The major costs Kulula and FlySafair incur to keep their flying capes on
For the analyst:
Understanding how money flows in and out of a company is of critical importance.
This article is a look at how costs are incurred at Kulula and FlySafair and the advantages of one strategy over the other.
Kulula* and FlySafair are 2 of South Africa’s biggest low-cost private airlines.
*Kulula is owned by JSE-listed Comair while FlySafair is not listed.
Kulula first took to the air in July 2001 promising no-frills cheap air travel while
FlySafair launched in October 2014.
Costs are everything to low cost carriers;
In order to be able to keep ticket prices low, controlling costs is of the utmost importance.
A major cost of all airliners (and the focus of this study) consist of:
Airplane itself and
Jet-fuel consumption.
The prices of planes and fuel are usually priced in US Dollars to a large extent locally, are determined by the USD/ZAR exchange rate. The effects of the exchange rate will not be analysed in detail here.
Airplane fleet
(1). FlySafair
FlySafair has a fleet of 16 airplanes.
The 16 planes are made up of eight Boeing 737-400 able to carry 165 passengers and eight Boeing 737-800 models able to carry 189 passengers.
That is approximately 2832 passengers in the air at any time assuming all planes are flying at the same time.
A look through FlySafair’s fleet shows that the current fleet was all previously used by other airlines by as many as 30 years ago.
FlySafair buys 2nd hand planes.
This should not cause any operational issues if they are well maintained.
(2) Kulula
Kulula has a fleet of 10 planes.
The 10 planes are made up of nine Boeing 737-800s capable of carrying 186 passengers and one Boeing 737-400 that carries 162 passengers
That is approximately 1836 passengers in the air at any time assuming all planes are flying at the same time.
Of its nine 737-800 planes, Kulula has purchased 6 of them spanking-brand new at a cost of approx. R400m each. The remaining 3 are leased.
Kulula was also supposed to start flying a brand new Boeing 737-Max purchased with R750 million which are unfortunately grounded pending aviation authorities clearance after 2 tragic crashes.
In comparison to Kulula,
FlySafair’s fleet is quite old!
This again should not cause any operational issues if they are well maintained
In comparison of the aircraft fleet
The Boeing 737-800s are much later to the 737-400s and
It can carry about 20 more passengers per flight and
Burns approximately 8% less fuel than the 737-400s.
The different airliners strategy
FlySafair’s strategy
FlySafair purchases 2nd, 3rd or 4th hand planes cheaply from other carriers
(even Kulula's old 737-400s planes and SAA's Boeings).
Older planes are not as efficient as modern models in terms of fuel consumption and passengers carried per flight.
However
FlySafair has a huge cost advantage over Kulula.
Because FlySafair purchases planes cheaply in the used planes market;
The company does not have to carry a lot of debt on its balance sheet in purchasing planes.
The company's plane depreciation costs of flying over a route are significantly lower.
Think of it like this:
Say that a plane can fly 50 000 flights in its lifetime.
-If Kulula bought at R500 million, it will average a cost of R50 000 per flight.
-FlySafair can purchase the same plane say 10 years later at a cost of R80 million,
-It will average a cost of R8000 per flight.
Planes go for cheap in the second hand market.
Norwegian airlines sold 5 of its Boeing 737-800s for $50m to a Chinese company leasing them out.
A used (1990s model) 737-400 can cost around $2-3 million (approx. R35 million)
A used (late 1990s mode) 737-800 can cost around $10-15 million (approx. R180 million)
A 2018 737-800 costs around $48 million
Kulula's strategy
Kulula tries to switch to the latest and most fuel efficient Boeings as early as possible (either buying or leasing). The older planes are sold (even to FlySafair).
In the short-term this strategy results in a reduction of jet-fuel consumption and more passengers carried per fight.
However
buying new planes leaves the company in a lot of debt
(Comair was R3.3billion in Aircraft-financing debt on 30 June 2019) and
the benefits of the cost savings and more passengers per flight are likely to be devoted to reducing the debt and not increasing shareholder returns.
In the medium to long term FlySafair can purchase the fuel efficient planes at a much cheaper price and enjoy the same cost reduction and more passengers per flight.
No conclusion is made regarding which cost strategy works best as we do not have FlySafair financial statement.
Lawrence Madire
TheSai
22 November 2019