SAA burning or ambitious?

In late 2013, South African Airways (SAA) unveiled its 12-year, four-phase turnaround plan, known as its long-term turnaround strategy (LTTS). This plan aimed to get SAA’s high costs and debts under control, improve yields, stabilise the airline and rationalise its fleet and operations. But after a number of leadership changes and a battle to prove its status as a going concern, the airline was forced to roll out an urgent 90-day push which ran to March 2015. 

Munetsi said SAA could not focus on the long-term, when it was effectively perched on a burning platform. “You can’t just sit around and watch it burn; you need to put out the fire, so that’s exactly what we did. External factors were more significant than anything else.”

SAA already had a cost containment programme underway and was beginning to engrain cost control into its culture, but any gains the airline achieved internally were being rapidly offset by external conditions. In Munetsi’s words, life became really difficult for SAA.

COMPETITIVE CLIMATE

“I think two things were significant. The first is that while we were doing all this [LTTS] planning, the world economy did a wobble. Then there was the depreciation of the South African Rand and the commodity collapse. Some of our source markets became less vibrant. The demand that we forecasted also took a knock. There was nothing we could do about it; that’s just the way economies work.”

Against this background of diminishing demand, competition also intensified as SAA’s rivals decided to retrench back to their home market. “While this was happening, our competitors also found it hard to compete between other markets and they felt they could come onto the continent and be able to sustainably grow their footprint, which meant there was more competition for us, so it was an ease in demand - plus increased competition.”

STRATEGIC CHANGES

Network changes, including the axing of SAA’s direct Beijing and Mumbai services, saved R440 million ($33.6 million). A further R290 million in savings came from fleet changes, while the renegotiation of over 150 supplier contracts added another R425 million to the total.

“From a network point of view, we went back to base zero. We looked at each and every one of our operations to see how the network could be rebuilt, so it can achieve what it’s meant to achieve: the feed of our network into our hub,” Munetsi said. 

SAA has since shifted its focus to its core African markets, which generate the majority of its revenue, and is using this traffic to increase utilisation and load factors. This will be a focal point of the airline’s strategy for the mid-term, over the next one to three years.

“We are in a position to be much stronger in our African operations,” Munetsi said. Specifically, this strategy involves using any under-used traffic rights to add frequencies and make better use of capacity. “If capacity is not utilised, let’s utilise it.”

The first of the targets is adjacent markets, where SAA is looking to combine traffic and frequencies. For example, SAA was serving Douala in Cameroon from Johannesburg with one aircraft and Libreville in Gabon with another, but it has now negotiated fifth freedom traffic rights to combine these services. The route now operates as a Johannesburg-Libreville-Douala-Libreville-Johannesburg rotation, using just one aircraft to serve three markets.

Another focus area is what Munetsi describes as “transformational markets,” where SAA has never operated. This involves seeking out fifth freedom long-haul opportunities in countries that do not have their own airline, such as Ghana and Uganda. For example, instead of just operating Johannesburg-Accra, SAA would operate from Johannesburg to Accra and then be the designated carrier from Accra to destinations like London, New York, or Washington DC. 

“We are talking to other markets in Africa. We are talking to Zimbabwe about Harare-London, to Zambia about Lusaka-London and to Uganda about Entebbe-London. It’s been very well received. The Ghanaian government has been exceptionally supportive and the government of Uganda has approached us, asking what they need to do to fast-track the process. The Zimbabwean government is cooperating with us very well and the same with Zambia. We overfly most of these markets from Johannesburg, so it makes sense for us to drop in capacity as we go.”

The bottom line is that SAA is trying to carry more passengers with greater density and higher yield, making existing capacity more profitable. The aim is also for labour to become more productive and, while SAA is not planning any compulsory redundancies, it is cutting down staff numbers through voluntary departures. 

“We are now at the stage of optimising staff levels, so doing more with less staff, without affecting morale,” Munetsi said. Around 300 people have already left the company on a voluntary basis, although SAA is still a huge employer with just under 9,000 staff.

LIQUIDITY/FINANCES

Questions have been raised about the state of SAA’s finances and ability to continue as a going concern, but Munetsi defended the company’s track record.

“We actually have a very profitable network, with year-on-year increases in revenue and passengers. We have a very sustainable cargo operation, which does exceptionally well, and our technical base is world-renowned. The only challenge is, because we are 100% state-owned, we haven’t had much capital injection. We do our own financial arrangements with banks and we have never been in the situation where we have been unable to meet our credit requirements. We still have operating debts, but we have not defaulted on any.”

