South African Airways: Will it survive?

Johannesburg, South Africa | AGENCIES | After writing, South African Airways has entered bankruptcy protection. As yet, it’s unclear what this means for the long-term future of the airline, but the airline must show appointed financial practitioners it can secure the funds to avoid liquidation according to South African law.

The trials and tribulations for South Africa’s national carrier have been documented for years.  It has not been agile due to political interference in commercial decisions – a challenge for state-owned carriers across the world.  And it has been damaged internationally by a number of factors. It now seems a rescue loan may be a bridge too far for the South African government.

South African Airways fleet: A340s not suited to hot-and-high Johannesburg

A key pitfall in recent years was the airline’s decision to order A340s. These aren’t well-suited for the challenges of long-range operations from its hot-and-high hub, Johannesburg (5,500ft). In addition, as fuel prices rose from 2007, the four-engine type was less capable than rival twins or higher-capacity quads used by Emirates, among others.

Route performance: declining yields as load factors fall

The airline has been steadily reducing mainline capacity at Johannesburg since 2013, in a bid to cut losses as part of its ‘Long Term Turnaround Strategy’.

The majority of long-haul capacity to/from the African continent is served by non-African carriers. This market is saturated, yet we see startups attempt to serve such routes and ultimately fail to make a profit. South African Airways, even being a legacy carrier of over 80 years’ standing, is no exception.

This can be seen in deteriorating fare performance, as rivals gain market share and poor load factors (with 76% the highest in a five year period for South African) force the carrier to loss-lead to attempt to fill aircraft. This is particularly telling on its three longest routes – Hong Kong, New York JFK, and Washington Dulles – with each posting at least 9% drops. Indeed, the carrier has announced the suspension of Hong Kong flights, with fares significantly below the trend curve.  Guangzhou will be served instead, but Johannesburg – Guangzhou has even lower average fares across all airlines.

Lower competition in Southern African markets historically meant the airline could enjoy healthy profits on such routes. However, results from the airline’s short-haul profit lifelines have been steadily declining.

Cash runs out as debt set to reach $3bn

Ultimately, amidst the network difficulties and strategic missteps, the crux of the issue crippling South African Airways is relatively simple: rising costs, debt, and revenues failing to match. Tellingly, since 2017, the airline has opted to stop releasing annual statements; a year in which net losses quadrupled.

Despite the lack of published statements, the trend is clear. Liabilities have been increasing steadily at 20% p.a. on average since 2013, from $1.1bn in 2013 to a projected $3.3bn in 2019 based on this rate. Meanwhile, shareholder equity has been steadily declining, and unit cost rising.

After a promising 2016, losses almost quadrupled in 2017 as costs surged against stagnant revenue. Could the answer for South African Airways be to park its loss-making long-haul fleet, and refocus around a simplified short-haul operation? Until the last reported statement at least, this side of the business posted small but vital operating profits. The carrier could also benefit from the long-awaited Single African Air Transport Market, which 27 nations have signed an initial commitment to join.

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Source: Airline Network News ,OAG Traffic Analyser and SA Annual reports