Last week, it was announced that SAA weren’t going to be releasing their 2014 results for a while – because SAA and SA Express need further government guarantees before the auditors will allow the financials to be released on a going concern basis.
That is: SAA is insolvent. Which isn’t news, exactly – it’s been insolvent for years. But it’s more insolvent than it was.
- How many more bailouts?
- How many more restructuring plans?
- How many more mass walk-outs of management?
- And on that point, how much more mismanagement?
- SAA is sitting on its laurels.
- *other clichés*
Here’s a statement from the DA:
With nine ‘turnaround’ strategies in 13 years and R16bn (in bail-outs) over the past 20 years, investing any more state funds into SAA would be madness; SAA cannot be allowed to use the fiscus as its personal bank account with impunity.
Now obviously, that’s vote-mongering rhetoric – because you just have to glance through the 2013 financials to see that there are no personal bank accounts being used here. Well – perhaps some trifling ones – but vastly immaterial to the issue at hand. I mean, you don’t declare the whole of Woolworths a sh*thole because a store manager lifted a punnet of blueberries from the Woolies Food in Victory Park.
SAA has its own rhetorical response to these rhetorical questions:
The idea being, I guess, that supporting SAA is a stimulative exercise that achieves far more in terms of economic growth/support than any other governmental program. Because what else is government to do with the money?
Far better that it proceed indirectly into the economy through salary payments than it flow through *gasp* social security payments where the indigent continue to be indigent. At least, I’m assuming that all the privatisation proponents are right-wingers, and therefore they like the idea of social security programs about as much as they like the idea of parastatals being supported by government guarantee.
“But wait!” you might say. “Won’t a private airline fill the gap just as successfully?”
So I went looking through the 2013 financials (the latest ones we have – the 2014 reports, as I said above, are a little embargoed at the moment).
Some Key Points and Graphs
In 2013, the SAA group serviced 8.8 million passengers across 42 destinations using 61 aircraft (and bear in mind that some of those fleet are dedicated to cargo transportation). It generated R27 billion in revenue and R28 billion in expenses (and we’ll get to a breakdown of some of those expenses in a moment).
But first, and because I like pictures, let’s have a look at those destinational contributions:
So there we are then. First problem: international flights are properly loss-making (and SAA was only less loss-making in 2013 because they cancelled the CPT-LDN route).
Rapidly increasing fuel costs. Higher regulated costs (these are parking fees, landing fees, etc – charged by airports and the like). And higher operating costs (mostly due to salary increases and higher repairs and maintenance costs).
Basically, the whole thing points to an ageing fleet.
The problem with using old aircraft
The basic business model of any airline is that you buy a plane and then you traffic passengers in it. Two things to be aware of:
- In order for you to have the chance of making any money, your planes have to be in the air.
- And when your planes are in the air, they need to be making enough money per passenger in order to cover all your costs.
Here’re the problems of having an ageing fleet:
- The fleet costs more in repairs and maintenance (because it’s older). So any passenger fees have to cover more costs.
- But also, planes that are being repaired and maintained are not in the air – they’re in a hanger. So passenger fees also have to cover a greater proportion of the fixed cost base in order to make up for the planes that aren’t flying.
- That is: there is a double cost.
- Actually, let’s also make that a triple cost: because older aircraft have worse fuel consumption. So each flight uses more fuel than it should.
- And a quadruple cost: because older planes have fewer seats.
At the same time, remember that SAA is basically an importer:
- It buys supplies in foreign currency (the planes themselves, the fuel, the parking fees); and
- It sells its product (air tickets) in South African Rands.
A rand which has done this over the last few years:
So there’s a spiralling expense stream for you.
Then three more things to add on the international front:
- Emirates (order 200 aircraft in 2013 alone)
- Etihad (has something like 205 aircraft on order)
- Qatar (along similar lines)
We can talk about “legacy” carriers – but there’s nothing like competing with legacy carriers from the oil-rich countries of the Middle East.
It’s no wonder that the international routes are a bleed.
There are two seemingly obvious “turnaround” requirements:
- Cut the unprofitable international routes.
- Replace the fleet.
As I see it, the real reasons for the big bailouts and so on:
- The bailouts don’t go far enough (you can’t replace fleets with R5 billion guarantees).
- The unpopular decisions are politically impracticable (how well would it go down if SAA only did local and regional flights?).
Don’t forget that SAA is one of the few airlines to offer direct international flights to many destinations. I mean – were it not for SAA, all USA trips from Joburg would have to be via London, Dubai or Doha (I stand to be corrected – but I believe that’s the case).
In the interim, we can be consoled by the fact that SAA is one of the more cost-effective social grant programs in the government repertoire. Just ask the people at Oxford.