07-Jan-2015 11:15 AM

flyafrica.com 2015 outlook: rapid expansion and new Namibia base as competition intensifies

Analysis

New LCC group flyafrica.com is planning rapid expansion in 2015 as it launches its second affiliate in Namibia and continues to grow its original affiliate in Zimbabwe. The airline also aims to compete in the Zambia-South Africa market using fifth freedom rights and establish joint ventures in West Africa.

South Africa continues to be the target market as the group pursues a strategy of using affiliates in neighbouring countries to bring low fares to South Africa's underserved regional international market. Setting up in Namibia and Zimbabwe has proven to be a much easier path than attempting to secure an operating certificate and traffic rights in much larger South Africa.

Six of the seven routes flyAfrica.com plans to operate by the end of Mar-2015 are into South Africa, which will give the LCC about a 9% share of South Africa's short-haul international market. All six of these routes have historically been governed by very high fares and been dominated by South African Airways (SAA). The potential for market stimulation is therefore considerable.

Summary

flyafrica.com is planning rapid expansion in 2015, launching its second affiliate in Namibia and continuing to grow its original affiliate in Zimbabwe.
The airline aims to compete in the Zambia-South Africa market using fifth freedom rights and establish joint ventures in West Africa.
flyafrica.com plans to operate six of its seven routes into South Africa, giving it a 9% share of South Africa's short-haul international market.
The airline currently operates three routes, with plans to launch a fourth route from Bulawayo to Johannesburg in March 2015.
flyafrica.com has significantly driven down fares in the South Africa-Zimbabwe market, offering flights for as low as ZAR399 (USD34) one-way excluding taxes.
The airline aims to establish more affiliates in Southern Africa and West Africa, with plans to cover the entire African continent in the long term.

flyafrica.com currently operates only three routes

flyafrica.com commenced operations in Jul-2014 with the launch of services by its Zimbabwean affiliate from Victoria Falls to Johannesburg using 114-seat 737-500s in two-class configuration. flyafrica.com Zimbabwe added services from the capital Harare to Johannesburg on 1-Nov-2014 and began domestic flights linking Harare with Victoria Falls on 1-Dec-2014.

flyafrica.com currently operates one daily flight on Harare-Johannesburg, which is by far the largest route in Zimbabwe (domestic or international) with a large volume of business as well as VFR and migrant worker traffic. flyafrica.com Zimbabwe also now offers four weekly flights on Victoria Falls-Johannesburg, which is primarily an inbound leisure market, and three weekly flights on Victoria Falls-Harare.

flyafrica.com Zimbabwe plans to launch a fourth route - and its third to South Africa - on 2-Mar-2015 with the launch of a daily flight from Zimbabwe's second largest city, Bulawayo, to Johannesburg. The new service will give flyafrica.com about 4,800 weekly seats in the Zimbabwean market, or approximately a 12% share of total seat capacity. Only SAA and full service flag carrier Air Zimbabwe are larger with seat shares of about 23% each.

Zimbabwe seat capacity by carrier: 2-Mar-2015 to 8-Mar-2015

Rank	Airline		Total Seats
1	SA	South African Airways	9,611
2	UM	Air Zimbabwe	9,469
3	Z7	flyafrica.com	4,788
4	BA	British Airways	4,242
5	ET	Ethiopian Airlines	3,994
6	EK	Emirates	3,738
7	KQ	Kenya Airways	3,172
8	FN	fastjet	864
9	SW	Air Namibia	444
10	3W	Malawian Airlines	402
11	BP	Air Botswana	184
12	DT	TAAG	120

flyafrica.com share of the Zimbabwe-South Africa market will approach 20%

flyafrica.com now competes against SAA, Air Zimbabwe and British Airways franchise partner Comair on the Johannesburg-Harare and Johannesburg-Victoria Falls routes. flyafrica.com will also compete against SAA and Air Zimbabwe on Johannesburg-Bulawayo, according to OAG data.

SAA has four Zimbabwe-South Africa routes in total as it also offers four weekly regional jet flights from Durban to Harare, a route that flyafrica.com also has been considering. There are currently no non-stop services between Cape Town and Zimbabwe.

SAA now has a leading 44% share of seat capacity in the South Africa-Zimbabwe market (includes flights operated by regional partners) compared to 23% for Air Zimbabwe, 21% for British Airways/Comair and 12% for flyafrica.com. The flyafrica.com share of capacity in the South Africa-Zimbabwe market will increase to about 19% in Mar-2014, giving it a significant stake in South Africa's third largest international market after the UAE and UK (based on seat capacity).

flyafrica.com has significantly driven down fares by regularly offering flights on all its Zimbabwe-South Africa routes of ZAR399 (USD34) one-way excluding taxes, or about ZAR2,000 (USD172) return when including all taxes. Promotional fares have been even cheaper.

