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

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Presentation on theme: "Strategy for Growth in International Tourism to South Africa Presentation to June 2003 DEPARTMENT OF ENVIRONMENTAL AFFAIRS AND TOURISM."— Presentation transcript:

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

2 Copyright © 2001 Monitor Company Group LP Confidential XXXCAS-COD-Prez-Date-CTL Confidential 2 Presentation Structure The Growth Strategy - Summary Major Constraints to Success Recommendations Strategic Context

3 Copyright © 2001 Monitor Company Group LP Confidential XXXCAS-COD-Prez-Date-CTL Confidential 3 South African Tourism is reconfiguring itself to drive tourisms contribution to the nations transformation programme Sustainable GDP growth Sustainable job creation Redistribution and transformation In the Tourism Act, SAT must contribute to … 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 Increases in tourist volume Increases in tourist spend Increased length of stay … through delivering sustained... Improved geographic spread Improved seasonality patterns Promote transformation

4 Copyright © 2001 Monitor Company Group LP Confidential XXXCAS-COD-Prez-Date-CTL Confidential 4 Domestic and International Short-Haul Tourism are the bedrock of the tourism industry, but SA Tourisms core business is foreign tourism Split of SAs International Tourists by Long-Haul and Short-Haul (2000) 1.55 million 4.20 million Short-Haul (SADC, Central & East Africa) 73% Long-Haul (Overseas and North Africa) 27% Split of SAs International and Domestic Tourists (2000) 5.75 million 9.8 million Domestic 63% International 37%

5 Copyright © 2001 Monitor Company Group LP Confidential XXXCAS-COD-Prez-Date-CTL Confidential 5 Current international arrivals are driven off a hand-full of core markets Split of SAs Inbound Tourists by Long-Haul and Short-Haul (2000) 1.55 million 4.20 million Short-Haul (SADC, Central & East Africa) 73% Long-Haul (Overseas and North Africa) 27% Long-Haul Tourist Arrivals to South Africa from Top 10 Source Markets (2000) Short-Haul Tourist Arrivals to South Africa from Top 10 Source Markets (2000)

6 Copyright © 2001 Monitor Company Group LP Confidential XXXCAS-COD-Prez-Date-CTL Confidential 6 The steady growth in tourism arrivals post 1994 has slowed to 0.3% between 1998 and 2001 Total Arrivals to South Africa over the 7 Year Period from 1994 Arrivals to South Africa 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 Source: South African Tourism Table K 6 Month Moving Average of Total Arrivals CAGR (94-01) 6.9% CAGR (98-01) 0.3%

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

8 Copyright © 2001 Monitor Company Group LP Confidential XXXCAS-COD-Prez-Date-CTL Confidential 8 South Africas current portfolio is driven off 21 countries which account for 90% of the arrivals Graph Showing Share of Arrivals to South Africa by Country (2001) % Share of Arrivals Source: Monitor analysis; Statistics South Africa, 2001; Foreign Visitor Departure Surveys, 2000 & 2001 Arrivals projected to decline Arrivals projected to increase 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

9 Copyright © 2001 Monitor Company Group LP Confidential XXXCAS-COD-Prez-Date-CTL Confidential 9 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% Source: Monitor analysis; Statistics South Africa, 2001; Foreign Visitor Departure Surveys, 2000 & 2001

10 Copyright © 2001 Monitor Company Group LP Confidential XXXCAS-COD-Prez-Date-CTL Confidential 10 Seasonality presents a major constraint on capacity for growth Arrivals to South Africa ( ) Arrivals (000s) The deep seasonal pattern of arrivals into South Africa creates significant challenges for investing in capacity to serve increased demand. Source: South African Tourism Strategic Research Unit Europe (98-01) North America (98-01) Asia (98-01) Africa (98-01)

