Crash landing for South African industry?

Crash landing for South African industry?

Although South Africa’s aviation industry is the most developed on the continent, it is going through perhaps the most turbulent storms in recent memory. Martin Rivers, covering the International Air Transport Association (IATA) AGM in Cape Town last month, discovered an industry creaking under court cases, allegations of protectionism and patronage and commercial losses.

Constant bickering between incumbent and future operators in South Africa underscores how its aviation sector – though by far the most developed on the continent – remains beset by problems. Ten of the 11 independent airlines created since market deregulation in 1991 have collapsed, most recently including 1time and Velvet Sky.

The atmosphere  has become even more heated as the bickering has reached the country’s courts. For example, Comair has already challenged the R5bn ($490m) government guarantee afforded to flag carrier South African Airways (SAA).

“We just have to wait for a court date,” says Comair chief executive Erik Venter, when asked about his next move. He believes that state support enables SAA to undercut fair market ticket prices, driving private carriers out of business.

Unsurprisingly, that viewpoint is categorically rejected by outgoing SAA chief executive Nico Bezuidenhout, who has now returned to his role heading up low-cost subsidiary Mango. “Since 2008/09, SAA has not received capital injections in the form of cash,” he says in response to anti-competitive allegations. Instead, the flag carrier uses its guarantees to underwrite debt in the open market – something which entails a higher cost of capital than is encountered by, for example, private equity-backed airlines.

At SAA, Bezuidenhout’s interim appointment capped a remarkable sequence of events in the flag carrier’s boardroom. His full-time replacement, Monwabisi Kalawe, now becomes the fourth chief executive to serve SAA in less than a year.

Siza Mzimela’s resignation in October 2012 precipitated the short-lived appointment of Vuyisile Kona, who was suspended for allegedly breaching procurement processes. Chairwoman Cheryl Carolus and several non-executive directors also jumped ship last year.

The exodus spurred accusations of political meddling by the South African government, which wholly owns SAA. Newcomer Kalawe’s former positions at Airports Company South Africa and state-owned utilities firm Eskom will only fuel such concerns. But there is hope of a change in direction. During his brief time in the top job, Bezuidenhout developed a 20-year turnaround plan geared towards tackling SAA’s year-on-year losses.

“We spent the last four months drafting this strategy to return SAA to financial sustainability,” Bezuidenhout says, adding that Kalawe must “make [the plan] his own” in order for it to succeed. “We intentionally wrote the strategy in a manner that provides the management of the day with some flexibility, while still giving a firm direction.”

Though the government has yet to give its final approval, Bezuidenhout confirms that the turnaround plan envisages pushing through an urgent fleet renewal while leveraging the flag carrier’s strategic partnerships. Cutting its wage bill will likely be another component, prompting trade unions to begin sabre rattling about industrial action.

On the fleet front, SAA’s decision to order four-engine Airbus A340s at the turn of the century – when oil prices stood at just $20 per barrel, compared with $100 today – has rendered its long-haul routes heavily loss-making. The airline’s 18 fuel-inefficient wide-body jets will be withdrawn “as soon as possible”, Bezuidenhout says, with leased aircraft being brought in ahead of direct purchases. The Boeing 787 and upcoming Airbus A350 are likely candidates.

But geography has also played a part in damaging SAA’s commercial prospects. As an end-of-line destination, Johannesburg does not have the same potential for transit traffic as more central African hubs such as Addis Ababa, Nairobi and Lagos.

Responding to this, the flag carrier took a crucial step forward in May by announcing a codeshare partnership with Abu Dhabi’s Etihad Airways. When the agreement comes into effect, it will entail SAA selling tickets for Etihad-operated services connecting through the United Arab Emirates. This will likely be accompanied by near-term contraction of SAA’s long-haul network – which has already seen routes such as Cape Town-London Heathrow axed – and a renewed focus on profitable trunk routes.

Though codeshares are not new to SAA – it has similar deals across the Star Alliance, as well as with unaligned carriers like JetBlue – teaming up with one of the Gulf mega-carriers suggests an acceptance of a more modest role within the global aviation scene. Bezuidenhout says the scope of the partnership will be up to Kalawe to determine.

“We’re very consciously taking a phased approach to it,” he explains. “The first phase is a very strong codeshare. The second phase may very well transition into matters of semi-collective procurement, skills transfer, knowledge sharing, attacking your cost-base collectively. And from there, it can evolve to a substantially deeper relationship.”

Partnerships are increasingly being pursued across the continent, evoking comparisons with the consolidation of European and American carriers over the past decade. Comair’s Venter is among those calling for safety in numbers. He says that “very high level” talks have already been held with International Airlines Group (IAG) – the parent company of franchise partner British Airways – though he stresses that there are “no immediate plans” to join the group.

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Written by African Business Magazine

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