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SAA moves at last to cull lossmaking routes, flags major future changes

SAA acting CEO Nico Bezuidenhout

SAA acting CEO Nico Bezuidenhout

Photo by Duane Daws

16th February 2015

By: Terence Creamer

Creamer Media Editor

  

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South African Airways (SAA) confirmed on Monday that some R600-million in yearly savings would arise as a direct result of a decision to cull lossmaking services to Beijing, China, and Mumbai, India, as from the end of March.

The cessation of the long-haul routes, together with impending changes to the troubled national carrier’s North American services, would salso make up the lion’s share of R1.1-billion in sustainable savings identified during the first 60 days of a 90-day action plan, aimed at ensuring that the group remained solvent.

In a frank briefing, acting CEO Nico Bezuidenhout reported that he was confident that the airline would meet its target for identifying R1.25-billion-worth of savings by March 24; the date by which the airline was due to return to its shareholder, the National Treasury, with a revalidated Long-Term Turnaround Strategy (LTTS), aimed at overhauling of its financial, network, fleet and operational model.

The 90-day action plan itself had been premised on safeguarding SAA’s immediate going-concern status, which had been made possible with the aid of a controversial R6.48-billion government guarantee. The support –the latest in a series of guarantees, cumulatively worth R14-billion – had enabled SAA to raise the finance it required to navigate company-threatening liquidity and solvency problems.

The National Treasury had refused to recapitalise the airline, noting that the newest turnaround intervention represented the ninth such attempt in a decade and that it required progress on implementation before it could consider extending any additional support. The debt raised off the back of the guarantee would increase SAA’s yearly interest payments from around R250-million in 2013/14, to R500-million in 2014/15 and to R700-million in 2015/16.

Bezuidenhout, who oversaw the drafting of the LTTS in 2013 before returning to head SAA’s low-cost carrier Mango, acknowledged that most of the components of the 2013 plan had been retained, with only the fleet plan likely to be materially adjusted, mostly because the fall in the oil price made the fleet renewal less urgent.

For this reason, SAA would redesign and defer any tender for additional wide-body capacity, particularly in light its current negotiations with Airbus to reconfigure an imprudent 2002 order for 15 A320s.

Following intensive talks, Airbus had agreed to increase the order, which SAA wrongly assumed had been cancelled by Transnet when it was unbundled from the freight logistics utility, from 15 to 20, as well as exchange the last ten A320s for a lease agreement covering five A330s, which were better suited to its ambitions for expanding into the African markets.

Bezuidenhout said the negotiations were well advanced and that SAA was optimistic of securing a cumulative benefit of R2.8-billion – benefits that would arise as a result of not having to make pre-delivery milestone payments on the ten A320s foregone, as well as through a claw-back on the premium paid for the A320s on the original contract.

Besides the cancellation of lossmaking routes to Asia (which would be compensated for through code-share arrangements), SAA would also make major adjustments to service its lossmaking service to Washington DC, in the US.

Integral to the plan was the establishment of a new West African hub outside of Senegal, which was viewed as lacking the scale required to underpin SAA’s regional and North American strategy. Bezuidenhout did not identify the location of the new hub, confirming only that it was not Lagos, Nigeria.

Another LTTS priority would be the upscaling of Mango as a domestic operator and the downscaling of SAA’s full-service domestic market offering, which would also have future fleet implications for both Mango and SAA.

Bezuidenhout indicated that it had become increasingly difficult for SAA to remain profitable on domestic routes in light of the rise of low-cost carriers and indicated that Mango would use its R1-billion in cash holdings, together with its strong profit history, to expedite the expansion of its domestic capacity.

Cost-cutting would also continue to be a major theme with SAA having completed about 40% of identified contract renegotiations, which had already yielded annualised savings of R91-million.

It would tread more cautiously, though, before embarking on job cuts, although Bezuidenhout noted that the airline currently had 1 750 more employees than was the case five years ago, when the airline was operating profitably.

Edited by Creamer Media Reporter

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