Cape Town - While the domestic operations of the South African Airways (SAA) Group remained profitable and grew during the 2013/2014 financial year, and regional African routes performed positively, the group's losses on its long-haul operations grew to R1.6bn.
Accordingly SAA announced at its AGM on Friday that it will stop its loss-making direct flights between Johannesburg and Beijing.
READ: SAA announcement as it happened
It also said the loss-making routes to Mumbai will undergo a re-configuration.
There was also an ongoing impact of the weakened rand and high fuel prices during the period in review.
During the period in review, the SAA Group realised growth in revenues by 12% (from R27.1bn to R30.3bn with an operating loss (Ebitda) of R374m reported.
Cost containment during the financial year yielded savings of R453m.
The SAA Group’s domestic operations remain profitable with 10% growth in its profit contribution from R722m to R791m.
Subsidiary Mango recorded a profit during the period in review.
Regionally, African routes performed positively with a 17% increase from R648m to R761m.
SAA’s long-haul intercontinental operations recorded an increased loss from R1.3bn in the previous financial year (2012/13) to R1.6bn in losses reported for the 2013/2014 financial year.
READ: Treasury approves R6.5bn loan for SAA
Optimisation of the SAA network
Under the 90 day action plan, SAA will optimise its intercontinental network with network expansion through code sharing.
The introduction of flights between Johannesburg and Abu Dhabi (announced in December 2014) with substantial SAA-coded network end point growth in the Asia-Pacific region through its deepened commercial relationship with Etihad Airways.
The route is expected to attract inbound traffic from several destinations within its geographic reach while also adding a large number of additional outbound destinations via the Middle-Eastern hub.
SAA has announced an expanded partnership with Air China (early December 2014), opening up a host of new possibilities to improve the connectivity between southern Africa and China.
SAA has increased regional frequencies between Johannesburg and several key, high volume regional destinations including Mauritius, Zambia, Zimbabwe and Mozambique among others.
90 Day Action Plan Status Highlights: Further Cost Compression
"A full contract review is under way with onerous agreements being examined. It includes all supplier agreements including a review of aircraft leasing contractual positions," said SAA.
An immediate freeze on headcount was implemented with a moratorium on any new appointments.
Rand impact
When announcing its results on Friday, SAA said the volatility of the rand has seen a decline in value of over 34% during the 2013/14 financial year.
"This has placed local airlines at a disadvantage considering the fact that nearly 60% of all input costs are priced in foreign currency, while forex revenues represent only 40% of gross income," said SAA.
"The disparity when measured against international competitors places the business in a challenging competitive position."
An increase of 2% in overall input costs impacted the bottom line positively. During the period in review SAA realised net hedging gains of R76m compared to hedging losses of R84m incurred in the previous financial year.
Fleet impairments
Another significant cost included in the financial statements for the period in review is the impairment relating to aircraft.
A critical element of SAA’s long-term turnaround strategy is the future replacement of its existing wide-body fleet with new generation, more fuel-efficient twin-engine aircraft.
In this regard, the seven wide-body aircraft owned by SAA had to be revalued in terms of International Financial Reporting Standards (IFRS) to take into account their anticipated remaining useful life.
This revaluation resulted in an impairment of R782m, as well as an additional R192m write down on related spares and inventory, which are reflected in the statements.
Further impairments were recognised relating to the delivery of four new A320 aircraft. These form part of a legacy agreement for 20 aircraft, dating from 2002, which was renegotiated in 2009.
However, the contract provides for annual escalations which resulted in the purchase price exceeding the market value at date of delivery, thus leading to a further impairment of R369m.
"Unfortunately, similar impairments are expected on future deliveries on this contract. SAA’s remaining capital commitment for these purchases is R822m," SAA said.
SAA has been reliant on guarantees from the SA government for several years and the company is technically insovent.
"It is the intent of the Board (reconstituted in October 2014) and SAA management to reduce the reliance on guarantees and return the business to relative stability," said SAA.
"The lack of implementation of several critical aspects of the long-term turnaround strategy, during the latter half of the period in review, has resulted in the need for a further guarantee (as issued in December 2014) to ensure the continued going concern status of SAA over the short-term."
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