11 Copyright © 2001 Monitor Company Group LP Confidential XXXCAS-COD-Prez-Date-CTL Confidential 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 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 Re-balance the portfolio Generic spray and pray marketing averages messages and has low returns. SAs 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. Marketing to be based on a view of customers Behind the strategy the tourism industry needs to redefine and upgrade products and services to deliver against the promise offered by the marketing message. Create alignment within the tourism sector Note: Source:

12 Copyright © 2001 Monitor Company Group LP Confidential XXXCAS-COD-Prez-Date-CTL Confidential 12 Presentation Structure The Growth Strategy - Summary Major Constraints to Success Recommendations Strategic Context

13 Copyright © 2001 Monitor Company Group LP Confidential XXXCAS-COD-Prez-Date-CTL Confidential 13 The strategy is about re-balancing the portfolio through four areas Reducing Seasonal Variations Growth in volume Growth in Revenue Seeking out the countries and markets that will address these various components is key to establishing the portfolio Defend the Current Position

14 Copyright © 2001 Monitor Company Group LP Confidential XXXCAS-COD-Prez-Date-CTL Confidential 14 Clearly different countries and / or segments will drive growth in different ways Dairy Company 5. Attract new-to category consumers 5. Convert short-haul travellers to long- haul travellers 3.Generate new uses by existing consumers 3. Get them to come back to SA to do different things 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 To obtain growth and defend the current shares, an integrated strategy needs to focus on five key drivers 4.Attract new-to- you consumers 4. Convert customers from the competitor to South Africa Acquire New Consumers Competitor

15 Copyright © 2001 Monitor Company Group LP Confidential XXXCAS-COD-Prez-Date-CTL Confidential 15 Africa The Main Driver of International Tourism to South Africa Source: SA Tourism - Table A December 2002 AFRICA 4,455,971 Arrivals (4,435,218 mainland) 69.3% of total (69% mainland) Central & South America 38,311 arrivals 0.6% of total North America 216,275 arrivals 3,36% of total Europe 1,252,710 arrivals 19,5% of total Asia 117,415 arrivals 1,8% of total Australasia 85,775 arrivals 1,3% of total Middle East 33,401 arrivals 0.5% of total Other 3,64% of total

16 Copyright © 2001 Monitor Company Group LP Confidential XXXCAS-COD-Prez-Date-CTL Confidential 16 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 Dairy Company 5. Attract new-to category consumers 3. Generate new uses by existing consumers 2. Stimulate current uses with existing consumers 1. Retain uses by existing consumers Given that 60% of South Africas arrivals are accounted for by 5 of the neighbouring states, the strategy for SADC is largely one of defend 4.Attract new-to- you consumers Competitor

17 Copyright © 2001 Monitor Company Group LP Confidential XXXCAS-COD-Prez-Date-CTL Confidential 17 Africa and specifically neighboring SADC are important source markets for South Africa Regional Share of Arrivals to South Africa, 2000 Breakdown of Africa Arrivals to South Africa, 2000 Source: Statistics South Africa Neighboring SADC (92%) Other SADC (5%) Rest of Africa (3%) Africa accounts for 72% of the arrivals to South Africa, with neighboring SADC countries representing the majority of these arrivals

18 Copyright © 2001 Monitor Company Group LP Confidential XXXCAS-COD-Prez-Date-CTL Confidential 18 Other 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 Share of Arrivals to SA (%) Top 5 Source Markets to SA (2001) Source: Statistics South Africa, Foreign Visitor Departure Survey, Monitor Analysis 99.56% 98.74% 98.29% 69.79% 83.72% Mozambique Zimbabwe Botswana Swaziland Lesotho SA Market Share Arrivals CAGR (98-01)

19 Copyright © 2001 Monitor Company Group LP Confidential XXXCAS-COD-Prez-Date-CTL Confidential 19 Air Travel from Africa is Growing Note: The land travellers out of the rest of Africa are insignificant Source: Statistics South Africa 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) Breakdown of Land Travellers to SA (98-00) 51% 53%54% 31% 29% 19% 18% 17% 97% Arrivals CAGR (98-00) 10% 4% 1% 4% 0% Other Africa Non-neighboring SADC Neighboring SADC

