Business

Festive season is no time for airlines to celebrate

Lynley Donnelly

The move by SAA to secure R550-million to cover operations during the festive season was unsurprising given the financial difficulties it has faced.

In its annual report SAA said the biggest contributors to currency risk include foreign revenues earned at operating unit level and aircraft financing transactions. (Gallo)

And the tough climate in aviation generally, according to industry experts.

The national carrier was granted a R5-billion guarantee by the government last year to keep it going and to help it to stabilise its cash flow. The guarantee was announced shortly before the airline released its 2012 annual results, which revealed a R1.3-billion operating loss.

"The festive period is a challenging time because the big revenue-generating business-class ticket sales drop off substantially and people travelling on holiday book well in advance to get the best discounts," said Linden Birns, managing director of aviation consultancy Plane Talking.

Covering fuel costs at this time is "not just an SAA problem", said Birns, and the company had little control over rising fuel prices.

He said SAA had experienced growing demand on routes to African countries such as Angola, Ghana and Nigeria. But those countries had some of the highest global jet fuel prices; in Angola it was three times the international average.

Fuel accounted for 33% of SAA's operating expenditure last year, up from 28% in the previous financial year, or a R2.2-billion increase, according to its annual report. The airline used 104-million litres of jet fuel a month last year, up from 101-million in 2011.

Currency risk
Birns said the airline also incurred increases in overheads because SAA's revenues were predominantly rand based, which made it vulnerable to foreign-exchange fluctuations.

In its annual report SAA said the biggest contributors to currency risk include foreign revenues earned at operating unit level and aircraft financing transactions. SAA policy is to hedge between 50 and 75% of its foreign exchange exposure.

"Airline growth tracked gross domestic product and the global economic environment left the industry struggling the world over," said Birns.

Guy Leitch, an aviation expert and the publisher of the SA Flyer magazine, said that accessing the bank facility "was inevitable" given SAA's R1.3-billion operating loss.

"This means SAA has been losing at least R100-million a month," Leitch said. He added that its new leadership, the acting board chairperson, Duduzile Myeni, and acting chief executive, Vuyisile Kona, lacked the hands-on experience necessary to identify the issues that had to be addressed in the short term.

A task team was appointed by Malusi Gigaba, the public enterprises minister, to develop a turn-around plan for the airline. It was due to report to the minister on December 15, although it not clear whether the meeting took place. But Kona has said in statements to the media that a number of areas of business are being scrutinised to find savings and improve efficiencies, including fuel costs and a review of SAA's fuel contracts, technical and maintenance operations, and catering services.

Long-standing problem
Leitch said the airline could curb the effects of rising fuel costs on its bottom line by fuel hedging, but he doubted whether the company could save much money by entering contracts with new fuel suppliers.

The airline's policy is to hedge a maximum of 60% of its jet fuel costs on a 12-month basis, according to its annual report.

"I am not sure how much of a saving they would make from international fuel suppliers, maybe a few cents here or there, but not much," Leitch said.

Maintenance was a long-standing problem but, without the company being more transparent, it was not clear what state that part of its business was in. In the past, the airline had the skill and infrastructure to perform its own maintenance and to do maintenance for other international airlines, Leitch said. But it had lost that capability over the years and some of SAA's African competitors, such as Ethiopian Airlines, now had the expertise in-house.

Tlali Tlali, SAA's spokesperson, referred all questions to the department of public enterprises, which refused to comment.

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