FIFI PETERS: It has been almost three months since South African Airways returned to the skies following the initial blow from the Covid-19 pandemic that grounded flights and sent the airline into business rescue. Of course, more recently the Omicron variant has dealt another blow to the aviation sector.
Here to talk about the kind of turbulence SAA is experiencing and how the recovery plan is going, I’m joined by Simon Newton Smith, the chief commercial officer at SAA. Simon, thanks so much for your time. How is business lately?
SIMON NEWTON-SMITH: Thank you for having me join you today, Fifi. Yeah, just going to your intro today, it is exactly three months since we started flying again and everything has been going to plan, ahead of plan. But, to your point, Covid has been a fly in the ointment for most travellers and airlines this year. Yes, we are obviously being impacted and we are adjusting appropriately.
FIFI PETERS: When you say ‘going according to plan,’ I think that when SAA resumed flights the fourth wave and the Omicron variant hadn’t yet been discovered. Then that happened, and we saw a whole host of travel bans on South Africa and other African countries happening. What kind of impact has that had on your business?
SIMON NEWTON-SMITH: The first impact was literally over the weekend that the Omicron variant was discovered; that was November 26/27, 2021. Then obviously we saw countries taking immediate action with their borders.
Initially Mauritius made a quick decision to restrict travel for South Africans arriving into Mauritius.
So, having started the new service only on November 21 – I believe it was – we were forced to get our customers back from Mauritius very quickly.
Our hearts went out to all of those people waiting for a well-earned vacation, only to have it cut short. We deployed bigger aircraft out to Mauritius to get people back and we were able to get people home literally the same week the Mauritius ports closed.
Since then other countries introduced policies for passengers arriving from South Africa, and that has had an impact an impact on demand. People facing quarantine on arrival are obviously not particularly excited about travelling, so we have experienced some softening in demand as well as cancellations, as most other airlines have over the last few weeks.
The good news is we’re starting to see a little bit of recovery, but there’s no doubt that the positive trajectory of all of the numbers since restart certainly took a hit from the end of November up until probably about a week ago.
FIFI PETERS: What number of cancellations exactly have you experienced and, as an airline, are you able to quantify in rands the cost of many countries’ dealing with the travel bans as a result of the Omicron variant?
SIMON NEWTON-SMITH: The impact on the bookings has been sort of twofold if you like, because people holding bookings decided not to travel and cancelled, and people who were thinking about travelling were more hesitant to make bookings. So there was a double-whammy effect.
I think at a high level the numbers have been erratic over the last couple of weeks. I would say on average, just looking at the sales run rate over the three weeks following the discovery of the new variant, we could see that our booking run rate was off to the tune of 20% to 30%, depending on the week.
A lot of those people rebooked travel later, so the financial impact is not as easy to quantify. But certainly from an overall booking rate we saw a softening of 20% to 30%. We are starting to see recovery now; week-on-week sales are actually moving positive versus negative. Again, I think with the sentiment globally and certainly what we’re seeing from countries that introduced some quick border restrictions, we’re starting to see some of those ease and that’s giving people confidence to book and travel again.
FIFI PETERS: Where’s the recovery coming from? Just give us a sense of who you are experiencing new bookings from at this stage.
SIMON NEWTON-SMITH: We’re seeing very strong bookings for Cape Town. Cape Town right now is our only domestic service. Those folks who were planning to travel overseas are finding a different place to get some sun and a break over the holidays, so we’re seeing a good recovery in Cape Town, but a solid recovery elsewhere as well.
West Africa – our services to Accra and to Lagos took an initial blow in terms of a slowdown in bookings, not many cancellations; but since the border policies have stabilised in those markets, we’re seeing good recovery for travel to West Africa as well.
And closer to home – Harare, Lusaka, Kinshasa – we’re seeing steady recovery; certainly not where we expected the numbers to be for December. But those bookings are moving positively again, which is really encouraging.
