Air transport and seafaring have much in common. Both carry passengers and cargo to their
destinations on scheduled services. Both operate in hazardous environments so are prone
to operational disruption. Both try to ensure that their vessels, be they air- or ocean-craft,
take the shortest and most efficient routes possible. And private jet interiors often contain
tones of wood and brass, inspired by yachting.
Before the Suez and Panama Canals opened in 1869 and 1914 respectively,
circumnavigating clippers carried cargo by heading south. They caught strong westerly
winds in the roaring forties, furious fifties and high sixties, the numbers corresponding to
degrees of latitude. This far down south, strong winds flow around the world with no land to
get in the way.
For clippers like the Cutty Sark, now a tourist attraction in London’s trendy docklands, there
were three milestones on the route. First up on was Cape Agulhas in South Africa. Next
came Southeast Cape in Tasmania. Finally, and homeward bound there was Chile’s Cape
Horn. These three capes are known to sailors as the “Great Capes”.
Each of the three Great Capes is associated with an airline – South African Airlines (SAA),
Aerolineas Argentinas and Australia’s Qantas. But while Qantas is highly successful and
achieved profit in ten out of the 12 years to 2019, the other two are less so.
In the 2018/19 financial year SAA lost ZAR 3.7 billion (USD 256 million) on ZAR 26.0 billion
revenue to achieve a margin of negative 14.3 per cent. At the same time Aerolineas lost a
whopping USD 603 million on USD 1.33 billion revenue, negative 45.2 per cent margin.
Geographically the three airlines have much in common. Because they are located close to
the Great Capes much of their aircraft’s range is wasted. In the map below I have drawn
3,000-mile circles around Buenos Aires, Johannesburg and Sydney, with some other
significant airports and cities noted.
These represent each airlines’ local catchment area – people will travel to and from
destinations in this region. Longhaul passengers will originate or terminate in the circles.
See how much of the range is over water. That is all wasted. And because these hubs are at
the end of the line they are poor choices for passengers wanting to connect. High fuel costs
from long inbound flights and poor connectivity is a bad combination.
So why is Qantas so successful while Aerolineas and SAA languish? Part of the answer may
well be down to cost. But can Aerolineas and SAA make up the revenue shortfall? Read
on…
The table below shows the total economic activity in real GDP at purchasing power parity,
population and GDP per capital within the 3,000-mile circles in the map. I took data from the
CIA World Fact Book, using 2019’s GDP numbers and 2023’s population estimate. My
thinking was that GDP was artificially lowered in 2020-22 due to COVID, so 2019 is the best
“realistic” guess.
img src=”https://zurulink.africa/wp-content/uploads/2023/05/Table-1-450×110.jpg” alt=”” width=”450″ height=”110″ class=”alignnone size-medium wp-image-2541″ />
A combination of GDP per capita and total GDP should be a good macroeconomic proxy for
airline demand. In India, the population is high, but demand is low. Tiny Qatar, population
2.5 million, GDP per capita USD100,700 supports the world’s best business class.
The airline industry does not seem to pay much attention to these top-level numbers. They
should, because simply put the more people there are in highly productive employment, the
more travel and ancillary spend there will be. Prosperous consumers spend disposable
income on holidays and businesses bring in capital to invest in a region.
I was interested to see how close GDP per capita is in Qantas and Aerolineas catchment
areas. Across whole 3,000-mile circle, Aerolineas serves more economic activity (USD6.5
trillion) even than Qantas (USD4.7. trillion). That is good news for Aerolineas. The more than
one billion people in SAA’s catchment area will not do the airline much good if most of them
never fly.
Now look at the charts below, which show the same indicators for each country in the three
catchment areas. French overseas departments Mayotte, Reunion, New Caledonia, and
French Guyana are excluded.
Things could look promising for Aerolineas. They are close to middle-income countries
where income is growing and the economic powerhouse of Brazil, a population 219
million/GDP USD 3.1 trillion.
Since Sao Paolo and Rio de Janeiro are not too far from Argentina, connections to and from
the north via Ezeiza Airport are feasible. Connections to Chile are viable too, and in this
market, there is good solid corporate demand on full-fare business class tickets thanks to
the mining industry. Aerolineas is in a good position to capture some of this traffic.
For SAA on the other hand the market is more limited. There is mining like Chile’s in
Namibia and some safari and other tourism. British Airways franchisee Comair made a profit
in almost every year of its existence and there is no reason SAA could not do the same on
its domestic network.
The key to Qantas’ success has been market segmentation. The Aussie carrier offers four-
cabin service on its A380s and three cabins including premium economy on its 787s.
Neither SAA nor Aerolineas offers premium economy – they should. Both can take out low-
yield economy seats and win traffic at double the yield in the middle cabin, even with
business class left as it is. The key to success will be selling premium economy as its own
experience to established premium economy fliers from the north, not as an upgrade from
the economy. Demand should be there as their trunk routes are long.
Qantas was earning USD59 per passenger in ancillary revenue ten years ago. With retailing
based on the NDC communications standard and a “gateway” strategy, Aerolineas and SAA
can surely beat that for their long haul arrivals.
But the Aussies in Qantas’ home market are rich with nearly USD50k GDP per capita. Many
can afford a pricey coffee or extra bag. Incomes may be just about high enough in Latin
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America for retailing to work well for Aerolineas, so they can perhaps do well. But they have
a long way to go – revenue needs to nearly double to reach profitability.
Will SAA be able to achieve a strong retailing strategy in its low-income economic
environment? They do not have quite as far to go as Aerolineas, margin-wise, to reach
profit. But underlying macroeconomic conditions suggest that it will still be difficult if not
impossible and require both careful and enthusiastic management.
For both airlines, achieving profitability will be a challenge. We will have to wait and see
whether they can do it. But easy revenue growth from installing premium economy and
embracing retailing should be no-brainers. If Aerolineas or SAA fail to do they will have
nobody to blame but themselves.
