An assessment of Charter airline benefits for Port Elizabeth and the Eastern Cape

Abstract

Tourism is becoming a vital component for economic development in South Africa. The income generated by the tourism industry is about 6% of the GDP, which is significant but still falls short of the goal set by the White Paper on Tourism in 2000. In the light of South Africa hosting the 2010 Football Wor1d Cup, it is important to identify ways of sustainable tourism development that would continue to increase the benefits to the economy long after the event's over. The main objective of the research was to explore an idea for increasing the level of tourist income generated in the Port Elizabeth (Eastern Cape) area. The idea was researched by means of conducting a cost-benefit analysis of two tourist related projects. These projects would introduce Charter airline services between Europe and Port Elizabeth. A second objective was to identify constraints on the project or market failures which would prevent their implementation. The economic theory behind the operation of an airline showed that lease costs and aeroplane operating costs are the two most important factors determine Charter airline's profitability. In order to offset these costs, airlines must achieve high passenger load factors. Charter airlines have the advantage over scheduled air1ines, in that they will only fly if a minimum level of people has pre-booked seats. Two aeroplanes were chosen for comparison purpose: an Airbus A 340-300 and a Boeing 767-300ER. The private benefits calculated were based on load factors between 80 and 95 percent for ticket prices of USD 667 and USD 773. In addition, to private costs and benefits, social benefits were also estimated in the form of additional secondary revenue generated. With the introduction of net social benefits, both projects become profitable. A 50 percent substitution of revenue generated by the Charter tourists reduces the profits for the both projects drastically. A project based on a Boeing 767-300ER is the most efficient project as it has the highest NPV and BCR values. A reduction in the lease cost of the Airbus 340-300 could make projects based on it more competitive. A few constraints on the establishment of a Charter air1ine operator based in Port Elizabeth are: the lack of adequate runway for the landing of the long-haul carriers and the need of a larger liberalisation of the aviation policy by eliminating protectionism. The cost benefit analysis undertaken in this research does not take into account social costs and benefits to the economy of establishing a Charter airline based in Port Elizabeth, such as an employment, infrastructure development and poverty alleviation. Nevertheless the analysis does suggest that there are strong private and social benefits warranting the establishment of an airline business between Europe and Port Elizabeth. The economic benefits of the tourism industry and its link to airline travel are outlined in section 3. It is shown that the growth of the airline industry is a major component and contributor to tourism growth.