ANALYSIS: SAA network cuts spark criticism

South African Airways A320
South African Airways A320
Credit: Rob Finlayson

Business rescue practitioners (BRPs) are battling to save South African Airways (SAA), but their restructuring efforts are coming under fire from both government and labor. Is this valid criticism, or yet another symptom of the airline’s long-term sickness?

Cash-strapped SAA was put into business rescue—the rough equivalent of administration—in early December 2019. Business rescue involves an external BRP, in this case Les Matuson and Siviwe Dongwana, taking charge of a company and restructuring to keep it in business.

Matuson and Dongwana’s rescue plan is not scheduled for publication until the end of February, but on Feb. 6 the joint BRPs announced plans to axe a number of routes to conserve cash.

The route cuts, which are scheduled to take effect on Feb. 29, include Johannesburg to Abidjan (Cote d’ Ivoire), via Accra (Ghana), Entebbe (Uganda), Guangzhou (China), Hong Kong, Livingston (Zambia), Luanda (Angola), Munich (Germany), Ndola (Zambia) and Sao Paulo (Brazil).

SAA will continue to serve Cape Town on a reduced basis, but all other South African domestic services—including Durban, East London and Port Elizabeth—will be suspended.

These decisions immediately drew the ire of SAA’s unions, South African president Cyril Ramaphosa and South Africa’s Department of Public Enterprises (DPE), who all said the rationale for the route cuts was unclear.

“We are not in agreement with what the rescue practitioners have come up with, that domestic flights will be canceled,” President Ramaphosa said, speaking to CNBC Africa on Feb. 7.

The DPE said the announcement could “jeopardize the long-term future of the airline,” arguing that any need for network cuts must be balanced with SAA’s future sustainability.

In the words of Albert Einstein: “The definition of insanity is doing the same thing over and over again but expecting different results.” At this stage, more of the same will not help SAA. Painful cuts are exactly what is needed to give SAA a chance of survival, but that idea is understandably unappealing to the government and labor.

“SAA is a classic case of too much political interference and lack of stability in management,” JLS Consulting owner John Strickland said. “There has been a revolving door of leadership and political reluctance to grasp the nettles of difficult, but necessary, commercial decisions. There could be a future for a smaller leaner airline, left to run on a purely commercial basis.”

Naveo Consultancy managing director Richard Brown agreed that government interference and mismanagement have created SAA’s current predicament. “The president of South Africa has commented that SAA shouldn’t be cutting loss-making domestic routes. Governments shouldn’t be doing network, or fleet planning,” Brown said.

Government and labor opposition to the cuts fails to take account of the realities of the South African domestic market, which already has several strong players—including SAA’s own LCC subsidiary Mango.

South African aviation journalist Guy Leitch, who is editor of SA Flyer and FlightCom magazines, told ATW that he can see the sense in the BRPs decisions on both the short- and long-haul network.

On short-haul, Leitch questions whether there truly is demand for SAA’s full-service product, when the longest sector is Johannesburg-Cape Town with a flight duration of around 1hr 45mins.

“The movement seems to be clear: people are prepared to put up with cramped seats and no other ancillary benefits for the sake of low prices on the short-haul market. Therefore, it makes a lot of sense that SAA pulls out of that sector of the market and leaves it to Mango, as its subsidiary,” Leitch said.

SAA is facing competition from LCC rival Flysafair, British Airways franchise carrier Comair and Comair’s own LCC, Kulula. Leitch said Flysafair is “making all the headway” and expanding rapidly. “They’ve just acquired another three 737-800s and they really are running an incredibly tight and well-run operation,” Leitch said. He added that Comair has been going through management changes, but Kulula has been doing “pretty well.”

Turning to regional services, SAA will continue to operate flights from Johannesburg to Blantyre (Malawi), Dar es Salaam (Tanzania), Harare (Zimbabwe), Kinshasa (DRC), Lagos (Nigeria), Lilongwe (Malawi), Lusaka (Zambia), Maputo (Mozambique), Mauritius, Nairobi (Kenya), Victoria Falls (Zimbabwe) and Windhoek (Nambia).

Leitch said the regional situation is “a little more complex.” SAA is passing some routes on to regional operator SA Airlink. “This is a great growth opportunity for SA Airlink,” he observed. “SAA only owns 3% of Airlink and Airlink has just announced its intention to separate itself from the SAA franchise, so it’s going increasingly on its own.”

