South African Airways To Be Reorganized Into Three Business Units

South African Airways has been losing money for years, and there are no signs of things getting better.

South African Airways’ struggles

The airline has an inefficient fleet, an inefficient route network, and there are also reports of a lot of corruption. The airline has missed several payments to creditors, and in 2017 South Africa’s deputy finance spokesperson said that “essentially they are insolvent and should have filed for liquidation.”

The airline went through seven CEOs in five years, which gives you a sense of the situation they’re in. In November 2017 the airline appointed their first permanent CEO in three years, Vuyani Jarana.

Jarana actually seems to have a strategy for the airline, and said he wanted to shrink SAA into profitability. He said he thought he could turn the airline around within three years, which is no small feat when you consider that the airline lost 473 million USD in 2017, not to mention oil prices are rising.

SAA’s strategy was to shrink by cutting money-losing routes, and also to transfer unneeded planes to Mango Airlines, their profitable low cost subsidiary. SAA’s new CEO was so confident the airline will become profitable that in June 2018 he bet R100,000 (~8,000USD) of his own money that he can make the airline profitable within three years.

Unfortunately things haven’t improved much for the airline, as SAA is still in massive amounts of debt. In October 2018 it was announced that the airline would receive another R5 billion (~354 million USD) bailout in order to settle debt, which follows a bailout of R3 billion the previous year.

South African Airways to be split into three business units

It looks like SAA now has another new strategy for trying to turn a profit. I get where they’re coming from, but I question the merit of it. It’s being reported that South African Airways will be split into three business units — international, domestic, and regional.

It’s said that each unit will have its own management, rather than decisions being centralized, which is intended to increase accountability at the airline.

As SAA’s CEO described it:

“We are evolving into an operating model of three business units.

We want to build a new SAA, fit for the future, place the right people in the right jobs.”

So I can sort of see where he’s coming from in terms of wanting to increase accountability. If SAA were run well to begin with, then I think this is a good idea, as there are a lot of successful airlines that take this approach.

But for an airline in SAA’s position, it seems to me like there are major downsides to this:

  • Each unit having a separate management team will almost certainly lead to greater overhead and more redundant jobs
  • SAA as a whole needs to operate more cohesively, rather than less cohesively; breaking up business units creates a system where one unit may be encouraged to do something that’s good for them but not good for the airline on the whole
  • SAA has historically had issues with corruption, and decentralizing things like this seems like it could bring back some of that.

Eventually I can see them trying to sell off one of these units, though in the short term this really doesn’t seem to get at the crux of their problem, and if anything, will only make things worse.

Heck, they’re doing exactly the opposite of what Air France-KLM is trying to do right now.

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

What do you think — does it make sense to split SAA up into three business units, or no?

Comments

  1. This is not unlike how Qantas is run – international, domestic and freight, Loyalty, Jetstar etc all have separate CEOs.

  2. Does ‘the guy’ not have a name??

    Or is the only airline CE you know the name of Ben (Smith) of AF-KLM??

  3. Alexander could be wrong but pretty sure Qantas only has one CEO for the whole airline. Jetstar is obviously considered a separate fully owned entity.

  4. Like you alluded to, it’s probably an intermediate step towards shedding the loss-generating longhaul portion of the airline.

  5. It’s scary to even think about their long haul operations and how much of a loss they generate… Having 16 A340s is a bit of a joke for such an unprofitable airline with (surely) unprofitable long haul routes to JFK/IAD/GRU/PER/HKG…

  6. To make things more confusing there are subsidiaries like SA Air Link and SA Express which fly regional and domestic.

  7. SAA has been on a downhill run for 15 years. Ground employees in JNB are the laziest I’ve ever seen. It’s riddled with corruption like the SA government. Let it die!!!

  8. “SAA has historically had issues with corruption, and decentralizing things like this seems like it could bring back some of that.”

    Yup. Smaller BUs make malfeasance more difficult to ferret out.

    “I fly 5/6 times from USA to Joburg & SAA is almost always the highest priced for business class”

    With the worst hard product and worst soft product.

    SAA is a mess.

    I only fly BA within South and southern Africa if the only alternative is SAA. BA costs more, but is so much better than SAA.

  9. I don’t know what bankruptcy laws are like in South Africa but this seems like a play to protect the regional and domestic wings of the airline (which are likely profitable) from the inevitable bankruptcy of the long-haul wing. By creating this level of separateness between the operations they can prevent the regional/domestic parts from being dragged into the bankruptcy of SAA’s long haul flights.

  10. The questions was “What do you think — does it make sense to split SAA up into three business units, or no?”

    Yes it does. Your arguments are flawed and show your youth in the ‘Corporate World’. You cannot have a Business Unit with practices that go against the corporation. It is illogical. A Busiess Unit (BU) can have practices / procedures very different from the other BUs, but all are in line and in synch with the vision from the corporation.

    It makes it easier to pinpoint shortfalls from a global perspective and it empowers BUs to set their own goals, requirements and even working conditions.

    A Business Unit cannot hide its shortcomings by laying blame outside its own walls; every genemal manager is accountable for his/her performance. Makes it easier to promote or sack employees based on results.

    Now, will this work at SAA? It can’t hurt, given the context.

  11. 1. Privatisation has been explicitly and strongly ruled out, all units remain 100% state-owned
    2. SA Airline is not a subsidiary of SAA, it is a separate privately owned company which operates flights exclusively under SA codes
    3. A lot of detail is not clear yet, such as whether there’ll be separate CEOs or just senior management teams

  12. I’ve used SAA a lot domestic and long haul, no complaints. Service is friendly on board and decent food. I hope they turn it around. Unfortunately some people will always try and put the national airline down for political reasons.

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