Is South African Airways On The Verge Of Liquidation?

I recently visited South Africa, and had the chance to fly South African Airways business class there — on the way out I flew from Frankfurt to Johannesburg, and on the way back I flew from Johannesburg to London. Overall I enjoyed my flights on them, though their business class product was a bit outdated.

SAA-Business-Class-2

I knew SAA wasn’t in a very good financial situation. The airline has gone through seven CEOs in just four years, which should give you an idea of how difficult it is to turn the airline around. In a way, there are a lot of similarities between SAA and Malaysia Airlines, which is in the process of some very big changes.

Cape-Town

However, I didn’t realize just how bad of a situation SAA was in, and that they’re basically on the brink of liquidation — at least that’s what’s suggested by Airways Magazine. Per the article:

In the last several weeks, South African has missed or is in danger of missing several payments to creditors, including a 250 million rand ($18 million) loan that Standard Bank of South Africa has requested immediate repayment on.

Meanwhile, the company faces a September 6 deadline from Hong Kong’s registrar of companies, which has threatened to withdraw SAA’s right to serve its daily Hong Kong – Johannesburg route unless the airline submits financial statements the registrar.

The problem for SAA is that right now its financial situation is so dire that if the carrier submitted its current financials, it would not be considered a viable business and forced to withdraw from Hong Kong anyway. Thus, in order to survive, SAA urgently needs a loan guarantee of 5 billion rand ($350 million), after losing 2.3 billion rand ($161 million) in fiscal 2014, and a still undisclosed amount in fiscal 2015.

I’d recommend checking out the entire article, as it’s a good read.

South-African-Lounge-Cape-Town-Airport - 23

What’s the core of South African Airways’ issues?

  • They have a fuel inefficient longhaul fleet, consisting largely of A340 aircraft, which are gas guzzlers
  • They haven’t been able to raise the capital and/or reach an agreement on which planes to order to modernize their fleet, which is long overdue
  • Their aircraft utilization is horrible, given that for most of their longhaul routes, the plane sits on the ground for an entire day before the return flight to Johannesburg
  • While South Africa is a big and (somewhat) high yield market, it’s otherwise a destination that doesn’t have many geographical advantages, given that you’ll almost always be backtracking if routing through Johannesburg to other points in Africa; Ethiopian’s Addis Ababa hub is much more practical as a hub to Africa
  • There are rumors of misconduct from executives at the airline, which seems to be all too common at state owned airlines

Ethiopian-787

How can South African Airways fix these issues? From my perspective:

  • On the most basic level, they need a more modern fleet, given that the operating costs of the planes they currently fly are significantly higher than the new technology planes out there, like the A350 and 787 (I realize this is a “chicken and egg” situation, since you need money to buy new planes)
  • They need a more efficient route network, and it sounds like they’re considering cutting all longhaul routes except New York, Washington, London, and Frankfurt
  • They could benefit from significant downsizing and perhaps a partnership with a Gulf carrier, where they’d essentially feed passengers to one of the Gulf hubs, and then the Gulf carrier could transport passengers from there (this is similar to what Malaysia Airlines recently did); it could be mutually beneficial, as it would help SAA operate a lean and profitable route network, while giving them revenue for the passengers they’re routing onto a partner airline through a codeshare agreement

Emirates-A380-First-Class-01

I’ll be curious to see how this all plays out…

Comments

  1. @MilesFromBlighty – Etihad and SAA allegedly agreed a deal once already, but it fell apart over certain “non-disclosures” on the SAA side

  2. Yes, they are quite bad for a while, and doesn’t surprise me why they can sell 300 USD fares from Brazil to S Africa.

    Just a correction: Addis Ababa is not geographically better since is in a high altitude. Ethiopian’s advantage is their low cost!

  3. The government always bails out SAA and the CEOs are normally politically connected rather than any good at running an airline. They were once a great airline with a great fleet, one of the airlines that went fully flat in J first and also once had an amazing first class rivaling BA. They have cut so many routes including Argentina, Paris, Amsterdam, Beijing etc. I don’t even think they fly to Sydney. But with service on them what it is in Y and even some flights J, I can’t blame passengers for not returning. Let’s hope they get someone proper onboard that can change the course for them.

  4. From what I have learned from SA locals.

    This is one of the results of putting race ahead of talent, and political correctness ahead of scientific management. So the market is distorted and the talents flee from the nation.

