April 2010
INDICATIVE OF the growing condemnation by the world airline industry over the fee increase proposals by South Africa’s ATNS and ACSA (see World Airnews, March 2010) and the Regulating Committee’s reaction to date, the director general and CEO of the International Airline Transport Association (IATA), Giovanni Bisignani, has now added his strong criticism of the proposals in this Flarepath article written exclusively for World Airnews….
“No competitive business could make such preposterous proposals....”
IT IS good to be a monopoly. The South African Air Traffic and Navigation Service (ATNS) wants to increase its prices by 64,5% over the next five years. Not to be outdone, the Airports Company South Africa (ACSA) wants a price increase of 130,9%. No competitive business could make such preposterous proposals. There is a Regulating Committee that is meant to keep such abuse of position in check. It recently published its draft permission for airport and air traffic control charges that could pave the way for approval.
Consider the timing of the proposal. In the first year (2010/2011) ACSA charges would rise by 59,9%, while ATNS would see an increase of 42,6%. Airlines footing the bill are reeling from a decade in which the industry lost a net of US$50-billion. In a single year industry revenues fell from $535-billion to $456-billion. That Is an unprecedented 15% fall.
Cost increases are not acceptable. Airlines are fighting for survival by reducing costs. Unfortunately, these increases may only be the tip of the iceberg.
Despite traffic falling over the last 18 months, ACSA continues to pursue a R12,6-billion agenda of capital expenditure through to 2015. Airlines do not require capital expenditure at these levels to operate in South Africa. Paying for such unwanted extravagance could place ACSA airports among the most expensive in the world.
ATNS, on the other hand, plans to increase staff costs 83% by 2015. It is a symptom of a monopoly unable to control its cost base. The Regulating Committee must stop such excesses, but we have seen no evidence that this is imminent.
Does South Africa want to be trapped in a downward spiral of charges increases and inefficiency in its air transport infrastructure that drives away business? The Regulating Committee is meant to protect the nation from this conclusion. But it must do its job by ensuring meaningful consultation, transparency, non-discrimination and cost effectiveness. Operating costs must be scrutinised and capital expenditure programmes should only proceed if they meet identified needs of the user.
This is not just an airlines story. Rising costs for air transport infrastructure is a losing proposition for South Africa’s business community. If airlines can defy history and succeed in passing on increases to customers, the tourist industry can expect lower volumes. IATA’s price elasticity studies show that demand drops up to 8% for every 10% that prices increase for travel to South Africa.
On the other hand is the more likely scenario of airlines absorbing the increases into their operational costs. South Africa is a low yielding market. Margins are razor-thin. Any cost increase could mean the difference between a viable service and a route that needs to be cut or downgraded because it is not generating returns.
The Regulating Committee has a responsibility to protect air transport’s important contribution to South Africa’s economy. It must ensure robust cost management at ATNS and ACSA. If there is a need to inject cash or to improve their balance sheets, this should be undertaken by the shareholders of those organisations – as would be the case in any other business. The full cost recovery mechanism should not be misused to generate equity for such shortfalls.
- What does the Regulating Committee need to do? To protect the South African economy, passengers and airlines from monopolies abusing their market power it must address five issues:
- Cost overruns must be scrutinised and then adjusted or disallowed. Simply passing them through to the airlines is a licence for inefficiency.
- Capital expenditure must meet the needs of users. Airlines pay the bill. They need to be consulted. This should happen in advance of commencing design work based on pre-agreed “development triggers”.
- Airlines did not support the development of King Shaka International Airport (La Mercy). Cost overruns above the allowed R3,15-billion should not be included in ACSA’s asset base.
- Differential charges must progressively disappear as they penalize international carriers flying to South Africa.
- Any increases for ACSA or ATNS charges must be phased-in. The Regulating Committee missed the opportunity to deal with these issues in the definition phase of its review of ACSA and ATNS pricing proposals. To maintain some credibility, it must render a final conclusion to force ACSA and ATNS down to earth with cost cuts and efficiency.
We are not asking the impossible. Over the last decade, airlines improved labour productivity by 71%, fuel efficiency increased by 25% and sales and distribution costs were slashed by a third. The same efficiency gains are not visible in monopoly infrastructure partners. But, if the Regulating Committee needs some ideas for ACSA and ATNS, IATA and its 230 member airlines have plenty of experiences to share. In the meantime IATA is ringing the warning bell. If the current proposals pass, the Regulating Committee will have given the ATNS and ACSA a licence to print money. The South African Government must not stand idly by as the competitiveness of South African business — especially tourism — is eroded by poorly regulated infrastructure
monopolies. It would be an unfortunate embarrassment if this is not resolved before the world comes to visit with the FIFA World Cup in June.
