South African Start-up Enters ‘The Golden Triangle’

New South African low-cost carrier Velvet Sky Aviation inaugurated operations this week, offering a daily schedule between Johannesburg and Cape Town and 12 flights per week between Johannesburg and Durban, using a leased Boeing 737-300. There is already a lot of competition on these two routes with 269 weekly frequencies on the Durban – Johannesburg route and a massive 389 weekly flights between Cape Town and Johannesburg, and the airline will have to differentiate itself from existing operators - either through price or service – to win market share on the routes.

Velvet Sky was incorporated in February 2008 and has spent the past three years formalising its launch, while the industry was in downturn. It is backed by a number of local investors including Chairman Cecil Reddy, owner of engineering company Macdonald Holdings, and Chief Executive Officer Dhevan Pillay, who has interests in the retail sector, mainly in the photographic business. The airline originally planned to launch operations with three Boeing 737-300s offering a greater schedule on its launch routes, as well as a Cape Town – Durban link but has taken a cautious stance.

“Our approach to launching the company has been particularly cautious, as our aim is to guarantee an operation that will ultimately delight the South African travelling public,” said Cecil Reddy, ahead of the airline’s launch flight on March 22. “The increased volume of air passengers has led us to believe that the market is ready for a new entrant to bring us back to the hallmarks of air carriage – punctuality, safety and service. We intend operating three 737-300s when we are at full strength, but as we are a new company, we are adopting a prudent approach for now and will be phasing in our other two aircraft, although they are on standby to meet any service gaps.”

Source: Flightbase (April 14 – 20, 2011); IATA BSP (February 2010 – January 2011)

As the above table shows, Velvet Sky will have just a five per cent share of the capacity on offer when it fulfills its planned schedule on the Durban – Johannesburg route where there is already a strong mix of full-service and low-cost carriers. South African Airways (SAA) dominates the market, accounting for more than a third of the weekly capacity and almost 40 per cent of the O&D passengers. Interestingly, of the five carriers currently serving the route, Kulula offers the lowest capacity with just under 5,000 weekly seats but thanks to its low fares, which are estimated to be almost half the price of its rivals, it generated a larger share of the traffic than Mango and its full-service sister carrier British Airways / Comair.

Source: Flightbase (April 14 – 20, 2011); IATA BSP (February 2010 – January 2011)

The demand for services on the Cape Town – Johannesburg route is 50 per cent greater than the Durban – Johannesburg route and average fares are considerably higher. SAA has an even stronger control of this market with a 40 per cent share of capacity and traffic, with the market equally balanced among its domestic rivals.

Source: Flightbase (April 14 – 20, 2011); IATA BSP (February 2010 – January 2011)

Velvet Sky’s proposed third route between Durban and Cape Town is on display in the GDS, another competitive domestic market, although the carrier is not currently advertising these for sale on its website. SAA dominates the market in terms of capacity and demand with up to seven flights a day, however, the use of Bombardier CRJ200s on some of these flights means that low-cost carrier Mango offers a similar number of seats. Approximately 927,000 O&D passengers travelled on the route, a figure that will certainly exceed the one million milestone during the current year.

These statistics demonstrate what a difficult task it will be for Velvet Sky to break into the domestic South African market, regardless of expected traffic growth within the country. Still, its management is confident it has picked the right time to launch. “Having spent two years assessing the trends and demands of the airline industry, we are extremely eager to enter this market and believe that now is, without doubt, the perfect time to do so,” said Cecil Reddy.