South African Airways & South African Airlink on their activities to improve coordination between the tourism and aviation sector

Committee: Tourism

Chairperson: Mr D Gumede (ANC)

Date of Meeting: 15 Aug 2011

Summary

South African Airways (SAA) and SA Airlink briefed the Committee respectively on their activities to improve co-ordination between tourism and aviation sector.

SAA felt it already played a strong role in tourism in that it worked with SA Tourism. Its activities had four distinct channels of effect. The first was direct impacts which entailed activity and scale of growth in the aviation sector for example  airport infrastructure development, the second was indirect impacts which was activities supporting non-aviation tourism infrastructure development for example car rentals and hotels, the third was induced impacts which was activity by those directly or indirectly benefitting from the aviation sector and the fourth was consumer welfare impacts which was general benefits to South Africans from increased tourism access. SAA carried approximately 50% of inbound passengers to South Africa and its GDP contribution was R11.7bn.It also supported 58 000 jobs. Certain challenges like the global recession, the rand/dollar exchange rate and high fuel prices were highlighted as it hugely impacted upon the industry. Baggage theft in South Africa was high and the situation at OR Tambo Airport was out of control. South Africa’s airports were already high cost by global standards. Airport charges were recovered by airlines through charging higher fares. A major challenge was that excessive capacity was being allowed for foreign airlines into the country. South Africa allowed foreign carriers to fill excess capacity. Johannesburg Airport should be made the preferred hub. South Africa was promoting other hubs as the hubs of choice over the country’s hubs. Another concern was that African markets were not opening up as quickly as the rest of the world was. Greater co-ordination was needed between aviation and tourism. SAA wished to forge stronger links with SA Tourism. There was currently a lack of cohesion at a formal and practical level. There was however a joint working group between SAA and SA Tourism.

Members raised concerns over high airport charges and SAA’s ticket prices being too high. Service levels were also complained about and whether staff was given sufficient training. The observation was even made that passengers seemed to prefer British Airways over SAA. Members were perplexed over why there was continued baggage theft at OR Tambo Airport. SAA and ACSA had two years prior given the Committee assurances that it would be nipped in the bud. In the words of SAA themselves the baggage theft situation at OR Tambo was out of control.

SA Airlink initiated the briefing by providing the Committee with an overview of the airline itself and its operations. SA Airlink was an airline officially established in 1992. It had two main investors-Coronation Capital and Nedbank. It entered into the SAA franchise in 1997. SAA has a 3% share in SA Airlink. It had 29 aircrafts were operational, 16 on domestic routes and 13 on regional routes. Turnover was at R1.4bn per annum and its net asset value was R240m. Its staff complement sat at 900. SA Airlink believed that business tourism was a big part of tourism. Especially bringing business tourists through South Africa to stop over and go on to other destinations in Africa. Most of SA Airlink’s network was exclusively theirs. Seventy percent of its customers were business travellers and the remaining thirty percent fell into other categories. It encouraged business travellers through marketing mechanisms to stop over and visit places of interest. The Committee was shown a map of SA Airlink’s network in Africa. It had flights specific to areas where industrial development was taking place. Many expatriates settled in those countries for work purposes and travelled back into the country over weekends. Angola was one such country where SA Airlink had regular flights to. The airline also had local routes to Pietermaritzburg, Durban and Upington to mention a few. Relating to tourism SA Airlink had partnerships with the National Department of Tourism, SA Tourism, provincial tourism, Southern Africa Tourism Services Association (SATSA) and Limpopo Tourism. The airline had also commented and participated on the National Department Tourism Strategy. Destination marketing initiatives had been undertaken locally and internationally. Tour packages with tour operators had also been co-ordinated. SA Airlink identified challenges facing the aviation sector or to put it another way impediments to tourism growth. Input costs for ACSA sat at seventy percent and for the South African Civil Aviation Authority (SACAA) was 50%.There were also infrastructure and system inefficiencies. In addition there was furthermore insufficient expert capacity within SACAA to process supplemental type certificates (STCs), airspace issues, global navigation satellite systems (GNSS) approvals and to unlock potential opportunities such as Johannesburg Grand Central Airport (GCJ). There was also the misguided application of the Tourism Developmental Budget to synthesize competition rather than creating equal opportunities for tourism development.  The funds could have been used for new destination development in Plettenberg Bay, Margate, Sishen and Lephalale. Potentially key tourism destinations were not being recognised as such and not being developed as destinations. For example places like Phalaborwa and Skukuza fell into this category. Phalaborwa’s airport was under utilised and the airport at Skukuza had restrictions attached to it. Skukuza airport was closed to scheduled air services, only private charters were allowed. This hampered the growth of tourism in the respective areas. South Africa’s airports were in the top 50 most expensive airports in the world.

