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ENVIRONMENTAL AFFAIRS

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1 ENVIRONMENTAL AFFAIRS
Strategy for Growth in International Tourism to South Africa Presentation to June 2003 DEPARTMENT OF ENVIRONMENTAL AFFAIRS AND TOURISM

2 Presentation Structure
Strategic Context The Growth Strategy - Summary Major Constraints to Success Recommendations

3 South African Tourism is reconfiguring itself to drive tourism’s contribution to the nation’s transformation programme In the Tourism Act, SAT must contribute to … Sustainable GDP growth Sustainable job creation Redistribution and transformation Increases in tourist volume Increases in tourist spend Increased length of stay … through delivering sustained ... Improved geographic spread Improved seasonality patterns Promote transformation Understand the market Choose the attractive segments Market the Destination … by acting in a focused way to … Facilitate the removal of obstacles Facilitate the product platform Monitor and learn from tourist experience

4 Domestic and International Short-Haul Tourism are the bedrock of the tourism industry, but SA Tourism’s core business is foreign tourism Split of SA’s International Tourists by Long-Haul and Short-Haul (2000) Split of SA’s International and Domestic Tourists (2000) 5.75 million 1.55 million Long-Haul (Overseas and North Africa) 27% Domestic 63% International 37% Short-Haul (SADC, Central & East Africa) 73% 9.8 million 4.20 million

5 Current international arrivals are driven off a hand-full of core markets
Long-Haul Tourist Arrivals to South Africa from Top 10 Source Markets (2000) Split of SA’s Inbound Tourists by Long-Haul and Short-Haul (2000) 1.55 million Long-Haul (Overseas and North Africa) 27% Short-Haul Tourist Arrivals to South Africa from Top 10 Source Markets (2000) Short-Haul (SADC, Central & East Africa) 73% 4.20 million

6 Total Arrivals to South Africa over the 7 Year Period from 1994
The steady growth in tourism arrivals post 1994 has slowed to 0.3% between 1998 and 2001 The major declines in tourism arrivals from Lesotho have been a major issue, but even without Lesotho, overall growth has slowed to 3.2% CAGR between 1998 and 2001 Total Arrivals to South Africa over the 7 Year Period from 1994 CAGR (94-01) CAGR (98-01) 6.9% 0.3% Arrivals to South Africa 6 Month Moving Average of Total Arrivals Source: South African Tourism Table K

7 Compounded Annual Growth Rate of Arrivals
Arrivals to South Africa have under performed the world tourism arrivals and most of the world regional arrivals over the period 1998 to 2001 The forecasts for many of the world regions are lower for the period to 2020 Compounded Annual Growth Rate of Arrivals Arrivals to South Asia Arrivals to Middle East Arrivals to Europe Arrivals to East Asia and the Pacific Arrivals to America CAGR WTO Forecast (95-20) Arrivals to Africa CAGR Arrivals (98-01) World Arrivals CAGR Arrivals to SA (98-01) Total Arrivals to South Africa Percentage (%) Note: Source: Tourism Market Trends, WTO 2001 Edition ; Tourism Highlights 2001, WTO

8 Graph Showing Share of Arrivals to South Africa by Country (2001)
South Africa’s current portfolio is driven off 21 countries which account for 90% of the arrivals Many of the markets were (until 2001) in decline which suggests a need to defend current share, while at the same time rebalancing the portfolio of source markets Graph Showing Share of Arrivals to South Africa by Country (2001) % Share of Arrivals Arrivals projected to decline Arrivals projected to increase Source: Monitor analysis; Statistics South Africa, 2001; Foreign Visitor Departure Surveys, 2000 & 2001

9 Graph Showing the Relationship Between Volume of Arrivals and Tourist
When the contribution to revenue is assessed, it is seen that the high value countries contribute the least in terms of arrivals Thus, although Lesotho accounts for 22% of the arrivals, its contribution to revenue is only 7%, while the UK accounts 6% of arrivals, its contribution to revenue is 14% 10 20 30 40 50 60 70 80 90 100 Lesotho Swaziland Botswana Zimbabwe Mozambique UK Germany Namibia USA Netherlands France Zambia Malawi Other Graph Showing the Relationship Between Volume of Arrivals and Tourist Revenues % Arrivals % Revenue Source: Monitor analysis; Statistics South Africa, 2001; Foreign Visitor Departure Surveys, 2000 & 2001

10 Seasonality presents a major constraint on capacity for growth
The deep seasonal pattern of arrivals into South Africa creates significant challenges for investing in capacity to serve increased demand. Asia (98-01) Europe (98-01) Arrivals to South Africa ( ) Arrivals (000’s) North America (98-01) Africa (98-01) Source: South African Tourism Strategic Research Unit