20 Copyright © 2001 Monitor Company Group LP Confidential XXXCAS-COD-Prez-Date-CTL Confidential 20 Initially, we considered 27 countries in East and West Africa Algeria Sudan Morocco Tunisia Cote d'Ivoire The Gambia Ghana Benin Burkina Faso Guinea Guinea-Bissau Liberia Mali Mauritania Niger Nigeria Saint Helena Senegal Sierra Leone Togo Eritrea Ethiopia Kenya Madagascar Rwanda Burundi Somalia Reunion Tanzania Uganda Angola Botswana Democratic Republic of Congo Lesotho Malawi Mauritius Mozambique Namibia Seychelles South Africa Swaziland Zambia Zimbabwe Came- roon Central African Republic Chad Congo Equatorial Guinea Gabon Sao Tome and Principe Cape Verde Comoros Djibouti Why West Africa? 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 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 Why not Middle Africa? Low current outbound numbers imply very limited short and medium term potential Why not North Africa? Due to proximity to Europe, and language barriers, conversion deemed relatively more difficult Western Sahara

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

22 Copyright © 2001 Monitor Company Group LP Confidential XXXCAS-COD-Prez-Date-CTL Confidential 22 Prioritisation of these markets tended to confirm the hypothesis of focus on Nigeria and Kenya Total Travel Potential Index Total Current Travel Index Relative Attractiveness of Target Markets Ethiopia Kenya Tanzania Uganda Cote DIvoire Ghana Nigeria Senegal 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 Mali 30 Top right hand box is most attractive area

23 Copyright © 2001 Monitor Company Group LP Confidential XXXCAS-COD-Prez-Date-CTL Confidential 23 Challenges in Africa: There appear to be several country groupings with significant internal travel (like South Africa has with SADC) )Burundi 2)Comores 3)Djibouti 4)Eritrea 5)Ethiopia 6)Kenya 7)Madagascar 8)Reunion 9)Rwanda 10)Seychelles 11)Somalia 12)Tanzania 13)Uganda )Benin 2)Burkina Faso 3)Cape Verde 4)Cote DIvoire 5)Gambia 6)Ghana 7)Guinea 8)Guinea-Bissau 9)Liberia 10)Mali 11)Mauritania 12)Niger 13)Nigeria 14)Senegal 15)Sierra Leone 16)Togo Band 1 (25,000 – 50,000) Band 2 (50,000 – 100,000) Band 3 (100,000 – 200,000) Band 4 (200,000+) East Africa West Africa 10 6 Source: OAG, Monitor Analysis Capacity: Kenya, Tanzania and Uganda appear to be tightly linked Two country groupings appear to exist in West Africa –Nigeria and Ghana –Cote dIvoire, Senegal and Mali Cote dIvoire might act as the bridge between Anglophone and Francophone West Africa Kenya, Tanzania and Uganda appear to be tightly linked Two country groupings appear to exist in West Africa –Nigeria and Ghana –Cote dIvoire, Senegal and Mali Cote dIvoire might act as the bridge between Anglophone and Francophone West Africa

