SAA gets unlikely help from coronavirus outbreak

While international airlines have been blindsided by the impact of the coronavirus on global travel, the outbreak may bring unexpected benefits for South African Airways as it battles to lower costs.

A sharp reduction in international flights has deflated the price of leasing jets and made it easier for state-owned SAA to re-negotiate terms, according to Siviwe Dongwana, one of two administrators hired by the government to draw up a turnaround plan. Equally, this week’s oil-price crash triggered by Saudi Arabia and Russia will lower the cost of fuel, he said.

“The coronavirus issues and the impact on the industry means that a lot more lessors are going to find themselves with a lot of aircraft,” the administrator said in an interview on Wednesday in Bloomberg’s Johannesburg office. “At a risk of being too much of an optimist that’s a silver lining for our renegotiation of aircraft.”

SAA has racked up 26 billion rand ($1.6 billion) of losses over the past six years and was placed in a local form of bankruptcy protection in December to end a damaging cycle of government bailouts. The administrators have cut back the number of domestic and international routes and started a legal process with the company’s 4,708 employees about job cuts, while trying to reduce costs across the board.

While the coronavirus may have significantly cut demand for international travel, an enforced reduction in flights to hubs such as London could help SAA preserve cash in the short term by taking out landing fees and fuel bills, said Dongwana, an accountant who once served as the country’s director general in the public works ministry.

Many of SAA’s routes are loss-making anyway and the load factor on its planes — or the amount of seats filled — fell to 71% in January as flyers feared for the airline’s survival.

Four Options

The administrators have offered the government four options for SAA, ranging from complete liquidation to a light restructuring, and are proceeding with the latter course, Dongwana said. If they succeed, some suspended routes could be reinstated, he said.

Some overheads that need to be trimmed range from over-staffing and generous employee benefits to supplier contracts on unfavorable terms. While some airlines operate with as few as 30 employees per plane, SAA has a ratio of more than 100, Dongwana said.

“We need to deal with it now to cleanse the airline of sins of the past,” he said, adding that he anticipates a “complicated and lengthy discussion” regarding jobs with SAA’s seven different unions.

If and when SAA becomes a viable business, the government can turn to its long-held goal of seeking a strategic partner to bolster its balance sheet and rectify an underinvestment in technology that’s left the airline with dated planes and inferior flying experience.

The company has enough money to keep going until early April and is in discussions with lenders about providing a bridge financing to take the company to the next stage of development, Dongwana said.

Until then he needs to do “everything I can to extend the runway,” he said.

Now read: 17 confirmed coronavirus cases in South Africa

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SAA gets unlikely help from coronavirus outbreak