Hampered by financial woes and other limitations, SAA may be running out of time
The South African government has pumped more than $1 billion into South African Airways over the past 20 years with the sole purpose of keeping the airline flying. But the current administration is adamant that this latest lifeline will also be the last.
The state-owned carrier was on the brink of financial collapse until very recently and has been lobbying the government to extend a 7 billion rand ($741 million) bailout to address its imminent cash needs as well as to cover a long-term turnaround that will see structural changes within the company. A renewal of South African Airways' (SAA) increasingly inefficient fleet is at the top of the wish list. That turnaround plan has remained in place, but Public Enterprises Minister Malusi Gigaba did not come through with an outright grant; instead SAA will have to make do with a 5 billion rand loan that is to be repaid within two years.
In spite of its long-standing inefficiencies, SAA is still the largest airline in Africa. It accounts for 25% of the total intercontinental capacity offered by African airlines, although that translates into less than 10% if all foreign carriers are added to the equation. It controls 26% of the intra-African market followed by, Egyptair and (6% each). But SAA is losing market share as others gain. Since the opening of South Africa's domestic market, low-cost carriers have become a real threat and have eaten into SAA's former monopoly. In the international market, Kenya Airways and Ethiopian in particular have become increasingly serious competitors. Their respective hubs are also ideally located close to the center of Africa, which puts them in a prime position for intra-African connections as well as for long-haul services beyond the continent.
As an end-of-the-line carrier (currently it does not connect beyond Johannesburg) with chronic long-haul losses, SAA has initiated an arrangement that has the potential to bolster its faltering status: It is now teaming up withand is code-sharing beyond the latter's Abu Dhabi hub.
Even though the fundamentals seem to speak against a successful recovery, the government's official stance is to continue to shore up the airline and attempt to increase its market share. The government has also made clear that it has no intention of privatizing SAA (previous attempts have failed).
One key element in this process is the renewal of SAA's fleet, which has been put off on many occasions. SAA has had a long-standing order for 20, but deliveries have been pushed out over and over again as the airline attempted to secure financing. It now has reached an agreement with an as yet undisclosed lessor over a sale-and-lease-back deal for 10 aircraft that will allow the airline to start the delivery flow while it continues to explore how to finance the remaining 10.
But the narrowbody fleet is not the real issue. The long-haul equipment needs more urgent attention and given the capital expenditure this will take, it is also the more difficult problem to solve. SAA currently operates a widebody fleet of nine Airbus-300s and nine A340-600s. That already is small by international standards, but it is also very inefficient at current fuel prices. In spite of its financial limitations, SAA has started discussions with both Airbus and about how to bolster its fleet. As far as types are concerned, the Airbus -900 and the -8/-9 look like obvious contenders. However, SAA may find it hard to obtain production slots any time soon and may therefore have to rely on leasing aircraft.
SAA posted a 1.25 billion rand loss in its fiscal year 2011-12 and is expected to have remained in the red in 2012-13 (the fiscal year ended March 31). It has gone through another round of management turmoil following the resignation of CEO Siza Mzimela in October 2012. As Mzimela wrote in a letter to the staff, her decision was “not a random move,” and shortly thereafter the majority of SAA's board of directors resigned in what many have interpreted as a clash between the board and the Ministry of Public Enterprises.
Mzimela will be replaced by Monwabisi Kalawe, who currently runs a food services company and who worked for Airports Company South Africa earlier in his career.
Large parts of Kalawe's agenda have already been defined. Gigaba expects South African to set up a holding company that includes SAA, its low-fare division Mango and South African Express, a regional carrier that has so far been operating separately and which has also been in a severe cash crunch since late last year.