11 SA Tourism recognised that tourism growth faces some key challenges
Despite increases in overall funding of the marketing campaign, the total budget is small in global terms, and as the currency weakens, is getting smaller. SA Tourism needs to focus its efforts and resources on those countries and customer segments which are most valuable to South Africa Focus effort and resources Re-balance the portfolio Arrivals to South Africa are too dependent on a few large markets. The mix of arrivals needs to lessen dependence on volatile markets and at the same time increase our share in high-value markets Marketing to be based on a view of customers Generic “spray and pray” marketing averages messages and has low returns. SA’s marketing needs to focus on specific sets of customers, and speak directly to their specific holiday buying criteria. We need to move from pushing what we like about SA to selling customers what they want. Create alignment within the tourism sector Behind the strategy the tourism industry needs to redefine and upgrade products and services to deliver against the promise offered by the marketing message. Note: Source:

12 Presentation Structure
Strategic Context The Growth Strategy - Summary Major Constraints to Success Recommendations

13 The strategy is about re-balancing the portfolio through four areas
Seeking out the countries and markets that will address these various components is key to establishing the portfolio Growth in volume Growth in Revenue Defend the Current Position Reducing Seasonal Variations

14 To obtain growth and defend the current shares, an integrated strategy needs to focus on five key drivers Clearly different countries and / or segments will drive growth in different ways 2. Stimulate current uses with existing consumers 2. Stimulate your current customers to come here more often 1. Retain uses by existing consumers 1. Maintain current purchasing pattern Increase Volume with Current Consumers 4. Attract new-to-you consumers 4. Convert customers from the competitor to South Africa Acquire New Consumers Competitor 5. Attract new-to category consumers 5. Convert short-haul travellers to long-haul travellers Dairy Company 3. Generate new uses by existing consumers 3. Get them to come back to SA to do different things Improved growth comes from two avenues: 1. Rebuilding the value proposition of an existing product or service to improve its relevance, distinctiveness and consistency for the customer (Revitalization), and/or 2. Extending the existing value proposition to new customers, channels and / or geographies (Push) In other words, you can revitalize the core and old sources of growth, and/or you can push existing equities and capabilities into areas where they create new sources of growth. (Often, companies’ value propositions drift over time and, as a result, lose their impact. There are many root causes for this. For example: Product upgrades from old platforms are often overloaded with features and functions not intended for the original platform, or not valued by customers. Brands may lose their distinctiveness when competitors copy the most effective elements of the positioning. Competitors pioneer new channels that are more convenient to the consumer. In all cases, the core value proposition is broken — it fails to deliver differential value to the customer. Understanding that the proposition is broken, and how, prompts clients to take action aimed at rebuilding.) (In contrast, many companies apply their value proposition too narrowly. This happens for many reasons. For example: The company may not have the capability to put additional infrastructure in place. There is limited overlap between competitors’ and company’s products and footprint. Customer awareness of the suitability of the product for the application may have been low.) Deconstructing the growth challenge even further, there are only five ways a company can grow their volume. You can: 1. Retain uses by the existing customers (or minimize shrinkage in your base) - Revitalization 2. Stimulate current usage with existing customers (or get customers to buy/consume more within their typical use occasions) - Revitalization 3. Attract new-to-category customers (or recruit customers who are outside the category) - Push 4. Generate new uses by existing customers (or create new purchase and use occasions for existing users) - Push 5. Attract new-to-you customers (or steal customers and their use occasions from competitors) – Push Getting down to the level of the five growth drivers is critical to making the growth opportunity real to your organization. These drivers define the components of growth – that is, the specific change in the customer’s mindset that must be achieved in order to grow. (For example: Retaining uses by the existing customers are the actions like those that keep customers from switching, such as a long distance rewards program that accumulates points based on your status as a customer. Stimulating current usage with existing customers are actions like creating long distance calling plans that give an incentive to have longer phone conversations Attracting new-to-category customers would include actions such as selling telephone service to college students who leave home. Generating new uses by existing customers would include actions such as extending the traditional telephony bundle to include mobile services to current subscribers. Attracting new-to-you customers would include actions such as offering reduced rates on long distance to a competitor’s customers if they sign up)

15 Africa — The Main Driver of International Tourism to South Africa
Europe 1,252,710 arrivals 19,5% of total North America 216,275 arrivals 3,36% of total Middle East 33,401 arrivals 0.5% of total Asia 117,415 arrivals 1,8% of total Central & South America 38,311 arrivals 0.6% of total Australasia 85,775 arrivals 1,3% of total AFRICA 4,455,971 Arrivals (4,435,218 mainland) 69.3% of total (69% mainland) Other 3,64% of total Source: SA Tourism - Table A December 2002