The Committee was impressed by the presentation and noted the concerns raised by SA Airlink. Certain airports were under utilised, had limited services or were totally closed down. SA Airlink would furnish the Committee with particulars on the airports concerned. Members agreed to engage with government departments over the issue as lack of access to areas did not bode well for tourism in those areas. Mr Foster had also alleged that the Tourism Developmental Budget did not create equal opportunities. The allegation would be looked into by the Committee. The Committee on a recent oversight visit to the Northern Cape had identified the need for an airport at Northern Cape. The need for airlines to earmark new destinations was an issue that the Committee would engage further with.



Minutes

Opening Remarks
The Chairperson at the outset of the meeting stated that the purpose of the briefing was for Members to get an idea of the activities of airlines specifically relating to improving co-ordination between the tourism and airline sectors. What synergies were there? Was government creating an environment which was conducive or was there obstacles? He asked whether the regulations pertaining to the aviation sector was acceptable or were they more of a hindrance.

South African Airways (SAA)
South African Airways was represented by Ms Siza Mzimela Chief Executive Officer and Mr George Mothema Executive Legal Advisor.

Ms Mzimela undertook the briefing. She made the point that all SAA’s businesses, which comprised of a group of companies, supported the tourism sector. The list of companies comprised of Mango Airlines, SAA Cargo, SAA Technical, Air Chefs and SAA Travel Centre. SAA already played a strong role in tourism in that it worked with SA Tourism. Its activities had four distinct channels of effect. The first was direct impacts which entailed activity and scale of growth in the aviation sector for example airport infrastructure development, the second was indirect impacts which was activities supporting non-aviation tourism infrastructure development for example car rentals and hotels, the third was induced impacts which was activity by those directly or indirectly benefitting from the aviation sector and the fourth was consumer welfare impacts which was general benefits to South Africans from increased tourism access. Oxford Economics was commissioned by the International Air Transport Association (IATA) to undertake an analysis of aviation’s tourism sectoral contribution. Aviation contributed R23.4bn to the GDP in addition to another R50.9bn in other sectors. In total 116 000 tourism jobs were created as well as 227 000 jobs created in other sectors. On SAA’s side it carried approximately 50% of inbound passengers and its GDP contribution was R11.7bn and it supported 58000 jobs. SAA’s forecasted passenger growth was 37% to the end of March 2014. Cargo growth forecast for the same period was 19.5%. This would increase SAA’s tourism sector GDP contribution and job creation, with direct job creation targets within SAA already agreed upon with the Department of Public Enterprises.

Ms Mzimela highlighted current challenges facing the aviation sector in SA. The slow recovery from the global economic meltdown hugely impacted the sector. Global demand growth rates had not yet recovered. Leisure travel was also slow to recover. Unexpected occurrences like the Japanese earthquake and the recent volcanic ash clouds impacted upon the industry as well. The economy was continually monitored to check on recovery. Fuel costs were another factor which had to be taken into consideration. One third of SAA’s operating costs were spent on fuel. Fuel was currently close to 40% of SAA’s costs. It impacted hugely upon international routes. Dollar/Rand exchange rates had to be monitored as fuel was paid for in dollars. Transit visa complexities and baggage theft were additional factors that had to be considered. There was a 20% decline in African markets as transit visas were required for countries like Lesotho, Swaziland, Namibia, Zimbabwe, Botswana and Mozambique. Other African countries’ airports were easier to transit than SA’s. Baggage theft in SA was high and the situation at OR Tambo Airport was out of control. South Africa’s airports were already high cost by global standards. Airport charges were projected to increase by 129% from 2010 to 2015. Airport charges were recovered by airlines through charging higher fares. A major challenge was that excessive capacity was being allowed for foreign airlines into SA. Demand was simply being redistributed to intermediary hubs.  Capacity was being allocated far ahead of their home market origin and destination requirements. The potential to grow direct services to SA was being reduced. South Africa allowed foreign carriers to fill excess capacity. Johannesburg Airport should be made the preferred hub. South Africa was promoting other hubs as the hubs of choice over hubs in this country. She stressed that the issue was not about SAA trying to avoid competing with other carriers. Another concern was that African markets were not opening up as quickly as the rest of the world was. More than half of the world’s aviation capacity was now operating in open markets with Africa still liberalising slowly. SAA was also disadvantaged because of where South Africa was located. SAA was an end of hemisphere airline which meant it had longer distances to travel than mid hemisphere airlines like Emirates. SAA’s response to being an end of hemisphere carrier was to redesign its network and to capitalise on east-west traffic flows. Focus would be on new route development and to strengthen the Johannesburg hub.

