ANALYSIS: New SAA chief faces tough recovery task

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State-owned South African Airways surprised no one in May when it said it was borrowing rand (R) 1.5 billion ($159 million) to cover its near-term operating costs. The loan, secured against last year's R5 billion government guarantee, will be used as working capital while the flag carrier implements its latest turnaround plan - the ninth such strategy put before its shareholder.

Scepticism about SAA's ability to turn the corner has been fuelled by a spate of management resignations and dismissals, with Monwabisi Kalawe due to become its fourth chief executive in less than a year. Although his interim predecessor, Nico Bezuidenhout, insists "green shoots" are emerging following last year's R1.3 billion loss, the airline's chequered history and its status as an end-of-line carrier has left analysts reserving judgments.

"SAA has become dependent on state aid in recent years due to its inability to sufficiently address several critical challenges it faced, including its high cost structure, unprofitable long-haul routes, inefficient aircraft fleet, over-staffing, management instability and its lack of success in forging strong partnerships within Africa," says Nick Fadugba, chief executive of African Aviation Services and a former secretary general of African Airlines Association. "It could also be argued that SAA's key hub, Johannesburg, is geographically disadvantaged compared with the more centrally located hubs of Nairobi, Addis Ababa and Lagos."

Fadugba insists that modern twin-engined jets such as the Boeing 787, 777, Airbus A330 or the upcoming A350 must be introduced as replacements for SAA's 18 fuel-inefficient A340s. But any large-scale capital injections require the approval of South Africa's government, which has earned itself a reputation for meddling in the carrier's affairs and impeding meaningful reform.

No official reason was ever given for Siza Mzimela's resignation as chief in October 2012, but her departure came one month after chairwoman Cheryl Carolus stepped down along with several non-executive directors. Local media reports suggested that Malusi Gigaba, the minister for public enterprises, had blocked Mzimela's plan to replace SAA's ageing widebody fleet with A350s. Her interim replacement, Vuyisile Kona, was then suspended following allegations that he contravened procurement processes. He was succeeded by Bezuidenhout, who also heads SAA's low-cost subsidiary Mango.

While crisis after crisis hit the boardroom, Gigaba was finalising details of the turnaround plan that Kalawe will be tasked with executing. But few details have emerged beyond Mzimela's pre-existing strategy of strengthening African, Asian and Latin American connections. SAA will only confirm that the three-phase, 20-year plan aims to improve governance and accountability, and will include widebody replacements for A340s. Until concrete details emerge, analysts remain unconvinced.

"Kalawe has been given the daunting responsibility of returning the airline to profitability, but he has had no input in drawing up the airline's new long-term turnaround strategy," Fadugba notes. "This could pose challenges for Kalawe, as it remains to be seen whether the turnaround strategy will become a straitjacket, or whether he will be given a free hand to modify the strategy in line with the challenges he faces in the course of running the airline."

Describing the government's penchant for micro-managing SAA as "counter-productive", Fadugba cautions that overhauling the fleet, streamlining the route network and cutting costs will only take Kalawe so far. "The availability of state bailouts has created a culture of complacency in the airline and undermined the need to be bottom-line oriented," he warns.

Criticism of SAA's subsidies is most frequently aired by Erik Venter, chief executive of rival Comair, which operates full-service British Airways and low-cost Kulula brands in South Africa. He has launched a High Court challenge to the flag carrier's R5 billion guarantee. Although Venter stops short of calling for all state funding to stop, he believes that excessive support results in anti-competitive price distortion.

"Comair's sole objective is to attain a level playing field in the domestic aviation market," he says. "By receiving government bailouts SAA avoids this commercial reality, and this negatively impacts on all current and potential airline operators...In an industry where private capital competes with a state-owned enterprise, Comair cannot afford to see this plan unfold over another 20 years."

Back in SAA's boardroom, Bezuidenhout's optimism is not without some merit. SAA's suspension of low-yielding routes like Cape Town-London Heathrow suggests an evolving strategy. A recent codeshare deal with sixth-freedom Gulf carrier Etihad Airways underscores such pragmatism. But efforts to fix the model are likely to face continued state scrutiny. "Few national carriers worldwide are profitable," Fadugba says. "If the South African government wishes to retain 100% ownership of SAA, it will have to continue to underwrite the airline's losses."