Is SAA in for a hard landing?

The dream of a SAA 2.0 does not have to end with the snuffing out of the Takatso deal this week, experts say. But to avoid a hard landing after posting substantial losses again, the carrier must become commercially sustainable.

“We cannot accept outgoing Public Enterprises Minister Pravin Gordhan’s word for it,” said the Democratic Alliance’s Alf Lees of Gordhan’s statement that the airline will keep going for at least another 18 months to two years.

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Lees didn’t expect much from the Takatso deal to begin with, nor does he hold out much hope for the company that now remains state owned.

“SAA must just be liquidated, because it is inevitable that mismanagement, dodgy deals and government interference will eventually sink the airline back to business rescue,” said Lees.

‘An unlikely lifeboat’

SAA’s former chief strategy officer, Barry Parsons, who left in 2015 over what he alleged was shareholder incompetence, obstruction, inertia and the board’s corruption, said: “The Takatso deal was an unlikely lifeboat, however, the real problem is the years it has taken to get to this point which has only made management’s job harder still.“

However, he said there might be some light at the end of the tunnel because of its people.

“There are still many decent people at SAA doing their very best to save what was once a good airline. They continue to be let down by the shareholder and the state in general,” Parsons said.

He places failure at the door of government which, he alleged, “remains incompetent and duplicitous”. SAA will still face many of the same challenges it has for decades. That it operates from the southern tip of Africa, at a geographical disadvantage, hasn’t changed.

Commercially, SAA must deal with similar challenges that other remote airlines like Air New Zealand have had to. “Ten years ago, SAA and Air New Zealand were of similar size,” said SA Flyer Magazine editor and aviation analyst Guy Leitch, “and while SAA has shrunk since, it’s not yet mortally wounded.”

According to Parsons, however, the ship has long sailed.

“The only hope SAA 2.0 has for longterm commercial sustainability is to minimise outside interference and implement a solid strategy based on forging commercial partnerships to feed and de-feed its network,” he said.

He noted that this concern was raised as far back as 2011, when SAA management at the time tried to implement successful lessons from Air New Zealand.

“The then board immediately understood the end of hemisphere disadvantage and, when put to the shareholder’s minister of the day, they killed off any idea of the strategic partnerships required to address this, famously telling a major shareholder briefing that the Ethiopians had nothing to teach ‘us’ about running an airline.“

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Ethiopian Airways is now the continent’s largest and most successful airline, rivalling Middle Eastern carriers for global connecting hub traffic. “SAA has been left far behind,” said Leitch.

“It has two older Airbus A 330 aircraft and an old Airbus A340 for longer-haul flights. Neither can compete against modern fleets of other airlines; from fuel efficiency through to inflight entertainment systems.”

Currently, the Airbus A330 twin-jet is used on the recently reopened route to Brazil, while the four-engined A340-300 is to be used on the route to Perth in Australia, which will open at the end of next month. He said that looking ahead, SAA’s problem would be its fleets.

“The A340 is 25% less fuel efficient than a new Airbus A350, so others will make money when they sell tickets 10% cheaper than SAA’s break-even in a very price sensitive market.”

Presently, SAA’s narrow body fleet is supplemented by four wetleased aircraft from Turkish carrier SunExpress. Wet-leased aircraft mean that the aircraft and crew are “rented” from another airline for a limited period.

Parsons said that the arrangement looked like a reasonable way forward. “It gives me some confidence in SAA’s approach.”

The way forward

He added he hoped SAA developed a comprehensive network plan based on solid demand forecasting.

In part, he said, by using their own fleet and parts based on strategic partnerships beyond their simple Star Alliance partnerships, particularly as they will have very limited capital.

“Unless a likely loss-making route, specifically requested by the shareholder – for example to a Brics partner – is underwritten by a fiscal transfer mechanism from the shareholder, then SAA should not operate the route.

“If they are compelled to operate loss-making routes with no fiscal safety net, their working capital will be quickly eroded.” Leitch said he had noticed SAA changed past behaviours like charging into markets in favour of exercising more caution now.

“When SAA operated between Johannesburg and Beijing, it lost R1 million a flight.” The route burnt cash over an extended period.

“Now we see the carrier quickly withdraw from markets where it seemed doubtful they would make money,” said Leitch, citing SAA’s recent exit from Malawi.

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Organisation Against Tax Abuse chief executive Wayne Duvenage said: “I don’t believe SAA will become profitable in future.”

He said the carrier is still too cumbersome. “You need high agility in pricing, service excellence, high utilisation of assets and well experienced top leadership to grow airlines in a highly competitive space. SAA doesn’t cut it in all those areas.”

The DA’s Lees agreed, but added he doubted that losses would again be as big as in the past. Leitch suggested that, while SAA might never be profitable, it will eventually cover its direct operating costs.

Parsons added: “Over a long period, SAA’s financial statements and their feeble scrutiny by a weak standing committee on public accounts gives me no confidence to comment on financial position or performance.

Given the promised capital injection from Takatso is gone, it’s likely they can incur significant losses without a recapitalisation.”