High fuel costs give weight to SAA swap deal
Neither President Jacob Zuma nor SAA board chairperson Dudu Myeni can be blamed for the operational unprofitability of the airline.
South Africans are currently rallying together in the #ZumaMustFall campaign, which was in part triggered by the removal of Nhlanhla Nene as finance minister, allegedly because of his stance on the SAA A320/A330 swap transaction.
In the past few weeks, Ernst & Young tabled a damning forensic report detailing weak financial controls at the airline, stating that up to 60% of procurement and contracting was improperly negotiated, poorly contracted and weakly managed. Public perception has decided that corruption and cronyism is the cause of the airline’s woes.
But SAA’s unprofitability should be seen from an aeronautical perspective. In the financial year 2001-2002, SAA operated 62 aircraft (Boeing 737s and 747s). Today, it operates about 50 – a mix of wide-body aircraft (Airbus A340s and A330s), with the narrow-body fleet comprising Airbus A320s and Boeing 737s.
SAA’s decision to replace the ageing Boeing 747 fleet in the early 2000s was premised on the fact that the four-engined replacement, the A340 family, would offer more value for money based on fuel efficiency than a Boeing fleet. Also, choosing a four-engined aircraft rather than twin engines made sense economically because of SAA flying intercontinental, transoceanic routes.
Extended-range Twin-engine Operation Performance Standards (Etops) regulations for twin-engined aircraft operating out of Johannesburg would have prohibited some routes that did not have the requisite airport diversion radius of 90 minutes. These rules did not apply to the four-engined A340s selected by SAA.
Aircraft design is usually a multidisciplinary effort, using diverse specialists, as there are many complex and often conflicting requirements to be considered. Fuel efficiency has always been a consideration but, for a long time, it was never really a design constraint. The higher-speed, longer-range philosophy proved to work well when fuel was inexpensive. The design resulted in favourable economic returns as crew costs and amortisation of capital investment in the aircraft could be spread over more seat miles flown per day, despite higher fuel consumption.
In running an airline, fuel costs are among the top operating expenses. Now that fuel has tripled in price in a decade, it can account for half of an airline’s operating costs.
At the time of SAA choosing the A340s, the average price of Brent crude was about $20 a barrel. By 2014, this had soared to an average of $108 a barrel, according to the latest SAA annual report. This obviously would have devastating effects for an airline operating a four-engined wide-body fleet, and airlines began to opt for twin-engined Airbus A330s and Boeing 777s instead of the A340.
The A340 programme officially came to an end in 2011, with Airbus citing changing market dynamics as the reason behind the end of production. Airline giants Lufthansa and Emirates are phasing out the A340s in their fleet and Singapore Airlines has already retired its A340 fleet.
This has been a significant contributing factor to the losses reported by SAA on its international routes. It has consistently noted the operating fleet and rising oil price as an area of concern for the business. By replacing the A340 fleet with more fuel-efficient twin-engined aircraft with the latest Etops certification, SAA can begin to realise a profit in parts of its operations. It has scrutinised and scrapped a number of loss-making routes (Kigali, Bujumbura, Buenos Aires, Mumbai and Beijing).
There is light at the end of the tunnel for an airline like SAA seeking to replace its uneconomic and inappropriate fleet. Advancements in technology have allowed aircraft similar in size and specification to the A340 to be powered by two engines instead of four. Aerodynamic efficiency, weight efficiency, the use of composite materials, cabin layout and seating density, engine efficiency and aircraft fuel burn – driven by operations/mission profile (payload, range, speed and flight levels) – have allowed the newer twin-engined aircraft to replace their older predecessors.
The current drop in oil price compared with recent years has given SAA breathing space to consider a more permanent solution to the wide-body long-haul fleet renewal. Swapping 10 A320s for five A330s makes sense for now. Part of the current A340 fleet lease has been extended, allowing operations to continue, although the risk of rising oil prices could very well destabilise SAA’s path to profitability.
The bottom line is that Zuma and Myeni had nothing to do with aircraft designers selecting the optimum parameters in the 1980s and 1990s. The conditions that made the A340 acquisition suitable for SAA no longer exist. The cost benefit of a long-range, transoceanic design can no longer be realised and, unfortunately, the patience of the South African public is wearing thin. In this regard, Zuma and Myeni are easy targets for the average citizen who may not appreciate the complexity of operating a fleet of large transport aircraft.
The findings that Ernst & Young have brought to light (and their implications for the airline) deserve more attention rather than flogging the already dead horse of operational unprofitability owed to the legacy of the fleet.
Aarti Panday is an aeronautical engineer. This post was first published on thoughtleader.co.za