In business, it is a popular refrain: Let the market take care of it.
But for major airlines, that’s not necessarily true. Yes, governments will let second-rate carriers, like Air Berlin, or Monarch Airlines, go bust. But often, governments do not want to lose their nation’s internal transportation system, or air links abroad, so they protect flag carriers no matter how much money the airlines lose.
This is an issue many places, but in few countries is it as dire as in South Africa. The national airline, South African Airways, is government-owned and hemorrhaging cash after six years of operating losses, including a loss of 5.6 billion rand, or about $428 million, in its most recent fiscal year. Moreover, while it’s a solid, safe airline, it has some outdated planes, such as gas-guzzling Airbus A340s, flying marginal or unprofitable routes.
Yet it persists, relying on taxpayer cash it to keep it solvent.
The government has proposed at least 10 turnaround plans in the past two decades, said Sean Gossel, a professor at the Graduate School of Business at the University of Cape Town. But none has worked, not because the plans have been bad, but because there was little impetus to implement them, he said.
“After decades of mismanagement, the airline has now reached a state where it is no longer a going concern,” Gossel said in an email.
But this time is different, Vuyani Jarana, the newest CEO said in an interview. Jarana, a former mobile telecommunications company executive who joined the airline in November, said he will turn the airline into a market-driven profitable company within three years. He even hopes to attract private investors.
“People need to understand we are in an open market,” he said last week in Sydney during IATA’s Annual General Meeting, a conference of airline executives. “We are not a state department. We are a business that competes for the attention of the customer.”
Jarana proposes a relatively simple plan. He promises to cut spending on procurement and staff— “the costs are just too high” — while slashing unprofitable routes, and overhauling the company’s culture, which he said has been too complacent.
He estimates he’ll need to raise roughly 12.5 billion rand, or about $957 million U.S., to fund the company until it’s profitable. He said he will also need about 9.7 billion rand, or $743 million, to fund debt that matures next year.
Jarana has brought in several outsiders, including Peter Davies, former CEO of Brussels Airlines, as chief restructuring officer. His team is purposely keeping the plan manageable, to impress potential investors who want to see movement — any movement — from the new team. It’s a way to show this time will be different, Jarana said.
“There’s a lot of cynicism about whether the turnaround can work,” Jarana said. “There have been strategies before. They’ve never been implemented before. I think the only way to convince investors that the turnaround will work is for us to take the hard decisions. When you see us implementing the things we said we were going to do, even if some of them are unpopular, that’s when they are going to believe there is a team that is committed.”
On Monday, Reuters reported he is making progress. Citing sources familiar with the airline, the news organization said Jarana planned to cut 1,000 to 1,500 employees, including roughly 300 flight attendants. The airline has slightly more than 10,000 employees.
Still, Gossel said he’s not optimistic.
“Attracting investors will be difficult because the airline has serious governance problems, is losing skills, does not have a service-orientated corporate culture, and operates in an environment where its competitors are more capable, a common problem with aging [and] outdated state-owned airlines,” he said.
Failure is Not Possible
If there were any other industry, the airline might fail.
But that’s highly unlikely to happen. Some reasons are specific to South Africa, as Gossel said there’s a concern the airline’s default would expose the country to other state enterprise debts, estimated at 300 billion rand, or $23 billion U.S.
“Many of the country’s state-owned enterprises have cross-default clauses,” he said.
But other issues are more typical for state-owned airlines. No one wants to see the national airline go out business. People still use it to fly around the country, the continent and abroad. One South African investor and airline insider told reporters last year she equates the airline to a “embassy with wings.”
“It’s the role SAA plays in South Africa and on the continent,” Jarana said. “It still plays a very critical role in moving people across the continent despite its own financial problems. Many people would say, ‘Well, the market would take care of this.’ But just with the size of SAA — from pure people movement — it’s not something the market could address overnight.”
Instead, the airline will try to remain solvent, by transferring more routes to its low-cost carrier, Mango, as well as partner airlines, and reassessing where it flies. It recently cut one of two daily flights to London and slashed some Central Africa flying. “The ones that we are keeping are the ones where we can improve margins,” Jarana said.
Flights to New York and Washington, D.C., will stay because they make money— “United States is not bad,” Jarana said — as will Hong Kong. That route does not perform well, though Jarana said it must remain because it’s the carrier’s only flight to Asia.
It’s not clear South Africa needs connections to Asia, but long-term, Jarana said the country needs a true connecting hub, because so many African travelers already change planes in Europe and the Middle East for long-haul flights.Only a handful of airlines in Africa — South African and Ethiopian Airlines among them — operate anything close to true intercontinental hubs.
“It’s important to have airlines that are creating hubs inside the continent to improve their economies and to make it easy for Africans to move within their continents,” Jarana said.
But that might be wishful thinking, Gossel said. Eventually, he said he expects South African will probably “radically scale down” and restructure.
“It has been apparent for many years what needs to be done to save SAA but the government does not have the will to let go of its vanity project,” he said.