For SAA Cargo its future is first and foremost being substantially shaped from within, as the stateowned carrier grapples with devising a turnaround plan to reverse growing debt and management uncertainty in order to inject vitality and a new strategic vision into the 79 year-old carrier.
Addressing the South African Parliament’s Portfolio Committee on Public Enterprises – effectively the carrier’s owner – on the airline’s annual report and financial statements recently, SAA representatives, led by acting chairperson Duduzile Myeni, said the strategy would take SAA into the next 20 years. “I urge you to have faith in the national carrier,” Myeni implored his political overseers.
A turnaround plan will be crafted from the best elements of about nine or ten proposals compiled over the past decade by the carrier. The committee was also told that candidates had been shortlisted for the position of SAA CEO, a position vacated through a series of resignations and terminations in the highly politicised job.
Speaking at the committee hearing, acting CEO Nico Bezuidenhout said that SAA had lost ZAR12 billion (US$1.32 billion) in capital over the past 10 years, of which at least ZAR9 billion was lost through fuel hedging, he said.
“We are beyond the point of denial. There has to be a way of moving forward, hence the turnaround strategy,” Bezuidenhout said, adding there would be no “piecemeal approach” as SAA crafted its new strategy.
Cargo optimism
The Speaking to Payload Asia on the sidelines of the Air Cargo Africa exhibition and conference in Johannesburg in February, South African Airways Cargo general manager Tleli Makhetha and the cargo division’s head of sales, Auriel Newman exhibited a calm confidence that decisions being made, on among other things fleet renewal, will also take into consideration the goals and aspirations of the cargo department. What is key, according to Makhetha, is that the future strategy of the airline has taken into full account the importance of cargo to the overall success of the airline.
“There is a much more inclusive decision making in so far as South African Airways is concerned, it is taking more cognizance of the cargo business which is an integral part of the planning process.” Indeed a key part of the turnaround plan involves developing a long haul fleet plan, of which a decision is imminent. Although the details have yet to be released, what is clear is that the carrier will be increasing its number of long haul aircraft which will involve taking on either Airbus or Boeing wide-bodies.
“We did an assessment of both suppliers and it could go either way – but if we look at the markets we serve – our passenger side is developing their strategy alongside our belly requirements,” said Newman.
“We work closely and with regards to how the whole cargo plans evolve, our passenger side has a very collaborative relationship with us, so as part of their long haul fleet planning they have information from us to ensure that each traffic lane has sufficient capacity to meet our demands as well.”
Makhetha added: “What is important for cargo is what is going to happen to the passenger fleet because as we introduce into our medium-haul routes into West Africa – in particular with wide-body passenger aircraft – that will naturally give us the belly capacity and its actually an easier way into those markets than with a freighter.”
Currently the airline has a passenger fleet of 53 aircraft – a mix of A319/320/321, A330, A340 and B737 aircraft – flying to 11 international destinations and 26 destinations on the African continent from its hub at Johannesburg’s OR Tambo International Airport.
The carrier also has four short-haul freighters – two B737-200s and two B737- 300s – which it operates predominantly in the Southern African Development Community (SADC) region (a socioeconomic, political and security grouping of 15 southern African states).
Currently the carrier uplifts nearly 140,000 tonnes of cargo per annum – of which 70 per cent is belly capacity and the remainder maindeck. Makhetha says this will increasingly change in favour of belly as the carrier undergoes wide-body fleet expansion.
Network expansion
With South Africa’s export economy predominantly centred on automotive and perishables exports, much of SAA Cargo’s main trade is on the SADC region and the traditional Africa-Europe trade lane with London, Frankfurt and Munich comprising the only three European gateways the carrier serves.
A significant network expansion occurred last year when the carrier began operating a weekly non-stop Johannesburg-Beijing service three times a week using A340-600 equipment. Although this opens up interesting possibilities for the cargo side, cargo options can be severely constrained by the fact it’s a 15.5 hour flight which places severe cargo weight restrictions because of fuel requirements.
But overall Newman says it has been reasonably good so far and in February the cargo division put a record cargo onboard of 32 tonnes. Not good news for the passenger side as it means load factors upstairs were thin, but she says this is an inherent problem on the route as load factors are inconsistent partly due to the movement of migrant workers.
India is also performing well, she adds, with the carrier recently increasing frequencies on its Mumbai service to daily, using A330-300 aircraft. The interesting difference between India and China, Newman notes, is that: “India requires frequency, whereas China requires volume”.
