Running costs: SAA’s new majority shareholder Takatso said while the transaction was not concluded, due diligence was ‘substantially complete’
Embattled national carrier South African Airways is set to take to the skies again on 23 September after being grounded for a year and a half. The airline enters a market that underwent seismic shifts in the wake of the industry-bashing pandemic, but is poised for a small but neat restart, analysts say.
Flights are set to operate from Johannesburg to Cape Town starting from 23 September. Four days later, the airline will begin operating flights to Accra, Kinshasa, Harare, Lusaka and Maputo. More destinations are expected to be added to the route network as SAA ramps up its operations.
Aviation analyst Phuthego Mojapele was upbeat about SAA’s relaunch strategy. He noted the airline would re-enter the market leaner, having done away with major routes that would have required it to use much larger fleets.
SAA has reduced its workforce to 1 000 employees, which — along with the airline’s decision to reduce the number of routes it offers — has narrowed its input costs considerably.
The market SAA is re-entering has radically changed from the market the national carrier left, aviation specialist Linden Burns said, adding that although there certainly is demand for air travel in the domestic market, people are also cost-conscious.
“What airlines can command in terms of air fares is nowhere near what they could command before the pandemic,” said Burns.
Further, Burns said the margins in the industry were very slim and “one has to ask to what extent the airline is willing to entertain getting into a fares war and whether it can sustain one, given that it will be relying on taxpayers’ money”.
The airline has targeted its most lucrative routes for its initial restart, Mojapele said, adding: “Currently there aren’t many local airlines operating on those routes. So they have strategically positioned themselves in a way that they are able to penetrate the market on that basis.”
SAA will only face competition on its Johannesburg-Cape Town route, coming up against British Airways as its single premium rival, Mojapele noted.
Capacity may eventually become a challenge for the airline, especially if it decides to increase the number of routes it offers, Mojapele added. “But at this stage, the decision was based on its projections on the most lucrative routes, its capacity and its current fleet composition.”
Burns said the airline was coming into a market “that already has a lot of competition, a market where they have to rebuild their reputation, their brand trust”.
“It was identified during the business rescue process that the airline is still sitting with R3-billion worth of unflown tickets it has to honour. There are a lot of people who have spent money on SAA who have yet to receive what they paid for. There are a lot of suppliers to the airline, such as fuel companies that are going to be looking very carefully because they all got burnt in the business rescue,” Burns added.
The airline became the first state-owned entity to be placed under business rescue, which started in December 2019.
The process took almost 18 months and cost taxpayers about R250‑million. In October last year, during his medium-term budget speech, then-finance minister Tito Mboweni announced the allocation of R10.5-billion to SAA for the business rescue plan.
In April, the airline exited business rescue with R500-million for its working capital requirements. SAA’s very thin balance sheet justifies it starting small, Mojapele said.
SAA’s second act comes three months after Public Enterprises Minister Pravin Gordhan announced that the airline would get a new majority shareholder: Takatso, a consortium consisting of Johannesburg-based Global Airways and private equity firm Harith General Partners.
In June, the minister revealed that the consortium had committed more than R3-billion over a three-year period to fund the airline, which will eventually be publicly listed. The transaction signalled the end of SAA’s burden on an already strained fiscus.
“Our objective of creating a viable, competitive, sustainable airline … takes a huge step forward with this agreement being in place, and with the partnership that we have created as government with this consortium,” the minister said. The deal was announced prior to any due diligence process being completed.
Although SAA is set to fly again this week, the Takatso transaction — and the R3-billion that will come with it — has not yet been completed. However, late last month, the consortium did announce that its due diligence of the airline “is substantially complete and that no material issues have been identified”.
In the statement, the consortium noted SAA’s plans to start flying again, but said it was not involved in the management or funding of the airline or any relaunch plans.
Mojapele said it made sense for SAA to relaunch without the consortium’s backing.
“When you put your money into something, you are first going to test the market. You’re not going to put your money into something you haven’t tried. So I think it is proper for them to try and re-establish the routes and test the market before they spend even more money.”
After receiving its renewed operating license in early August, SAA announced its new take-off date later that month. At the time of the take-off announcement, the airline’s interim chief executive Thomas Kgokolo said: “The aviation sector is currently going through a testing period, and we are aware of the tough challenges that lie ahead in the coming weeks.”
SAA has its work cut out for it in terms of restoring confidence and building its reputation and brand, Burns said. Customers are going to look at it in terms of value for money and will look at things like punctuality, reliability and service and convenience.
“I am absolutely positive that the people who are working at the airline in the commercial division especially under Simon Newton-Smith — he’s been around and worked for other major airlines — will know what they need to do,” Burns added.
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