What might a rescued SAA look like?

It should’ve been made to offload domestic routes to Mango years ago.
There is no room for sympathy in a business rescue process. Image: Shutterstock

As National Treasury continues to scrounge around for the R2 billion in funding desperately required by ailing South African Airways (SAA), the state-owned airline offered some indication this week of what it may well look like should it emerge from the business rescue process intact.

Read: Government still looking for R2bn to save SAA

Chaos followed an advisory issued by Flight Centre – and not by SAA itself – on Tuesday morning claiming that as many as 19 flights had been cut. The actual number, according to an official statement issued by SAA after 11am, was 28 domestic flights and 10 international ones. All affected flights are scheduled for this week (including some scheduled for yesterday).

Read: SAA cancels 38 ‘low demand’ domestic and international flights

Eight flights (four return) between Johannesburg and Cape Town have been “consolidated” as the airline is currently “operating training flights for pilots on the new state-of-the-art Airbus 350-900 aircraft on this route, before transferring the new planes to international routes”.

This, it says, has “resulted in temporary surplus capacity on the route”.

All five weekday flights to and from Munich (10 in total) have been cancelled.

‘Responsible strategy’

It says these decisions are in line with SAA’s usual policy of reviewing flights and consolidating services with low demand. “Furthermore, during the current process of business rescue, these cancellations represent a responsible strategy to conserve cash and optimise the airline’s position ahead of any further capital investment.”

Expect more changes as SAA says it “will be reviewing further possible flight schedule amendments over the coming days”.

The Johannesburg-Durban cuts are telling as one of the three slots affected is at a peak time: the 06:30 departure to Durban (affecting a total of four flights this week). The problem is that SAA then has a plane returning to Johannesburg at 08:05 – only arriving at 09:05, which is too late for business travellers.

Low-cost ‘sister’ airline Mango has badly cannibalised demand on SAA as it has a flight operating in each direction that lands in each city at around 07:00. The same happens between 16:00 and 18:00, cannibalising business demand in the afternoons too. There is also competition on this route from rival airlines, including Kulula and FlySafair.

Two years ago, this writer argued that the domestic flight cuts announced by SAA – effectively chunks of the schedule were offloaded to Mango – did not go far enough.

There is simply not a big enough market for full-service travel on domestic routes (plus the longest flight in the country is a paltry two hours).

The only reason business class services persist is because of the free flights gifted annually to government ministers, parliamentarians, their spouses and children, and freebies doled out to SAA retirees. Comair’s British Airways service would likely look very different if these perks (which can be used on BA and SAA, payable by the taxpayer) disappeared.

Read: SAA rescue supremo faces long to-do list

The business rescue practitioners (and various executives at SAA) obviously know exactly which flights and routes are profitable. It is not a stretch to imagine that the Johannesburg-Durban route is not one of those. Even Johannesburg-Cape Town (one of the busiest domestic routes in the world) is likely only consistently profitable when parliament is not in recess and during peak holiday periods.

What may emerge from the business rescue process – the practitioners have to publish a plan by the end of February – is that most if not all of SAA’s domestic routes are offloaded to Mango. Mango already operates more flights to and from Durban than SAA.

Cape Town is a more challenging decision, given the sheer size of the route, but there is no room for sympathy in a business rescue process.

The services to Port Elizabeth and East London (effectively two return flights per day to each destination) will surely be shuttered as soon as practicable. Mango already operates an average of four return flights a day to Port Elizabeth. Introducing a daily return flight to East London will solve that problem.

SAA has no business operating a full-service domestic airline.

It just cannot get the unit economics per seat down to levels anywhere close to those of low-cost airline Mango (and Mango is likely not the most cost-effective operator in the market).

Why would you choose to fly passengers around domestically at structurally higher costs?

The business rescue plan will make it clear just how nonsensical this ‘strategy’ of SAA’s has been.

Of course, there are aircraft lease obligations that will complicate matters, but the plan will surely point to a rapid exit from the domestic market.

