Aarti Panday
Aarti Panday

The aeronautics behind SAA’s unprofitability

Let me just say it straight up — neither President Jacob Zuma nor SAA board chairperson Dudu Myeni are to be blamed for the operational unprofitability of SAA. South Africans are currently rallying together in the #ZumaMustFall campaign, which was in part triggered by the removal of Nhlanhla Nene as finance minister, allegedly due to his stance on the SAA A320/A330 swap transaction.

Within the past weeks, Ernst & Young tabled a damning forensic report detailing weak financial controls at the airline, stating that up to 60% of procurement and contracting was improperly negotiated, poorly contracted and weakly managed. Public perception has decided that corruption and cronyism is the cause of the airline’s woes. I hope to unravel the causes of unprofitability at SAA from an aeronautical perspective.

In financial year 2001/2002, SAA was operating a total of 62 aircraft (Boeing 737s and 747s) Today, SAA operates around 50 aircraft — a mix of widebody aircraft (Airbus A340s and A330s), with the narrow body fleet comprising Airbus A320s and Boeing 737s.

When SAA made the decision to replace the ageing Boeing 747 fleet in the early 2000s, it was premised on the fact that the four-engined replacement, the A340 family, would offer more value for money based on fuel efficiency over the Boeing fleet. Also, choosing a four-engined aircraft over a twin engine made sense economically due to SAA flying intercontinental, transoceanic routes. Extended-range Twin-engine Operation Performance Standards (Etops) regulations for twin engine aircraft operating out of Johannesburg would have prohibited certain routes that did not have the requisite airport diversion radius of 90 minutes. These rules did not apply to the four-engined A340s selected by SAA.

Gallo

Gallo

Aircraft design is usually a multi-disciplinary effort, with diverse specialists coming together as a team as there are many complex and often conflicting requirements to be considered. Fuel efficiency has always been a consideration, but for a long time, it was never really a design constraint. The higher-speed, longer-range philosophy proved to work well as fuel was inexpensive, the design would result in favourable economic returns since crew costs and amortisation of capital investment in the aircraft could be spread over more seat miles flown per day, despite higher fuel consumption.

In running an airline, fuel costs are amongst the top operating expenses. Now that fuel has tripled in price within the decade, it can account for half of an airline’s operating costs. In today’s economic climate, fuel efficiency has become the name of the game. Any savings in fuel costs, over the long term, add up for an airline.

At the time of SAA choosing the A340s, the average price of Brent crude was about $20 a barrel. In 2014, this had soared to an average of $108 a barrel, according to the latest SAA annual report. This obviously would have devastating effects for an airline operating a four-engine widebody fleet. The economics of operations are no longer favourable based on the prevailing market conditions. Airlines began to opt for twin engine Airbus A330s and Boeing 777s instead of the A340. The A340 programme officially came to an end in 2011, with Airbus citing changing market dynamics as the reason behind the end of production. Airline giants Lufthansa and Emirates are phasing out the A340s in their fleet and Singapore Airlines has already retired its A340 fleet.

This has been a significant contributing factor to the losses reported by SAA on its international routes. SAA has consistently noted the operating fleet and rising oil price as an area of concern for the business. By replacing the A340 fleet with more fuel-efficient, twin-engined aircraft with latest Etops certification, SAA can begin to realise a profit in segments of its operations. SAA has already made changes to its routes — it has scrutinised and scrapped a number of loss-making routes (Kigali, Bujumbura, Buenos Aires, Mumbai, Beijing).

There is light at the end of the tunnel for an airline like SAA looking to replace its uneconomic and inappropriate fleet. Advancements in technology have allowed aircraft similar in size and specification to the A340 to be powered by two engines instead of four. Aerodynamic efficiency, weight efficiency, the use of composite materials, cabin layout and seating density, engine efficiency and aircraft fuel burn — driven by operations/mission profile (payload, range, speed and flight levels) have allowed the newer twin engine jets to replace their older predecessors.

The current drop in oil price compared to recent years, has given SAA some breathing space to consider a more permanent solution to the widebody long-haul fleet renewal. Swapping out ten A320s for five A330s makes sense for now. A portion of the current A340 fleet lease has been extended, allowing operations to continue, although the risk of rising oil prices could very well destabilise SAA’s path to profitability.

The bottom line is that Zuma and Myeni had nothing to do with aircraft designers selecting parameters to optimise in the 1980s and 1990s. The conditions that made the A340 acquisition suitable for SAA no longer exist. The cost benefit of a long-range, transoceanic design can no longer be realised, and unfortunately, the patience of the South African public is wearing thin. In this regard, Zuma and Myeni are easy targets for the average citizen who may not appreciate the multiple layers of complexity behind operating a fleet of large transport aircraft. The findings which Ernst & Young have brought to light (and their implications for the airline) deserve more attention than further flogging the already dead horse of operational unprofitability due to fleet legacy.