16 Given that 60% of South Africa’s arrivals are accounted for by 5 of the neighbouring states, the strategy for SADC is largely one of “defend” Given the high market share already in SADC and the absence of any true competition the focus for SADC shifts to one of retention and the extraction of additional value. Outside of neighbouring SADC however, there is scope to attract smaller high-end leisure volumes which long term may provide growth 2. Stimulate current uses with existing consumers 4. Attract new-to-you consumers 1. Retain uses by existing consumers 5. Attract new-to category consumers Improved growth comes from two avenues: 1. Rebuilding the value proposition of an existing product or service to improve its relevance, distinctiveness and consistency for the customer (Revitalization), and/or 2. Extending the existing value proposition to new customers, channels and / or geographies (Push) In other words, you can revitalize the core and old sources of growth, and/or you can push existing equities and capabilities into areas where they create new sources of growth. (Often, companies’ value propositions drift over time and, as a result, lose their impact. There are many root causes for this. For example: Product upgrades from old platforms are often overloaded with features and functions not intended for the original platform, or not valued by customers. Brands may lose their distinctiveness when competitors copy the most effective elements of the positioning. Competitors pioneer new channels that are more convenient to the consumer. In all cases, the core value proposition is broken — it fails to deliver differential value to the customer. Understanding that the proposition is broken, and how, prompts clients to take action aimed at rebuilding.) (In contrast, many companies apply their value proposition too narrowly. This happens for many reasons. For example: The company may not have the capability to put additional infrastructure in place. There is limited overlap between competitors’ and company’s products and footprint. Customer awareness of the suitability of the product for the application may have been low.) Deconstructing the growth challenge even further, there are only five ways a company can grow their volume. You can: 1. Retain uses by the existing customers (or minimize shrinkage in your base) - Revitalization 2. Stimulate current usage with existing customers (or get customers to buy/consume more within their typical use occasions) - Revitalization 3. Attract new-to-category customers (or recruit customers who are outside the category) - Push 4. Generate new uses by existing customers (or create new purchase and use occasions for existing users) - Push 5. Attract new-to-you customers (or steal customers and their use occasions from competitors) – Push Getting down to the level of the five growth drivers is critical to making the growth opportunity real to your organization. These drivers define the components of growth – that is, the specific change in the customer’s mindset that must be achieved in order to grow. (For example: Retaining uses by the existing customers are the actions like those that keep customers from switching, such as a long distance rewards program that accumulates points based on your status as a customer. Stimulating current usage with existing customers are actions like creating long distance calling plans that give an incentive to have longer phone conversations Attracting new-to-category customers would include actions such as selling telephone service to college students who leave home. Generating new uses by existing customers would include actions such as extending the traditional telephony bundle to include mobile services to current subscribers. Attracting new-to-you customers would include actions such as offering reduced rates on long distance to a competitor’s customers if they sign up) Competitor Dairy Company 3. Generate new uses by existing consumers

17 Africa and specifically neighboring SADC are important source markets for South Africa
Africa accounts for 72% of the arrivals to South Africa, with neighboring SADC countries representing the majority of these arrivals Regional Share of Arrivals to South Africa, 2000 Breakdown of Africa Arrivals to South Africa, 2000 Rest of Africa (3%) Other SADC (5%) Neighboring SADC (92%) Source: Statistics South Africa

18 Top 5 Source Markets to SA (2001)
Nearly two-thirds of arrivals come from just 5 countries with little growth and therefore we need to look at air travel in Africa for growth SA Market Share Arrivals CAGR (98-01) Top 5 Source Markets to SA (2001) 83.72% Other Mozambique 69.79% Zimbabwe 98.29% Share of Arrivals to SA (%) Botswana Swaziland 98.74% Lesotho 99.56% Source: Statistics South Africa, Foreign Visitor Departure Survey, Monitor Analysis

19 Air Travel from Africa is Growing
Overall, travel into SA from neighbouring SADC is stagnant, but air arrivals are growing fast, including out of neighbouring SADC states. Breakdown of Air Travellers to SA (98-00) CAGR (98-00) 1% 17% 18% 19% Arrivals 29% 29% 31% 4% 10% 51% 53% 54% Breakdown of Land Travellers to SA (98-00) Other Africa 4% Non-neighboring SADC Arrivals 0% Neighboring SADC 97% 97% 97% Note: The land travellers out of the rest of Africa are insignificant Source: Statistics South Africa

