A Tale of Three Capes

Three geographically remote airlines have vastly different performance & prospects

Air transport and seafaring have much in common. Both carry passengers and cargo to their destinations on scheduled services. Both operate in hazardous environments so are prone to operational disruption. Both try to ensure that their vessels, be they air- or ocean-craft, take the shortest and most efficient routes possible. And private jet interiors often contain tones of wood and brass, inspired by yachting.

Before the Suez and Panama Canals opened in 1869 and 1914 respectively, circumnavigating clippers carried cargo by heading south. They caught strong westerly winds in the roaring forties, furious fifties and high sixties, the numbers corresponding to degrees of latitude. This far down south, strong winds flow around the world with no land to get in the way.

For clippers like the Cutty Sark, now a tourist attraction in London’s trendy docklands, there were three milestones on the route. First up on was Cape Agulhas in South Africa. Next came South East Cape in Tasmania. Finally and homeward bound there was Chile’s Cape Horn. These three capes are known to sailors as the “Great Capes”.

Each of the three Great Capes is associated with an airline – South African Airlines (SAA), Aerolineas Argentinas and Australia’s Qantas. But while Qantas is highly successful and achieved profit in ten out of the 12 years to 2019, the other two are less so.

In the 2018/19 financial year SAA lost ZAR 3.7 billion (USD 256 million) on ZAR 26.0 billion revenue to achieve a margin of negative 14.3%. At the same time Aerolineas lost a whopping USD 603 million on USD 1.33 billion revenue, negative 45.2% margin.

Geographically the three airlines have much in common. Because they are located close to the Great Capes much of their aircraft’s range is wasted. In the map below I have drawn 3,000 mile circles around Buenos Aires, Johannesburg and Sydney, with some other significant airports and cities noted.

These represent each airlines’ local catchment area – people will travel to and from destinations in this region. Longhaul passengers will originate or terminate in the circles.

See how much of the range is over water. That is all wasted. And because these hubs are at the end of the line they are poor choices for passengers wanting to connect. High fuel costs from long inbound flights and poor connectivity at the hub is a bad combination.

So why is Qantas so successful while Aerolineas and SAA languish? Part of the answer may well be down to cost. But can Aerolineas and SAA make up the revenue shortfall? Read on…

The table below shows the total economic activity in real GDP at purchasing power parity, population and GDP per capital within the 3,000 mile circles in the map. I took data from the CIA World Fact Book, using 2019’s GDP numbers and 2023’s population estimate. My thinking was that GDP was artificially lowered in 2020-22 due to COVID, so 2019 is the best “realistic” guess.

A combination of GDP per capita and total GDP should be a good macroeconomic proxy for airline demand. In India, the population is high but demand is low. Tiny Qatar, population 2.5 million, GDP per capita $100,700, supports the world’s best business class (see article).

As a whole, the airline industry does not seem to pay much attention to these top-level numbers. They should, because put simply the more people there are in highly productive employment, the more travel and ancillary spend there will be. Prosperous consumers spend disposable income on holidays and businesses bring in capital to invest in a region.

I was interested to see how close GDP per capita is in Qantas and Aerolineas catchment areas. Across whole 3,000 mile circle, Aerolineas serves more economic activity ($6.5 trn) even than Qantas ($4.7 trn). That is good news for Aerolineas. The more than one billion people in SAA’s catchment area will not do the airline much good if most of them never fly.

Now look at the charts below, which show the same indicators for each country in the three catchment areas. French overseas departments Mayotte, Reunion, New Caledonia and French Guyana are excluded.

Things could look promising for Aerolineas. They are close to middle income countries where income is growing and the economic powerhouse of Brazil, population 219 million/GDP USD 3.1 trillion.

Since Sao Paolo and Rio de Janeiro are not too far from Argentina, connections to and from the north via Ezeiza Airport are feasible. Connections to Chile are viable too, and in this market there is good solid corporate demand on full-fare business class tickets thanks to the mining industry. Aerolineas is in a good position to capture some of this traffic.

For SAA on the other hand the market is more limited. There is mining like Chile’s in Namibia and some safari and other tourism. British Airways franchisee Comair, my first client :-), made a profit in almost every year of it’s existence and there is no reason SAA could not do the same on it’s domestic network.

The key to Qantas’ success has been market segmentation. The Aussie carrier offers four-cabin service on it’s A380s and three cabins including premium economy on it’s 787s.

Neither SAA or Aerolineas offer premium economy (see this article and this article) – they should. Both can take out low-yield economy seats and win traffic at double the yield in the middle cabin, even with business class left as it is. The key to success will be selling premium economy as it’s own experience to established premium economy fliers from the north, not as an upgrade from economy. Demand should be there as their trunk routes are long.

Qantas was earning $59 per passenger in ancillary revenue ten years ago. With retailing based on the NDC communications standard and a “gateway” strategy (see article), Aerolineas and SAA can surely beat that for their longhaul arrivals.

But the Aussies in Qantas’ home market are rich with nearly USD 50k GDP per capita. Many can afford a pricey coffee or extra bag. Incomes may be just about high enough in Latin America for retailing to work well for Aerolineas, so they can perhaps do well. But they have a long way to go - revenue needs to nearly double to reach profitability.

Will SAA be able to achieve a strong retailing strategy in it’s low income economic environment? They do not have quite as far to go as Aerolineas, margin-wise, to reach profit. But underlying macroeconomic conditions suggest that it will still be difficult if not impossible and require both careful and enthusiastic management.

For both airlines, achieving profitability will be a challenge. We will have to wait and see whether they can do it. But easy revenue growth from installing premium economy and embracing retailing should be no-brainers. If Aerolineas or SAA fail to do either they will have nobody to blame but themselves.

oliver AT ransonpricing DOT com