She emphasised that greater co-ordination was needed between aviation and tourism. SAA wished to forge stronger links with SA Tourism. There was currently a lack of cohesion at a formal and practical level. There was a joint working group between SAA and SA Tourism. The idea was to develop a three-year strategy and an Annual Working Plan for all markets. There would be planning and implementation monitoring at a corporate and field level. The SAA Regional General Manager Europe was working closely with the Head of SA Tourism Europe.

Discussion
Mr L Khorai (ANC) understood that currency fluctuations affected tourism but asked for more detail. He also wished for greater clarity on the rates of airport charges. Why did travellers prefer to fly with British Airways than SAA? He asked how tourism was affected by the challenge that South Africa was allowing foreign carriers to fill excess capacity. How was SAA intending to use its network as an advantage? He was not convinced that SAA was promoting tourism to the extent that it should. At both OR Tambo and Cape Town International SAA’s efforts in tourism was not highlighted enough.

Ms Mzimela replied that currency exchange rates did affect tourism. For one it affected hotel prices. It also affected the prices of tickets as many of SAA’s expenses had to be covered and paid for in dollars. As far as British Airways being preferred over SAA, the reality was competition and SAA understood the competitive market. It was a give and take, sometimes SAA would lose passengers and other times it would gain passengers. The statistics spoke for themselves and the reality was very different to people’s perceptions. It was not about SAA losing to British Airways. SAA could hold its own. On the issue of network carriers and how SAA was to capitalise on its advantages, Ms Mzimela stated that more people from South America were travelling to the East. SAA had to take advantage of this opportunity. SAA had to increase its frequency. South Africa had to be made a better choice than Europe.

Mr G Krumbock (DA) was concerned that the baggage theft at OR Tambo was out of control. It was a serious state of affairs. Two years ago SAA and the Airport Company of SA (ACSA) had informed the Committee that baggage theft at OR Tambo was double than what it was at other airports. Members had been informed that 25% of staff at OR Tambo were dishonest and 50% were corruptible. When foreign sports teams arrived in South Africa to compete, often their entire kits were stolen. These thefts damaged the South African brand. The Committee was at the time given assurances that the baggage theft issue would be sorted out by 2010. Hearing that in 2011 the situation was out of control was alarming. How was the situation allowed to get worse? OR Tambo was a confined urban space, why was cameras not installed at all points where luggage was handled. Why could the airport not track luggage?
He referred to SAA’s concern that other countries were using South Africa to promote their own hubs and that South African airlines were suffering because the airways were liberalised. Why could South African airlines not compete with other long haul airlines? The fact was that the big spenders came from long haul destinations. If South Africa could not compete to bring in people cheaply how was tourism going to be boosted. If other airlines were bringing in tourists more cheaply then let it be. The bottom line was to get tourists on the shores of South Africa. Why could SAA not compete? How could overseas airlines do it cheaper than SAA? He felt that the situation with SAA seemed not to be getting better. Why was South Africa subsiding SAA?

