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South African Airways Low-Cost Unit Grows in Slow Economy
By Kamlesh Bhuckory - Oct 9, 2014
Mango Airlines SOC Ltd., the profitable low-cost carrier owned by state company
South African Airways, plans to add new routes and planes as slower economic growth increases demand for cheaper flights.
"As the South African population becomes increasingly price-sensitive and moves across to lower and more affordable price options, we are experiencing great passenger demand," Chief Executive Officer Nico Bezuidenhout said in an interview yesterday at Bloomberg's offices in Johannesburg. "This is going to be a good revenue year for us."
Mango, which has eight
Boeing Co. (BA) 737-800 planes flying mainly between South African hubs such as
Cape Town, Johannesburg and Durban, reported record profit of 40 million rand ($3.6 million) for the year ending March while sales gained 42 percent. Unprofitable South African Airways has yet to publish earnings for the period and is awaiting approval from the National Treasury for additional financial assistance to keep it afloat.
"Good control of unit costs, increasing gain in market share, all add to better margins," said Bezuidenhout, 39, who was briefly interim CEO of SAA before Monwabisi Kalawe took over last year. "Having said that of course, aviation margins are notoriously bad."
Margin Pressure
While Mango forecasts higher revenue this year, the flipside of slower South African economic growth is that profit margins may fall, he said. The
International Monetary Fund reduced its 2014 forecast for the nation's gross domestic product growth to 1.4 percent on Oct. 7 as
Africa's second-biggest economy struggles to recover from protracted
strike action and rising inflation.
"This year is a bit tougher I must admit," Bezuidenhout said. "I see there is margin pressure."
The outlook for the rest of year is further clouded by the arrival of low-cost carrier
FlySafair, which operates its first Cape Town-Johannesburg flight on Oct. 16. The newcomer joins Mango and Kulula, a unit of
Comair Ltd. (COM), in the low-cost market.
"My estimation is that they will suppress revenue by about 300 million rand given their scale," Bezuidenhout said.
Mango plans to add a further two Boeing aircraft as it continues to grow -- both likely to be inherited from SAA -- and will increase capacity to
Port Elizabeth and George with the possibility of a new route to East London, Bezuidenhout said.
That's while seeking a new destination elsewhere on the continent to add to its flights to Zanzibar, off the coast of Tanzania. Possible locations include Kenya and Indian Ocean island nation Mauritius, he said.
Leisure Orientated
"We are sensitive to our shareholder when it comes to African expansion," Bezuidenhout said, referring to an obligation to the government not to compete directly with SAA on routes such as Johannesburg to Harare, the Zimbabwean capital.
"Our focus is to try to be on leisure-orientated routes more so than business-orientated routes."
Mango's positive cash flow and debt-free balance sheet will provide enough financial strength to renew its fleet in about 2021, Bezuidenhout said. The airline will start to look at new Boeing and
Airbus Group NV (AIR) models from 2017.
To contact the reporter on this story: Kamlesh Bhuckory in Johannesburg at
kbhuckory@bloomberg.net
To contact the editors responsible for this story: Simon Thiel at
sthiel1@bloomberg.net John Bowker, John Viljoen
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