Airline industry to see little growth with challenged economy and higher commodity prices in 2017; Industry-wide consolidation expected

Published Tuesday, December 6, 2016

Johannesburg: The South African domestic aviation industry may be set for another challenging year laced with occasional opportunity in 2017. So says Mango acting CEO Nic Vlok as the airline reviews the past calendar year and looks ahead to likely scenarios for next year’s environment. Vlok notes that the two primary themes for airlines next year would be cost compression and greater spending prudence while on the opposite end delivering increasingly attractive value propositions to consumers, drawing in market share during a sustained period of consolidation. 

“Economic growth is expected to remain flat at less than 1% year on year growth forecast,” says Vlok, “and give the fact that GDP and aviation growth tracks one another closely, this is the likely scenario facing airlines in South Africa.” He adds that 2017 will likely see other airlines follow Mango’s consolidation path of 2016, to continue next year, wherein the airline has managed to stem negativity and build success within its business. “Little positive movement in traveller volumes, price competition and an expected rise in commodity prices will add growing pressure on already squeezed airline margins.” 

Outside of GDP and demand-side influence, the primary factors that will impact domestic aviation are commodity prices, the exchange rate and the possible early implementation of the Yamoussoukro Decision. In its October Commodities Market forecast released by the World Bank, crude oil prices are set to recover from its recent lows and rise 20% from 2016 levels to around US$ 55 in 2017. “Given that fuel represents approximately 30% of airline overheads, an increase in the spot price of oil next year will add pressure on carries in a highly competitive environment. Operational efficiencies, fuel efficient aircraft and productivity growth will be critical factors in cushioning the impact,” notes Vlok.

He goes on to say that forecasts on the Rand’s performance lie both at the top and bottom of the scale. Last week News 24 reported that the most bullish forecasts for the currency sees it trading at R 13 to the US$ in 2017 with a bearish outlook peaking at R 16,50 lows against the greenback. According to reports, economists warn that the Rand is one of the world’s most volatile currencies, highly sensitive to geo-political movement. “Much of an airline’s operational cost is priced in foreign currency, making aviation particularly vulnerable to negative movement in the Rand,” says Vlok. This, coupled with the expected rise in fuel, shows cause for prudence.

“Mango’s approach during its first decade has been a measured approach to growth, and not dissimilar to the hangover of 2008’s Global Financial Crisis, the current economic conditions have created an environment conducive to consolidation.” This year Mango focused on this strategy and it is delivering the goods. “Load factors are up, revenue is looking solid and as a mitigation to current market conditions it is paying substantial dividends. It is to be expected that domestic growth across the industry will follow the same path next year.” Vlok predicts less than 1% sustainable growth in the industry.

2017 is also the year of the planned early implementation of the Yamoussoukro Decision, opening up Africa’s skies. South Africa will be a participant in this exercise, presenting both opportunity and the challenge of an injection of additional capacity into the local market. “Albeit from a low base, IATA’s 2035 forecast for African aviation was pegged at 5.1% with growth of 192 million passengers in a market of 303 million. The implementation of the Yamoussoukro Decision opens up these markets to South African low-cost airlines. Conversely though, it also holds the potential to see more airlines entering the domestic market here.” He believes that while the African opportunity may still be some time away, it presents the greatest opportunity for South African carriers to grow outside of its own, currently saturated, market.

Mango has successfully weathered the economic see-saw during some of the most difficult economic periods in its first ten years of operation, and continued to lead sustainable and affordable fares while step-changing much of the industry through innovation and distribution. “Mango expects to continue performing solidly despite the environmental challenges,” says Vlok, “with our focus for next year to exercise cost control, ensure as much value as possible for consumer’s pockets and to continue making air travel accessible for all the people of South Africa. This has and will always be our founding mandate and despite the likely challenges ahead, Mango’s approach is proactive and positive rather than cynical.”
 

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