Friday, August 4, 2017

How to fix South African Airways - my personal opinion

According to a recent BBC article (, South African Airways is once again figuratively bankrupt and requests another major government bailout to ensure its short term survival. Over the past five years, it is the airline which has had the most number of CEO's leaving the post amidst a variety of allegations. Time after time all new business plans that have been submitted and approved either dont get implemented or get so half way through only.

Make no mistake about it, the South African market demand overall is high in volume domestically as well as for some international routes, both long haul and medium haul. However like majority of leisure, VFR oriented markets, yields have been a core problem in lieu of increasing competition especially on the long haul front to EU and Asia. A lot of their prime domestic + intra Africa routes make good money and see high yields but its the long haul operation that is a big financial killer for the airline especially so many destinations are still flown nonstop using the gas guzzling A346s/A343s.

Mentioned below is my personal input on how (if the Pretoria Govt wants to) can implement a quick fix solution for SAA which will cost some money in the short term but will have long term cash saving benefits considerably:

1. SAA's fleet of 8 A343s + 9 A346s need to be grounded by end of IATA W17 season i.e. 24MAR18.

2. A tender should be placed immediately to dry lease A332s and A333IGWs (only) to replace these 17 A340s asap. Sri Lankan Airlines has 4 relatively new and in good condition A333IGWs which are in a 2 class 297 seater configuration. These aircraft can operate on flights up to 10 hours nonstop from JNB airport. In addition, airlines such as Turkish too (who are in a bit of a cash crisis) wont mind dry leasing out few A333IGWs or A332s to generate guaranteed cash. Another airline that has spare wide body capacity available especially if the on going political crisis in the Gulf continues is Qatar Airways. They may have few A332s to dry lease out to SAA if an agreement can be reached.    

3. Currently, there are 2 destinations that are operated nonstop by SAA's A340 fleet which the A332/A333 cannot fly to i.e. JNB-JFK and JNB-HKG each respectively. 

For JFK, if a deal can be reached to lease in additional A330s to replace the gas guzzling A340 there is an easy solution as SAA should look to operate JFK via DKR on a daily basis using an A333. In total, the block time is 2 hours 10 minutes more round trip JNB-DKR-JFK v.v. versus JNB-JFK-JNB but the operational cost savings of using the A333 versus the A346 on a 30 hour plus route (round trip) is huge. In this manner, SAA would fly JNB-DKR-JFK daily with an A333 and its JNB-ACC-IAD 4 weekly + 3 weekly JNB-DKR-IAD would become JNB-ACC-IAD operated daily also using an A333. 

Approximately, an A346 costs US$ 526,000 at full costs to operate JNB-JFK-JNB whilst an A333 approximately would cost US$ 456,500 to operate JNB-DKR-JFK-DKR-JNB thus a daily savings of US$ 69,500 equating to US$ 25.36 million annually.

As far as HKG is concerned, its operated daily using an A343 with the flying block time being 13:05. Unfortunately, SAA needs to make the hard call and suspend flying to HKG for the foreseeable future as the A332/A333 cannot operate this route nonstop from JNB airport. There is no point operating one stop via MRU or any other point as it will result in a big competitive disadvantage hence until it can get its finances in order, SAA should look to code share with SQ and CX on the HKG-JNB-HKG sector. Sometimes, tough calls need to be made which SAA did in 2015 by suspending BOM, EZE and PEK so once again over here too, HKG needs to get the axe as there is no way the route can turn a net profit using an A343. 

4. Routes such as FRA and MUC which are 10:40 in flying time are just 10 minutes longer than JNB-GRU which is 10:30 and that is flown currently using an A333 so FRA and MUC too can become daily A333 services instead of costlier A346s (FRA) and A343s (MUC). Frequency reduction to MUC should also be implemented to save on costs i.e. from daily to 4 weekly maximum and only in peak winter season (DEC-FEB) when demand is ultra high should daily flights be operated.  

The costs saved by downgrading FRA from daily A346 to daily A333 is US$ 25.5 million + US$ 11.8 million for MUC from daily A343 to A333.

5. PER-JNB-PER is operated daily by an A343 however this route needs to be downgraded to an A332 as the A333 wont be able to operate with a full payload out of PER to JNB as the flying block time is 11:15. 

The costs saved by downgrading PER from daily A343 to daily A332 is US$ 18.47 million net.  

So in total this adds up to be US$ 81.13 million saved by downgrading flights from A340s to A330s on an annual basis !

6. In its short haul fleet, SAA for silly reasons operate both A320s and B738s on domestic + intra Africa routes. In any disciplined airline, fleet standardization is a key driver in reducing costs and increasing profits. Initially, SAA had B738s operating on its short/medium haul routes but then was forced into placing an order for A319s/A320s mysteriously which makes no commercial sense having two aircraft of the same type operating similar routes. Due to JNB's higher altitude, the B738 is a more stronger and capable aircraft versus the A320 especially if the flight time exceeds 4 hours. However considering that SAA's current narrow body mainline fleet has only 7 B738s versus 20 A319s/A320s (combined), it is best to focus it around the A320 family and sell its 7 B738s. In this way, if fleet standardization can be implemented, SAA's fleet would only consist of two types of aircraft i.e. A320 and A330 families which also have a cross crew qualification certification allowing pilots of both aircraft types to fly one or the other thus making it easy to roster and maintain across the board. 

7. SAA must lobby their local government to restrict access to the Middle East carriers into South Africa as they have taken away a lot of the market demand by dumping way too much capacity combined with offering sometimes predatory low fares on long haul market segments. For EK, SAA must lobby the Pretoria Government to restrict them to operate JNB on a double daily basis only + 11 weekly to CPT, daily to DUR and nothing more. EK currently operates 4 times daily to JNB and though it sees high S/F year round, its fares on long haul segments especially out of JNB are quite low in economy class. To CPT, EK operates triple daily which again is very excessive for a carrier that is heavily reliant on transfer traffic via DXB rather than P2P. 

8. If all of the above cannot be agreed upon and implemented by December 2017, then the South African government should not waste tax payer money keeping the airline afloat and should look to just shut it down and allow a foreign airline to launch a new privatized version of SAA and pay an annual royalty to the Pretoria Government thus generating guaranteed income for the state versus incurring massive losses year after year. A foreign carrier looking to invest in the South African marketplace must be allowed full independence and no government control. They must not be forced into taking on 100% of all of SAA's staff but rather only the most qualified and best fit to perform their job functions. 

9. If even point # 8 cannot be agreed upon by the Government then must look at the Swissair successful model of shutting down the airline and re-emerging under a new name with a clean balance sheet which has no legacy debt included in it. In addition, the newly emerged airline should not be allowed to have in its fleet the A340s under any circumstances. For this to take place, the government must take the punt and absorb all of SAA's historical debt and losses.

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