    The problem does not occur only in aviation industry. It takes place throughout all industries, organizations, government, health sector and education and etc. Some sectors are just not as badly hit as the aviation industry.

    Sadly, SA is repeating what Argentina did in the second half of 20th century – ‘neutralizing’ instead of developing.

  5. Not sure how Addis Ababa’s altitude will be a disatvantage when most of of Africa could technically be reached non stop from Addis.
    In fact the bread and butter of Ethiopian are African passengers using It’s Addis Ababa Hub to travel to Middle East, Far East and beyond.
    Yes Jo’burg is on geographical disadvantage just as Lucky alluded to.

  6. SAA is an end-of-the-line carrier, like Qantas. The recommendations you suggested are those that Qantas has applied/applying namely:

    •Changing to a more modern/fuel efficient fleet (QF stayed away from A340s)
    •Cutting all long haul routes except key markets
    •A partnership with a Gulf carrier

    It is an accident of history that carriers from the southern hemisphere struggle with an end-of-the-line issue. It is testament to the continued North/South direction of business – a throwback from a 19th century age of globalisation.

    Countries in the southern hemisphere have always looked to the north. Perhaps the focus needs to switch, where major economies in the south think about how they can promote trade across economies in the southern hemisphere.

  7. It’s definitely an interesting article, I do agree with you, making the fleet smaller and cutting loss leading long haul routes would probably do them some good, it’s probably a pride thing. Like when Virgin Atlantic kept flying to Sydney for all those years just so they could say they did, but never really made any money on it.

    Is it just me or has the airline industry become a lot tougher and more competitive in the last 15 years, possibly because of budget airlines ? I mean its great for the customer, just not legacy airlines.

  8. I am in South Africa at the moment and the subject came up over a lunch with locals, knowing my experience in the airline industry and extensive flying. The consensus was SAA is poorly run because its senior executives are all political appointees and friends of Zuma. They fear the president would never put competent people on the board of directors (there are several longstanding vacancies) nor replace the current president. This all is not unusual in “the new South Africa” and nepotism and cronyism, along with kleptocracy, is more rampant than ever and demoralizing. (It has also led to the defeat of ANC councils and mayoralties in the country’s major cities earlier this month, and sets up the potential that the ANC could lose the next national election.)

    That said, the country cannot afford to let SAA collapse. This is the premier country on the continent and to let its national carrier go down would be the greatest defeat, image-wise and otherwise, of the government, and of a modern African regime. However, just bailing SAA out once again will not resolve the problems listed above. Only the hiring of a seasoned airline manager from outside Africa with a mandate to change the culture will save SAA, and such a move (though done in Malaysia) is highly unlikely to be done down here. Nor is it likely any seasoned airline exec from North America, Asia or Europe would take on the job.

    Is a deal similar to the QF/EK one a possible solution? Paring SAA’s long haul system down to those key routes (JFK, IAD, LHR and FRA) and replacing Airbuses with modern versions or B777s, while EK takes on other international routes through its existing network would be a partial retreat, with SAA maintaining its domestic and regional African routes (though these too lose money). (It’s always been a mystery to me why SAA does not fly from Europe, Asia or North America to CPT while most other foreign carriers do, as this is a far more desirable entry into the country than JNB.)

    Letting SAA go down would further erode the value of the rand, and confidence in the country. That’s how important a symbol and reality SAA is. It’s not just an airline in the sense of how US airlines are regarded. But SAA is also a metaphor for the political collapse and decay of the ANC and general corruption that has taken over since the transition to true democracy and the end of Apartheid. “It’s our turn” has been the ethos of the ANC and the days of Mandela and Mbeki are over and full scale cronyism reigns under Zuma unchecked.

    SAA is merely the most visible example of this.

    I flew SAA from GRU-JNB but will be flying CX home via HKG to LAX and AA onward. Within the country I no longer book or fly SAA because I’ve been screwed over too many times by delayed flights and labour disputes that have made me miss international connecting flights, or miss meetings within the country. Alas I do have a return award ticket next January on SAA from CPT-JNB-GRU so would have to rely on a protected rebooking on LH or LX to get me home if the airline does go under. But I cannot see Zuma letting this happen and the money pit will just get larger and larger…it keeps tens of thousands of people employed at good salaries and massive layoffs would cost the government more in money and respect otherwise.