20 Initially, we considered 27 countries in East and West Africa
Tunisia Morocco Why East Africa? Good flight connections and outbound tourist potential Appears to be easiest region to generate significant increase in demand Initial findings indicate that additional consumer research could generate significant leverage Algeria Western Sahara Cape Verde Mauritania Mali Niger Senegal Eritrea Chad The Gambia Sudan Guinea-Bissau Burkina Faso Guinea Cote d'Ivoire Nigeria Central African Republic Ethiopia Sierra Leone Togo Liberia Benin Came-roon Somalia Uganda Equatorial Guinea Congo Democratic Republic of Congo Kenya Ghana Gabon Sao Tome and Principe Rwanda Burundi Tanzania Why not North Africa? Due to proximity to Europe, and language barriers, conversion deemed relatively more difficult Saint Helena Seychelles Malawi Angola Comoros Djibouti Why West Africa? Zambia Mozambique Limited current knowledge on region, but Sizeable populations, wealth, and relatively high outbound tourist numbers imply significant potential Seeing this potential, some airlines have recently been moving into this market Mauritius Zimbabwe Namibia Botswana Madagascar Why not Middle Africa? Low current outbound numbers imply very limited short and medium term potential Swaziland Reunion Lesotho South Africa

21 Of these 27 countries, nine appeared worth pursuing
Screening Matrix 250,000 Nigeria (pop = 58,287,100; travel = 240,236) Kenya Senegal Total Outbound Air Travel (1999) Ghana Tanzania Mali Ethiopia Benin Guinea Uganda Liberia Niger Cote d’lvoire Rwanda Togo Somalia The Gambia Burundi Burkina Faso Cape Verdi Sierra Leone Madagascar Comoros Mauritania Eritrea 60,000,000 Djbouti Note: Green shaded area is worth pursuing Source: World Bank Guinea-Bissau Total Urban Population (2001)

22 Prioritisation of these markets tended to confirm the hypothesis of focus on Nigeria and Kenya
Relative Attractiveness of Target Markets 100 Nigeria Cote D’Ivoire Top right hand box is most attractive area Senegal Kenya Tanzania Total Travel Potential Index 30 Uganda Mali Ghana Ethiopia 30 100 Note: Size of bubble denotes size of urban population: = 5 million; indices evenly weight component parts; indices from previous calculations Source: World Bank, ITU, IATA, OAG, Monitor Analysis Total Current Travel Index

23 Challenges in Africa: There appear to be several country groupings with significant internal travel (like South Africa has with SADC) Capacity: Band 1 (25,000 – 50,000) Band 2 (50,000 – 100,000) Band 3 (100,000 – 200,000) Band 4 (200,000+) 11 3 10 12 14 4 5 West Africa 8 2 13 7 3 1 East Africa 15 4 6 16 5 Benin Burkina Faso Cape Verde Cote D’Ivoire Gambia Ghana Guinea Guinea-Bissau Liberia Mali Mauritania Niger Nigeria Senegal Sierra Leone Togo 9 11 Burundi Comores Djibouti Eritrea Ethiopia Kenya Madagascar Reunion Rwanda Seychelles Somalia Tanzania Uganda 13 6 Kenya, Tanzania and Uganda appear to be tightly linked Two country groupings appear to exist in West Africa Nigeria and Ghana Cote d’Ivoire, Senegal and Mali Cote d’Ivoire might act as the bridge between Anglophone and Francophone West Africa 9 1 12 10 2 7 8 Source: OAG, Monitor Analysis

24 Additional Information: Inter-regional Capacity Flows
Band 1 (25,000 – 50,000) 19 Band 2 (50,000 – 100,000) 1 Band 3 (100,000 – 200,000) 11 Band 4 (200,000+) North / Central / West Africa 18 17 4 22 7 24 Algeria Benin Burkina Faso Cameroon Cape Verde Central Africa Republic Chad Congo Congo, Dem. Rep of Cote D’Ivoire Egypt Gambia Ghana Guinea Guinea-Bissau Liberia Mali Mauritania Morocco Nigeria Saint Helena Senegal Sierra Leone Sudan Togo 20 3 2 East & South Africa 13 6 25 10 5 Burundi Comoros Djibouti Eritrea Ethiopia Kenya Madagascar Malawi Mauritius Mayotte Reunion Rwanda Seychelles Somalia South Africa Tanzania Uganda Zambia Zimbabwe 4 14 6 17 8 12 9 1 While Ethiopia appears to be a northward facing hub, Kenya appears to be southward facing Nigeria appears to have moderate links to East Africa 16 8 2 18 19 10 7 9 11 15 Source: OAG, Monitor Analysis

