Turbulent tie-up
Lack of clarity on SAA-SA Express merger. Would it be a turbulent tie-up?
SAA-SA Express merger: failures apart, a winner together?
● A new dilemma faces loss-making national carrier SAA: how does it get SA Express — grounded since May by the Civil Aviation Authority — airborne again?
One possibility is a merger between SAA and SA Express. Mango, the other low-cost operator owned by SAA, is also said to be under consideration for inclusion should the formation of a single airline go ahead.
This proposal appears to have the blessing of Public Enterprises Minister Pravin Gordhan, who recently intimated that “discussions around the merger have begun”.
However, in an interview with Business Times on Friday, SAA CEO Vuyani Jarana said the airline had not been included in discussions about the merger.
“We are not part of the conversation, the board has not been engaged and we have not been engaged as well. So we are not in the conversation as yet, but we also know that government is talking.
“This is what we hear from the announcements. At the moment the board hasn’t given us that direction and we haven’t been briefed at that level,” Jarana said.
Best starting point
He added that the best starting point for the possible merger was to restructure the airlines first. A second important consideration was where the airlines were on their restructuring journeys.
“Obviously it’s a very complex process we [SAA] are going through because we are rebasing the organisation [to a far] more commercial focus. In doing so, it’s a lot harder to focus on two organisations that you are transforming, that need transformation on their own.
“So you need a lot more bandwidth, management bandwidth [and] executive bandwidth, to actually see [the merger] through,” Jarana said.
The Department of Public Enterprises had not responded to requests for comment at the time of going to print.
But such a merger would face challenges. SAA is plagued by legacy debts and a severe shortage of working capital and is in the midst of an ambitious turnaround plan tabled recently by Jarana. Over the next three years the airline needs about R22-billion to remain a going concern.
SA Express has a whole other set of problems.
It was grounded after the Civil Aviation Authority said it had failed to comply with safety regulations.
Joachim Vermooten, an independent aviation economist, said that to resume flights SA Express would require fresh air-operator certification.
It means it would have to start up as a new business and if it merged with SAA, then the bigger carrier would have to take on those costs in addition to dealing with its own challenges.
“They [SA Express] may have to call it a day,” said Vermooten.
Alf Lees, DA spokesman on finance, this week described SA Express as a “dead albatross” and called for its liquidation.
It’s unlikely that a merger would turn around the fortunes of the ailing airline.
“It won’t work with the present interference from the state and a hugely overstaffed airline [SAA]. The answer is to run it properly commercially and the only way [to do so] is to run it privately,” he said.
Mango, which is 100% owned by SAA, is the only one of the three airlines that is profitable and was the second-largest contributor, at 7%, to SAA group revenue of R30.7-bil- lion last year. In its nearly 12 years of operation, Mango has recorded a loss only twice.
Euromonitor, a market research firm, said the latest negative year, 2016, was a result of South Africa’s slow economic growth, “the decline in codeshare revenues and increasing competition from new low-cost airlines”.
Mango’s small fleet of 10 aircraft carried 2.9 million passengers last year — almost half the 6.8 million carried by SAA.
Against global trend
John Grant, director of JG Aviation Consultants in London, said the global trend was for a major airline to launch a separate low-cost carrier, rather than to merge with one.
“A real merger between a legacy airline and low-cost airline as such, no. I think one of the key challenges would be around merging such cultures,” he said.
“Working practices are very different, cost bases and working conditions are miles apart. If you were to try something like that, it would be best to probably stop the airlines, close down for a few days and then relaunch under one name with new contracts. It’s unclear how the unions would also react to that,” he said.
The grounding of SA Express is likely to strengthen the position of Comair’s kulula and Safair Operations, which owns FlySafair. The low-cost carrier segment has been growing steadily over the past few years and last year generated revenue of R6.7-billion, up from R4.5-billion in 2012.
“Kulula led low-cost carriers in 2017 with a value share of 39% in 2017,” Euromonitor said. “Despite leading low-cost carriers and reporting an increase in passengers, kulula also experienced a decline in current value terms in 2017.
“Safair Operations continued to record positive growth during the review period. Despite operating in a tough trading environment with an oversupply of seats on most domestic routes, FlySafair posted significant growth in passenger numbers, prompting the company to add more aircraft to its operating fleet,” Euromonitor said.
An industry expert who did not want to be named said legislation would have to be changed before any SAA-SA Express merger could take place.
Seniority and pay issues
Challenges in such a merger included seniority and pay issues within the combined staff hierarchies, the expert said, and how SA Express’s debts would be dealt with.
“It is not a matter of simply shutting down and saying SAA should take over the maintenance of SA Express aircraft,” he said.
“If [the merger happens], who assumes the debt and exposure from SA Express? Would [SAA] be able to take on that additional burden?”
It would be best to close down for a few days and relaunch under one name with new contracts John Grant
Director, JG Aviation Consultants