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Will low-cost carriers finally find their air space in 2016?

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If the spillover from the terror attacks and Ebola epidemic of 2014 determined the fortunes of East Africa’s air transport industry in 2015, nothing promises to be more disruptive to the business in 2016 than the coming of age of low-cost airlines and the sustained fall in oil prices. PHOTO | FILE 

By MICHAEL WAKABI

Posted  Friday, January 1   2016 at  10:12

In Summary

  • If the spillover from the terror attacks and Ebola epidemic of 2014 determined the fortunes of East Africa’s air transport industry in 2015, nothing promises to be more disruptive to the business in 2016 than the coming of age of low-cost airlines and the sustained fall in oil prices.
  • Increased penetration of telecommunications services and falling oil prices are likely to provide low cost carriers with more room for manoeuvre on their charges.
  • Legacy carriers will therefore see more disruption to their business models during 2016, but rationalisation of their structures should result in a better market for consumers.

If the spillover from the terror attacks and Ebola epidemic of 2014 determined the fortunes of East Africa’s air transport industry in 2015, nothing promises to be more disruptive to the business in 2016 than the coming of age of low-cost airlines and the sustained fall in oil prices.

In 2015, East Africa was a mixed bag for air travel. While major carriers were under increasing pressure as yields declined, new entrants were moving into the region adding to the competition.

Kenya Airways suffered a record $248 million loss and embarked on a fleet rationalisation programme.

Flydubai joined the melee, while China Southern and China National launched services out of Nairobi and Addis Ababa. British Airways pulled the plug on its service to Uganda, as SN Brussels exited its Nairobi slots for Lufthansa.

Exuding confidence, RwandAir ordered a pair of Airbus A330s, with delivery scheduled to start mid this year.

After a protracted struggle, Fastjet, the poster child of low-cost air travel in the region, will enter the Kenyan market in January, opening the possibility of low-cost flights between Kenya, Uganda and Tanzania. That development, while increasing consumer choice, is likely to initiate the segmentation of point-to-point travel in the region.

Manoeuvre on charges

Save for Nairobi’s Wilson Airport, the absence of secondary airports close to the major commercial centres has left low-cost operators hostage to the high user fees charged by regulators. Increased penetration of telecommunications services and falling oil prices are likely to provide low cost carriers with more room for manoeuvre on their charges.

With Iranian crude back on the market, and the US contemplating oil exports after domestic stocks reached record levels, oil prices are projected to stay below $50 for the next four years.

While falling oil prices ideally work for the industry across the board, it will be some time before the benefits fully feed into the cost structures of carriers such as Kenya Airways that are still tied to hedging plans contracted during the high price regime.

Amid high regulatory fees and infrastructure costs, falling oil prices will make low-cost travel more viable.

Fuel prices aside, the other factor that has been limiting low-cost carriers is the cost of distribution. New phone-based technologies will reduce these costs of distribution.

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