BASE COMMISSION OR COST CUTTING 14 SEPTEMBER 2004

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BASE COMMISSION OR COST CUTTING14 SEPTEMBER
2004
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Southwest to chop 88 scheduled flights (Financial
Mail 24/8/04) The largest US low-cost airline
yesterday said it would cut 88 scheduled flights
to boost revenue by freeing up aircraft for more
lucrative markets. SW has led the low-cost
carrier growth in market share over the past 6
years, has faced increasing competition from
rivals like JetBlue plus soaring fuel prices.
NEWS FROM AROUND THE WORLD
Tiger Airways to launch in September (Financial
Mail 24/8/04) Singapore Airlines budget arm
plans to launch services in September, 3 months
ahead of schedule. Tiger will be the 2nd budget
carrier to fly from Changi airport after
Singapores ValuAir. It has committed to fly out
of the dedicated low-cost terminal planned for
2006
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Foreign investor to buy 25stake in Air Decan
(Financial Mail 02/9/04)Indias first low-cost
airline, Air Decan, is in the final stages of
raising US75m from the sale of about 25 of its
equity to a foreign investor. Virgin Airlines had
been one possible investor but talks ended. It
marked its first of operation by launching
flights to Delhi and will lease more aircraft as
new low-cost airlines enter the market
NEWS FROM AROUND THE WORLD
EUjet joins low-cost market in Europe (Financial
Mail 02/9/04) EUjet, an Irish airline founded by
McGoldrick, former CE of Rynair, has become the
latest low-cost carrier to begin operations in
Europe in spite of warnings by Rynair and EasyJet
of looming bloodbath in the sector.
Planestation bought a 30 stake in EUjet for
US3.5m and the Kent County Council has invested
GB100,000 for a 1.5 stake. It will operate from
Manson to AMS/BCE/CPH/NCE

• Economic Indicators today (Business Day 13/9/04)
• R/ R??
• Brent Crude Oil US??/barel

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Singapore Airlines orders 31 aircraft (Financial
Mail 26/8/04) SIA has ordered 31 B777s from
Boeing manufacturer worth US7.35bn. Although
faced with soaring fuel and new competition from
low-cost airlines, to which it has responded by
establishing one itself, SIA has been able to cut
staff costs and reported a first quarter profit
of US151m as passenger loads rose.
NEWS FROM AROUND THE WORLD
Virgin Airways help for the tall (Financial
Mail 24/8/04) Travellers booking online with
low-cost carrier Virgin Express can now reserve
seats with extra leg room. Its rare for
no-frills airlines to allow passengers to call up
seat plans. Passengers can also book an extra 3
inch seat at a EU10 one-way surcharge on the B737
operated flights.
SAS offers low-cost business class frills
(Financial Mail 24/8/04) SAS is to introduce a
new class aimed at travellers who want the
time-saving features associated with business
cabin fares but at lower cost. To be called
Economy Flex, it will be launched on 31 October,
will offer priority check-in, free meals and
drinks
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THE STATE OF THE AIRLINE INDUSTRY

• US market is in slow recovery mode from 9/11and
  effects of Iraqi war.
• Europes major airlines lost capitalisation
  value after 9/11.
• Proliferation of low-cost airlines in Europe and
  Asia
• Asia is in virtual stagnation
• Airlines continue staff reduction and network
  rationalisation to cut costs
• South Africa is experiencing a growth of upstart
  low-cost airlines
• Domestic competition has increased
• Yields are under severe pressure as passengers
  buy down
• Corporates putting pressure for up-front
  discounts and lower fares
• Increased procurement consolidation to increase
  buying power

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MAIN DRIVERS FOR AIRLINE COSTS

• Distribution costs
• Soaring jet fuel costs
• Changing customer habits
• New Technology
• Proliferation of low-cost airlines

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HOW AIRLINES HAVE RESPONDED

• In 1996, top5 US agents contributed 80 - 85 of
  passengers revenue
• Today US agents account for less than 25 of
  passenger revenue
• European airlines pay between 1 - 5 base
  commission
• Airlines have introduced transaction fees or
  similar
• Airlines own huge online booking portals like
  Expedia
• Most airlines have their own online web fares -
  cheaper online
• SAA embarking on Reducing Cost of Sales
• Direct Sales initiatives targeting 7030 split
• Reduction of Distribution costs (base commission
  overrides)
• X and V classes migrated online only

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IMPACT ON CORPORATE-TMC

• Closer relationship between corporates and the
  Travel Management Company
• Corporates demand transparency on fares and
  commission structures
• Travel Management Companies will be paid on
  value add to the corporate
• As airlines embark on direct sales, possible
  strained relations with agents
• Possibility for vertical/horizontal integration
  between corporate and TMC
• Purchasing Consortia forming to increase buying
  power

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THE SAA - ASATA NEGOTIATIONS

• SAA - ASATA discussions revived 03 Aug. 04
• SAA still committed to constructive dialogue via
  ASATA
• Primary SAA objective is to reduce Cost of Sales
• All options will be explored - base commission
  vs. revenue increase
• Special SAA - ASATA negotiating teams set up
• Follow - up meetings 31 Aug. 15 Sep. 04
• Commitment to announce new model by end Sep. 04
• Corporates remain a major source of revenue

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THANK YOU