Ms Mzimela replied that OR Tambo Airport was a problem because SAA had so much capacity. Baggage theft was a huge problem for SAA; perhaps other carriers had better experiences. Why had the issue not been resolved? The problem was that everyone placed the blame with someone else. SAA blamed ACSA and ACSA in turn blamed the baggage carriers. It was a problem that needed to be addressed collectively. The problem might not lie with SAA but from a customer’s point of view the ticket was purchased from SAA and hence SAA should be held responsible. During the 2010 FIFA World Cup hardly any bags were lost as baggage handlers were more focussed and security conscious. The point was made that the African tourist did spent more money per night than many other tourists. SA Tourism could confirm this. She referred to the issue of other countries using South Africa to promote their own hubs and capacity being brought into the country and maintained that SAA did not want to be protected. SAA would go toe to toe with other airlines and compete. The issue was not highlighted to Members in order to stop those airline carriers from coming into SA. It was normal competition. The issue of the 6 freedom carriers was a different story all together. The issue affected not only SAA but South Africa as a whole. She emphasised that SAA was still responsible for 50% of travel into SA.

Ms M Njobe (COPE) stated that the Committee had recently returned from an oversight visit to the Northern Cape. The concern was that even though tourist attractions were available in the area the area was inaccessible. There was no airport. Complaints from Kimberley were that no international flights landed in that city. During the briefing reference had been made to 58 000 jobs having been created. Over what period were they created? She agreed with the sentiments of Mr Krumbock on the issue of baggage theft at OR Tambo Airport. She referred to SAA’s concern that overseas airlines were using the country to promote their own hubs. What was SAA doing about it? Who allowed these foreign airlines to do what they were doing? SAA’s link with SA Tourism was appreciated but what was actually happening.

Ms Mzimela replied that SAA had a very positive relationship with SA Tourism.

Ms V Bam-Mugwanya (ANC) referred to the jobs that SAA claimed it had created and asked for it to be quantified. What kinds of jobs were created? She felt that SAA should focus on promoting domestic tourism and cautioned that if SAA’s prices were too expensive then people would not use it. What kind of training did SAA provide to its staff? SAA staff treated passengers badly. If locals were treated badly what still about how foreigners were treated. She asked what SAA’s relationship with SA Airlink and ACSA was. Flights with SAA were often delayed which meant that Members often missed connecting international flights. The transit bus from the plane to the terminal was in a bad state. At Cape Town International and OR Tambo there was no dedicated SAA staff to assist disabled persons. It was no wonder that British Airways was preferred over SAA.

Ms Mzimela replied that 58 000 jobs had been created and supported. SAA would break the figure down and furnish the information to the Committee later. The types of jobs were with SAA, airports, hotels and even car rental companies. This was the value chain. On domestic tourism SAA needed to increase its frequency. There was a joint initiative between SAA and SA Tourism. There must be enough flights.
There were challenges concerning training and SAA was working on increasing the education given to its staff. There had been a turnaround in service levels of staff over the last few months. Consistency of service was key. The issue of disabled persons needed more attention. The transit bus that took passengers from planes to terminals was not SAA’s responsibility. She conceded that a great deal of work needed to be done by SAA, ACSA and all involved. On the issue of ticket prices, SAA did have a full range of fares. SAA was not a low cost carrier. SAA could not charge lower fares, as Mango was its low cost airline. Prices also depended on the availability of tickets.

Ms X Makasi (ANC) asked why SAA’s prices were so high. The Committee and SAA needed to look at ways to address the issue.

Ms C Zikalala (IFP) stated that in as much as she believed in SAA as SA’s national airline the service to its passengers had declined.

The Chairperson stated that the country did not have any aviation incident for a long period of time. The country’s commercial airlines were safe. The key to baggage theft was control. The problem did not per se lie with SAA but rather with ACSA. ACSA had a problem with its management. The issue of foreign airlines and promoting their hubs needed greater engagement.

