Getting SAA out of its tailspin

The state-owned South African Airways (SAA) has seen almost as many turnaround strategies as it has CEOs. There have been seven CEOs in the past four years, acting ones included. Neither CEOs nor turnaround plans seem to have done much towards fixing the embattled airline.

It is really quite easy to find bad news on SAA. For example, its finances. Any other company not owned by the state in this situation would have been liquidated long ago. The airline would be insolvent were it not for the state-backed guarantees that allows it to keep borrowing more money.

These guarantees allow SAA to get access to more debt to pay for operational expenses. This strategy is of course utter madness.

Its financial affairs are so bad that the airline has tried every trick in the book to hide its annual reports from public scrutiny. Only a few days ago, and only following an announcement by finance minister Pravin Gordhan that SAA will get another R5bn guarantee, the airline tabled its 2014/15 annual report. The report was meant to have been tabled by September 2015. The airline announced a R5.6bn loss, taking the total losses over the past four years to R14.6bn.

In November 2015, in a presentation to Parliament’s Standing Committee on Finance regarding SAA, Treasury told Parliament that revenue for the first six months of last year was 13.4% below budget due to poor performance on passenger revenues on the international and regional routes. Treasury also announced that the airline had made a loss of R648m for the first half of the financial year.

So clearly things are not improving, and the latest projections for the financial year 2015/16 indicate a loss of R1.8bn.

The tragedy is that the conditions for airlines globally are better than they have been for years, with oil prices well below the $140 per barrel seen a few years ago. Globally airlines are projected by the International Air Transport Association (IATA) to post a combined net profit of $36.3bn this year.

While other African airlines like Ethiopian Airlines are buying the world’s most modern and efficient aircraft, like the Airbus A350, SAA has placed a moratorium on all non-critical capital expenditure. This is a desperate move given that the bulk of SAA’s ageing wide-body long-range fleet needs to have been be replaced long ago by new-generation aircraft with lower fuel consumption and maintenance costs. If the four-engine fuel guzzlers aren’t replaced by twin-engine models, the airline will struggle to remain competitive on long distance routes, and losses can only increase substantially.

Some issues are outside the control of SAA. For one, the airline remains woefully undercapitalised. The balance sheet doesn’t have sufficient security to offer to potential funders and this is why government guarantees are required. Total finance cost on funding loans for SAA has increased by almost 400% over the last five years and the estimated cost of funding for the 2016 financial year alone will be in excess of R1bn.

The airline is also exposed to a number of macro-economic factors. A major element is the rand-dollar exchange rate. Approximately 60% of SAA’s operating costs are denominated in strong currencies. The negative impact of this currency exposure for the full current year was estimated by Treasury to be in excess of R900m.

Then there’s the leadership. A recently elected board sees a number of new directors of whom hardly any have any experience in aviation. The most experienced member is the chairwoman, Dudu Myeni, who has never, since her appointment in 2013, delivered anything but a loss.

Myeni claims her critics are opposed to her transformation programme. The reality is that during her tenure two black CEOs left. One was a very capable woman who has gone on to start her own airline quite successfully. In addition, SAA has a moratorium on staff recruitment. It would be interesting to know how many black pilots are currently being trained under Myeni’s leadership.

The potential is still there to turn things around, if only the airline could get its act together. The African market remains quite underserviced (and bearing in mind that it is on its African routes that SAA makes the most of its money) and by doing things right it could become successful again.

So what is needed to fix SAA?

In short, the following things are critical:

• A good, independent board that doesn’t interfere operationally.
• A sound CEO with relevant experience in aviation.
• An urgent audit of all routes with the aim to cut the loss-making ones if they cannot be justified.

Staff numbers should be audited with the goal to reduce headcount if and where possible and without fear or favour.

Combining SA Express, Mango and SAA into one airline with one board, one combined head office etc. would save a lot of money.

That would be a great start.

James-Brent Styan authored a book on the energy crisis called Blackout: The Eskom Crisis, published in 2015. He writes in his personal capacity. 

This article originally appeared in the 29 September edition of finweek. Buy and download the magazine here.