In the 2019-2020 year, every airline globally suffered devastating impact from COVID-19. The damage to SAA was even more severe than that suffered by others. It had already been driven into business rescue by years of misfortune, massive financial losses year on year, corruption, government interference, and lack of continuity at every level of management, when the pandemic arrived in South Africa.
Prior to the pandemic, SAA had a long history of massive losses on many of its routes, so it is somewhat surprising to note, on examination of its business rescue plan, that the BRPs plan to retain 27 of the beleaguered airline’s 32 routes for the ‘new SAA’. Also noteworthy is the announcement that the BRPs have cancelled all SAA’s existing leases, leaving the airline with a fleet of only nine aircraft.
According to the business rescue plan, five of SAA’s original nine international routes are proposed to be retained. These are Washington (via Accra), New York, Perth, Frankfurt and London. Hong Kong, Munich, São Paulo and Guangzhou have been cancelled.
Regionally, 19 of SAA’s 20 routes will be retained with only Abidjan via Accra being cancelled.
Despite the BRPs initially announcing that SAA would only operate domestically on the Johannesburg-Cape Town route, the business rescue plan outlines that the airline will also retain its Durban and Port Elizabeth routes, cancelling only its East London route.
“Government has affirmed that it supports a business rescue that results in a viable and sustainable national flag carrier that provides international, regional and domestic services and will not be dependent on further bail-outs from the fiscus. One of the outcomes of the proposed restructure is the commencement of a full domestic network and schedule starting in January 2021, operated by the restructured national airline. Regional schedules will be introduced as the market and passenger demand allows. The commencement of international routes and schedules is envisaged to follow thereafter, similarly informed by global market and passenger demand,” states section five of the business rescue plan.
The plan adds that the BRPs, together with SAA management and their advisers, had conducted an objective assessment of the company and evaluated various restructuring scenarios to optimise SAA’s business model, route network and cost base.
While previous SAA five-year turnaround plans have theorised that SAA should focus on regional routes (which have historically been most profitable for the airline) and cut back on international routes (which the airline has traditionally struggled to compete on), the BRPs intend to deviate from this strategy. This is despite the BRPs documenting in the plan that:
- only eight of SAA’s routes were profitable during the 2019 calendar year (seven profitable regional routes and one profitable international route)
- during 2019 SAA’s international route losses amounted to R3.04bn (€164m)
- during 2019, its regional route losses amounted to R315m (€17m)
- during 2019, its domestic route losses accounted for R868m (€47m).
Independent Business Rescue Practitioner and Aviation Economist, Dr Joachim Vermooten, described the scale of operations that the BRPs had proposed (where 2021 flight demand is forecast to be 30% of 2019 demand) as far too large in the present environment.
He believes that the new SAA would do better if it were to completely drop its domestic routes, scale back on regional routes and focus on allocating all its resources to operate a few core intercontinental routes successfully.
“It does not make sense for government to take on so much risk and expense to operate domestic routes when South Africa is already well serviced by private companies who have demonstrated that they are willing to take on this risk and can do so successfully,” said Vermooten.
He added that, as regional African routes were plagued by notoriously high costs and low volumes, it was his belief that the best option for SAA would be to identify five to six intercontinental routes, for which SAA could focus on developing the skills to operate well without subsidy. He commented that historically, intercontinental routes tended to be the most successful for government-owned airlines and said as SAA’s competitors were able to fly intercontinentally without subsidy, and had been expanding their services to South Africa over recent years, there was no reason why SAA should not be able to service a select few international routes successfully.
What about the fleet?
Since the approval of the plan, the BRPs have confirmed that all SAA’s aircraft leases have been terminated and that only nine aircraft, which the airline owns, have been retained, out of its original fleet of 49. The plan outlines that the airline will initially start with a small-scale operation utilising six aircraft, which will be followed by a ramp-up to 19 aircraft between March and November 2021. By December the airline is expected to be operating 26 aircraft.
“It appears that the DPE is short on cash and is trying to squeeze SAA’s creditors through its allocation of the business rescue funds. The plan is also unusual in its decision to treat creditors differently. This will result in many businesses that are owed money by SAA being short-changed while unflown ticket holders, who are also creditors, will receive vouchers for the full value of their tickets. This is a short-sighted approach when the government is planning to start up a new airline that will need, for example, to approach the same aircraft lessors to negotiate new terms for new aircraft,” said Vermooten.
But, he said there were bigger issues than the size of the fleet. According to him, the biggest issue with the plan was that only R2bn (€108m) in working capital was being set aside to restart the airline but the projected losses for the first year of operations were optimistically estimated to be R3.2bn (€173m) (of the R6bn (€325m) loss expected to accrue over three years). As the government has said it will not set aside further funding for the airline, the ‘new SAA’ would effectively be insolvent within the first year of operations, predicted Vermooten.