There has also been an increasing trend among lenders to seek government-backed guarantees from state-owned companies. “It creates a chicken and egg situation, where we need a guarantee,” Munetsi said, but he stressed that a guarantee is a guarantee – it’s not funding. Equally, SAA is not profitable, but it is aiming to turn this around to breakeven by 2021 and hit profitability thereafter.

HOLDING COMPANY

As part of this turnaround strategy, the government is keen to bring its three state-owned airlines together – along with other functions like technical, training and cargo – within a holding company to make them more stable and efficient. 

At the moment, SAA is parent to low-cost carrier Mango, but regional airline South African Express (SAX) is a different business entity – although it shares branding with SAA. The rough plan is to create a group CEO, with each airline subsidiary’s CEO reporting to them.

“The government is reassessing the effectiveness of our structure. They want us to merge with their other airline assets, like SAA and SAX. It is just logical that two airlines that are 100%-owned by the same government would have definite economies of scale. SAX is a completely separate company. We have no line of sight on what happens at SAX.”

Things are already developing. SAX has already moved into a part of SAA’s building that used to be leased out to other companies. The two companies are also cooperating on back-office systems.
Low-cost carrier Mango is a wholly-owned subsidiary of SAA, but it has its own CEO and management board. “Mango is part of the whole process. I’m sure we will keep Mango, because it serves a purpose and affects our business model.”

EQUITY PARTNER

The government is also pushing ahead with its quest for a strategic equity partner for its airlines. During the 90-day plan, SAA strengthened its partnership with Etihad Airways, which dates back to 2013, although relations are now understood to be not as strong and sources close to the situation have previously indicated that Etihad is not interested in taking an equity stake in SAA.

Beyond this, partnership talks are understood to be underway with a few companies showing interest, but negotiations are not advanced and none have not reached a conclusion yet. Currently foreign ownership of South African airlines is capped at 25%, although this could potentially be increased to 49%.

Munetsi said he is not involved with these strategic partner talks, as they are handled at shareholder level, and he is not aware of the timeframes for a potential deal. 

Closer to home, several major African carriers, including Ethiopian Airlines, Kenya Airways and SAA, have previously spoken on conference panels about the potential for greater cooperation.
Munetsi agrees that “there is room and scope for that” and the emphasis should be on doing more within Africa before looking outside the continent. But he believes the three airlines all have different businesses and that the there is “more to be done” in terms of the basics like liberalisation before doing anything else. 

For the time being, SAA is keeping its sights firmly on its own business and has no plans to form equity partnerships with regional airlines either. “We don’t see ourselves going out of our way to go and establish new regional airlines,” he said, but SAA is keen to extend its network and would be open to codeshares and new route opportunities.

FLEET

Instead, SAA is looking to improve its own game, focussing on the basics, upping its service levels, competitiveness, profitability – and ultimately sustainability.

SAA currently operates a fleet of 59 aircraft, comprising 13 Airbus A340s, 11 A330s, 20 A320s, six Boeing 737-800s and nine A319s. The whole fleet operates in a dual-class configuration and SAA has no immediate aircraft acquisition plans, according to Munetsi. 

Under SAA’ s strategic plan, it will refurbish its aircraft interiors and upgrade its product with WiFi, modernised inflight entertainment (IFE) and a revamped configuration, which could see SAA introduce first class – although this is only under study. 

Munetsi said that the focus for the long-haul fleet will be IFE, because people want to rest and be entertained, while on the mid-haul fleet - for routes around four to five hours’ duration – the focus will be on WiFi.

MANAGEMENT

But why does SAA keep losing CEOs? “It’s just the nature of the beast,” Munetsi said. “And of the operating environment. No doubt about it, it’s a tough job, but I think it’s a fun job.”

Currently the search is underway for yet another CEO. Will Munetsi be applying? “No way! I’m too old for that now,” he said, letting out a characteristic hearty laugh.

Munetsi has held positions with SAA in Dubai, Ethiopia, Ghana, Kenya, Nigeria, Senegal and Tanzania. He worked in business development, checking out countries before the airline launched there. Having lived in so many African countries, he would make a great person to travel with across the continent. He also has a great sense of humour, which helps.

“I was the ‘go to guy.’ I would go into the market and do on the ground in-situ analysis, establishing contacts and relationships when they wanted to see if SAA could operate there. Once one was established, stable and up and running, then the next project would come along.”

Munetsi is used to setting things up, dealing with change and moving on. This is the aim for SAA today; to get things going, make them stable and move on. Sometimes one man acts as a nice metaphor for the airline as a whole.

Source: http://www.africanaerospace.aero/saa-s-burning-ambition-.html