SAA has a sister regional carrier, SA Express, but Leitch said they are in “an even worse situation than SAA,” noting that SA Express has also just been pushed into business rescue.

“We’re seeing increasing movement regionally from some of the other carriers. Unfortunately, fastjet didn’t really make it, but we’re seeing fifth and sixth freedom rights emerging from some of the other carriers, particularly Ethiopian,” Leitch said.

On long-haul, SAA is retaining long-haul services from Johannesburg to Frankfurt (Germany), London Heathrow (UK), New York JFK (US) and Perth (Australia), as well as its Washington (US) link, which operates via Accra (Ghana).

Leitch describes SAA’s long-haul network as “surprisingly dysfunctional,” with the airline serving New York JFK and Washington as its only two North American destinations, despite them being “only a bus ride apart.”

“It makes no sense, if they’re not flying into Miami, or Atlanta, or Chicago, so it makes sense to rationalize those a little bit,” he said. However, SAA’s Accra-Washington route “performs an important function,” because it is one of the few links between North American and west Africa.

“The other interesting duplication of routes is flying to both Munich and Frankfurt,” Leitch said. “It makes a lot of sense for them to have dropped Munich and just be servicing Frankfurt.”

Turning to eastbound long-haul, SAA has struggled to compete with the three Middle East “super-connectors,” Emirates Airline, Etihad Airways and Qatar Airways.

“It’s extremely difficult for SAA as an end-of-spoke carrier,” Leitch said. “They really haven’t been able to make money in Guangzhou, or Hong Kong - or specifically Beijing, when they still flew there. Discounting the Hong Kong route was obviously easy, especially given the civil unrest in Hong Kong and now the coronavirus.”

Leitch observes that Australia has always been a strong partner. “The Perth link was obviously a good one to keep.”

However, he was surprised by the decision to cut Sao Paulo. “SAA was a relatively natural carrier from the Far East to Sao Paulo, through Johannesburg, but closing the Hong Kong sector of that route probably means that Johannesburg-Sao Paulo is not really viable.”

One of SAA’s challenges is that South Africa has been very liberal in terms of market access, which has created stiff competition from foreign operators on long-haul—and indirectly regional—flights.

“We’ve seen Qatar, Emirates, Turkish and others flying directly to South Africa’s secondary cities—Cape Town and Durban particularly—which took a lot of the local business away from SAA. SAA’s share of the total South African air-transport market has now declined to somewhere between 10 and 15%, from around about 70% 25 to 30 years ago,” Leitch said.

Brown from Naveo Consultancy agreed that SAA has not been able to keep pace with the competition, unlike government-owned rival Ethiopian Airlines.

“The challenges at SAA started years ago when the competition was allowed into the South African market and SAA faced nimble competitors, ready to offer lower fares. In Africa, Ethiopian Airlines stands as a rare example of a profitable African carrier. Even though it’s owned by the Ethiopian government, they allow the airline freedom to operate and are now linking the world via their hub in Addis Ababa. As Ethiopian has grown, SAA has shrunk,” Brown said.

All this leads to a bleak overall picture for SAA in its historic form. The airline needs to change to survive—and change will be painful.

Altair Advisory managing director Patrick Edmond sums up the situation: “My question would be whether even a new clean-sheet-of-paper standalone SAA would be sustainable. It would face LCC competition domestically and because it’s at the tip of Africa, it has no hinterland for feed—unlike European carriers, Turkish, Emirates or Ethiopian—so it’s structurally disadvantaged.

“Ethiopian has been setting up satellite carriers throughout Africa and I could imagine an ‘Ethiopian South Africa’ replacing SAA, serving a small number of key long-haul and regional O&Ds and feeding the rest through Addis Ababa, and taking the economies of scale from Ethiopian Airlines.”

It is already questionable whether the business-rescue plan will be enough to keep SAA afloat. Watering that plan down further seems like a recipe to sink, not swim.

Victoria Moores

Victoria Moores joined Air Transport World as our London-based European Editor/Bureau Chief on 18 June 2012. Victoria has nearly 20 years’ aviation industry experience, spanning airline ground operations, analytical, journalism and communications roles.