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Build for the future

Special Report - Southern Africa

“South Africa must not use the World Cup as an excuse to rob the industry by inflating infrastructure charges,” says Giovanni Bisignani, IATA Director General and CEO. “Proposals for a 59.9% increase in airport charges and a 42.6% increase in air traffic control charges are divorced from reality and completely unacceptable. When airlines are fighting for survival, such proposals are an embarrassment that must be resolved before the world comes to visit in June.”

The proposed increases are largely a result of the new King Shaka International Airport at La Mercy in Durban. The facility takes the adage of building for the future a bit too far. It will handle 7.5 million passengers per annum (mppa) with potential to expand to 45 million passengers.

The problem is that La Mercy, which is to open in May, is probably 10 years ahead of its time, according to capacity projections. Airlines say there was little consultation on the project, all claiming that Durban gives them something they don’t need.

And as the new fees involve a large amount of cross-subsidization—increases at Cape Town will partly finance the building of Durban—airlines that fly into South Africa but don’t use Durban will be paying for something they don’t use.

The Airports Company South Africa (ACSA) had not intended to build a new facility, says Nicky Knapp, Group Executive for Communications and Brand Management. “In August 2006, South Africa’s National Minister of Transport announced his decision that ACSA would take over the development of the new international airport at La Mercy from the KwaZulu-Natal Provincial Government, which had already started an EPC [engineer, procure and construct] process to develop the new airport.” Previously, the plan was to expand the existing facility.

And, says Knapp, the charges are simply the result of regulations, which state that ACSA must prefund all development and can only get its money back when the infrastructure comes online.

Cost Overrun

Durban has also suffered from severe cost overruns. Although ACSA made an initial “guestimate” that $409 million (ZAR 3.1 billion) would be spent on construction, latest estimates from the company are in the region of $900 million (ZAR 6.8 billion). It seems the regulating committee, which has accepted enormous increases in airport charges, is allowing most of the increased spend and even giving ACSA a return on it.

“The impact on South African Airways (SAA) and aviation in general will be negative as customers can absorb only so much before they reduce their trips,” says Vimla Maistry, SAA Acting Head Group Corporate Affairs. “Alternatively, SAA and other airlines need to absorb some of these costs, which might have an impact on other areas of service delivery.”

Price elasticity analysis performed by IATA has shown that the increases will materially affect international passenger numbers if the costs are passed on to
the ticket. This will doubtless affect South African businesses, tourism and the wider economy. It will mean tough decisions for airlines on how best to
serve particular routes, if at all. Yields continue to suffer in the wake of the economic downturn and the region was never a high-yield destination anyway.

Other upgrades are also responsible for ACSA’s requested price increase, although none is as controversial. At Johannesburg, capacity has been increased to 25 mppa. There is an additional pier with nine gates, and terminal space has been improved through the introduction of more self-service kiosks. A new rail link connecting the airport to downtown is under construction, and will later be expanded to cover parts of Pretoria. Capacity at Cape Town has been doubled to 14 mppa, and again greater emphasis has been placed on self-service.

There is a danger, though, that ACSA will continue to pursue developments at the two airports despite notable falls in passenger traffic. The improvements lined up are valued at $1.7 billion (ZAR 12.6 billion) up to 2015 alone, potentially leading to yet more substantial charges increases for the next regulatory period.

Air Navigation Charges

Air navigation charges have also increased. ATNS wants to increase staff and related costs by 83% by 2015. The Regulating Committee seems on the verge of agreeing to these hikes, making the likelihood of further uncontrolled increases in the future even greater.

Air traffic management in the region has improved, though, with the introduction of Reduced Vertical Separation Minima, and there is still much that can be done. “Southern Africa can still adopt new technology,” says Manoj R K Ujoodha, CEO of Air Mauritius. “Increased traffic management through air-ground data links such as CPDLC and ADS-B will further improve efficiency and safety especially where radio coverage is of lower quality.”

The challenge will be in making these improvements in an efficient and cost-effective manner.

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