South African Airways chief executive Khaya Ngqula has made great strides towards reviving the troubled flag carrier. Can his business model solve the troubles besetting beleaguered carriers elsewhere?
In an isolated country with a rough history, Khaya Ngqula is battling to turn a long floundering flag carrier into a top tier international airline. After just over two years, the aggressive chief executive is already well down the road to turning around South African Airways (SAA) and making it a potential role model for at least the rest of Africa if not the entire world.
He has created a business model so simple and realistic it could be a recipe for a sounder industry in the developing world and could solve some long-standing woes plaguing airlines in developed countries.
Ngqula, who has a background as unique as his country's history, thinks the airline industry is "easy". But airlines have made it more difficult than necessary by being "philanthropists".
"The only people in this industry that make money are the oil companies, the manufacturers and the IT suppliers - everyone except the airlines themselves," he says. "The airline industry has to do what the oil people do. They don't sell below cost. Neither does the IT industry. That period hasn't dawned on the airlines. I think it is going to come, where people will do what makes business sense. There are a lot of philanthropists out there and those philanthropists are going to learn the hard way."
SAA was one of those classic government-owned philanthropic airlines when Ngqula arrived in October 2004 after a stint as chief executive of the Industrial Development Corporation of South Africa. SAA was bleeding so much money Ngqula says it could not pay for all its aircraft, forcing him to sublease three new Airbus A340s to India's Jet Airways. Its IT systems were substandard and its passengers were unhappy.
"The yields were down. We were still in disarray. We didn't have a business case. We didn't have a business model. We were trying to reinvent ourselves but were doing all the things we'd done in the past, all the mistakes we had made in the past."
Ngqula quickly went to work, going after "quick wins" such as customer service, revenue management and aircraft scheduling. He also quickly made progress upgrading SAA's mainly organic IT systems, reducing costs, increasing employee productivity and improving efficiency, although many of these efforts are far from complete. "These are still the early days. We maybe are 60% there. There's still another 40% to go," he says.
Last April the most significant step forward was completed when SAA joined Star Alliance, becoming the first African member of any global grouping. Ngqula says the impact Star had on SAA's business was immediate and is "absolutely" responsible for a spike in international traffic in the first six months of fiscal 2006-07, resulting in load factors exceeding 90% on some long-haul routes. In September, SAA for the first time in its history flew 700,000 passengers in a single month. Codeshares with several Star members including bmi, Lufthansa, Singapore Airlines (SIA) and United Airlines helped drive the spike.
"Before we had 43 destinations, now we have 800 more that our passengers can fly to seamlessly. They didn't have that before. They get use of the lounges. When you fly SAA you feel like you belong to a big family. You're not on your own. All the passengers mention this without exception."
But Star is only one part of Ngqula's strategy for creating a bigger, better and more valuable network. SAA is forging codeshare pacts with Star and non-Star members. Ngqula says SAA will no longer fly its own metal halfway across the world for national pride.
Ngqula sees alliances and codeshares as "the way to do business" going forward and a quick and easy way for airlines to reverse past woes. SAA already codeshares with various non-Star members including El Al, Emirates, Qantas and several African carriers. It is trying to negotiate a codeshare agreement with Malaysia Airlines (MAS), which had been operating to Buenos Aires via South Africa since 1994. But even after SAA cut its Buenos Aires service in 2001, the two never considered any form of partnership. "We were all sleeping," concedes Ngqula.
SAA plans to relaunch its Buenos Aires service in July, but still sees value in codesharing with MAS. "We have a lot of South Africans who want to fly to Buenos Aires. It's a very big growth market. Trade is going through the roof between Africa and South America and also Africa and Asia," Ngqula says. SAA is also upgrading its only South American route, Johannesburg-São Paulo, from seven to 10 frequencies and is considering a service to Rio de Janeiro.