Clearly this first foray into North Asia with Beijing service has generated excitement in the group with Newman saying there is a desire for more. “We would like to expand into Asia more and I think it’s part of the plan on the passenger side to develop Asia more, but it all depends on how the passenger markets recover.” This could include, she says, Singapore or maybe Bangkok.
When asked whether this keen interest in Asia along with early cargo successes constrained by limited belly capacity could see SAA Cargo move into larger, longer range freighters, the answer is a clear “no”, at least for the foreseeable future.
“It’s all driven by trade flows,” notes Makhetha. “If the volumes are there one would consider it,” he says, adding that really it’s the imbalance issue that is the potential deal killer. “And imbalances are not just about volumes, but also about the commodities, because obviously different commodities give you different rates.
“For freighters, long haul freighters in particular, you have to make sure you’ve got it absolutely right. You may fill the aircraft in both directions, but one way you might fill it with low yield cargo and then suddenly the economics don’t work.” The two cargo executives also reference the very pertinent debate going on right now in the air cargo industry – whether long haul freighters have life ahead of them in light of the ample belly capacity of modern, wide body aircraft.
Africa focus “For now our emphasis is pretty much on Africa,” Newman adds, pointing to the carrier’s dominant market share in the southern African region. “We pretty much have SADC in the bag with about an 80 per cent market share in this region and now our growth – for freighters at least – is pretty much within the African continent.” Indeed this is the core of SAA Cargo’s strategy going forward. “Developing east and west hubs and feeding in and out of offline points – that is our focus for now,” she says.
“It depends on how markets pan out, but our intentions are that we have at least one hub in West Africa,” with Lagos and Accra two of the possibilities, she says. East Africa is more challenging, she adds, because of the over-capacity on that lane, predominantly Nairobi.
“And so in developing the hub it’s based on whether we can get the connectivity rights into off-line points and this is where the trade imbalances on points outside of Nairobi and East Africa are more challenging than in West because the market sizes are much smaller than in West. But developing hubs in both East and West is very much in the cards,” Newman emphasises, probably in the next two or three years with West Africa first, followed by East Africa.
“East, we can work on some partnerships in the short term, but in the medium term we would be looking at our own hub.” More freighters are clearly in the works to support this hub expansion, something larger than the current B737 shuttle fleet. “Hopefully in the next 2-3 years we should get another two midrange in – either B757 or B767 – anything with a 6.5 hour range,” Newman added.
Competition
Aside from the general market downturn, which Africa has somewhat avoided because of the improving economic conditions across large swaths of the vast continent, a key problem for SAA is competition. Makhetha describes it as “really, really rampant,” noting that the South African authorities take the view that they are not going to protect the national airline, “so we have moved quite far away from a protectionist regime.” “It’s a very open skies type atmosphere.
There are still bilaterals so the market is not unregulated, but the point is that entry into South Africa is not overly restrictive,” he says adding that “almost every global airline flies into OR Tambo.”
“Our challenge is to remain competitive in this very open market and taking into account the size of our economy – we don’t have the biggest economy in the world, we have an ambitious economy, but not the biggest –competition is a real issue for us. And because of all the capacity that is in our market, especially outbound, the whole question of yields and rates is a challenge because all this competition is suppressing yields,” says Makhetha.
In reality SAA Cargo’s two-fold challenge is not unique: “To maintain market share, but also to ensure we maintain yields to make our business sustainable. We tend to cooperate with a lot of airlines that are not flying in direct competition,” and sometimes this even means cooperating with what he terms the ‘mega-competitors’ like Emirates, with whom SAA Cargo has an interline agreement.
“Our approach to competition is that it’s there, we live with it and where we can leverage on our competition then we do that, but we have to be very careful that we don’t do it at our expense.” Currently the cargo carrier has interline agreements with over 40 carriers, predominantly in Asia, but also spanning the globe.
“It’s amazing because the people that knock at your door are the people you sometimes least expect, but it’s an open market,” he says.
Makhetha notes that where the carrier is doing well, is in offering more consistency than its competitors. “The problem with the Africa market is that people jump in and they jump out. We want to be the ‘Coca-Cola of Africa’ – reliable and consistent. Consistency in the market is our ‘trick’ – we avoid cancelling our freighters and would rather go with a low load factor because at least our customers can plan based on our frequency, because we know customers are developing or maintaining a trade link with someone else. We want to be known for that consistency.”
Looking ahead at this year Makhetha sees a recovery taking shape, “very, very slowly”. Indeed, only last year did SAA Cargo get back to anywhere near the pre-2008 levels he added. “We are now looking at a more steady growth at around five per cent in terms of volumes over the year which is on average for Africa where growth is projected at around 5-6 per cent.”