Return business class fares are offered at about ZAR6500 (USD560) including taxes. flyafrica.com has a separate business class cabin on its 737s, featuring recliner style seats in two by two configuration with meals and drinks. Economy is a pure LCC product with checked luggage, snacks and drinks all charged as ancillaries.

Fares in the South Africa-Zimbabwe market traditionally have been high - typically USD400 or more for a return ticket including taxes - although flights are less than two hours. flyafrica.com business class fares are competitive with typical full service carrier fares while its economy fares are significantly undercutting the incumbents.

flyafrica.com faces the prospect of competition with fastjet, starting with Zimbabwe

The Zimbabwe-South Africa market could potentially support more LCC capacity, particularly on the main Harare-Johannesburg route, as more low-cost seats would provide an opportunity for more price sensitive travellers to trade in long bus journeys for flying. flyafrica.com could be tempted to seek more traffic rights from the Zimbabwean side ahead of potential application from rival African LCC group fastjet.

As CAPA previously highlighted, the fastjet group is looking to establish an affiliate in Zimbabwe with the Harare-Johannesburg route its main target. As South African carriers currently account for slightly over 60% of seat capacity on Harare-Johannesburg there is still room for some expansion by Zimbabwean carriers. flyafrica.com will be keen to cement its first mover advantage in Zimbabwe's LCC sector and pursue any available traffic rights before fastjet formally establishes a joint venture in Zimbabwe and lodges an application with Zimbabwean authorities.

Zimbabwe will likely not be the only battleground for flyafrica.com and fastjet as both groups seek to expand their footprint by establishing affiliates throughout Africa. fastjet plans to launch its second affiliate in Zambia in 2015 and is also looking to open bases in Uganda and Zimbabwe.

flyafrica.com Namibia plans a Mar-2015 launch

flyafrica.com meanwhile announced in Oct-2014 a joint venture in Namibia which will become the second of several planned affiliates throughout Africa. The group initially set a launch date of 2-Feb-2015 for flyafrica.com Namibia, which began selling tickets on the Windhoek-Johannesburg route on 21-Oct-2014. The launch has since been pushed back to 2-Mar-2015 but the airline is optimistic it will not encounter any further delays and has also begun selling two other routes, Windhoek-Cape Town and Johannesburg-Lusaka.

flyafrica.com is currently selling flights on Johannesburg-Lusaka from 9-Mar-2015 and Windhoek-Cape Town from 16-Mar-2015. Windhoek-Johannesburg will initially be served with one daily flight, increasing to two daily flights on 9-Mar-2015 with one of the flights continuing onto Lusaka in Zambia. Windhoek-Cape Town will initially be served with one daily flight.

Namibia is the second largest African market from South Africa with about 14,000 weekly seats. Zimbabwe is the largest African market from South Africa and had about 16,000 weekly seats prior to flyafrica.com's entrance. As was the case with South Africa-Zimbabwe, flyafrica.com will be the first LCC operating between South Africa and Namibia.

SAA is by far the largest airline in the South Africa-Namibia market with about a 58% share of total seats. Air Namibia has about a 26% share while British Airways/Comair accounts for the remaining 16%, according to CAPA and OAG data. SAA operates four South Africa-Namibia routes - Johannesburg-Windhoek, Johannesburg-Walvis Bay, Cape Town-Windhoek and Cape Town-Walvis Bay - while Comair only operates between Johannesburg and Windhoek. Air Namibia serves Johannesburg-Windhoek and Cape Town-Windhoek.

flyafrica.com Namibia should be able to stimulate demand on the main Windhoek to Johannesburg and Cape Town routes. It is currently offering one-way fares excluding taxes of ZAR699 (USD60) on Cape Town-Windhoek and of ZAR799 (USD69) on Johannesburg-Windhoek. (The airline has never had a fuel surcharge.)

flyafrica.com will break the SAA monopoly on Johannesburg-Lusaka route

flyafrica.com is also offering one-way fares from Johannesburg to Lusaka from only ZAR399 (USD34) excluding taxes. Fares for Windhoek-Lusaka, which is offered as a same plane one-stop product, are significantly higher. flyafrica.com is obviously targeting the South Africa-Zambia market with its Windhoek-Johannesburg-Lusaka service because Windhoek-Lusaka is a very small market while Johannesburg-Lusaka is a large route now only served by SAA.

