presentation to AFCAC and the AUC to make the playing field more level?

A: From South African domiciled airline perspective, our first point of call is our Ministry of Transport in South Africa, and the second port of call through the Ministry of Transport is our Department of International Relations and Cooperation. And we’ve registered these complaints with both authorities already and the third complaint needs to go through to IATA and we registered the complaints with the IATA through the local office in South Africa. They are both fully aware of this complaint and they need to mobilize, so we need to be patient.

 

But on the other hand, we need to agitate because if we really are going to achieve SAATM in Africa, then this is the way that we have to do it. We can’t sit back and do nothing.

 

Q: Are AASA and AFRAA involved in this?

A: They are aware, I need to agitate more with Aaron Munetsi, as you all know, we are not members of AFRAA for the time being, but you know certainly Aaron Munetsi of AASA can mobilize activities and initiatives that can bring this under control and we have one or two cases in point.

 

We’re already at odds with the Civil Aviation Authority of that country and jurisdiction over excessive charges, where, as I say in the one instance for their airline to get a foreign operators permit to operate in and out of South Africa, is simply one 1000 rand; which is not a big number I mean.

 

There’re the administrative aspects of it which are important, but for us to get a foreign operators permit in their domain costs a prohibitive number and I mean a very, very big number in the millions.

 

Q: In the current situation where you have to fill the gap where many airlines have gone down in the region, what’s your strategy?

A: So, we need to do the capacity growth aspect of it. We need to do it with caution. We’ve seen the most recent airline failure being Comair which was in business rescue and now it’s gone into liquidation, sadly.

But at the same time there is a void that needs to be filled.

 

We don’t believe that all of the capacity that Comair had in the market, 40% of the share of the market where it participated, needs to come back. And we are very mindful of the fact that competing airlines are already in the process of adding capacity. So, we need to exercise caution because there’s a fundamental reason why there have been so many airline failures in southern Africa.

 

And that for me would be because of over capacity, and there’s been a principle of putting seats to the market at below the average affordable cost of the seats. If it wasn’t for that, then clearly the airlines would all be flourishing, but they’re not.

 

So, they’ve tried desperately to commoditize air travel and I think to some extent they have achieved it, but they’ve over capacitated the market. So, for me the market needs to have capacity reduction to some extent. If you remove 40% of the capacity, it’s a lot of capacity. And Airlink would like to share in filling of that gap, and our strategy is to cautiously add some capacity where we can. But we’ll be watching what happens with competitors as well in the interest of not over capacitating the market. We will be very cautious.

Mr. Rodger Foster, Chief Executive Officer, Airlink

Q: How are you responding to the fuel challenge?

A: Well, at the moment we are trying hard to pass some of it on through the fuel levy, which we’ve had in place; but we’ve noticed that the market is elastic in a negative context. So, as we’ve pushed harder, we’ve increase the fuel levy by 5 U.S. dollars in most instances, but we see resistance to that straight away, so the market doesn’t have the disposable income to be able to absorb increase of the nature that we are talking about.

 

So, we are mindful that obviously the current situation is not sustainable so what we are trying to do is change the ratios of supply and demand to make sure that the load factors improve so that we can absorb some of the extra costs by increasing the revenues that we get, and the increase in revenues would come about because of increase in load factors.

 

Q: There are other markets on the continent beyond the Southern Africa region, are you considering any form of partnerships to be able to reach beyond since SAA is not actually doing what they used to do to connect the continent so far?

A: Yes, we are and we see other points in Africa as of interest to us, but again we need to be extremely cautious that we don’t get ahead of ourselves in terms of the growth and expansion plans. I think all airlines in the world, and especially those in southern Africa as evidenced by the number of airline failures that we are aware of in southern Africa, have had their balance sheets decimated. So, we need to be extremely cautious about growing too quickly and growing beyond the means of the absorption capabilities and capacities of our balance sheet.

 

So, the first objective from our perspective is we’ve extended ourselves into the region and we’re providing comprehensive air services in a network throughout the sub region, including all the capitals, Harare, Lusaka, Gaborone, Maputo, Dar es Salaam, Windhoek even Luanda and at other points as well that are of relevance.

 

So, we need to allow that to settle down a little bit, to consolidate for a period of time, to start replenishing the forfeited equity on the balance sheet and as we do that, then we will get fresh oxygen in our lungs to be able to expand more into further regions beyond where we are at the moment into Africa.

 

Q: How’s your relationship with Embraer?

A: It’s very good and obviously we’re mindful of the fact that product support, OEM – original equipment manufacturer support – has been difficult through the COVID pandemic, mainly because of supply chain disruptions throughout the world. But we working with them and not only them but also the other original equipment manufacturers, engine manufacturers, the landing gear manufacturers, to ameliorate that to the best of their ability and to the best of our ability; but the relationship with Embraer absolutely excellent.

 

They regard Airlink as a very important element of their global footprint and we’re very proud of that. We’ve got a joint venture with a training center of excellence in Johannesburg where we’ve got two Embraer training devices.

 

Q: Where do you see Airlink at the end of the full year?

A: We probably consolidate during this year, we may embark on a little bit more growth, we have a few more aircraft deliveries, used aircraft that are coming from the global market which is saturated with used aircraft at the moment. We would deploy those aircraft into our system for now and then just use this over a period. We have got over 50 Embraer regional jets. Embraer regional jets will be up to about 58 by the end of the year.

 

I’ve just gone through 30 years of being the Chief Executive of the company and I mean, it’s something that I’m delighted at and obviously extremely proud of.

 

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