SAA to pull plug on loss-making routes

[FoxTROT]

From http://www.etnw.co.za/NewsDetails.aspx? ... iuniqueid=#

11 Wed, Sep 2013


By early next year SAA, SA Express and Mango are to be integrated into a new airline group that in turn will form part of a new holding company reporting to the Department of Public Enterprises (DPE). SAA will also review its global network and eliminate loss-making routes.

This restructuring forms part of SAA’s new Longterm Turnaround Strategy (LTTS) presented to the Parliamentary Portfolio Committee on Public Enterprises in Cape Town today. The long-awaited presentation was made jointly by Public Enterprises Minister, Malusi Gigaba, SAA chairperson, Dudu Myeni, and SAA ceo, Monwabisi Kalawe.

Of high priority, said Monwabisi, was the recapitalisation of SAA, a review of its global network to eliminate loss-making routes and refleeting to mitigate fuel costs. He confirmed that all of SAA's international routes were currently loss-making and were under review in co-operation with the DPE. "Management has clearly identified loss-making routes. We have asked DPE to identify those that are crucial to growth of the economy. Once these have been identified, we'll pull the plug on those not deemed crucial and that are making losses," he said.

Apart from the airlines group, the new holding company will include three other sub groups: a Maintenance and Repair Organisation (MRO) sub group that will rebuild SAA's aircraft maintenance capability, a Logistics sub group incorporating Air Chefs and Cargo, and a Loyalty sub group incorporating Voyager.

In order to ensure implementation of the LTTS, a turnaround office will be created that, along with the Group executive committee, will report to the ceo, who reports to the board, which in turn reports to the DPE and National Treasury via quarterly reports, and to the Parliamentary Portfolio Committee and other stakeholders, as required. The implementation plan is to be supported by a scorecard and management plan that encourages accountability.


Hilka Birns

[FoxTROT]

Any ideas on which routes are likely to be cut given the statement "all" international routes are unprofitable?

[evanb]

South Africa has a lousy geographic position to really build a long haul hub, which means its always going to a lot more lucrative to build a hub around connecting into and out of southern Africa. It's akin to Qantas and I think we are likely to see a very similar plan to what Qantas have done which is reduce long haul flying to connecting into a few key hubs and a small number of high yield/profitable points. It might also mean SA giving up on trying to be a Asia to South America connector since they are ultimately going to loose the long run battle with the middle eastern carriers on this.

So what are the key hubs that they will focus on? Well its probably more dependent on which airlines they will partner with. They will get a middle eastern partner. They have already started moving closer to Etihad, but that might just be to get Emirates, who knows. Etihad are more keen on these sorts of relationships, but Emirates would give them access to the global mega hub, cheaper Dubai fuel and cheap airports, just like Qantas.

That said, first routes to go would include Beijing and Buenoes Aires for sure, reduced frequencies on Sau Paulo and possibly London. Munich and Washington are probably not far behind.

[LongRangeCruise]

No route would be profitable if its financed from a weak balance sheet.

I think that all the routes we have are doing fine. If they cut routes it would further weaken the balance sheet. You can't support 11 000 staff on a smaller route structure. I don't think job losses are on the cards either.

All this talk will lead to little or no change.

[evanb]

Here is a functional problem of the world SAA live in. If you take the next flight tonight (11 September) or tomorrow morning form Johannesburg, returning a week from now (18 September) on SAA:

To London, you will pay R9917 in economy, R48568 in business
To Frankfurt, R12757, R41307
To Munich, R16112, R49692
To Hong Kong, R12521, R38561
To Beijing, R10044, R33042
To Mumbai, R6951, R19763
To Perth, R12515, R44694
To New York, R16151, R71542
To Washington, R18101, R76657
To Sao Paulo, R10459, R33811
To Buenos Aires, R10014, R33022

For routes where there is a lot of competition, especially through middle eastern competition, prices and yields are pretty low. Business class tickets to the United States for instance are double that of Europe and Asia. Economy tickets to London and India are cheaper than a lot of regional routes! Compare this to regional and short haul routes where flights times are sometimes 70% less:

However, compare this to short haul and regional:
Lagos, R9999, R52272 (note business class on the return is actually already fully sold a week ahead)
Accra, R6054, R21400
Luanda, R4937, R13006
Entebbe, R8268, R13772
Nairobi, R7093, R18117
Dar es Salaam, R8259, R12138
Mauritius, R6894, R15800 (note business class on the return is actually already fully sold a week ahead)
Windhoek, R3909, R6375
Harare, R3835, R8599
Lusaka, R3973, R10697
Victoria Falls, R6795, R7399
Livingstone, R5093, R7297
Durban, R1912, R5000
Cape Town, R2506, R7190
Port Elizabeth, R2734, R5548