25 Additional Information: Inter-continental Capacity Flows
Europe North America Asia Middle East 11 10 South Asia 3 12 4 5 15 2 8 5 3 7 1 Band 1 (25,000 – 50,000) Band 2 (50,000 – 100,000) Band 3 (100,000 – 200,000) Band 4 (200,000+) 13 16 6 4 17 9 11 West Africa 13 6 Benin Burkina Faso Cape Verde Cote D’Ivoire Gambia Ghana Guinea Guinea-Bissau Liberia Mali Mauritania Niger Nigeria Saint Helena Senegal Sierra Leone Togo 9 East Africa 1 12 Burundi Comoros Djibouti Eritrea Ethiopia Kenya Madagascar Reunion Rwanda Seychelles Somalia Tanzania Uganda 10 14 2 7 8 Source: OAG, Monitor Analysis

26 Outbound Departures by Region from Africa (1999)
Africa is a very focused market at travel costs are high and markets relatively small SA’s Market Share Outbound Departures by Region from Africa (1999) Long-haul Short-Haul (67.2%) (2.5%) (8.4%) (10.4%) (17.1%) (2.1%) (0.6%) (20.9%) Outbound Departures Note: Data for Mozambique is missing from SADC analysis. The only data on Mozambique are outbound departures from South Africa to Mozambique (2000). Missing data points for 1999 were projected based on historical growth rates and triangulated where possible with other sources Source: World Tourism Organization 1999; Monitor Analysis

27 Sum of the National Leisure Travellers and Expatriate Markets
An assessment was made of the expatriate markets in these countries, which boosts the overall attractiveness of many of these markets Although the markets are small relative to one UK segment, South Africa’s relative proximity and dominance in the air market makes these markets potentially easier to penetrate Sum of the National Leisure Travellers and Expatriate Markets Nationals Expatriates Potential Leisure Arrivals to SA * Segment includes all UK leisure travellers on group tours across all age groups Source: Telephonic interviews with High Commissions or Trade Missions in countries, Monitor Analysis

28 Central & South America
The Rest of the world Europe 1,252,710 arrivals 19,5% of total North America 216,275 arrivals 3,36% of total Middle East 33,401 arrivals 0.5% of total Asia 117,415 arrivals 1,8% of total Central & South America 38,311 arrivals 0.6% of total Australasia 85,775 arrivals 1,3% of total AFRICA 4,455,971 Arrivals (4,435,218 mainland) 69.3% of total (69% mainland) Other 3,64% of total Source: SA Tourism - Table A December 2002

29 In looking for growth opportunities, the eleven largest long-haul leisure markets cannot be ignored
These markets are forecast to continue growing and would be key in any portfolio Country Size of LH Leisure Travel (Holiday + VFR) Estimate of the LH Holiday Travel Ranking on Leisure Arrivals to SA, 2000 Arrivals Ranking, 2000 1 US 20,932,893 12,237,691 2 174728 3 Japan 14,076,641 22662 13 UK 8,604,193 7,127,271 349652 4 Germany 5,828,967 5,239,521 210227 5 France 4,847,124 3,540,034 89573 6 Canada 3,696,141 2,850,552 27531 10 7 Australia 3,500,183 2,245,261 56040 8 Italy 1,703,360 1,510,763 38195 9 Netherlands 1,548,637 1,259,025 91154 China 1,498,134 1,270,157 18306 17 11 Sweden 1,348,714 1,027,194 20213 15 12 Argentina 1,159,014 701,938 16 15383 20 Switzerland 1,124,213 985,611 33181 14 Spain 1,070,516 923,318 17941 18 Korea 1,056,369 802,983 8574 28

30 Different strategies will be required against these different markets
Territories like Japan are highly attractive, but are very difficult as a result of product barriers, while a market like the Netherlands has much lower attractiveness, though is comparatively much easier to activate Graph showing Potential Marketing Effort against Potential Gain How much easier is it to get yield from this market? How attractive is this market for SAT’s goals? OWN and GROW DEFEND INVEST for GROWTH PICK-OFF VALUABLE SEGMENTS Netherlands Italy Australia Sweden China Canada France Japan US UK Germany Source: Monitor Analysis and South African Tourism workshop.