In Asia, SAA is negotiating a codeshare with Indian Airlines and has just bolstered its Johannesburg-Mumbai service from four to five weekly flights. Ngqula sees growing demand from mainland China but this will be adequately served through codeshares with MAS and Star members SIA and Thai Airways. SIA and Thai serve South Africa while SAA flies to Hong Kong. "Chinese airlines don't fly here either. They don't have to. With alliances you can let other people do the work," explains Ngqula.
In North America, SAA will add a third gateway in April when it launches service to Chicago O'Hare, United's main hub. SAA already serves Washington Dulles, another United hub, and New York JFK.
Ngqula expects Asia, North America and South America to each generate 7-9% revenue growth over the next several years. In contrast, Ngqula says SAA will be "lucky to get 5% in Europe" because "it's a mature market and competition is fierce". SAA now flies to Frankfurt, London Heathrow, Paris, Zurich and will add Munich in July. London is by far its largest market - SAA just added its fourth daily flight to Heathrow and is now seeking slots for a fifth.
But Ngqula has the highest hopes for Africa, where he expects 15% annual growth, driving 10% growth network-wide. "We expect we'll be growing Africa. That's the most profitable part of the business."
SAA already serves just over 20 African cities and will add Point Noire in Congo and Bamako in Mali in January followed by Libreville in Gabon in April. African growth ambitions are nothing new for SAA, but its approach has changed. Ngqula says SAA is not interested in acquiring other African carriers, having learned lessons from a buy-in at Air Tanzania, where it held a 49% stake from 2002 until early 2006. "It wasn't a business relationship, it was political," he says.
Privatisation tenders at several African flag carriers are drawing the attention of other airlines in South Africa as well as from other parts of Africa and Europe. But Ngqula sees no need for SAA to get involved and much prefers the codeshare or block space route. SAA still codeshares with Air Tanzania, as it does with Air Senegal, EgyptAir and Rwandair Express. It is planning to add codeshares with Air Mauritius, Ghana International Airlines and Virgin Nigeria.
Ngqula would like to upgrade many of SAA's intra-African services to at least daily by adding frequencies or codesharing with more African carriers. But he says the biggest challenge to growing its African routes is not finding codeshare partners or a lack of demand, but bilateral restrictions.
Ngqula says SAA operates the maximum number of frequencies allowed under most bilaterals between South Africa and other African countries. As a result it is unable to upgrade services crucial to the continent's economic development. Other South African carriers, such as British Airways franchise Comair and Nationwide, are also prevented from adding regional African routes. They claim when new frequencies become available the government always favours SAA.
Ngqula says SAA is also unhappy about the restrictions, pointing out it is unable to increase its Lagos service beyond three weekly frequencies. "BA and Virgin can fly as much as they want", to Lagos from London, he points out. "The governments are controlling all the frequencies and slots," Ngqula says, adding SAA is seeking more frequencies to Nigeria as well as fifth-freedom rights to the USA. SAA now routes some of its US flights through Ghana and Senegal, but these markets are limited. Late last year SAA removed the Dakar stop on its Washington service and in May it will remove the stop on its New York service.
Ngqula will be spending a lot of time over the next months trying to persuade African ministers to lift air transport restrictions. But he also has a lot more tough work ahead at home in completing SAA's turnaround.
South Africanat a glance
Revenue $3.03 billion
Operating margin 2.2%
Net margin 0.3%
Year end March 2006
Airline Business Financial ranking 34
Airline Business traffic ranking 36
RPK growth 5.3%
ASK growth 4.8%
Load factor 69.6%
In IT, SAA is behind other Star carriers. While SAA has completed a painful transition to the Apollo reservations system, it still takes SAA staff several minutes longer than most of their Star counterparts to check in the average passenger. It does not have the technology to read frequent flyer cards or ascertain if a passenger has loyalty status on Star, which gives customers free lounge access and a larger baggage allowance.
