Political interference has left South African Airways seriously out of pocket and the airline's management quietly seething after a clash between two government departments over the interpretation of trade rules led to the delay of desperately needed new aircraft.

The debacle centres on SAA's order for seven B777s and two B747-400s placed last November for deliveries beginning in July 1997. The aircraft order was placed after approval of offset deals worth R110 million ($22 million) each in cash from Boeing and engine supplier Rolls-Royce by the Department of Public Enterprises, under whose jurisdiction SAA falls.

These payments were designed to meet South Africa's complicated counter trade rules set down by the Department of Trade and Industry. But when the DTI came to rubber stamp the engine order, it baulked at the size of cash offer and demanded a further sweetening of the pot. Since the R1 billion order for 22 Trent engines was still awaiting confirmation, the DTI refused to sanction the contract as it brought pressure to bear on Rolls-Royce to increase the offset payments.

The government was warned as long ago as February that further delay in awarding the engine contract could jeopardise the production slots at Boeing. But Zukile Nomvete, who was appointed by the government in April as director of Transnet, SAA's parent company, requested more time to study the deal after the DTI ruling - time that Boeing did not have.

The US manufacturer confirmed the loss of slots for the first two B777s, pushing them back to November or later, the same month. This could also have a domino effect on the production of the other five B777s, and possibly the two B747s.

More galling for the carrier is the increasing cost of the order. Since mid-February, when the engine contract should have been announced, the rand has depreciated by more than 17 per cent against the dollar. As the unit price was not fixed at the time of the order, there is speculation that production costs could rise by 20 per cent or R700 million ($160 million).

The Boeing contract includes an inflation correction of 1 per cent for every three to four months of delay, and SAA may also have to pay production line disruption penalties.

On top of this comes the loss to the carrier of revenue that the new aircraft would have generated on routes suffering capacity shortages and new destinations. 'This is a classic case of being penny wise, pound foolish,' an industry source observes. The carrier is desperately short of aircraft to service high density routes, as well as 16 planned new services to Africa, the Middle East and Far East, the US and Europe.

Boeing stresses that the airframe contract is cut and dried and Rolls-Royce refuses to elaborate. SAA's management is silent on developments, or lack of them, probably for fear of embarrassing or antagonising the new executive structure at Transnet.

The complicated set of counter trade rules, set down by the Department of Trade and Industry, is open to various interpretations, according to aviation sources. In the case of SAA the deal, worth R3.5 billion ($795 million), required a counter trade commitment of 80 per cent of total contract value, or R2.8 billion ($636 million). Boeing says it was informed that it must agree to a R110 million offset.

Roger Makings

Source: Airline Business