Value to Brand SA … and Africa

In January 2018, this writer also noted that: “Running SAA as a long-haul (and regional) airline is a perfect fit with government’s logic for wanting to keep a national flag carrier: the almost unmeasurable branding value it brings. Sure, there are arguably better ways of achieving this, but it is unlikely the state’s prevailing worldview will be changed.”

SAA’s regional (African) operations are likely its most profitable. On many of these routes, it is the sole direct operator, meaning that the only alternatives involve routing via Addis Ababa, Nairobi or Dubai (this has mopped up some demand and kept a lid on pricing). Despite the premium it is able to charge, the problem with these routes is that demand is far smaller than, say, the Johannesburg-Cape Town route (or even Johannesburg-Durban).

The regional schedule is not small, however. There are three daily return flights to Harare, Windhoek, Lusaka and Maputo, two daily return flights to Windhoek and at least daily flights to a number of destinations, including Lagos, Victoria Falls, Livingstone, Nairobi, Dar es Salaam, Mauritius and Lilongwe.

As part of numerous turnaround plans, regional routes have already been ‘rationalised’. Depending on what the numbers say, expect a few more routes to be dropped or frequencies reduced.

Could Mango, which already has the Zanzibar route sewn up, be favoured to operate on a leisure route such as Mauritius, for example?

Here, there is a careful balance to be had between preserving artificially high margins (with a structurally high cost base) and offloading these to a low-cost operator that would compete at a different level of the market. Bookings via SAA, especially inbound international ones, would operate seamlessly under its existing code-share agreement with Mango.

International routes

When it comes to international routes, the “temporary” cancellation of flights to Munich may yet become permanent. While there is incredible tourist demand from Germany, it is highly seasonal. Frankfurt is the busier route, and it will probably cost SAA less to fly those affected passengers to Frankfurt on its service and route them onwards on another airline than it would to fly nearly empty wide-body Airbuses to Munich.

Competition has intensified in recent years, and Lufthansa already operates separate daily flights to Johannesburg and Cape Town.

It is not clear which of SAA’s other international routes (New York, Washington via Accra, São Paulo, London, Perth and Hong Kong) are marginal or unprofitable.

It has invested heavily (and has been patient) in establishing a West African base in Accra and it is unlikely it will give up on this strategy or route. London is likely still profitable, but only because of demand (as is likely the case with New York). São Paulo is a tough call as there are practically no other direct flights between the two continents, which likely still keeps demand buoyant.

Surely there are large question marks over Perth and Hong Kong?

Australia is well-serviced by both Qantas and Emirates (in alliance), with demand aggregated through Sydney or Dubai. On the Hong Kong route, SAA competes directly with Cathay Pacific (non-stop) as well as the Gulf and South-East Asian carriers.

Expect some trimming on the international front too.

The hardest question for the business rescue practitioners to answer is at what point will the cuts to routes render SAA sub-scale? Even after cuts to staff and the like, the base of fixed costs will be high.

Planes need to be flying for them to make money – revenue first, and ideally, with an appropriate cost base, profit follows.

That’s the biggest problem with the international network. At many of its destinations, including all of those in Europe, SAA planes sit idle for the entire day before returning the following night. This breaks the model somewhat.

The national carrier cannot compete domestically. And after that, just what is left?

Can SAA even be rescued? We will know what the chances are by the end of next month, if not before.

Get access to Moneyweb's financial intelligence and support quality journalism for only
R63/month or R630/year.
Sign up here, cancel at any time.

AUTHOR PROFILE

COMMENTS   20

You must be signed in to comment.

SIGN IN SIGN UP

The unprofitable routes is but a small part of the problem. Inflated contracts and tenders, scheming of the top, inflated work force, BEE suppliers. All these things have caused the demise of SAA.
It is easy to cut routes, it is less easy to tackle the other many problems. It seems as if ‘they’ do not want to tackle these other problems?