While this ignores may variables like costs, cargo, load factors, etc, you see why they want to focus on Africa and cut long haul flying! Now sure, you might say, well why does BA, AF, KL and LH have so much capacity into Joburg, well its because they have a massive feed at their hubs, and a lot of that feed is coming in from higher yield destinations in North America. Johannesburg is a hub for sure, but only from a small number of domestic and regional destinations, mostly because of its remotely geographically. It is best comapred to Sydney, and besides for domestic connections (and New Zealand) it does connect people from one country to another. SA needs to realize that it's role is mainly domestic and regional, and keep long haul flying to key hubs where there is either sufficient high yield O&D traffic and to hubs where it can maintain a good feed with a partner that is interested in feeding it!

[evanb]

And here is the crunch:

It can sell a ticket for the same price to Lagos as it does to London, and to Nairobi for the same as it does to Mumbai, even though the flight is half the time and distance!

[ERASER]

In the LTTS they apparently identified China and some Africa routes as “dead ducks”.........now the million dollar question, will they really cut China as it was a “political” route in the first place due to “BRICKS” and bite the hand(government) that feeds them???

[HAAN]

South Africa has a lousy geographic position to really build a long haul hub, which means its always going to a lot more lucrative to build a hub around connecting into and out of southern Africa. It's akin to Qantas and I think we are likely to see a very similar plan to what Qantas have done which is reduce long haul flying to connecting into a few key hubs and a small number of high yield/profitable points. It might also mean SA giving up on trying to be a Asia to South America connector since they are ultimately going to loose the long run battle with the middle eastern carriers on this.

So what are the key hubs that they will focus on? Well its probably more dependent on which airlines they will partner with. They will get a middle eastern partner. They have already started moving closer to Etihad, but that might just be to get Emirates, who knows. Etihad are more keen on these sorts of relationships, but Emirates would give them access to the global mega hub, cheaper Dubai fuel and cheap airports, just like Qantas.

That said, first routes to go would include Beijing and Buenoes Aires for sure, reduced frequencies on Sau Paulo and possibly London. Munich and Washington are probably not far behind.

I agree with evanb. The only way SAA can turn around profit is to do what Qantas did. SAA need an alliance like Emirates. SAA need to can Beijing, Mumbai and Hong Kong and give that to Emirates.
And let SAA pass through Dubai and operate to LHR and FRA. There is enough market there, especially to London where they can re-route 1 flight a day via Dubai. They can even do like TAAG and re-route
through to Beijing and have 5th freedom rights.

This will also give my me opportunity to see my ex buddies at SAA when they pass through here in Dubai!!!

[JBs]

I agree with evanb. The only way SAA can turn around profit is to do what Qantas did. SAA need an alliance like Emirates. SAA need to can Beijing, Mumbai and Hong Kong and give that to Emirates.
And let SAA pass through Dubai and operate to LHR and FRA. There is enough market there, especially to London where they can re-route 1 flight a day via Dubai. They can even do like TAAG and re-route
through to Beijing and have 5th freedom rights.

This will also give my me opportunity to see my ex buddies at SAA when they pass through here in Dubai!!!

I also agree with the overall strategy, but there is one subtle difference between SA/QF; It is currently not possible to get from Aus to Europe without a stop, the old model saw QF stopping in SIN and then carrying on to LHR/FRA, and then connecting to other European destinations... This meant that other than London and Frankfurt, QF customers needed to have 2 stops. The EK deal means that customers can travel from Aus to most European destinations with one stop in DXB.

SAA is slightly different in that it can operate to a lot of these destinations non-stop, while a deal with a Middle Eastern carrier will undoubtedly open up more destinations, does this not worsen the proposition?

Wouldn't it be more beneficial for SAA to enter into a joint-business with LH on SA-Europe where both carriers can lever off eachother's short-haul network at each end of the route. They could have a form of revenue share/joint business arrangement on the long-haul sector such that it shouldn't matter which metal operates the sector.

JNB-LHR might be a route that can continue as a stand-alone, since bmi's closure connectivity out of LHR has deiminished substantially for SAA out of LHR.

Heading East, wouldn't the logical thing be to do the same thing with a Star Alliance member out that way? Singapore, AIr China or Asiana for example, enter into a joint business arrangement where sales teams of both ends are selling for eachother and sharing in the revenue/costs of the route.

The creation of LATAM and TAM's movement from Star to OneWorld would be something to think about on the S American routes, and there must be something that could be done with United on the US routes.

I personally think that in the absence of mergers, alliances are going to need to get a lot closer and join businesses a level deeper. (Much like BA/AA/IB and Virgin/Delta are doing over the Trans-Atlantic and QF are doing with EK).