24 Copyright © 2001 Monitor Company Group LP Confidential XXXCAS-COD-Prez-Date-CTL Confidential 24 1)Algeria 2)Benin 3)Burkina Faso 4)Cameroon 5)Cape Verde 6)Central Africa Republic 7)Chad 8)Congo 9)Congo, Dem. Rep of 10)Cote DIvoire 11)Egypt 12)Gambia 13)Ghana 14)Guinea 15)Guinea-Bissau 16)Liberia 17)Mali 18)Mauritania 19)Morocco 20)Nigeria 21)Saint Helena 22)Senegal 23)Sierra Leone 24)Sudan 25)Togo Additional Information: Inter-regional Capacity Flows )Burundi 2)Comoros 3)Djibouti 4)Eritrea 5)Ethiopia 6)Kenya 7)Madagascar 8)Malawi 9)Mauritius 10)Mayotte 11)Reunion 12)Rwanda 13)Seychelles 14)Somalia 15)South Africa 16)Tanzania 17)Uganda 18)Zambia 19)Zimbabwe 2 Band 1 (25,000 – 50,000) Band 2 (50,000 – 100,000) Band 3 (100,000 – 200,000) Band 4 (200,000+) East & South Africa 25 North / Central / West Africa While Ethiopia appears to be a northward facing hub, Kenya appears to be southward facing While Ethiopia appears to be a northward facing hub, Kenya appears to be southward facing Nigeria appears to have moderate links to East Africa Nigeria appears to have moderate links to East Africa While Ethiopia appears to be a northward facing hub, Kenya appears to be southward facing While Ethiopia appears to be a northward facing hub, Kenya appears to be southward facing Nigeria appears to have moderate links to East Africa Nigeria appears to have moderate links to East Africa Source: OAG, Monitor Analysis

25 Copyright © 2001 Monitor Company Group LP Confidential XXXCAS-COD-Prez-Date-CTL Confidential 25 Additional Information: Inter-continental Capacity Flows 1 Asia North America Middle East 1)Benin 2)Burkina Faso 3)Cape Verde 4)Cote DIvoire 5)Gambia 6)Ghana 7)Guinea 8)Guinea-Bissau 9)Liberia 10)Mali 11)Mauritania 12)Niger 13)Nigeria 14)Saint Helena 15)Senegal 16)Sierra Leone 17)Togo 1)Burundi 2)Comoros 3)Djibouti 4)Eritrea 5)Ethiopia 6)Kenya 7)Madagascar 8)Reunion 9)Rwanda 10)Seychelles 11)Somalia 12)Tanzania 13)Uganda East Africa West Africa Europe South Asia 5 6 Band 1 (25,000 – 50,000) Band 2 (50,000 – 100,000) Band 3 (100,000 – 200,000) Band 4 (200,000+) Source: OAG, Monitor Analysis

26 Copyright © 2001 Monitor Company Group LP Confidential XXXCAS-COD-Prez-Date-CTL Confidential 26 Outbound Departures by Region from Africa (1999) Outbound Departures SAs Market Share (0.6%) (17.1%) Africa is a very focused market at travel costs are high and markets relatively small (67.2%) (10.4%) (8.4%) (20.9%) (2.1%) Long- haul Short- Haul 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 (2.5%)

27 Copyright © 2001 Monitor Company Group LP Confidential XXXCAS-COD-Prez-Date-CTL Confidential 27 An assessment was made of the expatriate markets in these countries, which boosts the overall attractiveness of many of these markets * 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 Sum of the National Leisure Travellers and Expatriate Markets Potential Leisure Arrivals to SA Although the markets are small relative to one UK segment, South Africas relative proximity and dominance in the air market makes these markets potentially easier to penetrate Nationals Expatriates

28 Copyright © 2001 Monitor Company Group LP Confidential XXXCAS-COD-Prez-Date-CTL Confidential 28 The Rest of the world Source: SA Tourism - Table A December 2002 AFRICA 4,455,971 Arrivals (4,435,218 mainland) 69.3% of total (69% mainland) Central & South America 38,311 arrivals 0.6% of total North America 216,275 arrivals 3,36% of total Europe 1,252,710 arrivals 19,5% of total Asia 117,415 arrivals 1,8% of total Australasia 85,775 arrivals 1,3% of total Middle East 33,401 arrivals 0.5% of total Other 3,64% of total