Tags: , , , , ,

  • KwaZulu-Natal Lamb Curry
  • Where’s my invite?
  • The weakness of the ANC
  • In Tambo they trust
    • Partyforever

      Economists know all this stuff, privatize the industry or the government should improve it. It is not something new, new knowledge. South African business people, most entrepreneurs know everything about the airline industry’s situation. We know about this, we’ve known about this for a long time, from oil prices to purchasing aircraft, which should have been done from inexpensive countries, such as Japan, Russia, China etc. with only a few aircraft purchased from the US, EU. The US dollar purchases is for big airline companies with major tourist destinations in Europe, North America, Asia etc. This is not new! This is old, old, stuff people have known about for decades and decades and decades, the effect of rising oil prices on the airline industry, what needs to be done, the financing, aircraft choices etc. it’s old, old, old news from the 1970s and 1980s, business entrepreneurs and capitalists have known about it for a long, long time. It’s private sector business knowledge. Just read economic articles in economics magazines, open newspapers of the 1970s, 1980s etc. Go to university, study capitalist economics. People have studied the airline industry’s economics for decades and decades. They’ve done their Ph.Ds on it it. Give the capitalists some credit, they have experience, 10x more experience than the ANC government. Capitalism is 250 years old and based upon mathematics. It’s called business acumen and it’s most prominent in the private sector. It involves mathematics, science, economics and finance etc.

    • johnbpatson

      Etops regulations have not changed, and still ban a straight flight from South Africa to South America, or from South Africa to Australia, in two engined aircraft.
      There is still ample room to criticise the present management under your argument, for not being more reactive when oil prices were high.
      The A340s could have been grounded for European and USA routes and B777s or A330s could have been leased for Europe and USA routes, for example, if the money and build times meant SAA could not buy them outright.
      It would have meant longer flight times to the USA (up to Europe and then over the N Atlantic where Iceland and Greenland have airports that allow twin engined jets to qualify.)
      But SAA did nothing.

    • Jonathan Smith

      Aarti Panday does not seem to understand that SAA would not have made these poor operational decisions if it had had competent leadership over the years instead of Dudu Myeni and Jacob Zuma. They are precisely the reason why SAA is in a mess and bankrupt.

    • Green advocator

      Aarti they inherited an organisation that was functioning at the level of international standards. They had enough cash capital reserves to keep the company going strong. They did not pay their CEO or Board members exorbitant salaries and pay them bonus when they had a bad year. Something that those who have taken over State Owned Enterprises do not seem to distinguish between it being a State Owned and an Enterprise. Just because SAA is State Owned does not mean that the cash capital is a bottomless pit that will cover the overheads and still be able to pay the EXEC and Board such high salaries plus bonuses. Fix that and you will fix their cash problems.

    • feanor

      All airlines are faced with that problem, so why is SAA unique?

    • Dave Lowe

      What about the new Leasing Deal that Myeni is trying to force through? Whose fault is that? Other South African/African Airlines seem to manage to make a profit when facing the same circumstances so why shouldn’t SAA. Incompetence, Corruption and lack of proper business skills are the real reasons behind SAA’s situation. If, as you say, 60% of Procurement is flawed, whose responsibility is that. In any modern, properly run company, the Person at the top and/or the Board would have been removed a long tome ago.

    • Karl-Heinz Sittlinger

      While I am sure that this may have contributed to the financial situation SAA is in, gross mismanagement (how many CEOs in what time with how many golden handshakes?) Definitely had a large impact as well.
      The guaranteed billions bailout by the tax payer, has made the SAA very lax with trying to be profitable. Just looking at decisions to run some subsidaries like Mango through SAA in competition, which makes little sense…
      Wasteful expenditure in tenders has also been pulled into light, and let’s not forget very high salaries especially for management, seems very convenient.

      While I am sure your arguments are not untrue, stating that SAA woes should not be laid at Zuma and Myeni feet, is quite simply wrong, if alone for the responsibility they have when they take on their position, but from what we are seeing, much much more.

    • http://about.me/adrianschofield Adrian Schofield

      What about the completely unrealistic ratio of employees to aircraft in SAA?

    • CapnVan

      Actually, ETOPS regulations have changed significantly.

      On 1 December, Air New Zealand flew the first ETOPS-330 flight from Auckland to Buenos Aires. That 330 minutes from any diversionary airfield, on one engine, with a full load.

    • Sanza Nhlapho

      SAA was not efficient. Remember Andrews ???

    • Mbali

      Yet, the rot does seem to come from the ANC? Why?

    • Peter Leyland

      So Ms Panday, the fact that the Chairperson of the board’s qualifications are that she is a Primary School Principal rather than a qualified and experieinced business person used to running a mutimillion Rand organisation does not come into it?
      Perhaps you should let her fly one of your planes – with you as a passenger?
      Why not? If she is qualified to run the organisation, doing the work of a Pilot – basically a driver, acording to SATAWU, should be a piece of cake.

    • Cliff Smith

      “Bad workman always blames their tools” was what my late father always said. It must be an amazing existence in the ANC’s “holy zone” where no matter how how badly you screw it is miraculously never, ever, ever under any circumstances whatsoever your fault.

    • Troy Ounce

      the fact “is”, not are.