Home Business Survival of the fittest as airlines cut prices in battle for market share Sunday March 6 2016 email print The airline regulator has dived into the price war in the airline industry. PHOTO | FILE | NATION MEDIA GROUP In Summary The war sparked last month after the entry of Fastjet.Worse, airlines from countries within the East African bloc are soon expected to start operating on local routes.In 2012 Jetlink was forced to close down due to its inability to match the prices offered by Kenya Airways on the Nairobi-Juba route which was its lifeline. The aviation sector remains one of the highest taxed industries in the country. Advertisement By VINCENT ACHUKA More by this Author That the government was forced to wade into the price war between airlines could be the strongest indicator that it is likely to be a case of who blinks first or who gets knocked off in the latest competition for budget travellers on domestic routes.The war sparked last month after the entry of Fastjet that has seen most operators slash their fares on some routes is expected to go a notch higher as London Stock Exchange listed Low Cost Carrier (LCC) prepares to launch flights to Eldoret, Kisumu, Mombasa and Wajir.Worse, airlines from countries within the East African bloc are soon expected to start operating on local routes when classification of flights between the four countries becomes domestic as agreed during the 11th Northern Corridor Integration Summit in Nairobi two months ago.However, with operation costs in Kenya still high, there are fears that should the current fiasco snowball into a predatory pricing war, smaller airlines could be forced out of the market. In 2012 Jetlink was forced to close down due to among other reasons, its inability to match the prices offered by Kenya Airways on the Nairobi-Juba route which was its lifeline. INDUSTRY HEAVILY TAXED Related Content Aviation survey calls for more air operators Jambojet ups marketing ahead of Fastjet entry Regulator wades into KQ, Fastjet price war Easyjet founder wants Fastjet CEO fired A meeting called last week by the Kenya Civil Aviation Authority (KCAA) attended by all operators on how to moderate air fares failed to yield much as both sides could not agree on the reduction of taxes which airlines say take almost 50 per cent of ticket prices.KCAA had two weeks ago demanded an unconditional reduction of fares on domestic routes in line with a directive issued by Presidents Uhuru Kenyatta, Paul Kagame of Rwanda, Yoweri Museveni of Uganda and Salva Kiir of South Sudan.The authority says that while all airlines agreed to reduce their fares it might take time before their tax reduction demands are met.“There is a perception throughout Africa that governments see aviation as a luxury rather than a mode of transport and this is preventing prices to go as low as they should,” KCAA spokesman Mutia Mwandikwa says.The aviation sector remains one of the highest taxed industries in the country. For every ticket bought, airlines are charged up to nine different taxes and levies. These include Value Added Tax, fuel levy, air navigation fees, landing fees, parking fees and ground handling fees among others.The government which owns 29.8 per cent of Kenya Airways is, however, non-committal on whether it would reduce the taxes. This will leave them to compete in a highly taxed operating environment which is a huge disadvantage to small airlines that do not have big planes.“We operate in a liberalised environment, so the only effective and permissible strategy is to allow maximum and fair competition which is what we are exactly doing,” Transport Cabinet Secretary James Macharia told the Sunday Nation.PRICE WARThe current price war has already seen most airlines apart from Jambojet drop their prices to up to 30 per cent especially in the lucrative Nairobi-Mombasa, Nairobi-Kisumu and Nairobi-Eldoret routes. Jambojet charges from Sh2,850 on all its routes depending on seat availability. Kenya Airways for instance now charges from Sh5,740 depending on seat availability from Nairobi to Mombasa down from Sh10,130 a few months ago. To Kisumu the national carrier now charges Sh9,138 down from Sh 10,310. Fly540 on the other hand is charging Sh3,770, Sh6,770 and Sh7,250 from Nairobi to Eldoret, Mombasa and Kisumu respectively representing a drop of between 20 to 30 per cent from last year. These price reductions come in participation of Fastjet’s expected entry into the local market. Its entry on the Nairobi-Daresaalam route in January stirred competition in the regional airspace which forced KQ to drop prices by 30.5 per cent to Sh27,240 for a return trip. Fastjet charges Sh13,200 which is way lower than both KQ and Tanzanian Airline Presicion Air. KQ owns a 41.23 per cent stake in Presicion Air but is faced with serious financial issues that have forced it sell it assets. Last week, it sold its prime landing slot at Heathrow Airport in London and wet leased two planes to Oman Air bringing the number of planes it has offloaded to four in two months. Fly540 chief says the current prices might push small airlines out of business. “Present prices are not viable in the long term as they are below cost,” the airlines Chief Executive Don Smith says while accusing KQ and Jambojet for starting the war in the first place. “They are competing between themselves for market share. No airline in the world would compete with itself. It is stupid and I believe contributes a significant amount to KQ’s losses,” he told the Sunday Nation.Despite its rapid growth in the last few years, competition in the domestic market is currently limited with Kenya Airways, Fly540, Fly Sax, Jambojet, Air Kenya and Safari Link being the main players. Air Kenya and Safari link, however, concentrate on the tourism industry with most of their flights serving key tourist attractions.Jambojet is owned by Kenya Airways while Five Forty Aviation which owns Fly540 also has controlling shares in Fly SAX.The national carrier does not fly to Eldoret anymore citing low passenger numbers but has 10 daily flights on the Nairobi-Mombasa route and five on the Nairobi-Kisumu route. Fly540 on the other hand has two daily flights to Kisumu and five to Mombasa from Nairobi.But while KQ uses its larger and fuel efficient Embraer jets on its Kisumu and Mombasa routes, Fly540 uses Dash 8s and Bombardier CRJs on both routes which have limitations on passenger capacity and fuel efficiency.Even worse for smaller airlines is the fact that Jambojet-KQs low cost subsidiary uses Boeing 737s which can carry twice as many passengers per flight enabling it to charge very low prices on the same routes they are supposed to compete in including Eldoret where it flies three times a day.Last year Jambojet made a profit of Sh57 million compared to a loss of Sh237 million during its first year in service.“It is not healthy competition. Jambojet should feed KQ on the routes it does not operate on such as Lamu, Eldoret and Ukunda. Remember Jambojet leases aircraft from outside so by using aircraft from outside to compete with itself KQ are bleeding themselves,” Mr Smith argues.KQ has denied that its operation with Jambojet on similar routes is bad the market.“A national career that is strong at home is a better international player as home turf would be considered low hanging fruit. Kenya Airways aims to be a strong domestic player and has a great product offering for it and is not in competition with Jambo Jet,” says KQ’s chief executive Mbuvi Ngunze. email print Related Stories Wed Jan 20 01:50:00 EAT 2016 Aviation survey calls for more air operators KCAA has welcomed the licensing of more air operators to excite competition that would lead to improved services. 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