South African Airways has had a year of radical change. Profitable at last, bolstered by high load factors and a new partnership with Lufthansa, the carrier is optimistic about the future. Sara Guild reports from Johannesburg. The days of the orange and blue aircraft are numbered. By the turn of the century the outward face of South African Airways will accurately reflect the change which has been effected inside the organisation. The old colours of the apartheid regime will be replaced with a new livery reflecting the multicoloured flag of president Nelson Mandela's new South Africa.

The world watched tentatively as the South African nation found its feet, and SAA has been trying to respond to the sudden demand while radically changing its manner of doing business and mapping a path to success. The most dramatic change has been the financial turnaround from decades of losses, including R254 million (US$70.9 million) between 1991-94, to a profit of R217 million in the year ending 31 March 1995 on revenues of R4 billion. And that was despite losing R100 million in the first two months of the financial year, during the general election period when domestic and international traffic came to a standstill.

Contributing to the turnaround was the cost-cutting programme chief executive Mike Myburgh began implementing upon his arrival in April 1993, the result of which has been annual cost cuts of more than R100 million. And of course the renewed interest in South Africa as a tourist and business destination has resulted in passenger traffic rising 15 per cent, with cargo up 30 per cent in 1994. New aircraft are on the cards, but the order for nine aircraft on which SAA has said it could spend up to R4 billion, has been delayed since June and was due to be announced in November.

The new fleet will help SAA's current high load factors - London and Frankfurt are in the high 90s and Miami was overbooked 2 per cent during one week in September - which mean that SAA's own staff are prohibited from flying. While deputy chief executive John Hare acknowledges the load factors are too high, he believes the break even load factor for some of these routes, which has been in the mid-60s, is rising as increasing competition puts downward pressure on fares.

Full aircraft translate into positive predictions from Hare, who estimates that the carrier's net result will be R20 million better than the budgeted result for 1995/96, which was in turn set 20 per cent higher than the 1994/95 R217 million result.

The carrier's turnaround is perhaps more remarkable in light of the fact that the old regime had gradually allowed greater access to South Africa for foreign carriers. In 1991, the final year of apartheid, SAA was one of 19 international carriers at Johannesburg International airport. In 1995 the number totals 56.

This trend is expected to continue, backed by strong service increases from the Far East carriers, as evidenced by the presence of Cathay Pacific, Thai International, Malaysia and China Airlines, says Myburgh. With the stigma of apartheid gone, South Africa has signed 20 new bilateral agreements, mostly with the Far East and Eastern Europe, in addition to renegotiating frequencies for existing deals.

But competition is not just from the east. For example Johannesburg-London was once the 'golden route', according to Hare, but now is a 'slightly tarnished silver route - still profitable, but not like it used to be'. Now, Hare says, the likes of Air France, Alitalia and Sabena all offer competitive fares for just one stop in Europe. For the economically minded backpacker the likes of Aeroflot, and until recently Sudan Airways, provide the cheapest, albeit slower route to London.

With these competitive pressures at work it is just as well SAA has been transforming itself. Myburgh has not focused solely on cost cutting, but has also addressed yield improvements, marketing issues such as frequent flyer programmes and alliances, and training and the quality of SAA's products and services.

Cost cutting has meant a 17 per cent reduction in staff and a 15 per cent reduction in the fleet. Routes to Lisbon, Milan, Athens and Larnaca were axed in 1994, and the sales offices there and in Copenhagen, Hamburg, Manchester and Cairo were closed. Domestically, SAA transferred 10 per cent of its thinnest domestic routes to regional SA Express, a move which Hare says was originally estimated to give SAA a net gain of R35-40 million. The tertiary routes in South Africa's domestic market are operated by SA Airlink with Jetstream 41s under codeshares with SAA.

Meanwhile the implementation of a new yield management system has seen yields rise 18 per cent over 1994. One area that was sorely in need of attention on the marketing side was the carrier's frequent flyer programmes. Two separate programmes, one for domestic and one for international, were merged together and the expected 150,000 membership nearly doubled to 270,000.

The transferral of domestic routes complete, SAA looked at the wider southern African regional market and took a 40 per cent stake in Alliance, the international joint venture with the airlines and governments of Tanzania and Uganda. Alliance began operations in March by operating charters for SAA, later adding scheduled services from the two East African countries to London, Bombay and Dubai, using a B747SP wetleased from SAA.

SAA is currently working on an agreement with Air Malawi which would include doing that carrier's maintenance and codesharing on certain flights between the two countries. Also in eastern Africa, as Kenya Airways prepares for privatisation, SAA is considering taking an equity stake, with talks between the two carriers concerning this and codesharing due to start in November.