29 Copyright © 2001 Monitor Company Group LP Confidential XXXCAS-COD-Prez-Date-CTL Confidential 29 In looking for growth opportunities, the eleven largest long-haul leisure markets cannot be ignored CountrySize of LH Leisure Travel (Holiday + VFR) Estimate of the LH Holiday Travel Ranking on Leisure Arrivals to SA, 2000Arrivals Ranking, US 20,932,893 12,237, Japan 14,076, UK 8,604,193 7,127, Germany 5,828,967 5,239, France 4,847,124 3,540, Canada 3,696,141 2,850, Australia 3,500,183 2,245, Italy 1,703,360 1,510, Netherlands 1,548,637 1,259, China 1,498,134 1,270, Sweden 1,348,714 1,027, Argentina 1,159, , Switzerland 1,124, , Spain 1,070, , Korea 1,056, , These markets are forecast to continue growing and would be key in any portfolio

30 Copyright © 2001 Monitor Company Group LP Confidential XXXCAS-COD-Prez-Date-CTL Confidential 30 Different strategies will be required against these different markets 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 SATs 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. 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

31 Copyright © 2001 Monitor Company Group LP Confidential XXXCAS-COD-Prez-Date-CTL Confidential 31 Australia Canada France Germany Italy Netherlands United Kingdom United States Japan Sweden China Belgium Switzerland India Mozambique Namibia Zambia Angola Malawi Botswana Zimbabwe Niche Opportunities Additional markets where value has been identified Kenya Nigeria Egypt Mauritius Tanzania MICE Markets Top 20 Countries Accounting for 90% of Arrivals Top Eleven Outbound Markets of the World Lesotho Swaziland These countries account for 18% of arrivals, but 40% of revenue Austria Argentina Brazil Denmark Finland Greece Hong Kong Indonesia Norway New Zealand Philippines Poland Portugal Russia Saudi Arabia Singapore South Korea Spain Taiwan Thailand UAE Ireland Israel Malaysia Mexico Watch List These are markets which SAT may investigate further to find value segments The portfolio of countries focuses on identified pockets of value balanced by actionability

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

33 Copyright © 2001 Monitor Company Group LP Confidential XXXCAS-COD-Prez-Date-CTL Confidential 33 And changes the results dramatically % Growth Arrivals Growth Revenue Growth Source: Monitor analysis; Foreign Visitor Departure Surveys, 2000 & 2001 Projected 2005 Arrivals : 7,273,900 % Growth Arrivals Growth Revenue Growth 2002 Arrivals : 5,835,117 Results if we do nothing different (based on growth to the end of 2001) What the strategy can deliver 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

34 Copyright © 2001 Monitor Company Group LP Confidential XXXCAS-COD-Prez-Date-CTL Confidential 34 Presentation Structure The Growth Strategy - Summary Major Constraints to Success Recommendations Strategic Context

35 Copyright © 2001 Monitor Company Group LP Confidential XXXCAS-COD-Prez-Date-CTL Confidential 35 SA faces some key challenges if it is to realise the growth potential Choices about which segments to target and serve are required SA needs to differentiate itself - not be all things to all people FocusFocus Channel strategies must be based on reaching target consumers and maximising the value captured in SA ChannelsChannels Choices about which segments to serve must be backed by strategies to ensure adequate and easy access to South Africa AccessAccess Choices about which segments to serve must be supported by appropriate products with sufficient capacity ProductProduct Note: Source: Sustainable strategy depends on four areas. SAT controls only a few of the necessary levers

36 Copyright © 2001 Monitor Company Group LP Confidential XXXCAS-COD-Prez-Date-CTL Confidential 36 Marketing alone cannot deliver results - key constraints on delivery need to be removed SAT cannot afford representation in all markets which are important, but SA needs to maintain some marketing presence Maintain our presence in non- core markets 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 Align tourism product and services In certain key markets - particularly Africa - our immigration and visa procedures represent a major constraint Make it easier to get access to South Africa 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. Enable adequate and competitive airlift Note: Source:

37 Copyright © 2001 Monitor Company Group LP Confidential XXXCAS-COD-Prez-Date-CTL Confidential 37 Growth from these focus markets depends on increasing airlift capacity Across the core markets, there are a number of challenges regarding airlift 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 Capacity Constraints Direct access is not available from some of the key markets in the SAT portfolio. AccessAccess 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 Vulnerability to Unpredictable Foreign Supply 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 PricePrice Government faces key choices about creating the conditions which will lead to alignment between tourism strategy and the airlines in meeting these challenges

38 Copyright © 2001 Monitor Company Group LP Confidential XXXCAS-COD-Prez-Date-CTL Confidential 38 Access: Future success requires expansion in airlinks between SA and key markets Two of SAs 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. Note:SAA and Cathay Pacific serve the Hong Kong-Johannesburg route. However, leisure tourism growth in China is coming largely from the mainland

39 Copyright © 2001 Monitor Company Group LP Confidential XXXCAS-COD-Prez-Date-CTL Confidential 39 Dependency on Foreign Carriers Airlines serving SA have declined since 1997 Source:ACSA Between 1997 and 2001, the number of airlines serving South Africa dropped from 75 to 54

40 Copyright © 2001 Monitor Company Group LP Confidential XXXCAS-COD-Prez-Date-CTL Confidential 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 AgreementsActive Agreements Bi-Lateral Air Services Agreements Breakdown of Weekly Frequencies Available Frequencies Not Used Frequencies Used Foreign Operated SA Operated SAA Other SA carriers International Seat Utilisation into JIA (Aug.2000-Jul.2001) Average Seats per Month: 388,000 Average Passengers per Month: 197,000 Average Load factor: 50.73%

41 Copyright © 2001 Monitor Company Group LP Confidential XXXCAS-COD-Prez-Date-CTL Confidential 41 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 0 10,000 20,000 30,000 JanFebMarAprMayJunJulAugSepOctNovDec Arrivals 0 5,000 10,000 15,000 20, ,000, 35,000 40,000 45,000 SAA Load Factors European Services 2000/2001 JanFebMarAprMayJunJulAugSepOctNovDec 25,500 Monthly German Arrivals (2000) Monthly UK Arrivals (2000) Arrivals 20,000 Over 70% load factors between October and March indicate customers are starting to be turned away 0

42 Copyright © 2001 Monitor Company Group LP Confidential XXXCAS-COD-Prez-Date-CTL Confidential 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 Copyright © 2001 Monitor Company Group LP Confidential XXXCAS-COD-Prez-Date-CTL Confidential 43 Total Tourism Arrivals (Millions) Total Tourism Arrivals Thailand 5.52% South Africa 7.37% Brazil 26.48% Australia 5.50% U.A.E.28.00% Kenya17.81% Morocco10.50% CAGR 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 Update Total International Pax Carried 2000 Millions +- 60% +- 50% +- 35%

44 Copyright © 2001 Monitor Company Group LP Confidential XXXCAS-COD-Prez-Date-CTL Confidential 44 There have been two routes by which emerging destinations have achieved alignment between their tourism strategies and the flag-bearing airlines Thailands government built Thai with the explicit mandate:- 1.To develop and expand company business, as THAI* is a national flag carrier, to become one of the world best airlines 2.To promote Thailand as a gateway into the Asia- Pacific region 3.To support Thailands tourism industry 4.To maximise profit in order to raise funds for human resource development and equipment necessary to achieve the above objectives. Airlines and the success of destinations Australia explicitly developed a competitive approach to air services, and privatised Qantas against these objectives through:- 1.Providing Qantas with a three-year pre- privatisation period where the regulatory environment was liberalised to allow it to get fit 2.Privatisation was used to enable major re- investment and fleet expansion by Qantas with private-sector capital 3.Created an environment in which Qantas was encouraged to work in close alignment with the tourism industry and the Australian Tourist Commission 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 Indirect Regulation and FacilitationDirect State Involvement