31 The portfolio of countries focuses on identified pockets of value balanced by actionability
Lesotho Swaziland Niche Opportunities Additional markets where value has been identified Botswana Zimbabwe These countries account for 18% of arrivals, but 40% of revenue Kenya Nigeria Egypt Mauritius Tanzania MICE Markets Mozambique Namibia Zambia Angola Malawi Japan Sweden China Australia Canada France Germany Italy Netherlands United Kingdom United States Belgium Switzerland India Top Eleven Outbound Markets of the World Top 20 Countries Accounting for 90% of Arrivals Watch List These are markets which SAT may investigate further to find value segments Austria Argentina Brazil Denmark Finland Greece Hong Kong Indonesia Ireland Israel Malaysia Mexico Norway New Zealand Philippines Poland Portugal Russia Saudi Arabia Singapore South Korea Spain Taiwan Thailand UAE

32 Comparison of Current SA Portfolio and Predicted Portfolio, 2001-2005
Effective defense (to hold current share) and 2% growth per annum over five years in growth segments changes the mix in the portfolio Comparison of Current SA Portfolio and Predicted Portfolio, Other Netherlands, France, Zambia, Malawi, Australia, Belgium, Italy, Switzerland, Canada, Angola, India USA Namibia Germany UK Share of Arrivals to SA (%) Mozambique Zimbabwe Botswana Swaziland Lesotho Note: The 2005 portfolio was obtained using the assumptions outlined on the previous slide Source: Statistics South Africa, Foreign Visitor Departure Survey, Monitor Analysis

33 And changes the results dramatically
Tourism to SA is increased in 2002, however a clear targeted strategy needs to be followed to ensure that this is sustainable and not a temporary phenomena Results if we do nothing different (based on growth to the end of 2001) What the strategy can deliver Revenue Growth Revenue Growth Arrivals Growth Arrivals Growth 2002 Arrivals : 5,835,117 Projected 2005 Arrivals : 7,273,900 % Growth % Growth Source: Monitor analysis; Foreign Visitor Departure Surveys, 2000 & 2001

34 Presentation Structure
Strategic Context The Growth Strategy - Summary Major Constraints to Success Recommendations

35 SA faces some key challenges if it is to realise the growth potential
Sustainable strategy depends on four areas. SAT controls only a few of the necessary levers Focus Choices about which segments to target and serve are required SA needs to differentiate itself - not be all things to all people Channels Channel strategies must be based on reaching target consumers and maximising the value captured in SA Access Choices about which segments to serve must be backed by strategies to ensure adequate and easy access to South Africa Product Choices about which segments to serve must be supported by appropriate products with sufficient capacity Note: Source:

36 Marketing alone cannot deliver results - key constraints on delivery need to be removed
Maintain our presence in non-core markets SAT cannot afford representation in all markets which are important, but SA needs to maintain some marketing presence Align tourism product and services The new strategy requires that in our product and services we begin to do things differently from the past - and keep ahead of the competition Provide for a focuses tourism safety strategy Make it easier to get access to South Africa In certain key markets - particularly Africa - our immigration and visa procedures represent a major constraint Enable adequate and competitive airlift At certain times of the year, and in certain markets, the availability of airline seats is lower than would support growing demand. This combined with channel economic issues drives up the cost of holidays to SA compared to our competitors. Note: Source:

37 Growth from these focus markets depends on increasing airlift capacity
Across the core markets, there are a number of challenges regarding airlift Access Vulnerability to Unpredictable Foreign Supply Capacity Constraints Price Direct access is not available from some of the key markets in the SAT portfolio. Certain air links to key markets are either fully under the control of, or dominated by, foreign carriers with no commitment to the SA market Dramatic variations in arrival volumes through the year (high seasonality) has led to airlines restraining growth in capacity in order to manage profitability across the year On certain key routes, limited demand has led to few or only one operator serving the market. This limited competition has resulted in uncompetitive prices versus our competitor destinations Government faces key choices about creating the conditions which will lead to alignment between tourism strategy and the airlines in meeting these challenges

38 Access: Future success requires expansion in airlinks between SA and key markets
Two of SA’s key source markets for the future currently have no direct airlink whatsoever and a quarter of our future key source markets are currently not served by an SA-flag carrier on a direct service. û û û û û û û û û Note: SAA and Cathay Pacific serve the Hong Kong-Johannesburg route. However, leisure tourism growth in China is coming largely from the mainland

39 Dependency on Foreign Carriers Airlines serving SA have declined since 1997
Between 1997 and 2001, the number of airlines serving South Africa dropped from 75 to 54 Source: ACSA