But SAA does not continue alliances that do not yield benefits. It cancelled its codeshare with Varig to the Far East, when SAA decided to start flying to Bangkok. Other cancellations include Air Afrique and Austrian Airlines.

In addition to codeshare agreements with American Airlines, British Midland, Ansett, and Thai, SAA may have struck gold through its latest partnership with Lufthansa. The initial agreement was due to be signed in November though some aspects, such as cargo codesharing and joint marketing of cargo between Johannesburg and Frankfurt, are already underway.

Passengers should also be included in the first phase of the agreement through cooperation between the two FFPs in the first quarter of 1996, says Hare. In addition to the planned passenger codesharing between Johannesburg and Frankfurt, further codeshares out of the respective hubs are also being discussed. However Myburgh points out that what can be done here will depend very much on the bilateral agreements held by the two carriers' respective countries.

SAA particularly wants to increase utilisation of one of its B747s which arrives in Germany in the morning and does not depart until the evening. One suggestion has been that it could operate a joint flight with Lufthansa to, say New York, and then continue with SAA's New York-Johannesburg route. Further considerations for the two carriers include areas like joint marketing, technical cooperation and joint purchasing.

While Hare will not reveal the total revenue benefit SAA expects from the Lufthansa partnership, he does say higher revenue from increased frequencies should reach some R100 million, although costs must be factored in.

With affirmative action targets - the hiring of equally qualified black or coloured candidates in preference to whites - set at all levels of SAA's organisation, Mike Myburgh is careful to stress the need for well-trained employees. There is the danger that with the pressure on to increase the black workforce, candidates may need careful training. 'We need to ensure that additional staff are trained and always able to give a service that is consistent with the high service we have been striving for,' he says.

Meanwhile the morale of white employees must be kept from dropping. Last year the carrier ran a series of training and motivation programmes for all employees to boost employee confidence and morale.

Already the carrier has two blacks in senior management and 15-20 per cent of the next management level are also black. And SAA has put its money where its mouth is to train black cockpit crew. At present 24 pilot cadets are in training in Australia at a cost of R350,000 each. Training currently accounts for 5 per cent of the total labour bill, which in turn accounts for 20 per cent of the total costs. But, as Hare says, these are the costs of operating in South Africa at the moment. The aim is to establish a school in South Africa that can take 40 pilot candidates a year. Once they have gone through the 18-month scheme, trainees will fly for SA Airlink or SA Express for three years before joining SAA.

On the motivational side, Myburgh has instituted a profit share scheme whereby employees are promised 30 per cent of the profits above a certain level. Following the close of the last financial year, Myburgh paid a total of R25 million ($7 million) out to the carrier's 10,500 employees - or R2,380 each. When the accounts were audited two months later Myburgh found a further R2 to 3 million which was duly distributed to 'show the management's honesty'.

Myburgh believes it is important to 'tap not just the traditional input from each staff member but his whole mind and body in the emotional involvement of the airline'. Though this may seem somewhat fanatical, Myburgh clearly believes in instilling pride in the employees to get them on the side of the airline and its cost-cutting goals. 'You can have people in the airline working for you and achieve certain goals, but if you achieve emotional ownership on the part of the employees they are working, not just for a salary but because they are totally emotionally involved in the airline's success,' says Myburgh.

The in-flight product has also been boosted, with SAA shrinking its first class cabin, and upgrading the seats in first and business class, installing personal televisions for those up front and raising seat pitch in all classes. The revamp of the existing fleet has cost R134 million. Yet to come is the redesign of the carrier's livery, now being considered.

And of course there is the carrier's new fleet. Myburgh says only of the delay that SAA is carefully considering the options and has been looking at the possibility of benefiting from its alliance partners' fleets. The carrier needs four extra aircraft in the B747-400 size range, for delivery in early 1996-98. It recently acquired one of these, a 747-300 in the secondhand market, and Hare does not rule out the same solution for the remaining three. Myburgh says SAA will also need six medium-sized aircraft of the A340, Boeing 777 or MD11 type, at a delivery rate of two per year. Currently SAA has 51 aircraft including 12 747s of varying types, four 747SPs, eight A300s, seven A320s, 11 B737-200s and a B767.

Myburgh is keen that there be some standardisation of the fleet to eliminate the extra cost of separate pilot and technical pools, spare parts, and different simulators. 'We need to make the right choice so these aircraft will give us the best access to the market at the lowest cost,' he says.

With the lifting of the international embargo, SAA has also been able to transfer some of its maintenance to less costly centres and free up its own maintenance centre for third party work.

