From playbook to playlists, SAA will struggle to stay in the game
• Airline has too many legacy issues to interest a partner in an environment of brutal rivalry
Poor South African Airways (SAA) just can’t seem to get a break. In May trade union Solidarity filed an application to have the airline placed under business rescue on the basis that it was financially unviable. In a desperate bid to cut costs and reduce losses, CEO Vuyani Jarana announced that the airline would be cutting 1,000 to 1,500 jobs, but this was not enough to keep the business rescue wolves from the door.
Last week, as part of an agreement that would have Solidarity hold off on its business rescue application, Jarana announced that SAA would be urgently seeking an equity partner to acquire a stake in the business. Somewhere in the middle of all this the Department of Public Enterprises began a legal process to merge SAA and South African Express.
The final straw came on Tuesday when South African rapper AKA called SAA out on Twitter for not having a 100% local playlist as passengers board the plane. I mean, really.
You might ask why in the midst of all of this chaos it is even vaguely relevant what type of background music a national carrier plays when people board an aircraft. But it is, because running a successful airline is all about efficiency and attention to detail, and I doubt anyone at SAA had even thought about the playlist, let alone how much local content was on it.
It was probably the same tape they’ve had in the cassette player since 1999.
As things stand SAA has yet to find a willing equity partner, but even if it did it is still unlikely that the airline will ever be independently profitable. This may seem defeatist — after all SAA already has aircraft and infrastructure and staff — but to make it profitable would require getting rid of almost everything that makes SAA, SAA. And that probably includes the playlist.
For starters, there are too many legacy issues for a potential buyer to take on; masses of debt, expensive contracts, a fleet that isn’t suitable, and a staff complement that has become deeply demoralised.
To give you an idea of the scale, Jarana told a parliamentary portfolio committee last week that SAA needed R21.7bn over the next three years to return to profitability. As for the brand itself, it is arguable whether it has any value over and above the value of the brand of a new entrant.
Then there is the issue of costs and skills. SAA has already reduced its flight schedule, mainly due to unserviceable aircraft. But unless it can reduce its fixed costs proportionately its losses are likely to escalate.
One of these is staff. SAA has the highest staff to aircraft ratio in the region. Although reducing the headcount would help reduce costs, it creates another problem. One of SAA’s main efficiency constraints is a serious skills shortage. This is because running a profitable airline requires highly competent, skilled and specialised individuals. The margins are simply too small to be wasted by inefficient and incompetent staff.
In such a highly competitive market, the speed at which your ground staff can turn an aircraft around, the skill with which your pilots can manage their fuel consumption, the friendliness of your air stewards and the ease of buying and flying make or break your business.
Comair CEO Erik Venter says over the past decade skills have steadily been driven out of SAA. “These people have now either left the country [many working for Middle Eastern airlines] or moved on to other industries.”
Venter says although SAA has replaced these heads, it has never replaced the skills and competencies. “Globally aviation is a relatively small industry with very specialised knowledge that is not taught by tertiary institutions. This means skills are gained by working in a competent airline. There is no quick fix to building the right skills.”
Another key issue is costs. Over the past two decades costs have been rising faster than ticket prices in the airline industry. Although this phenomenon is not unique to SAA, it is another major challenge to a potential equity partner. Although airlines vary, Comair experiences average cost inflation of about 9.5% per annum. By comparison, the average ticket price has increased by only 1.5% per annum over the last 15 years.
These figures aren’t even adjusted for inflation — in real terms, ticket prices have decreased by about 50% over the last 15 years. The result is that airline operators in SA have to take out 8% of their costs per year or improve efficiencies proportionately, just to maintain their margin.
Outside of SAA’s own troubles, the airline industry itself is notoriously brutal. Apart from the airline’s day-to-day operational cost issues, the global airline market today is a world away from the old days, when SAA used to have a virtual monopoly on flights in and out of SA, and Johannesburg was the continental air travel hub.
The rapid growth of Middle Eastern carriers such as Emirates and Etihad means there is a lot more competition on routes into and out of SA. The huge economies of scale enjoyed by these carriers mean SAA cannot compete on costs because it cannot match the price per seat of the big carriers, and they are almost always beaten on price on a point-to-point basis.
When you take all of this in, Jarana has been tasked with the impossible. I know he had to do it to save face, but taking a bet with the Free Market Foundation’s Leon Louw that he could turn SAA around and make a profit in three years was a foolish thing to do. He would be better off, and save everyone’s nerves, by preparing an exit strategy for SAA.
AVIATION IS A SMALL INDUSTRY WITH VERY SPECIALISED KNOWLEDGE NOT TAUGHT BY TERTIARY INSTITUTIONS