South African Airways’ profitability and market share have declined at a time when air passenger numbers have more than doubled. This brings more urgency to SAA’s restructuring plans, amid concerns that the transformation of an ailing airline will not go far enough.
On Monday SAA unveiled its plan to achieve a R2,7-billion turnaround aimed at restoring the airline to profitability within 18 months. Public Enterprises Minister Alec Erwin warned that further state support depended on the plan’s successful implementation. SAA will ground six Boeing 747-400 planes, five of which it is leasing, close its Zurich and Paris routes, cut 30% of its management staff and “renegotiate working conditions”. The airline was coy about retrenchments, emphasising that it had not yet opened negotiations with staff unions. It will reshape its business into seven separate subsidiaries and will sell off its catering unit and travel industry platform Galileo.
It is no secret that the struggling enterprise has required a series of government bail-outs. In March this year alone, government injected another R1,3-billion of capital alone. But the sheer scale of SAA’s underperformance becomes clear only when examining the extraordinary growth of the South African market.
Last year 15,8-million people flew in South Africa, from 7,5-million in 1999. These figures, provided by economist Mike Schussler, include international, regional and domestic flights and show that the market has more than doubled.
Statistics from OR Tambo International Airport tell a similar story. In 1992 the airport saw fewer than three million arrivals. By the end of the 2006 financial year this had grown to 7,97-million. This growth was initiated by the launch of kulula.com and 1Time, both private-sector airlines.
But, at the same time, SAA’s market share has declined to 39% from almost 100% previously and the airline has struggled to make a profit, according to Schussler. “If it’s been this unsuccessful in a growing market, one dares not think what SAA would look like if interest rates went up,” he said.
During the unveiling of its restructuring plan, it emerged that SAA’s African routes are the most profitable part of its business, adding R500-million to the airline’s bottom line last year.
“SAA is traditionally strong on routes where it does not have much competition, such as on the African routes, and that can be put down to the management structure,” Schussler said.
At present SAA is Africa’s largest airline, but there are concerns that it would not be able to compete if African countries liberalised their aviation policies. SAA CE Khaya Ngqula identified delays in African liberalisation and an open-skies policy — where airlines are free to choose how many flights are needed — among the threats facing the airline.
Schussler believes the airline is overpriced in relation to its competitors and that cheaper flights bring in tourists with more money to spend in South Africa. At present much of SAA’s competition is domestic and provides jobs for South Africans, but must compete against an unfairly subsidised business. The lease agreement between SAA and Mango has not been made public, raising the question of whether the new subsidiary’s losses are being hidden in its parent’s balance sheet, he said.
Rival airline Comair takes a somewhat different view. Its CEO, Erik Venter, estimates SAA’s market share at 50% of total, as its wholly owned subsidiary, Mango, holds 12% of the market. “It’s hard to judge whether it [the restructuring] will make any difference,” he said. “There are more fundamental issues than what they are talking about.”
SAA decided to ground its 747-400s because of high costs, but many airlines, including British Airways and Virgin, successfully use 747s on the Johannesburg to London route, Venter said. International airlines receive a higher proportion of revenue in hard currency, compared with SAA, which makes it harder for the airline to compete globally. “They are pursuing a market share that’s too big for their cost structure,” he said.
If SAA does decide to retrench, it comes at a good time for their workers, said economist Iraj Abedian. With a booming economy, workers would be offered a retrenchment package and would be likely to get a job offer from another company with relative ease. Schussler agreed that retrenchments would release skills back into the economy, but added that the take-up of retrenched employees would depend on the specific skills they could offer.
The airline has a total staff complement of 10 085, including 698 managers. This means that, if the 30% management cut is carried through, at least 200 managers will be sending out CVs.
Venter agreed that retrenchment would not necessarily be a solution. In Comair’s experience, SAA typically pays its staff between 30% and 50% more than anyone else in the industry, underlying the need to look at total remuneration packages rather than retrenchments. “It’s not the number of staff so much as the level of expertise. There’s been massive turnover in top management. There might not be enough expertise left in the airline to take good decisions,” he said.