Sifiso Skenjana: Why there might just be hope for SAA | Fin24
 
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Sifiso Skenjana: Why there might just be hope for SAA

Feb 11 2020 09:05
Sifiso Skenjana

Embattled airline South Africa airways continues to dominate headlines as it goes through the business rescue process, having recently called on the Development Bank of South Africa to provide an equity bridge loan facility for R3.5 billion.

Many have wondered if the airline is a leaking bucket of taxpayer monies and whether it is salvageable in its current shape. Business Rescue specialist Les Matuson, of Matuson & Associates -  currently involved in the SAA rescue - was previously mandated to manage the Ellerines business rescue, and ended up strip selling the underlying assets like Dial-a-Bed and Beares to Coricraft and Lewis respectively. What makes us think that SAA can return to glory?

The answer lies in understanding the detail of some of the issues that rendered SAA uncompetitive.

Graver and Rutherford, in their 2017 Airline fuel efficiency ranking, found that 74% of variation in transatlantic fuel efficiency was explained by aircraft fuel burn and seating density, with the rest being 17% to freight and 11% passenger load factor.

These two tell us that that SAA probably had too many premium seats on their planes, and that their planes were burning fuel faster that Usain Bolt.

Operations and fleet optimisation

Meanwhile, SAA recently announced that it would cull 48 local and international flights in an effort to rationalise its routes, saving money and cutting costs. On 10 January, SAA also put to tender the sale of nine aircraft in the A340 family, as well as 15 engines and four auxiliary power units.

The A340 units were particularly problematic because they were part of older generation four-engine aircraft, making it costly and fuel inefficient relative to the new formats – newer generation craft were most characterised by twin engines.

Qatar Airways CEO Akbar Al Baker, just three years after having embarked on a fleet purchase of the A340 family in 2009 said: "If I could, I would throw them away. These planes are not efficient at all." Since then, Qatar Airways began selling its A340 fleet, moving onto the more efficient and newer fleet Boeing777 and Airbus A350s – as such they boast the youngest aircraft fleet with an average age of six years, while SAA was working with an average fleet age of close to 12 years.

The A340s are generally long-haul fleet, which SAA would in many instances use for the Cape Town/Johannesburg route.

All these (inter alia) point to how SAA’s maintenance cost continued to rise faster than revenue. Simply, signs of SAA selling its less efficient fleet is an important move on its restructuring journey, and we ought to recognise that for the operational value it purports to bring.

Rethinking revenue models

SAA argued that its reason for cancelling certain flights and was low demand. However, it does not hold true that demand is low in general; rather that demand is low for SAA.

This means, therefore, that in an environment where the airline revenues are already under pressure, a smarter move is towards optimising, rather than rationalising, your routes and fleet. That is, do not cut revenue opportunities in order to save costs, but rather figure out how to grow revenue and slow down cost growth. The difference is nuanced but very important.

In addition, SAA over the years has left a lot on the table in terms of its potential revenue diversification into cargo. On the road, South Africa carries close to twice the freight its developing counterparts do, meaning a real opportunity exists for some of that cargo to go via rail or air freight.

In addition, the rest of Africa accounts for roughly a quarter of our exports, and the largest share goes to the EU. This means there are rich opportunities to utilise cargo for higher revenues for SAA.

In 2017, Ethiopia Airlines carried almost three times the amount of cargo in tons compared to SAA, at 338 tons versus SAA’s 110 tons. The world’s largest airline Emirates generated roughly 15% of revenue form cargo while SAA generated a mere 5%.

Marketing and technology investment

FlySafair broke into the SA low-cost airline space in 2014, having cruised in the shadows with fleet leasing and maintenance solutions for over a decade.

Two of the things they got specifically right is their IT infrastructure and their marketing. Their through-the-line digital marketing is unmatched, and they have prioritised their efforts to ensure they always have bums on seats. A few days before an empty flight departs, they drop flight specials, and as such, they have achieve a good level of success in the six years since their launch.

SAA has hope

The clear message is that SAA is not too far gone.

But the airline has a lot of work to do to become financially sustainable. The correct prognosis needs to take centre stage if we are to take the right actions to bring the airline back to financial viability and ensure it reclaims its position as the African airline of choice.

Sifiso Skenjana is the Chief Economist and Thought Leadership Executive at IQ Business. Views expressed are his own. Follow him on Twitter: @sifiso_skenjana

This article has been amended on 11 February 2020 to reflect the author's updated bio. 

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