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Get rid of international business to save SAA - expert

Jan 16 2020 20:05
Carin Smith

Getting South African Airways into fit-for-purpose shape would mean getting rid of its international business.

This is the view of a reliable source with inside knowledge of the operations and financial situation at the cash-strapped state-owned airline, which is currently in business rescue.

"SAA should be configured to focus on domestic and regional business and without the international business," said the source, whose identity is known to Fin24, but who requested to remain anonymous due to the sensitive nature of the business rescue process.

"The international business must be where SAA is losing a lot of money, due to market competition and poor aircraft utilisation. When SAA flies into London, for example, it flies overnight and lands at 06:00 in the morning the next day. The aircraft stays on the ground for eleven hours before it can fly back to Johannesburg."

Part of the challenge leading to this inefficiency is the location of Johannesburg on the world map, making it complex to run a profitable long-haul international business for the airline, in the view of the source.

In their view, the logical step should be to get rid of the international business choose a partner who will use SAA traffic rights to feed and de-feed traffic into SAA domestic and regional networks. This is the model used in the Comair and British airways partnership in South Africa, for example.

Another example is the Australian airline Qantas, which, when faced by similar challenges in the past "gave" their international business to Emirates through a commercial joint venture. This allowed Qantas time to focus on its domestic and regional business.

"Experts in the industry have said that it is hard to think that an SAA modelled along the Comair type structure and commercial model, free of government interference and operating outside the Public Finance Management Act (PFMA), would not succeed," said the source.

Cash-strapped

Although the business rescue practitioners still have time before they have to present their official plan for South African Airways' future, question marks remain whether it can be saved or whether it faces imminent winding down.

The source explains that, during this phase of the business rescue process, before a formal business rescue plan is presented, the airline faces a number of challenges. These include the fact that some travel insurance companies pulled out of insuring SAA tickets and some global booking agents are not selling the airlines' tickets, especially on a forward booking basis due to uncertainty about the future of the airline.

"When all these things happen, the revenue of the company declines and costs accelerate, leading to an extreme cost-burn situation. Airlines often use the revenue generated from forward bookings to support present day costs. However, once the airline is placed under business rescue, it can no longer use the cash generated from revenue from 'unflown' tickets - in other words flights which have not yet been undertaken," explains the source.

"This further exacerbates the liquidity challenge for the airline and means the business rescue practitioners are facing a much more challenged business than it was before they took over."

SAA is walking a tightrope at the moment, needing R2bn promised by government in order to continue with operations. The source says he has been informed that it was highly unlikely that government would be able to avail these funds "at short notice", given the need to go through Parliament to appropriate any funds from the fiscus.

In the view of the source, what the SAA board and the business rescue practitioners should have done, is to ask the lenders (banks) to advance a bridge facility of the R2 billion to allow SAA to operate whilst government is going through the necessary process to get the funds approved.

saa  |  aviation  |  business rescue  |  airlines
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