  9. @DavidB – Actually, you’re a little off. While Cape Town is the far more desirable place for tourism – and I love it – Johannesburg is the place where there is high yield business travel. It is WAY more preferable for all the other airlines. You’ll see up to 3 flights a day in season from LHR on BA, and most major European airlines fly there, not to Cape Town. Delta has dropped CPT, LH only flies there seasonally, Virgin dropped it, Etihad dropped Cape Town. Cape Town is lovely, but the real money is in Johannesburg, and the business traffic, and the larger capacity airplanes (A380, multiple frequencies, etc) go to JNB.
    As far as serving as a feeder to an ME3 carrier, they’ve tried that already with Etihad. From February or March 2015 until January/ February of this year, SAA flew once a day JNB-AUH on a schedule designed to connect to/ from China and the far east, with some European connectivity as well. It failed miserably and is gone.
    Don’t know what to do with this airline. It’s sad. But as others have said, it’s been mismanaged and been seen as the realm of political appointees rather than as a serious airline. In my previous job at a ME 3 carrier in network planning I worked with some people who had left SAA. they were very good and smart, but did say the carrier was run poorly. And the subject of too much political interference. Oh well.

  10. @DavidB, @Jason,

    Two great comments, I learn a lot from reading this blog, especially from the comments from well informed readers. Thanks.

  11. My family and I are flying from JFK to CPT (RT) during Christmas holidays by SAA. Have also paid for local tickets to multiple safari destinations on SAA. DavidB’s excellent perspective has relieved some of my concerns but still worried that this could impact our vacation. Thanks for sharing this emerging information.

  12. SAA is currently chaired by a dubious individual Dudu Myeni who lied about her qualifications, she is currently qualified as a preschool teacher and is rumored to be a ‘girlfriend’ of zuma. She has absolutely no qualifications for the job at hand and is merely looking to fleece the organization of loans and tax monies – I doubt that she has even a basic grasp of the concept of flight or understanding of business management.

  13. They tried a gulf partnership with Etihad last year and it failed. Miserably. They cut their jnb-peak flight and added job-auh so that there was a double daily job-auh flight ( one on etihad, one on sa). This provided full connectivity to the etihad network. It failed miserably and SAA pulled the auh flight within less than a year. I know plenty of people in network planning sa who have said that only fra and gru were very profitable, London was a pit and iAd and JFK were marginal. The real money was in all the routes to the other African countries. Tbd what will happen – it sounds like a mess

  14. The biggest problem of SAA is political interference and given the top job to those who knows nothing about aviation and this is gradually spreading into other sectors. I hope the people in helm of affairs realize this and act fast.

  15. Interesting situation. Seems like airline isn’t exactly on the straight and narrow, but hardly great for a continent lacking in reasonable and available air service.

    https://www.africanindy.com/business/entire-air-zimbabwe-fleet-grounded-8651377. Best planes from its money-making routes have history of being seized to cover debts, so they lose potential revenue streams. “Ethiopian Airlines, Rwanda’s RwandAir and local budget carrier Rainbow Airlines have introduced flights, filling the vacuum left by Air Zimbabwe. Fastjet, Africa’s largest budget airline, last week increased the number of flights on the Harare-Victoria Falls route. Kenyan Airways has also announced plans to enter the fray.”

    Countries general aviation – Venezuela 2.0 in Africa. “This week, Australian carrier Qantas Airways told travel agents in Harare to stop selling tickets for its flights after the International Air Transport Association warned that it has become increasingly difficult to move funds out of the country.”

    https://www.bloomberg.com/news/articles/2017-07-11/air-zimbabwe-is-said-to-cut-more-than-a-third-of-its-workforce doesn’t bode well for future ops.

    https://www.newsday.co.zw/2017/06/26/air-zimbabwe-rebrands-acquires-4-boeing-777-200-planes/. So they’re taking Malaysia’s old 772s to set up revenue routes again? Somewhat reasonable with a good operational plan, but…

    http://www.herald.co.zw/airzim-retrenches-200-workers/ restructuring so ‘Harare is not viewed as a destination but a transit to other parts of the world’? Sure that’ll work with their geographic.

Leave a Reply

Your email address will not be published. Required fields are marked *