#182 South African Airways’ labour and efficiency trap needs to deliver a new frontier

KULULA’S LAST LAUGH?– It’s funny when looking back between Comair’s attack on SAA’s competitive position in the aviation space is dictated by government injections. When the case first surfaced, it was politically prudent to defend SAA, but now it does not add up at all. What if SAA was not an airline? What if it moved away from the same game Comair accused it of: “distorting the market”, discouraging market entry etc. Well it is not possible without getting beyond this labour trap, corporate decisions and the new frontier.

How do the headlines read? NUMSA strike downs SAA flights”, “Sacca and Numsa to embark on ‘mother of all strikes’ at SAAand even “How not to manage a national carrier, in three easy stepsamong many others. With a range of actors in the pool: unions, political parties and vested interests; there is much reason to worry about the state of our national carrier and the role of our state. Without dabbling in the past, let’s consider the facts of this issue. 

SAA has not been performing well for some time now, when measured in financial terms. Almost flat revenue, rising costs and debt-chocked business models against the backdrop of a highly politicised public entity. Before Jarana left the company, his turn-around strategy was focused on investing in staff competencies and skills in addition to the traditional framework for restructuring. His approach, here I mean his team, focused on investing in the existing human capital at the enterprise with an aim to realise returns from this effort through improved customer service and internal competencies. In principle, that strategic plan leaned on human capital as a long-term source of development within the organisation. It came as a surprise when the entity, unions and media practically reported that retrenchments are en-route without outlining the strategic context and contradictions underlying the effort to reform. 

Reforming high capital enterprises

It appears that the enterprise is taking a more corporate angle toward reform. However, the principle of reforming state enterprises involves changes in (a) institutional frameworks through policy; (b) management practices and structures and (c) investment strategies. 

Government policy with regard to SAA has focused on the principle of non-preferential treatment in terms of operations (i.e. flight, airport and other operations), but this principle is not applied with respect to its asset base because government is a majority share-holder. Comair (the company behind British Airways and low-fare carrier kulula.com) argued, some time ago, that SAA was distorting the market because of its constant bail-outs and thus, creating a barely level playing field for participants. There’s been little change in this space because there’s not much to change for now: the National Aviation Policy focuses on the principle of free market enterprise, non-discrimination and non-preferential treatment in a competitive aviation environment. 

Management strategy and investment strategies are rather intertwined in tis case, but I’d like to bring some context. A few airlines have tried and collapsed: 1Time a low-fare carrier which gained market share and then suddenly went into liquidation, Velvet Airways (or something like that) appeared and then vanished; Phakalane Airways a provincial carrier in the Northern-Cape came in and apparently collapsed too; and other low-fare carriers suffered the bitter end of the national carrier’s dominance. This is typical for full-service network carriers: ‘dominate’ the skies, lean on alliances, and fill-up the aircrafts for the long-haul. 

Only recently does a business model like the one FlySafair has actually flourish because it is relatively diverse in aircraft operations while only having one airline service embedded in the business. A side note: Safair is the backbone of FlySafair and truly exhibits the importance of specialisation within a specific trade and diversifying in a manner that reinforces the loop between skills, assets and best practice for decent returns and longevity.

When comparing Ethiopian Airways and South African Airways, well it is quite clear that dominance can be artificial through government injections which cushion an organisation from actually taking risks and expanding its operations. Ethiopian Airways is somewhat similar to the Airports Company South Africa in terms of how they do business: great acumen for partnerships, hunger for opportunities and an appetite for risk in a low-margin industry like aviation. 

Challenging decisions for long-term and short-term gains

SAA’s management strategy now, reads like a desperate attempt to cut costs and look viable for an equity partner— which  might be a great corporate strategy; bot not so much for an entity kept afloat by tax payers’ sweat. So, there is some merit in Sikonathi’s argument that SAA needs to retrench; implement reforms and unions need to tamed toward long-term gains, over short-term pains. On the other hand, there’s some risk of entering a R 5bn spiral of strike action costs like the pains Air France KLM had to go through, and still remains exposed to. It’s not about the immediate costs to the airline, but rather the impacts through the socio-political, economic and industry wide value chains if a precedent of this nature is set. At a n organisational level, the Sunday Times reported quite effectively that things could have been done better: salary increases across the board, transparency over retrenchments and all— but they weren’t: “now unions smell blood”. Lurking beneath this narrative are the misconceptions of privatisation, and how it is presented as an easy, quick and painless solution. 

Reorganising the entity and its impact on employees 

Even when government reduces its stake in the airline, it must still learn not to intervene in a manner that distorts the market— and eventually not intervene at all. Meanwhile, there is a need to retain and develop talents and skills in the airline while changing its cost structure and service scope: no-priority treatment at airports, cost cutting in operational design (i.e. fewer lounges, shared lounges, airport boarding gate optimisation, long-term service contracts etc). These should come first before any human being is “cut”. 

In 2017, Financial and Fiscal Commission made numerous proposals to improve SAA’s financial performance which resonate with the LTTS ranging from renegotiating contracts, selling non-strategic assets, outsourcing non-core services, diversifying income from ticket sales, halt non-performing routes are at the surface of operational shifts. Organisationally, one of the recommendations included “staff right sizing” due to the view that with respect to the size of the airline, the staff complement is relatively high; changes in salary perks and re-engineering benefit schemes for employees. They also outline these reforms within the context of a broader sector-wide set of shifts which would be necessary for the airline and the aviation industry in general to realise a market position that is competitive.

This is important because the manner in which the debate is presented in the public makes it seem as if nothing along the lines of restructuring staff has made it to the fore, although SAA’s Long-Term Turnaround Strategy (LTTS) has a pillar associated with redesigning the organisation in which their September 2019 presentation to the Portfolio Committee of Public Enterprises highlights the following:

  1. New operating model and organisational design developed and engagements with stakeholder initiated
  2. Implementation awaiting final Board approval 
  3. Business process reengineering initiated
  4. 68 Cabin Crew exited through voluntary exit options, i.e. voluntary severance packages (VSPs), early retirements and sabbaticals. 
  5. 122 excess pilots released on flying contracts with other airlines, early retirements and/or natural attrition.
  6. Section 189 process concluded at Air Chefs
  7. Ongoing engagement with organised labour

Unless if the carrier has been reporting to the Committee on false information, it appears that engagements with labour unions have been taking place on various issues, specifically (4), (5) and (6).

SAA as an industrial development platform 

Around this time last year, my core proposal was that SAA should not be considered as an airline, but rather as an Aviation Development Catalyst of sort. This reform requires the entity to go through and enter into a new frame of practice, policy, investment and management strategy that goes beyond what other airlines in other countries are doing. Aviation in Africa is set to soar, and if we structure this entity like an airline, we’d focus on shrinking, cutting costs, and improving its financial performance— these are valuable statements in the political theatre. However, as a source of a true gross-value added, the airline needs to take a different spirit, embody the need to catalyse aviation development in Africa and spread its wings beyond government into a new paradigm of practice. This sounds so distant, but with or without the airline, such efforts are essential. 
This requires a series of questions about how the airline is separated from its asset base, like airports — to the same extent as Transnet Ltd. run its ports and terminals; and SANRAL enters into concessions for some of its networks. It appears that the deregulation of the aviation industry in South Africa may have come to early, and the costs are now creeping into its value proposition today. Regardless of the 10 years of terrible business practices, there is room to recover an entity that is not an airline, but something else– beyond SAA.

Thank you for tuning in to this one, comment and share if you’re keen. More to come.

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