#195 South African Airways— the catalyst leaks

‘WONDERING BOOM’: How many regional airports serve the private sector’s flight sequences, local area cuisine and culture, and provide the community with a bare taste of the aviation industry? Raw and uncooked airports waiting to be primed for development, investment and activation are anchored all over South Africa. The missing link is somewhere between Airlink and SA Express-type regional airlines. One of the core limitations has been setting the appropriate prices, and underestimating the market. Can’t wait for these to take off.

Between 2014 and 2017 SAA was on the edges of transition toward broadening its role in crucial value chains. This most interesting one is the partnership with Sunchem SA, which is a research lead firm with a focus on non-GMO biofuel industry transitions. The first project was launched in 2014 with SAA involved in Project Solaris with SkyNRG and Boeing and now in 2019 it is expanding to airport operations with Swissport at OR Tambo International: reducing both the ground and aeronautic emissions through sustainable fuel through Reya Fofa. Between these two periods of environmental and supply chain reforms, the SOE’s been winning awards for customer service every year, and facing a financial situation which stable leadership and consistent strategic political support to implement have been lacking. This was exacerbated by the ‘fall-out’ with the SCOPA amidst an escalating union strike which was shrouded with false allegations and lead to a costly decision to retain labour stability.

The cost of labour stability

In the short-run, two major issues are of value. First, the strikes ended with an agreement for a 5.9% increase in the total cost of employment back-dated to 1 April 2019, and paid to employees between February, March (April to Sept 19) and April (October 19 to Jan 20) 2020. The second layer is that Section 189 A of the Labour Realties Act seems to be deferred to the 31st January 2020, which is usually associated with dismissing employees for operational reasons (SAA has already been preoccupied with this process in other divisions). Embedded in this is a Task Team which aims to practically reduce the costs of operations through various initiatives— the impact of these is articulated in their statement: “Should the Task Team be able to realise savings, a percentage of the after-tax savings may be ring-fenced and paid to employees in the Bargaining Unit. The Task Team will discuss and agree on a formula for such payment”. It is important to ask why this was not and is not part of the standard business practice for SAA, in which labour efficiencies are cycled back to the employees who are pushing the company to tangibly greater heights.

‘FLYING SAUCER’: This giant disc reminds me of a similar, but smaller structure in Kwaggasrand, in Pretoria– caught this one in France on my way out. Getting in to the airport here takes a train ride, and then literally moving in circles to explore the space and rise up to the terminals through these giant tubes. A visually appealing strip, but also a symbolic structure drenched in meaning, stranded there: but landed here.

Business rescue opportunity

These were among the primary ingredients to the spark which lead to business rescue— but they are not the fundamental source of the problem. With slow growing average-seat kilometres, at 1.8% in the industry, and slower revenue passenger kilometre growth at about 3% for 2019 the market is reaching a saturation point. At market saturation, structural limitations tend to be the source and load-factors reaching their all time high at 81%, with Africa at 70% for November 2019 are symptomatic of this saturation point. New capacity and service offerings are needed.

Strategically, airlines compete outside of the price points and focus on the customer service. Now imagine this: leading airlines with large cashflows have the edge to buy newer aircrafts at every cycle; customer service is not just about crews but also about the experience (i.e. technology, noise etc); and the airline has to maintain an affordable operating strategy. Building a competitive edge requires a fleet renewal strategy which is not only focuses on reduced emissions, higher efficiencies (i.e. lower operating costs), but also easy transition for flight crew and pilots— hence fleet commonality is crucial. One of the bi-products of introducing new transit units (i.e. aircrafts) to an existing system is the additional capacity. In the rail transport context, this causes scheduling problems due to higher speeds; but in the aviation context it causes problems when it comes to containing additional capacity. In their 21 January 2020 statement, SAA simply outlines some changes in its domestic offering due to additional capacity from the test flights with the new larger aircraft. International flight changes are apparently due to passenger demand changes. However the business case for reducing fuel consumption by 20% or more over long-haul and international flights may result in significant cashflow savings for the airline— if not off-setting the carbon taxation costs.

Thank you for reading this piece. Big shout out to Ron Derby and his team on PowerFM for the discussion last-night on the topic.

A note from Halo de Feijter on Dec 19, 2020

Boeing and SAA to fly planes on Tobacco Fuel, by Eduard Gismatullin on Bloomberg, Aug 6, 2014.

Monthly Passenger Report from IATA

Monthly Freight Report from IATA

Headline: Up to 38 flights cancelled by cash-strapped SAA, by Kgothatso Madisa, 21 Jan 2020