40 Capacity constraints Bi-laterals are an issue only in the minority of cases
In overall terms, plenty of spare capacity exists within the bi-lateral air services framework, as well as on average on aircraft Bi-Lateral Air Services Agreements International Seat Utilisation into JIA (Aug.2000-Jul.2001) 98 45 Agreements Active Agreements Breakdown of Weekly Frequencies Available Frequencies Not Used Used Foreign Operated SA SAA Other SA carriers 374 999 314 625 311 249 62 Average Seats per Month: 388,000 Average Passengers per Month: 197,000 Average Load factor: %

41 Monthly German Arrivals (2000) SAA Load Factors — European Services
Capacity Constraints Seasonal patterns on key routes create pressures at key times of the year High fluctuations in demand on key routes put airlines under pressure not to put capacity which is then under-utilised most of the year — putting pressure in peak months Monthly German Arrivals (2000) 30,000 SAA Load Factors — European Services 2000/2001 20,000 20,000 Arrivals 10,000 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Monthly UK Arrivals (2000) 45,000 40,000 35,000 Arrivals 30,000, 25,500 25000 20,000 15,000 10,000 5,000 Over 70% load factors between October and March indicate customers are starting to be turned away Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

42 Price The cost of the airfare is often uncompetitive where competition is limited
Indexed Cost of Air ticket From Tokyo (Long-Haul Destinations) Indexed Cost of Air Tickets From London (Long-Haul Destinations) Indexed Cost of Air Tickets From New York (Long-Haul Destinations) Indexed Cost of Air Tickets from Frankfurt (Long-Haul Destinations)

43 Flag Carriers are important to building destinations
For the majority of destinations that have emerged in the last ten years, the airline has been a key feature of their success CAGR ‘95-’99 Total Tourism Arrivals Total International Pax Carried 2000 Thailand 5.52% +- 60% +- 35% South Africa 7.37% Brazil 26.48% +- 50% Total Tourism Arrivals (Millions) Australia 5.50% U.A.E. 28.00% Morocco 10.50% Kenya 17.81% Update Millions

44 Airlines and the success of destinations
There have been two routes by which emerging destinations have achieved alignment between their tourism strategies and the flag-bearing airlines Indirect Regulation and Facilitation Direct State Involvement Australia explicitly developed a competitive approach to air services, and privatised Qantas against these objectives through:- Providing Qantas with a three-year pre-privatisation period where the regulatory environment was liberalised to allow it to “get fit” Privatisation was used to enable major re-investment and fleet expansion by Qantas with private-sector capital Created an environment in which Qantas was encouraged to work in close alignment with the tourism industry and the Australian Tourist Commission Thailand’s government built Thai with the explicit mandate:- To develop and expand company business, as THAI* is a national flag carrier, to become one of the world best airlines To promote Thailand as a gateway into the Asia-Pacific region To support Thailand’s tourism industry To maximise profit in order to raise funds for human resource development and equipment necessary to achieve the above objectives. Flag carriers’ financial interests are largely based on traffic into and out of a destination. This means a strong alignment of the airline financial interest and the national tourism interest, thus creating the basic conditions for strong common interest and alignment in strategy

45 Importance of Flag Carriers to tourism destinations The examples of Thai and Qantas investing with demand growth Part of Australia and Thailand’s success has been in how their airlines have invested in capacity to meet increasing demand… Qantas ASKs against Arrivals to Australia Thai ASKs against Arrivals to Australia Arrivals (Millions) Asks (Millions) Arrivals (Millions) Asks (Millions) Qantas provides capacity in line with growing demand Thai historically provided capacity ahead of demand growth

46 Importance of Flag Carriers Thai and Qantas have been major investors in the success of tourism
Flag carrier airline alignment to national objectives, and their direct investment in tourism, have been key to both Thailand and Australia’s success stories. Qantas has been a key role-player in achieving this success through: Building a strong brand consistent with Australia’s brand intent Investing in destination marketing that more than doubles Australia’s leverage Building a loyalty programme that promotes service improvements Development of holiday programme which is now the largest operator in the country Consciously building alignment with government strategy, product and the trade Thai airways has been a key investor in Thailands success through: Promotion of Thailand as a destination, and as hub into the South-East Asian Region Selling seats and holidays in ways consistent with Thailand’s value proposition Direct investment in national tourism marketing campaigns Strong promotion of regional destinations in line with government strategy Tourism to Australia has more than doubled from 2 million visitors in 1990 to 4.9 million in 2000 Tourism to Thailand has almost doubled from 5 million in 1990 to 9.6 million in 2000

47 South Africa SAA has not kept pace with growing demand
SAA on the other hand, has historically not kept capacity in line with tourism demand, and its most recent capex plans only deal with replacement of old aircraft. International Passenger Demand and Planned SAA Capacity Moving South Africa Findings in 1998 Passengers Waiting for updated SAA data - Expected Wednesday- International arrivals against SAA market share Source: SAA

