South African Airways has been in a terrible financial situation for a long time. The airline has been losing money for seven years, and there are no signs of that changing. While South Africa should be a big aviation market, the airline has an inefficient fleet, an inefficient route network, and there are also reports of a lot of corruption. The airline has gone through seven CEOs in the past five years, which gives you a sense of the situation they’re in.
As I wrote about last August, SAA had missed several payments to creditors, including an 18 million USD loan that a bank wanted immediate repayment on. On top of that, Hong Kong’s registrar of companies wanted SAA’s financial documents, but they knew that if they submitted those, their rights to serve Hong Kong would be withdrawn. Yeah, it’s that bad.
The airline even took out an ad in a newspaper asking for long term funding.
It has been almost a year since I last wrote about SAA’s situation, though it looks like things are no better. Today the BBC has a story about SAA’s dire financial situation. Per the story:
Last month, the Treasury paid out £125m to settle a loan from Standard Chartered Bank‚ which the bank had refused to extend.
South Africa’s Finance Minister, Malusi Gigaba, has disclosed that SAA asked the Treasury in March for a £560m recapitalisation. He is expected to give an answer by October.
Alf Lees, the deputy finance spokesman of the opposition Democratic Alliance, said: “Essentially they are insolvent and should have filed for liquidation.
“We believe that the directors are in breach of the South Africa companies act by continuing to trade recklessly knowing that SAA will not be able to meet its financial commitments and without any guarantee that the shareholder (the South African government) will be prepared to continue to bail them out.”
South African Airways’ A340 business class
On top of that, the cabin crew and mechanic unions are threatening to strike over pay, which could cause even further issues for the airline.
We’ll see how this all plays out, but it sure seems like South African Airways is basically having the same issues as Alitalia. On one hand the country needs a global airline, though on the other hand, in its current form the airline will just keep losing money. I’m not sure they’ll be able to make any radical changes without failing fully and starting over.
For now I’d feel pretty comfortable still booking tickets on SAA. It seems that the government hasn’t totally given up yet, and for the time being will keep supporting the airline, even if it isn’t going anywhere.
But I’m afraid South African Airways’ path to profitability is probably very similar to Malaysia Airlines’. If they’re not going to liquidate, the airline needs to shrink its way to profitability, rather than grow. It seems like they’re best off forming a joint venture with a Gulf carrier and focusing on a strong regional route network, rather than trying to compete on longhaul flights, where they have a significant disadvantage. This is similar to what Emirates and Qantas have done, which has worked out brilliantly for both airlines.
South African Airways to Scale Back in Three-Year Break-Even Bid https://www.bloomberg.com/news/articles/2018-03-12/south-african-airways-to-scale-back-in-three-year-break-even-bid
Shrinking they are.
We have ticketing for internal routing during the 2nd Quarter of 2018 . How likely is it that SAA will execute these flights or be belly up by then ?
I flew them on a short Johannesburg to Cape Town flight last year. Wanted to try out business class on their A340-600, it was decent but I'm not sure I'd want to be stuck in it for the JFK-JNB route.
The only apt comparison here is the Italian who commented about the government never letting Alitalia go belly up and explained the culture and local perception of the situation.
My own comments. I started my travel life on SAA, but I've not flown them for 15 years. Mostly because there are invariably cheaper options on airlines that provide a better experience. So my comments are based more on the way SAA fits into the bigger...
The only apt comparison here is the Italian who commented about the government never letting Alitalia go belly up and explained the culture and local perception of the situation.
My own comments. I started my travel life on SAA, but I've not flown them for 15 years. Mostly because there are invariably cheaper options on airlines that provide a better experience. So my comments are based more on the way SAA fits into the bigger political landscape in South Africa.
Staffing levels
The airline can't decrease their staffing levels because the unions and ultimately the government won't let them reduce their staff count. The country has a 27% unemployment rate and the voting public are led by the unions in deciding who to vote for at the next elections. Currently shifts are expected in the 2019 elections and the ruling party is doing its utmost to shore up its support base.
Also, the powers that be have a more socialistic approach to government. Rather give too many people work, than worry about the capitalist issues of profitability. As an odd comparison, currently there are studies in the agricultural industry identifying which crops are best to cultivate. The criteria used is profitability to the farmer and labour intensity. I think most would agree from a western perspective, profitability should be the highest priority and possibly the second priority would be low labour intensity to reduce potential labour disputes and all the other issues of having a large labour force. However, the purpose of the study is to ultimately find crops that have a high labour intensity (first priority) and as a second priority, are financially viable (viable as in able to achieve breakeven point rather than achieving high profitability. ......... I therefore do not believe that reducing staff is an option.
Cash cow for corrupt officials and the benefactors of State Capture.