SAA also has been slow, compared with most of its Star peers, at introducing airport kiosk and web check-in, although it hubs at an extremely congested airport where long check-in queues are common. It hopes the country's first kiosks finally will be up and running at Johannesburg's domestic terminal in 2007.
Ngqula also strives to make SAA more efficient and responsive to customer needs by converting the airline into a 24-hour operation. He says employees used to treat SAA as if it were an eight-hour operation. Ngqula has responded by adding second rotations for such jobs as the Johannesburg airport operations manager.
Ngqula believes SAA can also become more efficient by improving its aircraft utilisation. SAA now only uses its 24-aircraft widebody fleet 10 hours per day and its 28-aircraft narrowbody fleet eight to nine hours a day. One option under study is day flights to Europe. SAA's widebodies now operate mostly at night.
"Day flights, that's something we have to look at to make sure we get 12 to 13 hours of utilisation," he says. "We'll start with those things which are doable now. We will exhaust everything that is easy to do, the quick wins we like to call them, and then later on we will start adding and adding."
Day flights will help SAA grow its network and add frequencies without having to add aircraft. But Ngqula says it also needs more widebodies to fully meet its growth ambitions. In a few months it will take back the three A340s subleased to Jet Airways and plans to add nine widebodies by 2008.
Khaya Ngqula grew up and was educated in apartheid South Africa, but began his career in New York in 1981 as an IBM salesman. IBM subsequently sent him to its Dallas, Texas marketing school for training. "They didn't want to train me here because whites weren't going to buy from black people," he recalls.
In 1986 IBM moved him back to South Africa as an administrative assistant to the chief executive of its South African division. He left IBM in 1987 when it disinvested because of US sanctions and took a job as district sales manager for South African Breweries in Soweto. "That's where I learned about logistics - delivering beer."
In 1993 he joined Norwich Financial Trusts as managing director. In 1997 he was appointed chief executive of the Industrial Development Corporation of South Africa. He stayed at IDC, restructuring a major steel company, until October 2004 when he joined South African Airways on a six-year contract. He plans to stay the full term.
Ngqula is married with five children, ranging in age from under a year to 20. He spends much of his free time hunting at a farm which has been in his family since 1895.
On the revenue side, SAA has chalked up big growth over the last two years and is meeting targets, prompting it to embark on a period of growth after a period of consolidation. Revenues, driven by South Africa's red hot economy, surged 13% in fiscal 2005-06 to R19.6 billion. In the first half of the current fiscal year it increased another 7% to R9.6 billion.
SAA made heavy losses under former chief executive Andre Viljoen's final two years. He resigned in August 2004 after reporting a R8.7 billion loss for FY2003-04. While SAA was back in the black in the last two years, the recent trend has been discouraging. Net profit fell 90% from R648 million in FY2004-05 to R65 million 2005-06. Yields also dropped 4%, driven by increasing domestic low-cost competition. In November SAA launched a low-cost subsidiary to compete for this fast-growing market segment.
The R652 million loss in the first half of the current fiscal year represents a further 37% deterioration compared with the R475 loss for the first half of 2005-06.
While SAA is often held up internationally as a rare African success story, in South Africa it faces many challenges. Locals complain about the carrier's reliability and service, although Ngqula insists complaints have been reduced dramatically over the past year.
Ngqula has come under fire as being too aggressive. SAA's unionised workforce has a love-hate relationship with him, according to employees, and he clearly has clashed with many executives. Seven resigned in the first 18 months of Ngqula's tenure including the chief operating and chief financial officers. Ngqula acknowledges his style is aggressive, but says he is satisfied with his new 12-member executive team.
"I think we're there. I think we've got a team that is starting to deliver the goods and you can see the airline is building. They are used to me now. They trust me. They know when I say 'this is going to happen' it happens. When I say 'it's not going to happen' it's not going to happen. If you convince me, I change. A clear commander changes, a general in the army."
Source: Airline Business