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SAA will need a long runway to take off

Aug 19 2018 06:03
Thabanga Motsohi

SA Airways (SAA) is currently one of the most critical issues dominating the public debate. This is not entirely surprising considering the staggering amount of public funds that have been used to support it over the years.

I have argued that behind this erratic performance is the failure to confront the objective question: Should the national airline fulfil a commercial or developmental purpose?

I have also argued that the substantive answer to this question would determine what must then be done to turn around the airline and put it on a growth trajectory that can enhance profitability and customer value on a sustainable basis.

Since then, the government has decided that SAA must be prepared for equity partnership as soon as possible. This makes the challenge very clear and unambiguous. SAA must be made fit for purpose and growth by 2021 in line with the latest turn-around plan.

CLARITY OF PURPOSE

The challenge of comprehensively understanding the operating context is critical for any organisation to achieve its strategic vision and sustainable growth.

Telkom is a good example of how a review of strategic purpose and repositioning had a positive impact on the company’s prospects.

Today nobody asks whether Telkom is relevant, but 10 years ago that question was on everybody’s lips.

In the late 1990s, Telkom was receiving similar negative headlines as SAA is receiving today.

It is now considered as a benchmark on how to turn around poor performing and loss-making state enterprises.

But the most abiding lesson is that capable and competent leadership is a precondition for effective strategy execution.

SAA has traditionally relied on generous government bailouts and debt to fund its ongoing operations. However, the current stress and limitations on the government funding ability brought about by unmet tax collection targets and an onerous sovereign debt burden call for a fundamental re-examination of SAA and the question of relevance.

Indeed, the high number of strategies that have been proposed in the past 10 years point to a serious concern about the losses that have been incurred by SAA during this period.

However, none of them was successfully implemented.

A new management team, including industry experts, has since been contracted to implement a turn-around plan that has been sufficiently stress tested to improve probability of success.

The new plan is anchored on a carefully segmented market strategy and suitably structured operating entities to deliver the desired outcomes.

OPERATING IN THE RIGHT MARKETS

As the flagship carrier, SAA was protected from competition for over 40 years following the promulgation of the International Air Services Act, also known as the Air Services Act, Act No. 51 of 1949.

The Air Services Licensing Act, Act No. 115 of 1990 finally and officially deregulated the domestic market in 1991 and restrictions on market entry and exit, capacity, frequencies, and tariffs were removed.

At the time, SAA had more than 90% share of all the scheduled domestic market.

Deregulation significantly lowered barriers to entry into the domestic market, and increased competition resulted in loss of market share at the expense of SAA.

The critical question to be asked is: Did SAA do what was necessary and critical – restructure and reposition itself – for it to stay resonant to the dynamic and competitive context unleashed by the Air Services Licensing Act?

The chequered history of SAA since then provides an obvious answer.

The decision to introduce a low-cost operator in the form of Mango, a wholly owned subsidiary of SAA in 2006, was a result of this transforming operating context. Unlike its parent company, Mango operates on a different model and cost structure.

Low-cost carriers have specific characteristics.

Most of them operate single-type aircraft to optimise inventory management and operating costs.

They typically serve high-density routes of short time frames and price-sensitive customers whose main interest is to get to their destination fast and at the lowest cost possible.

The business model is driven by low operating costs and high-load factors on dense routes, such as the golden triangle (Johannesburg-Durban-East London; Port Elizabeth; and Cape Town).

Mango has been carefully structured and positioned to fit the needs of this market.

However, what has been missing is to reconfigure SAA optimally to serve the long-haul market on carefully selected routes and ensure that they are operated strictly for commercial purposes.

The airline was all over the place, using the wrong aircraft type, operating at super high cost, with a route network that was never managed on a profit and loss basis.

The business model for such an operation relies on revenue optimisation to succeed.

Essentially, SAA has not been run on a strict commercial ethic and mindset. This is the centre of the problem.

SAA had not operated its route network on a profit and loss basis before CEO Vuyani Jarana joined the airline in November last year.

He understands this principle very well, as he comes from a background in the telecommunications industry.

Besides the low cost and the long-haul markets, there is also the thin low-density traffic market on secondary routes to places such as Bloemfontein, Kimberley, Polokwane and Hoedspruit. They typically operate narrow gauge aircraft, including turbo-props and feed traffic to the long-haul operators.

This was partly the reason why SA Express was established. The consolidation of these state aviation assets under a single holding structure as separate operating entities is clearly the next step. In any event, they now all have a common shareholder.

CONFIDENT PREDICTION

I am confident that SAA can turn around and will show results, but we have to keep in mind that this will take time.

Changing a culture takes time, so does changing routes as this involves intergovernmental negotiations and country-to-country bilateral air services agreements.

To rebuild SAA is a massive and complex exercise that will require undivided management focus and dedication.

On the positive side, SAA is a powerful brand and its safety record is unquestionable.

This is a solid platform to return SAA to its former glory.

* Thabanga Motsohi is an organisational strategist at Lenomo Advisory and author of the new book Fit for Purpose, available from thabangjmotsohi.com.

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saa  |  state owned enterprises  |  airlines
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