As with Alitalia, there are many factors that have nothing to do with travel, planes or airlines. Think about the 2015 switch of 10 narrowbody planes (think they were A320's) to 5 widebody planes (A330's?). At the time, knowledgeable people argued that the company needs more narrowbody planes to service their profitable short to medium haul and that the company already had too many widebody planes to serve their unprofitable long haul routes. .... However, the deciding factor in buying the A330's vs the A320's was not SAA's needs but rather the financial structure of the deal and the advisors. The A330 deal had advisors who would reap substantial fees for a company owned by a Indian family who are in business with the president's son. At the time it was stated the airline could not afford the A330 deal nor were the aircraft needed. The only reason for the deal (at the risk of digging the company's grave deeper), was the substantial fees paid to advisors.
The current Finance Minister, Malusi Gigaba is mentioned in the above post. He does not have a background in Finance and is basically a rubber stamping puppet who just rubber stamps new equity and loans to government owned enterprises. These enterprises like SAA, then pay fees or award tender contracts to companies associated with the relevant Indian family and the president's son. So in short, Gigaba will keep recapitalizing SAA as it is only a vehicle to pump money to the benefactors of State Capture.
No airline story here.
Curious, many pro BA comments here. I flew Virgin Atlantic from Joburg a few years ago and found it all round very good experience
@ No Name, thank you for making my point for me, a widebody operating flight from JNB to LHR, FRA, MUC, HKG etc. will require less ground staff to service it than a single 737 doing JNB-CPT-JNB turns all day long.
But just to make my point again, let's look at Ethiopian Airlines, 92 aircraft, about evenly split between wide and narrow body aircraft and 12,700 employees. So SAA operates 2/3rds the aircraft that...
@ No Name, thank you for making my point for me, a widebody operating flight from JNB to LHR, FRA, MUC, HKG etc. will require less ground staff to service it than a single 737 doing JNB-CPT-JNB turns all day long.
But just to make my point again, let's look at Ethiopian Airlines, 92 aircraft, about evenly split between wide and narrow body aircraft and 12,700 employees. So SAA operates 2/3rds the aircraft that ET does with roughly the same number of employees. I'll stand by my earlier post.
@Michael
And how many widebodies operating longhaul routes does Alaska Airlines have?
You can't compare the airlines with just the numbers they operate, over half the SAA fleet are widebodies.
Sure SAA probably have to many employees. Most the extra bodies are probably in ground jobs where they do little or noting, and probably got their jobs as a political favor.
Legally, there is a subtle but important difference between Alitalia and SAA. The EU prohibits government funding of airlines (with a few exceptions, which Alitalia has exhausted). In South Africa there is no such regulation, so the government may actually respond in a positive way. In fact, the finance minister has already been replaced in this context and the new/current one seems rather positive about recapitalization. Probably, in order to keep the face, it will...
Legally, there is a subtle but important difference between Alitalia and SAA. The EU prohibits government funding of airlines (with a few exceptions, which Alitalia has exhausted). In South Africa there is no such regulation, so the government may actually respond in a positive way. In fact, the finance minister has already been replaced in this context and the new/current one seems rather positive about recapitalization. Probably, in order to keep the face, it will not be exactly the terms asked by SAA, but may be a bit less and with some conditions attached.
They are horrible and I agree with Michael too many employees you can see that on the flight line and checkin counters, let alone what must there behind the scenes.
British has been the mainstay to get in and out of SA and of course the ME3 are there. I usually take EK from the west coast and if going on around will take British or KLM. There is just too much corruption in SA...
They are horrible and I agree with Michael too many employees you can see that on the flight line and checkin counters, let alone what must there behind the scenes.
British has been the mainstay to get in and out of SA and of course the ME3 are there. I usually take EK from the west coast and if going on around will take British or KLM. There is just too much corruption in SA which is a shame it's a beautiful country and Cape Town is one of the best cities in the world to visit. Camps Bay!
I'm sure the best case senario is that they refund your points and taxes.
What if I use Aeroplan miles now to book a business class ticket on SAA for July 2018, and they stop flying before that? And let's assume there is no award space on other carriers. What will Aeroplan do? Will they buy a revenue ticket for me? Or will they just cancel the ticket?
Their biggest problem is too many employees. They have over 11k employees to run an airline with less than 60 aircraft. For comparison Alaska Airlines has just over 12k employees to run an airline with 150+ aircraft (Pre-Merger). So yeah, shrinking to profitability is the way to go, starting with firing the excess staff.
SAA is a terrible carrier, and I continue to avoid them at all costs, flying British Airways for all southern Africa travel when I can, and I have for well over 10 years now.
That said, if SAA collapses there will be a serious shortage in capacity to/from South Africa as well as regionally and within South Africa. That would be terrible. Especially for me, and that's what this blog is about, right? :)
I...
SAA is a terrible carrier, and I continue to avoid them at all costs, flying British Airways for all southern Africa travel when I can, and I have for well over 10 years now.
That said, if SAA collapses there will be a serious shortage in capacity to/from South Africa as well as regionally and within South Africa. That would be terrible. Especially for me, and that's what this blog is about, right? :)
I don't think the government will let it collapse, even now. But you're right, they're going to need to shrink, not grow their way out of this.