The carrier's cargo fleet consists of a B747-200F and two 737-200s which were recently acquired to help deal with the continuing boom in cargo. In August cargo was 41 per cent up over the previous year, and Hare predicts it will be up 20 per cent for 1995/6, to R600 million in revenue.

The careful, conservative thought process behind the development of the passenger fleet also applies to the carrier's route expansion strategy, though this is partly the result of having had to downsize only two years earlier, says Myburgh. The past two years have seen one route per year added. In 1994 SAA added Sao Paulo and in October services were due to begin to Buenos Aires twice a week as a continuation of the Sao Paulo and Rio de Janeiro route.

Instead of new destinations SAA plans to increase frequencies on some existing routes as soon as possible, for example by adding another weekly frequency to London, Frankfurt, Paris and Luanda, Angola. In addition to serving most of the southern African major cities and Amsterdam, Munich and Dusseldorf in Europe, the carrier serves Perth-Sydney, Taipei, Hong Kong, Bangkok, Singapore, Bombay, Dubai, Tel Aviv, New York and Miami.

SAA had hoped to increase its frequencies to the US and introduce a Los Angeles service, but South Africa and the US are currently in a stalemate over bilateral talks. The US Department of Transportation refuses to negotiate until South Africa agrees on third country codesharing. But SAA says that would give a carrier like Northwest a backdoor entry through Amsterdam with its codesharing partnership with KLM. Myburgh says an SAA flight from Denver to New York to Johannes-burg, for example, would end up 'buried' in the reservation system because a codeshared Northwest/KLM flight through Amsterdam linking the same destinations would be listed as one continuous flight. 'The US has tried this with Germany and we feel this is a high-handed approach,' says Myburgh.

As it grapples with such problems SAA continues to attack its costs to remain competitive. Salary increases have traditionally been indexed or linked to the cost of living in South Africa and public sector workers are currently demanding increases of 15-20 per cent. Hare emphasises such increases will not be possible for SAA given that fares will not increase by more than 4-5 per cent internationally, and possibly by 8-9 per cent on domestic routes.

Instead SAA wants to see salary increases linked to productivity gains. However Myburgh is determined in his efforts to bring unions and management together and says that he wants to set next year's budget in conjunction with the nine trade unions.

SAA has also been hit this year by the hike in fees charged by the airports company after it lost its government subsidy: the resulting increases left SAA with an extra R60 million bill. And due to the insolvency of the pension fund run by the previous government, all companies owned by Transnet - the state transport holding company - must contribute a total of R1.2 billion annually, of which SAA doles out some 22 per cent.

Because of this 'contribution', SAA feels justified in asking the government for a partial government guarantee for the aircraft purchases it is about to embark on, says Hare. 'At present we have a healthy gearing situation with 60 per cent internal capital and 40 per cent borrowing,' says Hare. 'We do not want to disturb that too much.'

However, the government is resisting this argument, and wants to maintain a level playing field with SAA continuing as a purely commercial entity. The carrier is planning to go to the international capital markets and export credit agencies for most of the financing of the new fleet.

However, the ownership of the carrier may well change, as the government has formed task forces to examine a restructuring of all state-owned entities. On the one hand the task forces are looking at possible changes in management, organisational structure and cultural emphasis, and on the other hand, at changes in ownership. The overriding concern is to promote increased efficiency and attract foreign investment into South Africa. The SAA task force is due to report on 6 December and Myburgh is quietly confident that there will be some progress. 'One should not preempt the findings of those task groups, but it is encouraging to see the government is really earnest regarding the obtainment of these specific goals that everyone subscribes to,' says Myburgh.

SAA would need two more years of profit before being allowed to float on the Johannesburg stock exchange, but this does not preclude private investors from buying it from the government should it decide to sell, he adds.

One further cost saving from the end of the apartheid regime was the ability of SAA to fly directly up the continent, instead of around the bulge of Africa, which added an extra two hours onto flights to Europe. Hare reckons British Airways had a R20,000 advantage on the London route, but says 'it never thrust to undercut us'.

However, SAA is currently carefully considering its route optimisation as the initial saving has been nearly eradicated by some African countries dramatically increasing their overflight charges. SAA may consider returning to flying around Africa's bulge, says Hare.

While it may take a few generations for the new South Africa to emerge fully, SAA has already undergone dramatic change. There are still challenges ahead, like changing the company's demographics to match those of South Africa by the turn of the century. But SAA has shown that losses can be stemmed and a turnaround achieved without emptying the state coffers in the process.

Source: Airline Business