South African Airways (SAA, 6.8m passengers in 2017) could well be the first major victim of the coronavirus crisis threatening the entire airline sector by the end of April. Potentially the first in a long series…
Placed in December under safeguard proceedings by the government, the company, indebted to the tune of 9.2bn rand, or 570m euros, and regularly bailed out (20 billion rand injected over the last three years), seemed to have some respite.
But the government’s decision in mid-April not to offer another 10bn rand extension sounded the alarm for this elderly company, born in 1934, which is both the pride of the Rainbow Nation and a model for the continent.
Assets to be sold to finance a redundancy plan
“It would have taken a lot of money to get it back on its feet. And, if before Covid, we could count on a measurable flow of traffic, that’s no longer the case today. We don’t know how quickly business will pick up again, or even if it will return to pre-crisis levels. The company was already struggling before the pandemic. How could it do better afterwards? ” says former deputy managing director, Sylvain Bosc, who is advising several African countries on how to revive their airlines.
Although the government made a commitment to the unions on 21 April to relaunch a new “viable and competitive” national carrier, Pretoria will have other priorities on its agenda in the coming weeks.
One out of every two South African companies does not see itself surviving the crisis, according to a poll published this week. And hunger is sweeping through poor neighbourhoods. For observers, the decision to “unplug” the country’s best-known company is a strong signal sent by President Ramaphosa that nothing will be the same again.
While unions are still hopeful, the company, which has made no profit since 2011, is currently preparing the plan to lay off its 4,700 employees. Providing for the payment of one month’s salary for each year of seniority, it should financed by asset sales.
These include its second night slot at London-Heathrow airport, which was worth around thirty million euros before the crisis, the few planes it still owns (and which are no longer worth much), engines and spare parts.
Its subsidiary SA Express, which was losing $50m a year, is to be wound up.
Leadership problems, corruption and poor strategic choices
The carrier’s operations had already been reduced to a pittance. In February, it had suspended eight international routes (Sao Paulo, Canton, Hong Kong, Munich, Luanda, Abidjan, etc.) and all its domestic and regional routes except the Johannesburg-Le Cap service.
It had also begun selling its nine A340s.
In recent weeks, SAA had been operating only cargo and repatriation flights.
The epilogue of a long descent into hell for an airline that had its heyday between the post-apartheid period of the late 1990s and the early 2000s, with the opening up of the country and the transport of raw materials.
READ MORE Saving South African Airways
Since 2013, the economic slowdown and increased competition combined with problems of leadership, political interventionism, corruption – symptomatic of President Zuma’s era – and poor strategic choices, has finally shattered the South African Airways myth.
Its demise will be a tragedy for employees. It is not expected to have an impact on the airline industry, particularly on the international niche market. In a market closely linked to the tourism industry (25.2m passengers in 2018) and where some fifty global carriers were working together, South African Airways had long since ceased to be a monopoly player.
Mango, one last nugget to save…
It had to face British Airways (and its five daily flights to London), Virgin Atlantic, Ethiopian Airlines, Emirates, and Etihad.
The latter could take over the slots left vacant by the withdrawal of SAA, if traffic eventually resumes with the same vigour. “Johannesburg should not lose its position as a hub in Africa, predicts Sylvain Bosc. It is the richest city on the continent, providing more than 10% of its GDP and concentrating financial services and consulting firms.”
The effect on the market for domestic and regional routes is expected to be stronger, particularly with regard to the future of the SAA empire’s only salvageable nugget, Mango.
Created in 2006 and relatively autonomous, the low-cost subsidiary (2.9 million passengers in 2017) is not losing much money. It should therefore be able to survive and even grow stronger.
If the sale is the option chosen by Cyril Ramaphosa, the latter will however have to obtain the approval of the ANC before being able to launch it. “Unless the administrator ignores this procedure,” notes the French consultant.
Coveting the Cape Town – Johannesburg line
Whatever the outcome, Mango has one card to play.
With its Boeing 737s with over 180 seats, the airline is perfectly calibrated to ramp up on its parent company’s most profitable domestic routes, such as Cape Town to Johannesburg. With fifty daily rotations, this route is the most important on the continent.
Having brought in $185 million to SAA between April 2018 and March 2019 according to OAG, it is the most revenue-generating intra-African route.
But it is also the cheapest in the world per kilometre with tickets that can be charged at 600 rand (45 euros) for trips of two and a half hours.
It is a line where other private operators are also fighting, and have a solid base.
And, although they have to face the economic difficulties caused by confinement, they too could fill the gap left by SAA. Alongside FlySafair, which expressed interest in buying Mango in March, there is another low-cost operator, Kulula, a subsidiary of South Africa’s Comair.
This player, which also operates domestic flights under the British Airways banner (its flights are connected to those of the British airline), recorded its 73rd successive positive financial year in 2019, an unprecedented performance in the airline industry.
In 2019, it won a long legal battle against SAA for unfair competition on its domestic routes, which had been going on since the early 2000s. SAA was ordered to pay 1.1 billion rand.
Airlink’s playing card
“For the domestic market to find its balance, it would be necessary to arrive at a logic of two operators. Maintaining three low-cost operators on the market inevitably drives prices down,” says Sylvain Bosc.
Moreover, it is by relying on the highly profitable regional routes to Zambia, Malawi, Zimbabwe and Mozambique, which SSA served several times a day, that its competitors would be able to make the most of the situation.
“Expectations in the Southern African market – small cabins and a large business customer base – are the opposite of the needs of the South African market, which is based on volume and low prices with a very low unit margin,” adds Sylvain Bosc.
In this context, it is the third South African competitor, Airlink, a former SAA franchisee, which seems best positioned to win. Indeed, it has a fleet of aircraft more suited to serving regional markets than those of Comair, FlySafair or Mango.
“The aircraft of the latter (about 180 seats) operate on routes with high domestic traffic but are not suitable for connecting other southern African countries”, explains the French consultant. “Airlink’s aircraft are smaller (30 to 98 passengers) and the company offers a solid business offer, with adapted service and frequent rotations.”
On the barely smoking ashes of South African Airways, a new battle is set to begin in the skies over South Africa and its neighbours. Once they reopen…
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