Boeing 747-400s to be grounded, airline to be split into seven units.
David Carte
04 June 2007
South African Airways is to ground six Boeing 747 aircraft and retrench hundreds of employees in a radical transformation announced by Public Enterprises Minister Alec Erwin in Johannesburg today.
CEO Khaya Ngqula said the national airline has obtained a government guarantee for another R1,3bn to tide it through its downsizing.
Said Ngqula: “This is an overhaul of SAA’s entire business model.”
Bhabhalazi Bulunga, general manager of human resources said the airline wanted to save R630m on personnel. He could not say how many jobs would go, as union negotiations were still proceeding. Much depends on what other people costs could be cut. Some 30% of management-level employees will be retrenched.
Some 28 pilots will be affected directly by the dropping of the 747 routes. They are likely to be retrained to work on other aircraft.
SAA will cease to fly to a number of international destinations, including Paris and Zurich. The Cape Town-Frankfurt route also loses money and is likely to be dropped.
Ngqula said a “cash conservation office” has already cut costs by more than R1bn a year. All SAA’s budgets, excepting salaries, fuel and safety, have been revoked. All purchases have to be justified.
Even tax-free personnel travel allowances of up to $90 a day offshore have been stopped. Now they have to claim expenses actually incurred.
Negotiations with the trades unions, including the SA Airline Pilots Association, have already started. The company will be restructured to comprise seven profit-seeking subsidiaries.
Ngqula said the airline aimed to save R2,7bn of costs and would return to profitability in the next 18 months. The 747s would be sub-let or returned to the lessor.
When they 747s were acquired under a lease and buyback deal under former CEO Coleman Andrews, rentals in the early years (“a holiday period”) were low but they have escalated sharply and were now subject to “balloon payments” of $28m a year each. The aircraft added R1bn a year to the airline’s costs.
Three Airbuses will be used on SAA’s international routes. Ngqula said because of the cost of running the 747s, SAA lost R500m on the London route alone last year – in spite of full aircraft.
Erwin said that with World Cup 2010 looming, it was imperative that key elements of the transformation should be achieved this year.
“The programme arises from a very detailed overhaul of the entire business model. It draws on successful turnarounds elsewhere in the world. The goal is to be a profitable airline with global reach. Government is fully behind the strategy. Indeed, we would not support the airline without a strategy.”
“ SAA has a highly regarded record of service safety and reliability. But its cost structure has moved out of line with competitors. This is no time or place for recrimination. Our competitors are moving faster.
“SAA you have my full support but you will experience very tough love in the coming year. A great airline lies in your hands.”
Ngqula said conditions of employment for SAA’s 800 pilots would be reviewed.
One SAA watcher said employees will have to accept the new terms and conditions because the alternative is simply to close the airline. The government could declare open skies and in three days other airlines would take over SAA’s business.
Just six months ago SAA asked government for R4bn. It was given R1,3m to maintain its solvency and instructed to come up with a transformation plan. This is the result.
SAA has 58 aircraft and after the grounding of the 747s will have 53 – enough, says Ngqula, to maintain the reduced scale of operations.
African operations were the most profitable and contributed some R500m to the bottom line last year. Domestic operations contributed R100m, while international operations lost R600m. The Cape Town-Sao Paulo, Perth and Johannesburg-Frankfurt routes were profitable. US routes remain “problematical” said Ngqula.
Three flights a day will continue to London using other aircraft. New services will be introduced to Munich and Libreville.
Ngqula said: “We are thinly capitalised. We have a debt:equity ratio of 100%. It should be more like 65%.”
Ngqula said virtually all airlines with the exceptions of SAA and Alitalia had undergone similar transformations in order to survive. He cited Air France and BA. Qantas has taken out A$500m a year for several years. He said the downsize should have happened years ago but no-one had the courage.
“There’s nothing wrong with our revenue. It continues to grow and reached R20bn last year. The trouble is that our costs were R21bn – up from R15bn just a couple of years ago.”
The major cost increase has been fuel. According to management consultants, SAA has a higher headcount than its comparable peers.
He could not comment on what might happen to SAA after the transformation when it is profitable again. He could not comment on a possible privatisation, IPO, sale or joint venture with some other airline.
Ngqula said he did not fear the defection of pilots.
“Our conditions for pilots are among the best.”
SAA is being advised on its transformation by specialist US consultant Seabury Consulting.
Ngqula said he will not suffer a personal salary cut, as he has had no increase or bonus in the four years during which he has served at SAA. He has large personal interests outside SAA, including a stake in World Wide African Investment Holdings, and reckons he could make a lot more money with a lot less work outside SAA.
Ngqula is confident that by 2010 SAA will again make big money, open skies or not, but said the Bambanami (grab it with me) cost cutting programme was not a one-off.
