Why Skywise was never going to fly

Mark D Young says the airline's business model was misconceived from the start

Many using airline flights between Johannesburg International and Cape Town International airports in the past few months will have seen the smart livery on aircraft leased by Skywise.

The airline is a startup carrier that began flying domestically earlier in 2015.

For the second time in as many months, it recently failed to operate due to unpaid debts and the withdrawal of services vital to operations. The latest issue involves the refusal of the Airports Company of South Africa to permit further operations until the airline settles a debt reported to be northwards of R8 million for parking and other service fees.

As a response, the airline management made several, increasingly desperate pleas to the public, institutions, government – in fact anyone they could think of – to help them return to the air. Their statements also alluded to the fact that “the industry” appeared to have hatched a plot to squeeze them out of the market.

Perhaps the most disappointing aspect of all these statements, interviews and letters dished out by the company's management is that none of them seemed to accept that the entire premise of the airline's operation was flawed from the start.

For the un-initiated, I shall set out some key aspects that – for those experienced in these matters – indicated the odds on survival forSkywise were always slim at best.

Aircraft choice

Worldwide, successful low cost airlines operate with one of two aircraft, either the Boeing B737-800 or the Airbus A321 series.

Both brands of aircraft compete in the same category and offer similar seating capacity in low-cost, high-density configurations. They offer similar fuel consumption figures and operating costs. Essentially choosing between the two is like choosing between a Hyundai or Toyota people carrier (for a more down-to-earth comparison) if you want something economical and affordable to operate and own.

Crucially, the two airliners offer seating for between 180 and 190 passengers. In the specific case of the Boeing model, 189 to be exact. Both Comair brands (Kulula and British Airways operated by Comair) and SAA's Mango subsidiary make use of the Boeing 737-800. As I write the aircraft used by Mango that were leased from Safair are in the process of being moved back into that company for use in its own low cost airline FlySafair.

Skywise, at the outset, was leasing a single Boeing 737-500 model (despite grandly showing images of the B737-800 on their website). This aircraft can only seat up to 140 passengers in its highest density configuration. In Skywise operations it had 136.

The passenger capacity difference between the Boeing 737-500 and the 737-800 meant that, on every flight on the Cape to Gauteng route, even if sold at a similar price for each seat (and taking the lowest advertised price), Skywise would realise (in round numbers) roughly R31 000 less revenue than any of its competitors. Taken on its initial 6 flights per day schedule, that means the carrier was always going to be at least R190 000 per day, or R5.3m per month, behind any rival flying the 737-800 model.

All the above assumes 100% capacity on each flight. The picture gets more confusing when we take into account that many flights operated at only 50-70% capacity but take it as read that lower actual passenger numbers makes the math more intimidating.

Another aspect which the airline's management like to raise is that the leasing costs for the B737-500 are way lower than those for a B737-800. While that is true, it does not alter the fundamental issue that the airline's opportunity to generate revenue when it was most needed during its stratup phase was compromised by opting for a single B737-500 and not a handful of B737-800s.

Interestingly enough, many in the industry to whom I have spoken seem to think the lower lease costs of the B737-500 and the falling cost of fuel from early in 2015 may have masked the underlying cash-flow problem for a period of time. Pundits say that these two factors may have allowed day to day expenses to be paid from advance ticket sales and mask the inevitable losses until ticket revenue fell following their first series of canceled flights in October. The drop in bookings after those incidents, in the end, magnified the core problems on the balance sheet.

Lack of capital and contingency aircraft

An old adage in the airline industry runs that the surest way to make a small fortune with an airline is to start with a large one.

In this case, when I speak of a lack of capital, I am not implying that the founders did not put any capital into the company – far from it. It appears that they had multiple investors and many millions of Rands but, when viewed against the capital needed to run a successful airline, they certainly appear to have undershot the mark.

To have had any hope of competing with the established carriers they needed to budget for a lease on at least 2 B737-800s or two Airbus A321s – preferably, in due course, 4 aircraft were needed to run a reliable and responsive airline on that route given their proposed flight schedule. Not to have these aircraft was a flaw in the basic plan and indicates that the higher cost of leasing the correct aircraft, to the correct depth, was too rich for the founders.

Furthermore if your sole aircraft has a technical issue-as can happen-then the airline needs to have a contingency plan on hand in the form of another aircraft with which to offer the service. Not to do so in a timely manner invites customer anger and an unrecoverable loss to your reputation – and via refunds, to your cash-flow. If they are honest, Skywise management will agree that they did, indeed, have too many of these “technical” no-fly instances for their own good. Angry, stranded passengers very seldom book your flights again.

Planned use of a Boeing 737-200

After their initial grounding in October, Skywise started operating again but then the unpaid bills to the company from which they were leasing their aircraft became too high for the lessor to bear and the Boeing 737-500 was recalled.

As an option, the company had lined-up an older generation Boeing 737-200, with even fewer seats and another major problem.

On the route between Cape Town and Johannesburg, the B737-200 uses up to 2000l more jet A1 fuel than the B737-800. Put another way, each flight – even if they had the same capacity – would now cost Skywise R12 000 more than any Kulula or Mango flight (using an average of current prices at the two airports). Daily, the increase in fuel costs would be R72 000 or up to R2m per month using the same 6 flights per day schedule.

If we now add that to the original seating issue (which is, in fact, made worse by the fact that the 737-200 only has 116 seats), then Skywise will be up to R7m per month adrift of where it needs to be.

Lack of airline experience

While it is not vital for the senior executives to know how to run an airline or fly the aircraft in detail, as such experience can be hired, it is important to have someone well schooled in the industry at the helm so as to understand the operational issues and the needs of the front-line staff when they need assistance or have to make decisions impacting on the company.

Skywise do mention an executive with previous airline experience in their corporate information but, to be brutally honest, running the failed re-born Sun Air operation in its last days as it went under in the early 2000s is akin to claiming you are an experienced and able ship's captain after driving the Titanic on its last night of existence.

The airline industry takes no prisoners and is highly competitive, everywhere in the world. To enter it thinking it will be a pleasant, affable place in which you can call on the finer aspects of human nature as you learn the ropes or when your own lack of acumen throws you a curved ball, is not only naive but immature.

As an indication of how tough the industry is, only one airline – on my research - has ever managed to show a profit in each year of its existence and that happens to be our own Comair. If they, Ryanair or Easyjet and other firms see fit to run the most up-to-date and efficient aircraft in an increasingly competitive environment, then anyone who fails to take note of their business model is bound to hit turbulence at some point.

So, in these circumstances, getting Skywise back in the air seems, from my research, not only highly unlikely, but perhaps, undesirable. And this is not for any of the spurious reasons raised by its executives in their letters and pleadings to the nation, but because the end result may be even messier for those left to deal with the debt and other fallout.

In a way then, ACSA may have done the industry and the flying public a favour by not permitting a poorly planned and under-funded operation run up further losses. It has certainly prevented untimely and vexatious cancellations that will, inevitably, strand the flying public without flights and the money they paid for them. If it was not ACSA demanding payment today, then it may well be the fuel or ground handling suppliers tomorrow.

While this is sad for those employed by the company, especially at Christmas time, it is, in the long run, better to call a halt to the charade than to let it carry on at any cost merely to pay lip service to principles of empowerment and so-called fair-play.

There is no substitution for proper planning in the airline industry.

Oh, and of course, there is that huge fortune needed at the outset.