There is a place for SAA domestically, if it adopts the low cost model

SAA is setting its sights on regional and international flights as it searches for more profitable routes, leaving the domestic airline industry under capacity. 

This comes after the airline was dropped by its investor, Takatso, in March in a deal that would have seen the consortium purchase a 51% stake in the airline for just R51, implying a R100 evaluation, with the condition that it would invest in its development.

After the airline left business rescue bruised and a shell of its former self, it said that because of the company’s partial privatisation process, SAA would re-enter intercontinental markets with caution. 

But now that Takatso — consisting of Global Airways, which owns budget airline Lift, and private equity firm Harith General Partners — has pulled out, the airline is seeking more profitable routes. 

The deal that was going to inject R3  billion into SAA but collapsed after then public enterprises minister Pravin Gordhan said the transaction would have to take into account the new valuations of SAA and not those from three years ago, when the airline had just come out of business rescue. 

Aviation analyst Desmond Latham said there was a place for SAA in the domestic market, but its high-cost model was not effective when it is competing with low-cost airlines, which is why it is looking to regional and international routes. 

“SAA has got a problem and the reason is because most domestic flights are now low-cost and SAA’s model has always been full service,” he said. 

Full-service airlines focus on network profitability, have a luggage allowance and serve a snack, sandwich or a hot meal in-flight. Low-cost carriers prioritise route profitability, with their passengers only being able to bring carry-on luggage, and all food and drinks, even water, cost extra. 

From the consumer’s perspective, the biggest and perhaps the most important difference between a full-service carrier and a low-cost carrier is the ticket price.

“SAA is struggling to get people back into its seats. Their website is still old-fashioned. They are recovering but the jury is out on whether SAA can run a fully functioning full service, which is required for long haul flights,” Latham said. 

In an interview with the Mail & Guardian in May, SAA interim chief executive John Lamola said the airline had restricted itself to Cape Town, Gqeberha and Durban while it extends to 21 other routes. 

The carrier currently operates 14 routes, including to São Paulo in Brazil and Perth in Australia. It plans to open routes to Frankfurt and Munich in Germany, and to London in the United Kingdom by 2028, according to Bloomberg. 

“They’re very focused on the high-cost route to New York and Perth, which was the flagship route. It made SAA money until Jacob Zuma’s era, when his deployees destroyed the airline. From his time on the airline didn’t make a profit,” Latham said. 

The commission of inquiry into state capture found that former chairperson Dudu Myeni effectively wrecked the state carrier and that she was retained as chief executive well beyond the point at which she should have been removed.

“That New York route is a moneymaker, and all international routes, if run properly, are moneymakers,” Latham said. 

He noted that airlines such as Emirates make money because they are “the place to go” if a person wants to fly anywhere in the world.

“For SAA to transplant that kind of operation [sub-par] region to region is problematic. They are definitely relying on some business and corporate travel,” Latham said. 

The carrier went through a tough time when it entered into business rescue and the end product is not what SAA looked like before it entered the process. 

It entered business rescue on 5 December 2019 and exited on 30  April 2021, after a R10.5  billion taxpayer bailout. But the total sum the fiscus has injected into the airline is more than R33  billion since May 2019.

The national carrier emerged from business rescue with only six aircraft and four routes. Before the rescue process, SAA had a fleet of 49 aircraft. There were 5  000 employees, but that number is now down to 1  000.

The South African domestic airline industry has SAA, Lift, CemAir, Airlink and FlySafair servicing passengers but Latham believes there is “capacity for another airline or two at least” and proof of this is how fully subscribed the FlySafair flights are. 

“SAA is regarded as a fuddy-duddy airline linked to the state, which is not the most appealing place in the world. To change their marketing and mode of operation can be difficult. They can’t relaunch Mango but they need something like that for the domestic market,” Latham said. 

SAA’s low-cost airline, Mango, was liquidated because it couldn’t implement its business rescue plan and recover from financial distress. 

Latham noted that the marketplace in Southern Africa is used to paying for less and expecting less when it comes to its airlines. “People have just got used to flying again, since the pandemic, but they have also got used to low-cost airlines.”

FlySafair has recently run its R10 annual sale for 50  000 seats in which travellers can snag domestic one-way tickets. These are the specials that South Africans have become used to. 

“They want to earn dollars and you fly internationally for that. That is what SAA is doing,” Latham said. 

Jonathan Ayache, the co-founder and chief executive of Lift Airline, said there was a vacuum when Lift launched in the midst of the Covid-19 pandemic because a number of airlines were not operating, including SAA. 

“At the same time there was significantly less demand for travel, with volumes less than half of what they were prior to the pandemic. The market has still not fully recovered to pre-pandemic volumes, but capacity has also not recovered as a number of large airlines are not operating today, such as Comair with British Airways and Kulula and Mango.”

Comair, the owner of low-cost carrier Kulula and the South African partner of British Airways, which supplied 40% of the domestic airfares, went into business rescue in May 2020. Flights were suspended on 31 May 2022 when the airline applied for provisional liquidation. 

Ayache said there was room for growth in the industry, “but it is important for all industry players to grow capacity responsibly and ensure the sustainability of the industry as the market continues to recover and grow”.

Lift has five planes that do 28 daily flights to Johannesburg, Durban and Cape Town. 

Latham said: “SAA’s high-cost model is not effective when competing with the likes of Lift, which has all the bells and whistles and caters to the upper-middle class … they’ve got a niche market. It would be tough for SAA to compete with that.”