Seeking the profitable core for SAA

The challenges, inefficiencies and problems that South African Airways (SAA) had to deal with on its journey to distress have been well documented, as has the fact that the finalization and implementation of the company’s highly publicised business rescue plan was very long and arduous. I focused on this in my first thought leadership article.

A bigger task awaits SAA. The implementation of the business rescue plan was merely the first steps on the company’s journey to implementing its turnaround strategy. SAA needs to become profitable again, what needs to take place to achieve this?

Finding the profitable core
The business rescue plan was based on the assumption that the business will be allowed to operate at losses for the next 3 years.

The assumptions in the business rescue plan (Appendix C) are: in line with the International Air Transport Association (IATA) predictions. The FY22 revenue levels are expected to be 60% of the FY19 levels of demand. IATA expects that it will take up to three years from FY22 to get to the FY19 demand, which means that the F19 revenue levels will only be achieved in FY25.

A recent article indicated that the average passenger break-even point for American airline companies pre-Covid was 75%.

The load factors in the financial model seem to refer to the overall weight load factor (passenger and cargo).  It starts at 32% and then increases to 64%. Looking at the Profit/Loss figures the breakeven Load Factor will be halfway between 51% (2023) and 61% (2024) = 56%. It, therefore, looks as if the underlying assumption is that reducing cost by 25% will mean that the new breakeven will be 75% (old breakeven load factor) x 75% = 56% (new breakeven load factor).

According to the IATA Report for April 2021 the passenger load factor was 82.6% in 2019 (i.e. a profit of 7% above the break-even load factor of 75%). The overall weight load factor (passenger + cargo) for 2021 is estimated to be 60% vs the estimated breakeven load factor of 66% (i.e. a loss of 6%).

The statistics show that the Breakeven Load factor (Passenger + Cargo) increased dramatically because there were fewer aircraft in service. This meant that overheads had to be spread over a smaller number of aircrafts.

Mango is in financial trouble due to this phenomenon.  Management has not returned the leased aircraft that are not in service so Mango has additional costs that have to be recovered which, in turn, will increase the breakeven load factor.

The 56% breakeven weight load factor (passengers and freight) in the Business Rescue Plan is 10% less than the industry norm of 66%, as mentioned above.  As a result, it may not be realistic.  The underlying assumption is that SAA will start with a clean slate and only use some of the newer, more economical aircraft (a best-case scenario).

Types of aircrafts that need to take to the sky
Rather than analysing the Airline industry by Domestic, Regional, and International Routes it makes more sense to analyse it in terms of short, medium, and long-haul aircraft.  Short-haul aircraft can also fly to neighbouring countries like Botswana and Zambia (regional routes).  Medium haul aircraft can be used on thick Domestic and Regional Routes whilst long-haul aircraft could also be used on Domestic and Regional Routes if there are enough passengers to make the flights profitable.  

The table above groups the destinations in terms of the range of the Short, Medium, and Long Haul aircraft.  There is no standard definition for this. According to Wikipedia Lufthansa defines its

•  long-haul fleet as wide-body aircraft such as the Airbus A330/340, A350, and A380 or Boeing 747
• medium-haul fleet as narrow-body aircraft like the A320 and Boeing 737 families, and
• short-haul fleet as regional jets like the Embraer E-jets or the Bombardier CRJ-900 Turboprops

I, therefore, used this classification for the discussion. The table shows which routes will not be profitable in terms of the criteria that are applied in the financial model (ie. If cost was cut by 25% and the income was 10% less) as well as the types of aircraft that would be needed to operate these routes.

Some initial observations can be drawn from this analysis. The short-haul routes were serviced by SA Express, Mango, and SAA.  The aircraft for thin routes (fewer passengers) that serve small airports with short landing strips typically include the Turboprops and small Embraer E-Jets that Airlink uses. Unless SAA brings in one type of aircraft for this market (as part of standardization to save cost) it will not be able to compete in this market.

In terms of medium-haul aircraft, thicker Domestic routes like Johannesburg to Cape Town can be serviced by a low-cost airline like Mango.  At the moment SAA is cannibalizing the Mango passenger market by taking away some of its customers. Regional routes that were serviced by SAA can also be serviced with Mango aircraft thereby putting them to better use by flying longer distances (depending on the load factors).

This basically, leaves SAA with the traditional long-haul (non-stop) overseas flights for international travellers provided that the number of flights per week (to one or more destinations) is sufficient to motivate the number of aircraft deployed.

Moving forward
In my first editorial, I focused on the reasons why SAA was placed in distress. In this article, I provide my views on how the airline can return to profitability.

Mathew 7:7 (from the Bible) says ask, and it shall be given to you; seek, and you shall find.

 There are a lot of BRPs who have used the SAA business rescue as a case study (as I have) and they have their own opinions about the matter. At the end of the day, you will rarely find two BRPs who have the same thoughts when it comes to SAA. However, we are all united in the view that a strong and profitable SAA can only benefit the country. SAA should ask for help and advice. It cannot hurt the implementation of their turnaround plan.

Hannes Brits is the Director of Kubu Business Optimization Consultants