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How to turn around South African Airways

2018-10-01  Staff Report 2

How to turn around South African Airways

David Thomas

JOHANNESBURG - Now minister of public enterprises, Gordhan’s department has assumed oversight of SAA at a critical moment in its history. As recently appointed CEO Vuyani Jarana and his new leadership team pursue a make-or-break turnaround strategy to boost passenger numbers, rationalise routes and coax vital financial support from the government, the future of the airline remains obscure. With huge decisions on a potential privatisation or equity partnership pending, it remains to be seen whether Gordhan and his department can provide the support and oversight necessary to rescue the airline.

“There has been a massive problem with state-owned entities in South Africa. The governance has not been up to scratch and [Gordhan] has been given responsibility to correct all that,” says Thabang Motsohi, an adviser to SAA’s chief executive. “There definitely will be change, and there will be more keen oversight.”

In appearances at the South African parliament’s Portfolio Committee on Public Enterprises, Gordhan gained respect for his tough stance towards South Africa’s network of failing SOEs. And while his analytical mind and refusal to suffer fools gladly will likely bring welcome oversight to SAA, the move is also intended to bring the state’s disparate airline holdings together, sparking a potential merger between SAA, the grounded SA Express and Mango, a budget carrier.
More significantly, analysts hope that the department will encourage an overdue shift to a commercial mindset at SAA, which has long been dogged by a costly but ill-defined mandate asserting that its activities should contribute to the “development” of South Africa. Experts claim this contributes to inappropriate route selection, overstaffing and muddled decision-making.

“The first issue is to determine what the mandate should be for the airline. It has many developmental and non-commercial mandates that need to be lessened,” says transport economist Joachim Vermooten. “It needs to focus on commercial sustainability. It’s very clear that the loss levels of SAA are not sustainable. So I’d like the department to change the mandate to a singular focus to operate on a more commercial basis.”

That renewed commercial focus cannot come soon enough. Even under new leadership, SAA haemorrhages money at an alarming rate. In 2017-18, SAA recorded a net loss of R5.7bn ($387m), significantly in excess of expectations of R2.9bn. Sales plunged on domestic routes by 21%, international routes by 11% and regional routes by 6%, according to BusinessDay, as fuel and maintenance costs mounted amid waning passenger numbers.

Cutting costs
Chief executive Jurana, a former Vodacom executive, has repeatedly spoken of his cost cutting intent, and told Reuters in June that job cuts were inevitable. Analysts predicted losses of up to 1500 employees. “SAA cannot carry the same workforce, whether it is pilots, cabin crew or administration. We have to make some tough decisions to save the airline,” he said. His advisor concurs. “SAA has never in 24 years since 1994 really managed to hold the right type of structure and size relative to the job it has… It’s very challenging but it has to be addressed. Its overbloated structure is just too big,” says Motsohi.

The company will also have to reassess its route network. While operations in the short-haul “golden triangle” of Cape Town-Johannesburg-Durban are profitable, routes to other African destinations are dogged by low capacities. Seats filled on all African airlines averaged just 61.5% this year, according to the International Air Transport Association. Furthermore, SAA has found itself outcompeted by foreign competitors on popular routes to destinations like London.

The raft of urgent short-term problems precludes the government’s ability to lay out a longer-term future for the airline. Even as the company undergoes a turnaround, mounting losses mean that it is forced to seek government cash to stay afloat. Jurana estimates that the airline requires R21.7bn of government money to stay in the air over the next three years. As a critic of wastage at SOEs, Gordhan is likely to demand close oversight and accounting of any future funds. With R30bn of taxpayer money already spent since 2012, the government faces a tough choice over whether to keep the taps open in the hope of better days or seek an alternative future for the airline.

“I just think it’s too much, the country cannot accommodate that in the annual budget, so unless they want to sell some other state assets, in my view they have to revise this whole thing. Cut the size of the losses, cut the whole operation to a level where losses can be accommodated,” says Vermooten.

Ambiguous future
Despite government plans for a foreign equity partner or eventual privatisation, few outside investors are likely to put significant amounts of cash into an airline with such an ambiguous future. That has left the government as the last bulwark of financial support until SAA whips itself into shape. “For the moment it would be futile and strategically unwise to talk about a tie up. You need to fix the entity before you can make it suitable and attractive enough for investment… So far green shoots are beginning to show, there’s massive change coming. Change doesn’t take place overnight, but the right person is pushing the right buttons, he’s got the right team of experts recruited from outside in various positions,” says Motsohi.

“The turnaround strategy has been accepted by government, the capitalisation required has been quantified and accepted and it’s a question now of making sure funds flow in over the next two and a half years.” With his keen eye for wasteful expenditure, it will be Gordhan’s job to help decide whether that will merely be throwing good money after bad. “With the financial commitments it has as at the moment one might as well look at other options like shutting it down and starting up a smaller thing that can be owner controlled from the word go,” says Vermooten. “I really think it requires a complete refocus otherwise it will be what economists call a permanently failing organisation.”

2018-10-01  Staff Report 2

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