45 Copyright © 2001 Monitor Company Group LP Confidential XXXCAS-COD-Prez-Date-CTL Confidential 45 Importance of Flag Carriers to tourism destinations The examples of Thai and Qantas investing with demand growth Part of Australia and Thailands success has been in how their airlines have invested in capacity to meet increasing demand… Qantas ASKs against Arrivals to Australia Qantas provides capacity in line with growing demand Arrivals (Millions) Asks (Millions) Thai ASKs against Arrivals to Australia Arrivals (Millions) Asks (Millions) Thai historically provided capacity ahead of demand growth

46 Copyright © 2001 Monitor Company Group LP Confidential XXXCAS-COD-Prez-Date-CTL Confidential 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 Australias success stories. Qantas has been a key role-player in achieving this success through: Building a strong brand consistent with Australias brand intent Investing in destination marketing that more than doubles Australias 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 Qantas has been a key role-player in achieving this success through: Building a strong brand consistent with Australias brand intent Investing in destination marketing that more than doubles Australias 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 Thailands value proposition Direct investment in national tourism marketing campaigns Strong promotion of regional destinations in line with government strategy 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 Thailands 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 Copyright © 2001 Monitor Company Group LP Confidential XXXCAS-COD-Prez-Date-CTL Confidential 47 South Africa SAA has not kept pace with growing demand International Passenger Demand and Planned SAA Capacity Moving South Africa Findings in 1998 Passengers Source: SAA 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. Waiting for updated SAA data - Expected Wednesday- International arrivals against SAA market share

48 Copyright © 2001 Monitor Company Group LP Confidential XXXCAS-COD-Prez-Date-CTL Confidential 48 SAA and SAs 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 Africas 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 Copyright © 2001 Monitor Company Group LP Confidential XXXCAS-COD-Prez-Date-CTL Confidential 49 South Africa Uncompetitive airfares and inadequate capacity the cost to SA in the US Variation in Segment Value, Activation Rates of 2% (Conservative) and 10% (Optimistic) of Interested Travellers $138 M (73, 843) $28 M (14,769) $77 M (33,634 visitors) $387 M (168,172 visitors) $485 M (167,958) $875 M (276,368) $435 M (157871) $663 M (186,651) $46 M (12,247) $9 M (2449) $97 M (55,274) $175 M (55,274) $87 M (31,574) $133 M (37,330) 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, Source: Monitor Analysis, WTO Data Currently the Wonderlusters dont 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 Currently the Wonderlusters dont 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

50 Copyright © 2001 Monitor Company Group LP Confidential XXXCAS-COD-Prez-Date-CTL Confidential 50 Stacking SAA financial performance against the revenue earned by SA from passengers delivered by SAA 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 SAA Financial Performance (97-01) 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

51 Copyright © 2001 Monitor Company Group LP Confidential XXXCAS-COD-Prez-Date-CTL Confidential 51 Governments objectives for tourism, aviation and SAA are many and at times competing - and need to be prioritised. Trade and Industry - Commercial access - Freight capacity Public Enterprises - Efficiency - Profitability - Restructuring - Transformation Transport - Safety - Sustainability - Competitiveness - Consumer Protection Finance - Maximise value - Privatisation revenues - Future dividends - Contingent Liabilities - Tax base - GDP Impact Foreign Affairs - Diplomatic Relations Labour - Job Creation - Labour protection Tourism - Maximise access - Maximise airlift - Sustainability - Safety - Service GovernmentObjectives Prioritising Governments Objectives

52 Copyright © 2001 Monitor Company Group LP Confidential XXXCAS-COD-Prez-Date-CTL Confidential 52 Recommendations for aligning tourism, airlines and the national interest 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 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 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 SAA capex strategy aligned to serve demand growth 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 Restructuring process of SAA to be guided by tourism goals in addition to existing priorities 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: Implement sector-level strategy to create conditions for the sustainable emergence of strong, SA-based international carriers Strong, sustainable flag carrier/s

53 Copyright © 2001 Monitor Company Group LP Confidential XXXCAS-COD-Prez-Date-CTL Confidential 53 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 Conclusion 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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