The South African airline industry is far from saturated and there is still room for new blood, particularly in the underserved low-cost airline market, analysts say.

The domestic no-frills airline business, estimated to be worth R3bn, has managed to secure 30% of the South African market since the arrival of the country's first low-cost carrier, kulula, in 2001.

National carrier South African Airways (SAA) enjoyed a whopping 65% of the market share when kulula was launched.Now, five years later following the arrival in the market of the second budget airline, 1time, two years ago SAA estimates that its market share has dwindled to less than 50%.

It is against this backdrop that SAA says it wants to launch its own low-cost subsidiary early next month. The other option is to sit back and do nothing and hope for the best. And the best might never come, SAA CEO Khaya Ngqula said recently.

SAA had previously said it had no intention of going the no-frills route. The parastatal had said its passengers were mostly discerning businesspeople who valued flight frequency, convenience, punctuality and reliability. But unrelenting competition from both kulula and 1time forced SAA to reduce its fares on certain domestic routes that it shares with the budget airlines.

Its payoff line was to offer its passengers all the frills at no-frills prices. But that strategy was costly and unsustainable, prompting the airline to admit in its 2004-05 financial report that its attempt to match the prices offered by low-cost carriers led to a decrease in the average yield (adjusted for foreign exchange rate impact) of 1,8%.

During that time, SAA's then parent, Transnet, announced its plan to leave the aviation sector, and government made it clear that it was no longer going to bale out SAA if it ran into financial trouble again.

So, SAA was forced to do something, and do it fast.

Entering the low-cost airline market was one answer. And when we look at the market share of the low-fare carriers, it is growing significantly, which shows that there is an existing market which says we don't literally care about the frills, says Ngqula.

Prof Jackie Walters, chairman of the transport and supply chain management department at the University of Johannesburg, says the entrance of SAA's subsidiary should be welcomed as the domestic aviation industry is far from saturated.

He says only 5% of the South African population flies at present, meaning there is still a huge potential for growth.The industry is growing quite substantially and there is still potential for growth, though uptake potential is less than it has been in the past, says Walters.

He says SA is yet to have a true low-cost carrier, similar to Europe's Ryanair or Southwest Airlines of the US. Walters says that although the focus is on domestic flights, there is the possibility of routes within the African continent. Some of SAA's domestic market competitors, such as kulula, 1time and Nationwide, have expressed concern about the entrance of a state-owned airline.

They fear that SAA could use the new airline to drive them out of business. The three airlines have requested the Air Services Licensing Council to ensure that SAA does not cross-subsidise the new airline.

The phenomenal growth of budget airlines is causing headaches to many full-service and so-called legacy carriers across the globe.

Emirates Airlines CEO Tim Clark said recently that the advent of low-cost carriers had revolutionised the aviation industry, forcing many legacy carriers to review their operations to compete.Many international legacy carriers, such as the UK's British Airways and Australia's Qantas, were forced to establish their own budget subsidiaries in a bid to stem the tide from mushrooming no-frills carriers.

Prof Nawal Taneja, of the Ohio State University's aviation department, last week warned the annual India and Middle East Low-cost Carrier Symposium, held in Mumbai, India, that the honeymoon period for budget airlines was over as full-service carriers began to fight back.

Taneja said the fight-back strategy by full-service carriers would cause turbulence in the operation of many weak, no-frills airlines. Those who think they have got it made, well let me tell you, the honeymoon is over. And those that think that full-service carriers are dead will have some serious problems.

He said the demise of many low-cost carriers would follow the same spectacular crash that befell the technology sector several years ago. It is going to be like the dotcom boom. There will be many failures, but a few that survive are going to become global players, he said.