This could finally be the year when the pieces start falling into place for South African Airways (SAA). If all goes according to plan, by the end of October the South African Government will have decided on a strategic partner to take a 20-30% stake in its flag carrier. Not only will it represent the start of SAA's farewell to the restrictions of state ownership, but it will also hold out the offer of a place within one of the emerging global airline alliances - a potent symbol of how far the carrier and the country have come from South Africa's years of isolation.

Africa's largest carrier has not found itself short of potential suitors. British Airways, Lufthansa, Singapore Airlines (SIA) and, most recently, Continental Airlines, have all expressed an interest in courting SAA.

SAA's chief executive, Mike Myburgh, concedes that much of the airline's strategy is on hold pending this key strategic decision, not least the long-delayed fleet replacement programme and further expansion of the international network. It is, he says, a "watershed".

The lingering question is whether SAA or its state owners will actually be in a position to meet what is beginning to look like an ambitious October target.

Early problems have already emerged over how to extract SAA from Transnet, the state holding company which oversees the airline - and everything else, from shipping through to oil pipelines. SAA is no more than another operating division at present, but the plan had been for it to emerge on 1 April as a standalone company, with its own board of directors and set of accounts. In the event, this corporatisation has had to be postponed as Transnet and the Government tackle the legal niceties of how to disentangle SAA from the holding company's heavily indebted balance sheet. There is also the issue of SAA's pension fund, which needs to be recapitalised, presumably by the Government, to the tune of around R2 billion ($400 million).

Myburgh concedes that the issues will have to be resolved, but argues that "-other preparation for the privatisation does not have to stop". Stella Sigcau, the minister for public enterprises overseeing the privatisation, also pledges that the October deadline will be met, although doubters believe that it may yet slip into 1999.

Even without the Transnet issues, SAA has problems of its own to address. Losses have been persistent, coming in at R323 million for the 1996/7 financial year and expected to be at much the same for 1997/8.

"We've certainly gone through a very difficult patch," says Myburgh. Not least from a sluggish domestic economy and the steady fall in the value of the rand over the last couple of years. Around 55% of the airline's costs are in hard currency, but only 35% of its earnings. A fierce domestic fares war has not helped and SAA has not even had the full windfall from declining world oil prices, with the cost of fuel in Johannesburg still at a premium.

The airline has been attempting to tighten up its operations, including efforts to stem what an uncharacteristically coy South African press refers to as "internal revenue leakages".

SAA says that its "operation clean up" project netted some R170 million in savings last year and the airline is pressing for a more fundamental restructuring. Management is still drawing up a new and comprehensive business plan designed to take the carrier through to privatisation and beyond. The effort goes on to agree a deal with a sceptical workforce.

In many ways, the issues are the same as those faced by any state-owned carrier attempting to sharpen up its commercial edge ahead of privatisation. For SAA, there is the added legacy of South Africa's isolation from the world community. That led to a drive for self-sufficiency that is still well in evidence across the group and still a source of pride among the workforce. Walking around the engine shops, maintenance hangars and offices at SAA's impressive new headquarters by Johannesburg Airport, it is difficult not to be struck by the scope of its capabilities nor by the contrast with the vogue among leaner western airlines for spin-offs and outsourcing.

Myburgh says that there is now a "strong move" to decentralise the group, dividing up units such as information technology or technical services, although he says that they will continue to develop "interdependently" with the core airline business. He concedes there is a clear opportunity to attract more outside work into the maintenance operations. "What would really bring in additional work here is an alliance with an aircraft or engine manufacturer," he says.

Last, but far from least, SAA -like the country as a whole - is finding its way in the uncharted territory of post-apartheid South Africa. It is easy to forget that it is only little over four years since president Nelson Mandela and the ANC swept to power in the first multi-racial elections.

The springbok may have been taken off the SAA tail, but more fundamental change will take a little longer. Some of the old mistrust lingers, making the usual sensitivities surrounding flag carrier politics even more delicate.

The fleet decision is perhaps a case in point. The original contest ended more than two years ago, with an order for four Boeing 777s and three options announced at the end of 1995. By now most of the aircraft should have been in service. Instead the order has sat on the shelf for two years, despite a clear need for new capacity. At least part of the delay was caused by suspicion within the new Transnet board over the decisions being made by SAA's Afrikaaner old guard. The competition has now been thrown open again, putting Airbus back in the race with its new A340/A330 offerings.

Despite these caveats, there does appear to be a head of steam building up behind the Government's privatisation effort. Myburgh confesses that, two years ago, he was sceptical about the speed with which the Socialist (and in part Communist) ANC Government would move, but has since travelled an "amazing" distance.

Domestic airline Sun Air has already been sold off and the country's airports authority partially privatised, with Italy's Aerporti di Roma as its strategic partner.

A similar plan is in place for SAA. Besides the strategic partner with a 20-30% stake, around another 3% will be set aside for staff, with another portion going to a black empowerment group, taking the total to 49%. In the longer term, the aim is to move to a flotation, but for that the airline will need to show steady profits. "You need a track record of at least two years and it was our intention to move as quickly as possible," Myburgh says, adding that the group should nevertheless be able to achieve profits this year.

It is the lack of profitability that is steering SAA towards an airline partner. Myburgh says that there is nothing to stop a bid from an institutional investor but, given SAA's current weak levels of return, the opportunity is likely to be of more strategic value to a fellow airline.

Several have already thrown their hats into the ring. Lufthansa, which already has a partnership with SAA, has now joined to support Star alliance partner SIA in a bid. BA plans to bid (its US partner American Airlines also has links to SAA) and Continental, now linked with the KLM/Alitalia/Northwest grouping, has expressed an interest.

The reasons not hard to trace. Africa is among the last regions in the world unaligned to the emerging global alliances, of which Myburgh believes that only four will survive. Air traffic growth in sub-Saharan Africa is hardly well developed. If and when it does begin to take off, SAA is well placed to take advantage from its Johannesburg hub.

After a hesitant start, SAA is beginning to make inroads into African markets. The latest additions have been new services to Senegal and Nigeria, extending coverage of west Africa, while frequencies have been raised to the eastern states backed by annual traffic growth of 15% per year. "I think we've tended to overlook Africa a little. We always saw ourselves as part of Africa even during the years of isolation. But it's taken us a while to realise the potential of the market," says Myburgh. Africa represents around 8% of the airline's income, but it could grow to 12-15%, with the added advantage that it effectively represents dollar earnings.

SAA's rehabilitation as a good African citizen has seen it begin to develop relationships within the southern African region. The Alliance venture with Uganda, Tanzania and now Rwanda is one example, which Myburgh believes can be built upon. He concedes that "-we will have to change the model in future" to allow the local airlines to take a larger stake to avoid the discontent that has occasionally marred the venture.

Johannesburg is also emerging as a base for badly needed technical capabilities and expertise in the region. May saw the opening of an International Air Transport Association learning centre at SAA's headquarters - the first on the Continent.

Beyond Africa, the North American market is "coming up very fast", says Myburgh. He adds that there had been plans to develop in the Far East, but those have been "put on hold" in the wake of the region's economic crisis.

For the future, Myburgh believes that there could be some interesting capital to be made out of promoting Johannesburg as an intercontinental connecting hub, capturing a cross flow of traffic coming down from the US east coast to Australia, or from Asia to South America. That should yield an additional 5%of traffic, he says. The advantages of a global alliance begin to become clear.

Source: Flight International