In addition our beloved president mentioned earlier this week that the ANC will no longer deploy unqualified people to SOE’s.

It means they have been doing this for 26 years now.

How many unqualified people have been employed during the 26 years at SAA?

He never mentioned that there are plans to resolve this.

So how do you rescue SAA that has been deliberately invested with unqualified people by the ANC?

Anybody that believe it is possible needs to think again.

your comment can also be used for eskom or for that matter every other soe, municipality and government entity managed by the anc for the last 26 years.

the only reason why it was not so obvious in the first few years of the anc regime is the fact that at that stage it was still running 10000 times more smoothly from what was taken over from the previous regime.

It is not operational SAA that is the problem it is the ticks latched on and sucking it dry that is the problem. Regarded as just another huge ATM.

The BEE ‘premium’ is a combination of mismanagement, corruption, wastage through inflated prices and loaded tenders.

Unsustainable.

More like, despite what Cyril said in his recent speech, because of political interference, SAA is unable to do anything about all these other problems.

I propose a boycott of SAA by all patriotic South Africans so that this terminally ill dinosaur can finally be laid to rest. With a bit of luck, the last boeing can fall from the sky and hit traffic cops hiding under a tree outside Beaufort West, thereby not only taking out the traffic cops but also the ANC politicians on board. Jackpot.

The answer is far simpler:
The Less the anc controls the better the country will run.

Therefore a boycott of all SOE is required, then the politicians can do their lip services with out having in impact.

I concur Danie, a nice drop straight from the ANC skies

I have been boycotting SAA since 2015.
I will take indirect flights to European cities on the likes of Emirates to avoid direct flights on SAA.

Emirates Lounge in Dubai is awesome. And the planes are tip top.

The final straw for me was when my entertainment system was not working on a London flight. I could see that business class was completely empty, but they refused to move me there. I would have been happy with the same food/drinks. Just a working movie but no. The staff was rude and dismissive.

That is why we all should fly Kulula.
All the other ones, have some government shareholder of sorts.
When flying Kulula, you pay for your seat, while also pay for someone else seat on SAA, since they pay taxes.
When flying SAA, YOU pay TWICE (or more) for your seat, since you pay SAA, and the rest is from your taxes!

It will look no different.

SAA should fold.

Like Eskom, it is simply a channel enabling the accelerated looting of government coffers by the ANC.

Enough of the doom. Lets acknowledge that a working SAA is critical for the continent and SA business in Africa. If SA Inc is to grow it needs to leverage off growth in Africa. Drastically reduced or no service between us and key cities like lagos, lusaka, kampala, etc undermines this. We need to airline to work.

Hi Bertie. Sorry to be a buzzkill. I have a better idea. You can keep on funding the SAA with your tax and we will cheer you on from the side with our hard earned money firmly in our pockets. Deal ?

You want to fly 6 hours to Lagos in those little Mango planes? Have fun!

We need AN airline to work : But please just not SAA : Enough is enough .

Are You insane Bertie? What do you want to do in Lagos , Lusaka and Kampala? You think its worth keeping an airline afloat to do business in banana republics?

Liquidate it!

Rescue RSA from SAA

COMAIR profitable for over 70 years now. Operating in similar environment.

C’mon SAA!

ONLY IF the ANC can stop its looting.

It escapes me why Hilton, and others, make the assumption that Mango is profitable or viable on its own. We have not seen any credible or recent financials that would prove this and we have no idea whether Mango is benefiting from services or assets provided by SAA on terms that are not arm’s-length. Given everything we do know about SAA and other state-owned enterprises, it is beyond naive to assume that Mango is a barnstorming business…

End of comments.

LATEST CURRENCIES  

USD / ZAR
GBP / ZAR
EUR / ZAR

Podcasts

NEWSLETTERS WEB APP SHOP PORTFOLIO TOOL TRENDING CPD HUB

Follow us:

Search Articles:Advanced Search
Click a Company: