Low-cost carriers taking over domestic air travel
8 May 2018 - by Kirby Gordon
It seems that there are some promising noises coming from the stable of the national carrier, with many movements afoot to turn the airline around. New SAA ceo, Vuyani Jarana, recently addressed the trade with reassurance of SAA’s commitment to a positive future for the carrier, but there is one change that was announced at the end of last year which is fundamentally changing the face of domestic air travel.
On December 14, 2017, SAA released a press statement detailing how the carrier would seek to cut domestic routes operated as SAA, and increase domestic capacity operated by subsidiary, Mango. On a more technical level this move sees SAA simplify its fleet by exiting six Boeing 737-800 aircraft from the predominantly Airbus fleet, and placing four of these with Mango which operates this aircraft type only. The remaining two Boeing 737-800 aircraft will be added to FlySafair’s fleet.
Keeping fleets simple is a key way to reduce complexity and overheads for an airline, so this makes great sense, but what it also means is quite a fundamental shift in the supply of domestic seats. Effectively, six aircraft will exit the market and reenter again painted in different colours, which would seem at first glance to leave us back at square one. The difference comes in with the fact that we are seeing six aircraft offering a full service leaving the market and returning as six aircraft offering a low-cost service. In other words, there’s going to be a reduction in the supply of full-service seats on some local routes, and an increase in the low-cost seats.
The first thing that the low-cost carriers will do is remove the business-class seats and replace them with a full-economy configuration. Following the laws of supply and demand, a decreased supply of business-class seats means that it’s likely to become even more expensive to fly in the soft seats – locally anyway.
On the flipside, with more supply entering the economy seat market, the prices of these seats are likely to drop a bit, or at least not increase as quickly as they would have otherwise.
For corporate travel buyers this change may mean that it’ll be time to work with your companies and clients to craft some revisions to internal travel policies. With businesses across all sectors looking to control costs, it’s going to be ever more challenging to justify the premium prices for a business-class seat on a short-haul flight, especially when the economy alternative is so reasonably priced.
There is another really important dynamic that’s unfolding behind the scenes when it comes to this switch of inventory from full-service carriers to low-cost carriers, and that has to do with the remuneration structures that travel management companies are exposed to. Traditional full-service carriers are more inclined to have space in their fares to pay commissions to travel brokers and indeed, many have these kinds of agreements in place. Low-cost carriers on the other hand, traditionally don’t pay these kinds of commissions. The result is that the earning potential for travel management companies on domestic inventory is going to be reduced.
Marco Ciocchetti, ceo of XL Travel was recently quoted saying: “This impacts our income, because initially there will still be no remuneration for booking Mango. SAA flight numbers can still be booked on Mango and would continue to be paid on the agreement, but flights will be more expensive than Mango, due to their added value offerings, including meal vouchers and the ability to earn voyager miles”.
This is the one small caveat to this shift from commission paying full-service to non-commissionable low-cost carriers: brokers will still be able to book Mango inventory on SAA flight numbers thanks to the codeshare agreement between the two airlines, and in so doing, earn commission on those sales. Naturally, these flights will sell at full-service carrier prices to cover those benefits Ciocchetti lists, along with the commission.
If it’s not already happened, you’re likely to be hearing from your TMC soon wanting to chat about this shift in their remuneration structure. This will be a great time to engage openly with your travel management partners to reassess terms of engagement and ensure that domestic air travel arrangements are constructed with the best interests of all parties.
These changes to the domestic market are interesting to see. What we’re witnessing is economy air travel continuing to become more affordable, which is a great thing for our people and our economy.
Kirby Gordon is head of Sales and Distribution at FlySafair. Kirby specialised in the sale and distribution of goods and services through e-commerce platforms and was head of brand at Kalahari.com before joining Safair and the travel trade in February 2015. Kirby holds an MBA from the UCT Graduate School of Business and currently resides in Johannesburg.