South African Airlink
The briefing was undertaken by Mr Rodger Foster Chief Executive Officer / Managing Director and Ms Nonny Mashika Strategic Market Executive. SA Airlink was an airline officially established in 1992. It had two main investors-Coronation Capital and Nedbank. It entered into the SAA franchise in 1997. SAA had a 3% share in SA Airlink. It had 29 aircrafts that were operational, 16 on domestic routes and 13 on regional routes. Turnover was at R1.4bn per annum and its net asset value was at R240m. Its staff complement sat at 900. SA Airlink believed that business tourism was a big part of tourism. Especially bringing business tourists through South Africa to stop over and go on to other destinations in Africa. Most of SA Airlink’s network was exclusively theirs. Seventy percent of its customers were business travellers and the remaining thirty percent fell into other categories. It encouraged business travellers through marketing mechanisms to stop over and visit places of interest. The Committee was shown a map of SA Airlink’s network in Africa. It had flights specific to areas where industrial development was taking place. Many expatriates settled in those countries for work purposes and travel back into South Africa over weekends. Angola was one such country where SA Airlink had regular flights to. The airline also had local routes to Pietermaritzburg, Durban and Upington to mention a few.

Members were shown slides of the types of aircraft that SA Airlink had in service and how many of each there were. SA Airlink did passenger travel and freight. In the near future it would have dedicated aircraft used exclusively for freight. Passenger travel grew by 7% per annum.

Ms Mashika spoke on inclusive tourism growth. SA Airlink had partnerships with the National Department of Tourism, SA Tourism, provincial tourism, Southern Africa Tourism Services Association (SATSA) and Limpopo Tourism. The airline had also commented and participated on the National Department Tourism Strategy. Destination marketing initiatives had been undertaken locally and internationally. Tour packages with tour operators had also been co-ordinated. SA Airlink has retained seventy five percent of its market share despite subsidised competition. Mr Foster added that SA Airlink developed markets and opened up new routes. Twenty years ago it had opened up the Nelspruit route, now it had opened up the route to Tete. Customer Equity was also considered and many indicators were used to gage it. Customer satisfaction was paramount and complaints were dealt with at the point where they were lodged. The number of complaints received was tracked and over the last 18 months there had been a downward trend. Punctuality was also measured. SA Airlink typically had a ninety percent on time performance punctuality. ACSA had ranked airlines on punctuality and SAA, Mango and SA Airlink was in the top three. Mr Foster noted that in 2002 passenger value capacity was at 50 000, the figure had increased to 80 000 in 2011. The price of fuel relative to passenger value growth over the past ten years, air fares had decreased by seventeen percent whereas input costs had trebled. The cost of aircrafts themselves was much higher as interest rates locally were much higher than abroad. Another cost factor was that jet fuel needed to be shipped to SA. Pilots and aircraft technicians’ salaries’ had to be on parity with international pay scales in order to retain individuals. SA Airlink’s achieved fare price was one third that of its global counterparts for same distance trips. The same could be said for SAA’s achieved fare prices. The staff complement had increased from 300 in 2001 to 900 at present.

He continued by highlighting some of the challenges facing the aviation sector or to put it another way impediments to tourism growth. Input costs for ACSA sat at seventy percent and at 50% for the South African Civil Aviation Authority (SACAA).There were also infrastructure and system inefficiencies. In addition there was furthermore insufficient expert capacity within SACAA to process supplemental type certificates (STCs), airspace issues, global navigation satellite systems (GNSS) approvals and to unlock potential opportunities such as Johannesburg Grand Central Airport (GCJ). There was also the misguided application of the Tourism Developmental Budget to synthesize competition rather than creating equal opportunities for tourism development. The funds could have been used for new destination development in Plettenberg Bay, Margate, Sishen and Lephalale. Potentially key tourism destinations were not being recognised as such and not being developed as destinations. For example places like Phalaborwa and Skukuza fell into this category.

He also pointed out that SA’s airports were in the top 50 most expensive airports in the world. SA Airlink owned the airport at Phalaborwa, which should not be the case. The airport should be owned by local or provincial government. The airport was closely situated to the Kruger National Park and other parks. It was hence an opportunity to boost tourism if the airport was utilised more. It was however currently under utilised. The runway was limited and had the potential to be expanded. Talks with Phalaborwa Municipality were taking place regarding taking over ownership. The airport itself was unusual and was a great tourist attraction.

At Skukuza Airport there was a restrictive agreement on its use which Mr Foster felt should be lifted as it had no legal basis. The airport was only used by smaller aircraft when larger aircraft should be using it as well. Scheduled air services were not allowed at Skukuza, only private charters.  

