South African airlines, not as seriously affected by the events of 11 September as European and US carriers, are fighting a crisis of their own as the South African rand plunges to records lows against the dollar.

Airlines say already marginal profits and shrinking yields will force them to cut back on discounted fares and seek increases in the new year despite hostile trading conditions that have seen a 10% drop in domestic passenger numbers since October.

In December, Comair issued a profit warning to shareholders and national carrier South African Airways (SAA) has said it might record another loss, reversing a targeted R50 million ($4.5 million) profit for this financial year following a loss of R735 million for 2000-1.

Nationwide, the third jet carrier operating the country's trunk routes, said fares would have to be increased next year if profitability was to be maintained. Chief executive Vernon Bricknell said yields will have to increase by 12.5% to overcome the 41% decrease in the value of the rand against the dollar since the beginning of 2001.

SAA says it is reassessing its rand/dollar exchange rate for the next financial year. Richard Forson, SAA chief financial officer, says: "Business travel is declining and the falling rand is not helping our operating costs, of which 51% are dollar-denominated. We have prepared some worst-case scenarios and the necessary corrective action. Primarily we will concentrate on both revenue generation and cost cutting."

To this end SAA has made 86 managers redundant, about 12% of its management structure, slashed perks like cellphones, entertainment, company cars and overseas travel, limited the use of consultants and cut turnaround times for aircraft to increase fleet productivity.

The airline budgeted for R8 to the dollar for this year but this assumption has obviously "been blown out of the water" as by mid-December the rand hit more than R11 to the dollar and R15 to the UK pound.

"We are reassessing the average level for 2002. It is going to have to be significantly higher," says Forson. He also expects the planned new long-haul fleet to cost that much more, but manufacturers will just have "to put additional items on the table".

Chris Hoare, commercial executive for Nationwide, notes: "Costs on leasing, distribution through our Zurich-based reservation system Atraxis, fuel, insurance and maintenance - all dollar-based - have increased, yet the domestic market is shrinking and yields are dropping."

He says there is overcapacity in the market and that Nationwide has reduced seats by 28% since the beginning of 2001 to sustain profitability.

Piet van Hoven, managing director of Comair, warned that discounted fares would be more difficult to come by in 2002. "They don't help our yields and these need to be boosted."

In a warning to shareholders, Comair said the weaker rand, a declining market and overcapacity were creating "adverse trading conditions". The rand might also have an impact on the number of new aircraft Comair acquires. It has five Boeing 737-400s on order, the first of which will arrive soon.

Meanwhile SAA parent Transnet has re-acquired Swissair's stake in the flag carrier for which the beleaguered Swiss group paid R1.4 billion two years ago. Although the deal has yet to be finalised, it is expected that Transnet, which had first refusal, will pay about half that amount to Swissair.

Source: Airline Business