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?