Breaking the SAA monopoly on Johannesburg-Lusaka would be a significant accomplishment as the group does not intend at least for the time being to have a South African or Zambian entity. fastjet Zambia is also targeting Johannesburg-Lusaka as one if its initial routes and could try to block flyafrica.com from launching the route as planned. Last second postponements of new routes are common in Africa due typically to regulatory holdups aimed at protecting local carriers.

Assuming it is able to launch Windhoek-Johannesburg-Lusaka and Windhoek-Cape Town, flyafrica.com will have broken through on six of SAA's regional routes. Inevitably this will impact the South African flag carrier, which in recent years has been turning consistent profits on its regional international operation while other aspects of its business have struggled.

But flyafrica.com should be able to grow the market as its low fares cater to a segment that previously could not afford to travel by air. South Africa's short-haul international market is clearly ripe for stimulation. The recent sharp drop in fuel prices should make it even easier for Africa's new wave of LCCs, particularly as flyafrica.com operates relatively inefficient old-generation 737-500s.

flyafrica.com quickly establishes a presence in South Africa's regional international market

flyafrica.com has been able to quickly build up a presence in South Africa's short-haul international market by establishing affiliates in neighbouring countries and pursuing fifth freedom rights where available. This is a logical strategy as South African carriers are generally fully using their traffic rights to other countries in Southern Africa while there are still available rights for carriers on the other side.

flyafrica.com plans to operate 46 weekly flights to South Africa by the end of Mar-2015, giving it about 10,500 weekly seats. This equates to a 9% share of total capacity between South Africa and other countries in Southern Africa - a significant figure given that flyafrica.com only launched in Jul-2014 and does not have a South African franchise. It is also significant as flyafrica.com is the only LCC operating services between South Africa and any of the other 14 countries in Southern Africa.

South Africa to Southern Africa international capacity (seats) by carrier: 23-Mar-2015 to 29-Mar-2015

Rank	Airline		Total Seats
1	SA	South African Airways	63,011
2	Z7	flyafrica.com	10,488
3	BA	British Airways	9,000
4	TM	LAM - Mozambique Airlines	8,058
5	SW	Air Namibia	6,474
6	BP	Air Botswana	6,392
7	UM	Air Zimbabwe	4,594
8	MK	Air Mauritius	3,714
9	DT	TAAG	3,030
10	3W	Malawian Airlines	2,646
11	ET	Ethiopian Airlines	2,156
12	UU	Air Austral	648
13	MD	Air Madagascar	520
14	D6	Interair South Africa	440

South Africa's LCCs only currently operate domestic services with the exception of Mango's three weekly flights between Johannesburg and the Tanzanian beach resort of Zanzibar. The only other foreign LCC serving South Africa is fastjet, which operates three weekly flights between Johannesburg and the Tanzanian capital of Dar es Salaam. These flights are not included in the above chart because Tanzania is in East Africa.

flyafrica.com is aiming to further expand in South Africa by using additional affiliates.

flyafrica.com aims to launch several new affiliates in 2015

The group eventually aims to cover the entire African continent but in the initial phase of its development is focusing on Southern Africa and West Africa. flyafrica.com CEO Adrian Hamilton-Manns said in a 11-Nov-2014 interview with South Africa's Ballz Radio that the group is looking at one or two more bases in Southern Africa as well at least two bases in West Africa. The group previously flagged Malawi as a potential base in Southern Africa.

Mr Hamilton-Manns added that the group has submitted an application with South African authorities for an Air Services Licence (ASL), which is a preliminary step ahead of an air operator's certificate (AOC). But flyafrica.com is not expecting to launch an affiliate in South Africa in the short to medium term. "We will see how many objection we can collect," Mr Hamilton-Manns said. "Not a lot people are going to want us in this market."

As CAPA previously highlighted, fastjet also seems to have put plans for a South African franchise on the backburner. With the recent launch of new South African LCC FlySafair and the expected launch of Skywise in early 2015 the South African domestic market could again become saturated. The opportunities are more enticing in the under-penetrated regional international market, which can only be served by LCCs based in other African countries given the current bilateral situation.

flyafrica.com's initial focus on the South Africa international market - albeit through the backdoor by launching affiliates in neighbouring countries - is logical as it is a market with relatively low hanging fruit. Over time the group will look to increase its presence in other African international markets and launch more routes that do not touch South Africa. As of the end of Mar-2015 South Africa will be the destination for six of the group's seven routes.

