What might a rescued SAA look like?

As National Treasury continues to scrounge around for the R2 billion in funding desperately required by ailing South African Airways (SAA), the state-owned airline offered some indication this week of what it may well look like should it emerge from the business rescue process intact.

Read: Government still looking for R2bn to save SAA

Chaos followed an advisory issued by Flight Centre – and not by SAA itself – on Tuesday morning claiming that as many as 19 flights had been cut. The actual number, according to an official statement issued by SAA after 11am, was 28 domestic flights and 10 international ones. All affected flights are scheduled for this week (including some scheduled for yesterday).

Read: SAA cancels 38 ‘low demand’ domestic and international flights

Eight flights (four return) between Johannesburg and Cape Town have been “consolidated” as the airline is currently “operating training flights for pilots on the new state-of-the-art Airbus 350-900 aircraft on this route, before transferring the new planes to international routes”.

This, it says, has “resulted in temporary surplus capacity on the route”.

All five weekday flights to and from Munich (10 in total) have been cancelled.

‘Responsible strategy’

It says these decisions are in line with SAA’s usual policy of reviewing flights and consolidating services with low demand. “Furthermore, during the current process of business rescue, these cancellations represent a responsible strategy to conserve cash and optimise the airline’s position ahead of any further capital investment.”

Expect more changes as SAA says it “will be reviewing further possible flight schedule amendments over the coming days”.

The Johannesburg-Durban cuts are telling as one of the three slots affected is at a peak time: the 06:30 departure to Durban (affecting a total of four flights this week). The problem is that SAA then has a plane returning to Johannesburg at 08:05 – only arriving at 09:05, which is too late for business travellers.

Low-cost ‘sister’ airline Mango has badly cannibalised demand on SAA as it has a flight operating in each direction that lands in each city at around 07:00. The same happens between 16:00 and 18:00, cannibalising business demand in the afternoons too. There is also competition on this route from rival airlines, including Kulula and FlySafair.

Two years ago, this writer argued that the domestic flight cuts announced by SAA – effectively chunks of the schedule were offloaded to Mango – did not go far enough.

There is simply not a big enough market for full-service travel on domestic routes (plus the longest flight in the country is a paltry two hours).

The only reason business class services persist is because of the free flights gifted annually to government ministers, parliamentarians, their spouses and children, and freebies doled out to SAA retirees. Comair’s British Airways service would likely look very different if these perks (which can be used on BA and SAA, payable by the taxpayer) disappeared.

Read: SAA rescue supremo faces long to-do list

The business rescue practitioners (and various executives at SAA) obviously know exactly which flights and routes are profitable. It is not a stretch to imagine that the Johannesburg-Durban route is not one of those. Even Johannesburg-Cape Town (one of the busiest domestic routes in the world) is likely only consistently profitable when parliament is not in recess and during peak holiday periods.

What may emerge from the business rescue process – the practitioners have to publish a plan by the end of February – is that most if not all of SAA’s domestic routes are offloaded to Mango. Mango already operates more flights to and from Durban than SAA.

Cape Town is a more challenging decision, given the sheer size of the route, but there is no room for sympathy in a business rescue process.

The services to Port Elizabeth and East London (effectively two return flights per day to each destination) will surely be shuttered as soon as practicable. Mango already operates an average of four return flights a day to Port Elizabeth. Introducing a daily return flight to East London will solve that problem.

SAA has no business operating a full-service domestic airline.

It just cannot get the unit economics per seat down to levels anywhere close to those of low-cost airline Mango (and Mango is likely not the most cost-effective operator in the market).

Why would you choose to fly passengers around domestically at structurally higher costs?

The business rescue plan will make it clear just how nonsensical this ‘strategy’ of SAA’s has been.

Of course, there are aircraft lease obligations that will complicate matters, but the plan will surely point to a rapid exit from the domestic market.

Value to Brand SA … and Africa

In January 2018, this writer also noted that: “Running SAA as a long-haul (and regional) airline is a perfect fit with government’s logic for wanting to keep a national flag carrier: the almost unmeasurable branding value it brings. Sure, there are arguably better ways of achieving this, but it is unlikely the state’s prevailing worldview will be changed.”

SAA’s regional (African) operations are likely its most profitable. On many of these routes, it is the sole direct operator, meaning that the only alternatives involve routing via Addis Ababa, Nairobi or Dubai (this has mopped up some demand and kept a lid on pricing). Despite the premium it is able to charge, the problem with these routes is that demand is far smaller than, say, the Johannesburg-Cape Town route (or even Johannesburg-Durban).

The regional schedule is not small, however. There are three daily return flights to Harare, Windhoek, Lusaka and Maputo, two daily return flights to Windhoek and at least daily flights to a number of destinations, including Lagos, Victoria Falls, Livingstone, Nairobi, Dar es Salaam, Mauritius and Lilongwe.

As part of numerous turnaround plans, regional routes have already been ‘rationalised’. Depending on what the numbers say, expect a few more routes to be dropped or frequencies reduced.

Could Mango, which already has the Zanzibar route sewn up, be favoured to operate on a leisure route such as Mauritius, for example?

Here, there is a careful balance to be had between preserving artificially high margins (with a structurally high cost base) and offloading these to a low-cost operator that would compete at a different level of the market. Bookings via SAA, especially inbound international ones, would operate seamlessly under its existing code-share agreement with Mango.

International routes

When it comes to international routes, the “temporary” cancellation of flights to Munich may yet become permanent. While there is incredible tourist demand from Germany, it is highly seasonal. Frankfurt is the busier route, and it will probably cost SAA less to fly those affected passengers to Frankfurt on its service and route them onwards on another airline than it would to fly nearly empty wide-body Airbuses to Munich.

Competition has intensified in recent years, and Lufthansa already operates separate daily flights to Johannesburg and Cape Town.

It is not clear which of SAA’s other international routes (New York, Washington via Accra, São Paulo, London, Perth and Hong Kong) are marginal or unprofitable.

It has invested heavily (and has been patient) in establishing a West African base in Accra and it is unlikely it will give up on this strategy or route. London is likely still profitable, but only because of demand (as is likely the case with New York). São Paulo is a tough call as there are practically no other direct flights between the two continents, which likely still keeps demand buoyant.

Surely there are large question marks over Perth and Hong Kong?

Australia is well-serviced by both Qantas and Emirates (in alliance), with demand aggregated through Sydney or Dubai. On the Hong Kong route, SAA competes directly with Cathay Pacific (non-stop) as well as the Gulf and South-East Asian carriers.

Expect some trimming on the international front too.

The hardest question for the business rescue practitioners to answer is at what point will the cuts to routes render SAA sub-scale? Even after cuts to staff and the like, the base of fixed costs will be high.

Planes need to be flying for them to make money – revenue first, and ideally, with an appropriate cost base, profit follows.

That’s the biggest problem with the international network. At many of its destinations, including all of those in Europe, SAA planes sit idle for the entire day before returning the following night. This breaks the model somewhat.

The national carrier cannot compete domestically. And after that, just what is left?

Can SAA even be rescued? We will know what the chances are by the end of next month, if not before.