This article first appeared in the Business Times section of The Sunday Times on 6 December 2015.
This week, domestic low cost airline Skywise’s operations were suspended by the Airports Company South Africa (ACSA) due to unpaid airport charges for landing, take off and parking of aircrafts.
Skywise was founded by Tabassum Qadir and J. Malik with the first daily scheduled flight taking off on 5 March this year.
Until Wednesday’s suspension, the airline serviced Johannesburg and Cape Town, with a daily schedule of six flights a day with its one leased Boeing 737 aircraft.
The suspension caused tremendous inconvenience for Skywise customers, especially the passengers stuck at airports in mid-week with no flight home.
So what is the real problem?
According to the Co-Chairperson of the airline, Tabassum Qadir they had estimated that it would take a few months for the new airline to break even.
“Any business takes six to eight months to break even. Then you come to a point where you start making money and profits in the peak season. This [December] was our peak season time. Even if we didn’t get the capital injection, we were good enough to go with the peak season.”
So Skywise founders believe that it takes a few months for any business to break even, and that the business model of domestic low cost carriers is to lose money all year and bank on a bumper December to make it all back and take some profits with. And in their case, ACSA is standing in the way of their payday.
If there is a business out there that breaks even within six to eight months, I want in. Furthermore, aviation is a thin margin industry that is extremely capital heavy and cash hungry.
Taking into account that the business of aviation requires a long-term commitment as well as deep pockets, how could Skywise's founders believe their business would break even in its first year of trade?
Did they ignore the tough economic climate and lethargic GDP growth curve that South Africa finds itself in?
What about the tight competition in the domestic low cost carrier market?
I do not want to believe that the entrepreneurs who invested R70 million of their own cash, could possibly be this naive. I am left with only speculation: The founders did not raise enough capital to carry the business.
The company was put on a “pay as you fly” plan after ACSA refused to extend and further credit to it, and the parties agreed on a six-month payment plan. Skywise made good on two payments and then struggled to keep up. The cash they hoped to generate was inadequate to fund the business, and the founders had already exhausted their capital.
This is not a new phenomenon and most successful entrepreneurs have been here before, at great cost to the reputation of their businesses.
Qadir concedes “Its not easy to start an airline. It was four years of hard work. And we are in operation for only nine months. We put in personal funding of R60 million – R70 million in the business. According to our business plan we were supposed to only make a profit in December and then continue to, going forward”
So a part of me sympathizes with the Skywise founders. I admire their bravery in entering aviation sector and am saddened by the strain they are having to manage.
However, I am also disappointed. I am disappointed by the business plan, which sounds more like “a hope” than “a plan”.
Blaming ACSA for suspending its services to Skywise due to non-payment, is not credible. Writing an open letter to President Jacob Zuma asking him to intervene is incomprehensible. If the airline has indeed secured equity investors to inject further capital, I sincerely hope they don’t expect a return in six to eight months. They would be lucky to see one in six to eight years.
Andile Khumalo is the CIO of MSG Afrika and MD of POWER 98.7. He also presents POWER Business on POWER 98.7 at 5pm, Monday to Thursday. This article first appeared in the Business Times section of The Sunday Times on 6 December 2015.
Click here to listen to Skywise Co-Chairperson, Tabassum Qadir's interview on POWER Business with Andile Khumalo