in Air Transport / Features

Family fortunes...

Posted 28 April 2017 · Add Comment

South African Express (SAX) and South African Airways (SAA) may be separate companies, but their corporate identities and destinies are closely intertwined. As Victoria Moores found out, both companies are battling a stagnant market and reputation issues, which will be hard to overcome.

“If South African Airways is sick, it is very difficult for us not to catch the flu. We need a successful SAA. We have to work to make sure they are a success.”
Those were the words of SAX CEO, Inati Ntshanga, who has led the regional airline for the past seven years.
There is definitely a bug doing the rounds of the South African market – triggering several airline demises – and SAX’s big brother, SAA, was not in the best health before the downturn, blighted by management instability.
While the commodity crisis has not really affected SAX, the Rand has dropped in value, there is no major growth in the South African market, and competition is stiff.
“The competition is here today, gone tomorrow,” Ntshanga said. “But we ended up with a huge price war. It’s not sustainable as we’re not building new passengers.”
In 2015, SAX carried 10,000 passengers. But this dropped to just 6,700 in 2016. New entrants are not stimulating the market, despite fierce price competition, so the airlines are fighting to attract the same passengers for less money.
On top of the sluggish market, SAX has watched on as SAA has suffered leadership and financial turmoil over the last few years, with a revolving door of CEOs hampering its long-term turnaround strategy (LTTS). Just to cap off an already pretty dire situation, SAX has had its own reputational worries to contend with.
“At the end of April 2016, we had our air operator’s certificate (AOC) suspended. That was very painful, but we were able to remove the suspension after 42 hours,” Ntshanga said.
There were two major triggers for the grounding, according to Ntshanga. Firstly, SAX failed to respond quickly enough to the findings of a Civil Aviation Authority audit seven days earlier. SAX had the documents it needed, but the airline did not respond satisfactorily to the CAA.
Then there was an incident where a SAX aircraft had a pressurisation problem, restricting it to a lower altitude. When the crew could not comply with an air traffic control (ATC) instruction to climb, ATC reported the problem to the CAA and SAX was slammed for not reporting it directly.
“At midnight [on the night of April 29-30, 2016], I received a message that the AOC has been suspended,” Ntshanga said. This was the Friday night. Meetings were held the next morning, but the airline remained grounded until 17.00 on the Sunday.
“We were back in service on Sunday evening, but we lost our status as the only airline in Africa that had never been grounded after 22 years,” Ntshanga lamented. “It was a lack of communication. It was mainly paperwork-related. It wasn’t great. We have learned since then. It has caused reputation issues, so management is working to rebuild passenger confidence. It shouldn’t have happened. I still maintain that.”
On top of the airline’s safety reputation, its financial stability – in terms of its ability to continue as a going concern – has also come under the spotlight.
“We have never defaulted on our aircraft payments, or anything like that, and we have never had to rely on the government guarantee. The government has never had to step in. We have enough money to run the business. We started from zero and have never been capitalised by any shareholder. We continue to exist purely on revenues from passengers, whereas if we were privately owned, we could have access to shareholder loans. This is one thing which is misunderstood.”
Meanwhile, Ntshanga said it has become “fashionable” for banks to require Rand-for-Rand government guarantees from state-owned companies, whereas this is not expected of privately owned companies. SAX missed the deadline for one of these government guarantee applications, which caused problems, and the financing trend means it has had to double its guarantees from R539 million ($41.7m) to R1.106 billion.
SAX also had to do a fairly substantial asset value re-evaluation in 2011, which caused people to question its finances. However, Ntshanga is planning to reduce the guarantee figure every year over the next five years and he defended the airline’s financial performance.
“The airline is going steady. So far, we have moved from a huge loss to a breakeven profit. If you take the revenue minus the costs, our operation is profitable. Last time we posted our finances, we had a R14.5 million ($1.1m) operating profit, but a net loss of R132 million ($10.2m). This was because of depreciation and write-offs.”
But Ntshanga acknowledges that trading conditions are tough and he has been working to restructure the airline’s operations to suit market conditions as part of a 20-year plan. “We’re looking at what we should be doing over the next 20 years to sustain ourselves and what we’ve learned over the last 20.”
Part of this involves a more detailed five-year strategy, which looks at SAX’s cooperation with SAA and the Star Alliance, as well as its own network, feeder flights and fleet. It also stretches to technical expertise and SAX’s role as a training ground for its sister companies. Finances and joint ventures are also covered.
In real terms, this has led to SAX cutting six routes that made up 13% of its available seat kilometres (ASKs) and withdrawing two Bombardier Q400s and two CRJ700s from its fleet. This downsizing has helped bring down the airline’s fuel costs, airport fees and taxes.
Lower fuel prices have also helped, but the weaker Rand has minimised this benefit. While fuel dropped from $99 to $35-40 per barrel, Ntshanga said SAX felt only 36% of this 66% reduction. Only 18% of this was from lower prices; the remainder came from SAX’s downscaled operations.
Other cost savings have come from a revamp of the airline’s on-board catering to a basic snack, which has halved this cost from R60 million ($4.6m) to R30 million. SAX also got a 38% saving by renegotiating its maintenance agreements. “All of the documents that I am seeing tell me that our costs are moving down,” Ntshanga said.
However, these cost cuts will not extend to redundancies. “There are not going to be any retrenchments, but we will allow for natural attrition,” Ntshanga said. In November 2014, SAX employed 1,188 staff and this figure narrowed to 1,006 by September 2016.
Despite the cuts, SAX is preparing to invest for its future. The airline is closing in on a lease deal for 20 aircraft for delivery over the next five years, as it seeks to upsize to 90-seat jets from its current fleet of 50- to 70-seaters. “We are trying to move away from smaller aircraft to bigger aircraft,” Ntshanga said. “We are in advanced discussions with lessors.”
SAX currently operates a fleet of 20 aircraft, comprising eight Bombardier CRJ200s, two CRJ700s and 10 Q400s. “We want to have a common fleet by 2022,” Ntshanga said. “As the current leases expire, we will replace them with 90-seat aircraft.”
While SA Express is considering COMAC, the Mitsubishi MRJ90 and the Sukhoi Superjet 100 (SSJ100), Ntshanga said the CRJ900 and Embraer E190 are the strongest contenders. He would consider E190-E2s, but this would depend on timing.
The company’s corporate structures are also coming under review and a “big name” consultant is being brought in to look at optimisation. “We want to have a holding so that all the other airlines [SAA, SAX and Mango] report to the holding company. We would like to see a single board working together on operations and strategy.”
While SAX is a separate company to SAA, the two airlines’ branding is closely aligned and any network moves are a necessary compromise between the two businesses. “What can we do, arm wrestle? I wish we could,” Ntshanga said.
“We are an incubator for training. We serve as the training ground, but that costs money. We want a father who will treat all his kids equally, with no favourites. We want to be able to go to our father and say ‘if we are training for everybody, can everyone please chip in’.”
 

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