48 Purpose of Travel out of the UK
SAA and SA’s tourism strategy Focusing on the business traveller pulls against tourism objectives As SAA has consolidated its routes and focuses on retaining share in the lucrative business market, the structure of seat pricing and product works against South Africa’s ability to drive growth out of the leisure market. “Dire straits of airline industry are partly due to an over-reliance on business travel” — Peter Martin, Business Day (January 9, 2002) BUT The focus on business travel is on the smallest section of the outbound travel market Purpose of Travel out of the UK

49 South Africa Uncompetitive airfares and inadequate capacity — the cost to SA in the US
The “Wonderluster” segment in the US is worth between $ 77 million and $ 387 million over the next three years if the cost of the airfare could be dropped from the average $ 1, to $ 1,000.00 Variation in Segment Value, Activation Rates of 2% (Conservative) and 10% (Optimistic) of Interested Travellers $875 M (276,368) Currently the “Wonderlusters” don’t travel to SA despite them being the most positive and interested segment in the US market By bringing the cost of a 10-day holiday to the price of US$ (including airfare of US$ ), SA could immediately begin to activate this segment worth between US$ 77 million and US$ 387 million if only between 2% and 10% of this segment actually do travel to SA $663 M (186,651) $485 M (167,958) $435 M (157871) $387 M (168,172 visitors) $138 M (73, 843) $175 M (55,274) $133 M (37,330) $77 M (33,634 visitors) $97 M (55,274) $87 M (31,574) $46 M (12,247) $28 M (14,769) $9 M (2449) Source: Monitor Analysis, WTO Data

50 Stacking SAA financial performance against the revenue earned by SA from passengers delivered by SAA
Assuming a conservative 35% overall market-share, the revenue to SA attributable to tourists delivered by SAA is almost R 7.5 billion compared to SAA headline loss in 2001 of R 735 million SAA Financial Performance (‘97-’01) Spend Attributable to South Africa from Air Arrivals (98-00) Tourist Spend (R billions) 1 The figures are brought to 2001 by using the inflation rate of 6% 2 The spend attributable to South Africa was calculated as [ 0.6* (Prepaid Accommodation)+ Spend in SA] Source: Statistics South Africa, Foreign Visitor Survey

51 Prioritising Government’s Objectives
Government’s objectives for tourism, aviation and SAA are many and at times competing - and need to be prioritised. Finance - Maximise value - Privatisation revenues - Future dividends - Contingent Liabilities - Tax base - GDP Impact Foreign Affairs - Diplomatic Relations Tourism - Maximise access - Maximise airlift - Sustainability - Safety - Service Government Objectives Trade and Industry - Commercial access - Freight capacity Transport - Safety - Sustainability - Competitiveness - Consumer Protection Public Enterprises - Efficiency - Profitability - Restructuring - Transformation Labour - Job Creation - Labour protection

52 Recommendations for aligning tourism, airlines and the national interest
As tourism strategy starts to stimulate increased volumes through focused marketing and product investment, airlift will become a key barrier. It is recommended that Government takes the following steps to address these critical questions: Review the competitive / regulatory environment on key routes to:- Stimulate increased competition on low competition routes Create more flexible conditions for airlines to manage capacity around seasonal fluctuations Competitive Environment Implement sector-level strategy to create conditions for the sustainable emergence of strong, SA-based international carriers Strong, sustainable flag carrier/s Implement corporate governance processes and performance measures in the SAA shareholding relationship which are aligned to tourism objectives and prioritised against against other government objectives, such as profitability Strategically aligned corporate governance of SAA SAA capex strategy aligned to serve demand growth Establish mechanisms, through the restructuring process or other funding instruments, to enable SAA to embark on a more comprehensive growth-oriented strategy underpinned by significant investment in additional international capacity Restructuring process of SAA to be guided by tourism goals in addition to existing priorities Ensure that the restructuring process, including the privatisation process is aligned with the needs of tourism to achieve sustainable air service capacity, at competitive prices and service from the key markets to SA Tourism growth

53 Conclusion Focused on growth from tourism, and backed by:-
Strong Brand Consistent with Brand SA Invested in the destination Marketing aligned to SAT Strategy aligned with Brand SA, products and channels Strong promotion of holidays, not just flights Focused on growth from high volume, high yield tourism markets, backed by: Focus on customers Informed by consumer insight Strong Brand Consistent with Brand SA Marketing aligned to products, channels and airlines Strategic alignment, Mutually reinforcing action


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