FIFI PETERS: Just going back to what you said earlier – that while things are going ‘according to plan’ you have had to adjust accordingly because of what the Omicron variant has done – what does that mean? Just give us the practical picture of what adjusting your strategy accordingly has meant.
SIMON NEWTON-SMITH: It’s a great question, Fifi. Most of the adjustment has been to do with the flying programme.
So, for example, if you look at Lusaka, Lusaka and travel to Zambia was sort of hit with a hesitation in bookings and we had to increase our services to five flights per week. We’re literally looking at the data on a day-by day basis and we’re trying to strike a balance, obviously getting people where they want to go. But, where the flights have got to such low demand we’ve been making some decisions about consolidating flights in advance of departure.
So, with some of our routes – Harare, Lusaka – we’ve seen some reduction in the flying just to better match that capacity with demand. I’m keeping my fingers crossed here, but the worst of that seems to be behind us.
One of the commitments that we made as an airline when we restarted is that changing the flying programme, changing the schedules, is a normal part of airline life. But, from a customer perspective, what you don’t want happening is a change happening on the day and you are left stranded at the airport waiting for another flight. I’m pleased to say that one of the data points that we measure every day is a thing called ‘completion rate’ – how many flights we say that we’re going to operate, and then how many we actually operate.
For November and December, actually since the start, we’re running at 99.7% completion rate.
Folks arriving at the airport know that their aircraft is operating. If there’s any change to the flying programme, we let our customers know in advance.
FIFI PETERS: Does that mean then, Simon, that you are comfortable with the financial position of SAA presently, and that as we approach the upcoming budget in February SAA will not be in need of extra help from government?
SIMON NEWTON-SMITH: The forecast that we built for the initial flying programme – let me be clear, relaunching an airline [during] Covid does not mean that the airline is going to be profitable from day one.
The objective of relaunching the airline was to ensure that we were selecting routes where we could drive an operating profit; that is, we are not going to be burning more cash flying than we were not flying.
Since we started, we are ahead of expectations, so we are adding positively to the bottom line. Again, it’s not profitable yet, but each of the routes that we’re flying is making a positive contribution, so we’re reducing that cash flap.
I’m very confident that when we set the budgets for next year, and as we see a recovery overall in demand, with our commitment to be sustainable we will be able to deliver.
FIFI PETERS: What are your current profitability timelines?
SIMON NEWTON-SMITH: Right now, if I look at the rest of the fiscal year from an operating profit versus a bottom-line profit, we are already meeting the goals of delivering an operating profit.
If I look at the long-term projections based on the original plans that were put in place early in 2020 – projections beyond business rescue – the airline was due to be profitable on that original plan within two years.
There’s still a long road ahead in terms of rebuilding the airline, but that initial five-year plan projected the airline would be profitable by the end of year two, and then into year three.
Right now, if I look at our projections, I think we can get ahead of that.
FIFI PETERS: What can your customers look forward to in 2022?
SIMON NEWTON-SMITH: Our goal right now is to rebuild the network. Obviously we’ve restarted a lot smaller than we were. Some of that is by design because we are launching while the overall travel demand – international travel demand – is not expected to recover fully until about 2025, 2026.
When I say ‘recover’, we’re looking at demand levels equivalent to 2018, 2019.
So there’s still a long road ahead for overall travel demand to get back to where it was. Domestic will come back sooner, and I can see a world where overall demand for travel within South Africa could be back up to 2019 levels by the middle of next year.
The regional – the Africa flying – will take a little bit longer than that. It will be the end of next year and early ’23 before we see the overall demand volume back to normal.
So our goal is to rebuild our network where we are seeing that growth return, doing that sensibly and over time we will get back to the network that we had – if not larger.
But again, it’s an initial five-year plan to get us back to where we were.
That will change depending on the market conditions. If we can go quicker and the market bounces back sooner, then we’ll grow quicker. If it’s still soft, we’ll take longer. We just need to do this sensibly.
FIFI PETERS: All right. Simon, thanks very much for your time, sir. We will leave it there. Enjoy your festive break. Simon Newton-Smith is the chief commercial officer at SAA.