Discussion
Mr Krumbock was impressed by SA Airlink’s presentation. He regularly travelled on SA Airlink from Pietermaritzburg to Johannesburg but often times when there was thick mist the flight would be diverted to Durban. He asked if the diverted flights cease when SA Airlink switched from its prop driven planes to jet engine planes. He asked why the greater number of flights to Polokwane got diverted. It surely was not good for Polokwane’s tourism industry. Perhaps the Committee could assist by looking into the matter.

Mr Foster responded that at Pietermaritzburg Airport a plane had to make a ninety degree turn to make a landing. Hence at low cloud there were diversions. Pietermaritzburg Airport had installed a GNSS which would greatly reduce diversions.

The Chairperson stated that most of the problems at the Polokwane Airport were around disagreements between aviation authorities.

Mr Foster responded that there were too diverse and divergent interests at the airport. Details would be forwarded to the Committee in due course.

Ms Njobe remarked that there was a great deal of follow up that was needed on many issues. Especially issues relating to why certain airports had been closed down. Why certain airports were also not used anymore like the airport at Bulembo in the Ciskei. Government departments need to be approached on the issue.

The Committee had to also look into the allegation that was made by Mr Foster that the Tourism Developmental Budget did not create equal opportunities. New destinations was also a topic which needed discussion. An airport was in dire need at Mafikeng.

Mr Foster stated that the funds from the Tourism Developmental Budget were in the hands of a competitor by way of a subsidy. The funds should have gone through a public process to all competitors.  SA Airlink felt that the funds could be better utilised in building infrastructure.
Bulembo Airport was close to East London Airport. It was a nice airport but was only 50km away from East London. In the North West Province there was an airport at Mbatho. SA Airlink used to have flights to Mbatho. The airport at Skukuza was closed 10 years ago. SA Airlink challenged the validity of the agreement that was in place that kept the airport closed. Dialogue with SANParks was taking place to have it reopened. Skukuza was a gateway to the Kruger National Park.  

Ms Bam-Mugwanya asked if SA Airlink had Black Economic Empowerment (BEE) partners. She asked what the volumes of passengers were from OR Tambo Airport to Umtata Airport was. The Eastern Cape had a pristine coastline. Did SA Airlink have flights to Umtata? It was a tourism opportunity area. From the presentation it would seem that SA Airlink had flights to industrial areas. She pointed out that when people fly from OR Tambo to Umtata they often got diverted to East London.  Airlink should take care of the people dumped in East London as ticket prices to Umtata were expensive. She felt that SA Airlink was unreliable in Umtata. Umtata Airport was used by many VIPs which included Mr Nelson Mandela. Why did SA Airlink not wish to have flights to Umtata? Was SA Airlink to focus more on freight? Would it not divert focus away from passenger flights?

On the issue of BEE partners, Mr Foster pointed out that Mr Sibusiso Ngwenya was the Chairperson of SA Airlink. He however noted that it was difficult to invest in an airline as financial institutions were not willing to provide finance. It was too high risk an industry. It was difficult to give investors guarantees in the aviation sector. He agreed that Umtata was an investment opportunity for tourism. Navigation aids was the problem at Umtata. Power was also an issue and beacons also needed replacing. On the issue of diversions to East London, Mr Foster explained that passengers from Johannesburg were returned to Johannesburg after the plane had a refuelling stop at East London. On the next available flight passengers would be taken to Umtata at SA Airlink’s expense. As a rule all airlines were not responsible for weather related diversions. The route from Johannesburg to Umtata was a thin route as not many people took those flights. The GNSS could work well in Umtata as it did in Pietermaritzburg. Umtata also needed more passenger movement. Terminal buildings also need to be upgraded and runways need to be lengthened and widened. SA Airlink was not intending to focus more on freight than on passenger flights. Two older prop passenger planes would be converted for freight purposes and two new jet planes were to be included for passenger transport.

The Chairperson asked if SA Airlink had flights to the Vaal, Vereeniging area. He suggested that it be considered. Perhaps the municipality in Umtata could assist with the airport issue. The burning question was why SA’s airports were so expensive. What was the reason? The Committee would try to assist on the airspace issue at Polokwane.

Mr Foster concluded that customer equity was important to SA Airlink. The airline tried to understand who its customers were.

 The meeting was adjourned.