I personally can see the value in a DXB hub for QF, but not really for SAA.

[evanb]

I think SA and QF are more alike than some think. Yes, you always had to go at least one stop to anywhere in Europe from Australia, and sometimes two stops. To get from most places in South Africa to most places in Europe you also need at least one stop. Only LHR, AMS, CDG, ZRH, FRA and MUC are not available non-stop from JNB in western Europe. MUC will probably lost, and gone are the days of MAD, LIS, BRU, MXP, CIA and ATH, and even longer gone are direct flights to MAN, CPH, LUX, etc. So unless you are going from JNB to one of these five places you have to connect.

Working through a hub like DXB or AUH (I think DXB offers a lot more) one can get one stop from JNB, CPT and DUR to a huge number of destinations through Europe, the Middle East, South Asia and East Asia. I like HAAN's idea of continuing to service LHR and FRA through a middle eastern hub (both Europe and UAE are very liberal on 5th freedoms). Also, this could go the same way east from to BOM, etc. However, I would think SA would want to keep HKG since it could be a profitable route and has been a good one in the past and is one that really is workable.

Unfortunately, the Star Alliance partners don't seem to care about the survival of SA. LH group have not tried to build their relationship with SA into anything more than some nice codeshares, United have been so awful that SA have looked to JetBlue in the US. SQ has been even hostile to SA, not willing to code on SA's regional network and bypassing them on South America.

[evanb]

Addition: SQ are pretty hostile to anything more than code shares in most of Star Alliance. It's nothing personal to SA.

[b7x7]

I think SA and QF are more alike than some think. Yes, you always had to go at least one stop to anywhere in Europe from Australia, and sometimes two stops. To get from most places in South Africa to most places in Europe you also need at least one stop. Only LHR, AMS, CDG, ZRH, FRA and MUC are not available non-stop from JNB in western Europe. MUC will probably lost, and gone are the days of MAD, LIS, BRU, MXP, CIA and ATH, and even longer gone are direct flights to MAN, CPH, LUX, etc. So unless you are going from JNB to one of these five places you have to connect.

Working through a hub like DXB or AUH (I think DXB offers a lot more) one can get one stop from JNB, CPT and DUR to a huge number of destinations through Europe, the Middle East, South Asia and East Asia. I like HAAN's idea of continuing to service LHR and FRA through a middle eastern hub (both Europe and UAE are very liberal on 5th freedoms). Also, this could go the same way east from to BOM, etc. However, I would think SA would want to keep HKG since it could be a profitable route and has been a good one in the past and is one that really is workable.

Unfortunately, the Star Alliance partners don't seem to care about the survival of SA. LH group have not tried to build their relationship with SA into anything more than some nice codeshares, United have been so awful that SA have looked to JetBlue in the US. SQ has been even hostile to SA, not willing to code on SA's regional network and bypassing them on South America.

It's not as simple as that. You are forgetting three important facts.

1. DXB is on the way to Europe for QF. QF needs to make a stop on the Kangaroo route- whether it's SIN, KUL, HKG, BKG, or DXB makes little difference as they are all along the flight path.

2. DXB is NOT on the way to Europe when flying from JNB or CPT. The flight to DXB is about 8hrs, then you need to add the connecting time, and then add another 5 to 8 hours for the second leg of your journey (depending on where in Europe you are flying to). So that's the equivalent of 2 long-haul flights to get to (say Rome) via DXB. Any European airline that flies to JHB will get you there a lot quicker, even with a connection in FRA, MUC, CDG, AMS, ZRH or LHR. Remember European airlines have multiple flights a day to most cities in Europe from these hubs, so you will always be looking at one long-haul flight to Europe, a short connecting time and then a short 1-3 hour flight.

3. Connecting times to many European cities via Dubai is not great. You can connect to the main ones like LHR, FRA, CDG etc fairly quickly, but just try Athens or Rome for example- even with 3 daily flights to JNB, you're sometimes looking at a connection of 4hrs+, which is not ideal. Plus then you have to catch a 5hr flight to Athens, or 8hrs+ for Western European cities.

Bottom line is that, geographically, a Middle East hub or venture for SAA similar to QF-EK does NOT make sense at all. Unless they can offer SA-EU flights dirt cheap (which they can't) in order to entice the masses, the holiday-makers etc, it would be unworkable. SA-Asia, maybe, but not SA-Europe/Oz or N America.

[evanb]

HAAN, what proportion of EK traffic from SA is to Europe, Asia, Australasia and other?

[three eighty]

70% + continue on to other destinations.

[evanb]

70% + continue on to other destinations.

I would say 90% plus continue to other destinations, I am interested to what destinations. A lot more go to Europe than people think.