South Africa, however, will almost certainly continue to account for the majority of the group's capacity. Namibia and Zimbabwe are both small aviation markets that without a strong reliance on South Africa could never be sustained.

South Africa currently accounts for about two-thirds of total international seat capacity in Namibia. The Namibian market is currently served by only five airlines (Air Namibia, SAA, BA/Comair, Angola's TAAG and Germany's Condor) with non-stop links to only six countries - South Africa, Germany, Angola, Zimbabwe, Zambia and Botswana.

Namibia international capacity share (% seats) by country: 5-Jan-2015 to 11-Jan-2015

flyafrica.com will likely only serve the Namibia-Zambia and Namibia-Zimbabwe markets via South Africa. The Namibia-Angola market is potentially large enough to support an LCC but securing approvals from typically restrictive and protective Angolan authorities could be challenging. Other regional markets from Namibia are probably too small.

Zimbabwe should gain some flyafrica.com routes that do not touch South Africa

Zimbabwe is a slightly larger market overall, with about 32,000 weekly international seats compared to about 21,000 for Namibia. flyafrica.com Zimbabwe has expressed interest in potentially serving Malawi, Mozambique, Tanzania and Zambia.

In flyafrica.com's Christmas message to customers the group stated that new destinations planned for 2015 include Beira and Maputo in Mozambique, Durban in South Africa, Kilimanjaro in Tanzania, Livingstone in Zambia, Luanda in Angola and Lubumbashi in the Congo. Specific routes were not mentioned but it would be logical for all these destinations to be served from Harare except Luanda, which is closer to the Windhoek base.

These are all relatively small markets from Zimbabwe compared to South Africa, which accounts for over 60% of total international seat capacity in Zimbabwe. But there should still be opportunities for flyafrica.com Zimbabwe to stimulate demand and sustain a handful of new international routes, particularly with services that are less than daily.

Zimbabwe international capacity share (% of seats) by country: 5-Jan-2015 to 11-Jan-2015

Zimbabwe-Zambia is the largest of the potential new international markets for flyafrica.com Zimbabwe. It is currently only served by carriers from other countries with fifth freedom rights, including Emirates, Kenya Airways, Ethiopian Airlines and Air Namibia.

The much smaller Zimbabwe-Malawian market is currently only served by five weekly turboprop flights, including three Air Malawi frequencies on Harare-Blantyre and two Ethiopian Airlines frequency on Harare-Lilongwe. The Zimbabwe-Tanzania market is currently only served by LCC fastjet Tanzania, which launched Dar es Salaam-Harare in Aug-2014 with three weekly flights. There are currently no non-stop services between Zimbabwe and Kilimanjaro or any destination in Mozambique, according to OAG.

Air Zimbabwe does not currently serve any of the potential new international destinations for flyafrica.com Zimbabwe. The flag carrier's only international destination is currently Johannesburg (served from Bulawayo, Harare and Victoria Falls). Domestically it operates from Harare to Bulawayo, Kariba and Victoria Falls as well as from Victoria Falls to Bulawayo and Kariba. As Zimbabwe has a relatively limited domestic market, nearly all of the potential expansion for flyafrica.com is in the international market.

Brewing flyafrica.com-fastjet rivalry could affect decision-making

flyafrica.com Zimbabwe could be tempted to quickly launch other international routes to beat fastjet. While the Zimbabwean market may not be large enough to support multiple local LCCs over the long term it could become a strategic battleground between Africa's first two LCC groups.

In the overall African market there should be more than enough opportunities to support both of Africa's emerging LCC groups. The intra-Africa international market remains relatively un-penetrated by LCCs. Even at their current miniscule size, flyafrica.com and fastjet account for almost all of the international LCC capacity within Africa.

Comparisons could be made to Asia early last decade - when LCC groups such as AirAsia, Jetstar and Lion began penetrating routes that had never seen a low fare option. But Africa is a very different market to Asia. Operating within Africa can be extremely challenging. Opportunities are limited by regulatory barriers.

Emerging LCC groups will also not be able to achieve the scale that Asian groups were quickly able to build up because markets such as Namibia, Tanzania, Zambia and Zimbabwe - where the initial fastjet and flyafrica.com activity has been centred - are very small. In Southeast Asia the big markets were initially penetrated rather than small markets such as Cambodia and Laos, which still do not have any local LCCs.

flyafrica.com has been able to quickly (particularly for African standards) carve out a niche in South Africa's international market by establishing airlines in smaller neighbouring markets. It is just the start of a long and arduous journey. Bureaucratic hurdles and red tape inevitably will need to be overcome along with competition from a rival LCC group with similar ambitions.