CAPE TOWN // The end of the line, or the gateway to Africa – these are the two possible outcomes that face South African Airways (SAA) and which path it ultimately follows could rely on Etihad and Emirates.
SAA is one of the world’s oldest carriers. It took to the skies with a leaping springbok as its emblem in the 1930s and is today one of the largest on the continent.
However, these are not good times for the airline as it struggles to meet costs and is forced to rely on its only shareholder – the state – for support. Among the problems with which it has to contend is an ageing fleet that is pushing up its fuel and maintenance bills, while its competitor airlines in Kenya and Ethiopia use modern aircraft that are much more economical to operate.
At the same time, SAA also has to fulfill a wide variety of political and social objectives that the state has laid down for it. The airline must adhere to targets to support black-owned suppliers, it must also develop routes to African countries in order to meet government objectives to develop relations with these states, even if the business case to do so is lacking.
Collectively these troubles have pushed the airline to the edge of financial survival.
“A change of direction is clearly required,” says Joachim Vermooten, an aviation consultant and analyst. “This would require normal commercial business objectives for SAA, which would require clear focus on profitability as a single objective instead of the bewildering number other non-commercial objectives.”
Mr Vermooten notes that passenger traffic through South African airports for intra-Africa travel is sparse by comparison, as low as 4 per cent of domestic traffic through South African airports. This means demand on African routes will not be able to support substantial deployment of long-haul wide bodied aircraft plying routes with too many empty seats.
SAA generates average income of 30 billion rand (Dh8.85bn) a year, but in 2014 posted a loss of 2.6bn rand. The government agreed to step in, as it has many times before, and added 6.5bn rand to its credit guarantee, bringing it up to a total of 14.5bn rand.
In January SAA announced a 90-day turnaround plan that included cutting loss-making routes to Beijing and Mumbai and introduced a new route to Abu Dhabi. It will also move its Johannesburg-Washington stop-off point from Dakar, Senegal to Accra, Ghana. According to the acting SAA chief executive Nico Bezuidenhout, the changes could save as much as 400 million rand a year.
SAA and Etihad launched a daily service between Johannesburg and Abu Dhabi on March 29, to complement Etihad’s existing flights between the two cities. The airlines first agreed an alliance last summer.
The Abu Dhabi-Johannesburg route is crucial to SAA’s turnaround plan and the codeshare partnership between the two will also double SAA’s intercontinental reach, adding almost 30 additional destinations.
"The partnership between Etihad Airways and South African Airways has been a resounding commercial success for both airlines," James Hogan, Etihad Airways' president and chief executive, said in December, announcing the extension of the agreement.
“Since our codeshare flights were first on sale in July last year, we have placed more than 20,000 passengers on to each other’s flights, and there is huge potential to significantly increase that number as the cooperation is developed in the coming years.
“Importantly, our expanded partnership will enhance the benefits that Etihad Airways and South African Airways offer to business and leisure travellers, such as improved connections, enhanced opportunities to earn and redeem miles, and a more seamless experience,” Mr Hogan adds.
Mr Vermooten agrees the tie-up has boosted visitor arrivals.
“There is no doubt that tourism to South Africa increased substantially as a result of substantially increased market access through traffic rights granted to Gulf states,” he says, adding that traffic along this route at times has exceeded inbound visitors from older, more established routes.
SAA, meanwhile, says indications are that its Arabian Gulf business is looking good. “While it is early days, indications are that traffic between Johannesburg and Abu Dhabi is growing along with the attendant benefit of onward code-sharing to both SAA and Etihad destinations,” says Tlali Tlali, a spokesman for SAA.
Overall, SAA’s passenger volumes have grown by 6 per cent in the three months since its new financial year started in April.
Other routes are also in the works. The airline is reportedly in talks with a Hong Kong carrier and an agreement is expected in the next few months. A link-up with Avianca Brasil will be announced “in due course”, says Mr Bezuidenhout. Another potential partner is LOT Polish Airlines, he adds.
Meanwhile, after a period of turbulence last year, talks with Emirates to enhance its existing codeshare agreement with SAA are ongoing.
Last month, news reports in South Africa said a 2 billion rand (Dh607.6m) deal to save SAA from possible bankruptcy fell through after a meeting between the two airlines in Paris.
“While the conversation is ongoing between management of SAA and Emirates within the context of the existing relationship, and the scope of the conversation between the two carriers is well within positive territory, circumstance has thus far not allowed for finality,” says Mr Tlali.
Last year the South Africa government threatened to ground Emirates over a dispute relating to the number of flights the Dubai airline could depart from Cape Town.
“South Africa’s always-political overtones in anything aviation continue to divert logic and sound policy,” says Will Horton, a senior analyst at the Centre for Aviation.
However, relations have improved since. “I am awaiting the board to conclude their deliberations on the matter for us to move forward on it,” Mr Bezuidenhout says. “I think that we’ve negotiated a good position for SAA.”
Mr Horton agrees that keeping Emirates onboard is important. "A Middle East partnership brings more opportunities and turns a competitor into your partner. Emirates is the second-largest international carrier in South Africa after SAA. Emirates is bigger than Air France, KLM and Lufthansa combined," he says.
It is also not outside the bounds of possibility that SAA will sell a stake to an equity partner. It has already previously done so: in 1999 Swissair paid US$230 million for a 20 per cent share in SAA but, three years later, the African carrier bought it back for 27 per cent of the purchase price after the European airline declared bankruptcy in the wake of the 9/11 attack in New York.
Mr Horton says “an equity stake elevates the partnership and could be a card to play at the board level if the [South African] government is blocking strategic developments”.
Were a sale to take place, it would probably be to a strategic investor, such as another airline, Mr Bezuidenhout says.
“Do I see that happening in the short-to-medium term? Probably not,” he admits. “But ultimately that remains a shareholder prerogative.”
Whether other airlines would be interested is another matter.
“It would be difficult to find any investor that would be prepared to invest in SAA’s non-commercial objectives as most investors base their decisions on reasonable returns on investment,” Mr Vermooten says. “In these circumstances it is doubtful that SAA can be privatised.”
For now, the airline is likely to focus on cost-cutting. About 700 employees from SAA and SAA Technical – the aircraft maintenance and repair company – are expected to have their contracts terminated. Efforts are already paying off. SAA’s operational expenses are 14 per cent lower than a year ago and a saving of 1.25bn rand will be made in the coming financial year, it says.
Still, it remains to be seen whether SAA will hold on to its status as Africa’s foremost carrier but Etihad and Emirates may prove crucial to the outcome.
business@thenational.ae
* with agencies
Follow The National's Business section on Twitter
