Can SAA grasp this opportunity for survival?

At the end of 2019, SAA collapsed financially and was forced into business rescue. Then, Covid-19 arrived and it looked as though the beleaguered airline would be beyond rescue. However, as the sole shareholder, the South African government was determined not to let this prized state asset die.

The government pumped in more than R36 billion (US$2 billion) to pay-off creditors and relaunch a much slimmed-down airline: ‘SAA V2’.

In justifying this massive bailout, the SA government committed to finding a private sector strategic equity partner (SEP) to take a 51 per cent share of the airline, effectively privatising it.

In due course an SEP buyer was identified – the Takatso Consortium. However the conclusion of the SEP deal encountered numerous obstacles and delays culminating in the competition commission’s objection to the share owned by Global Airways and thus SAA competitor Lift Airlines – who eventually withdrew from the consortium.

Finally, in March 2024, the Takatso deal was cancelled, once again calling into question the viability of the airline.

Guy Leitch asked SAA’s interim CEO, Professor John Lamola, what the effects of the cancellation of the Takatso deal will be on the airline, and the SAA group.

“Due to the protracted nature of financial transactions, the SAA management team devised a risk mitigation strategy should the deal fail to conclude,” Lamola said. “The strategy considered three scenarios: 1) Our ideal scenario was that the SEP transaction was consummated by April 2024. 2) The SEP transaction continued to drag on. 3) The SEP transaction failed.

“When the minister announced the collapse of the SEP negotiations with Takatso we adapted our business plans to the scenario we had considered for the absence of an SEP. Some of the changes included delaying our fleet and network plan including the relaunch of intercontinental routes to Europe and USA,” he said.

With the collapse of the Takatso deal, the government proposed that a minority 20 per cent private sector shareholder be found. When asked if he was optimistic that the right partner would be found, Lamola said: “Now that the SEP matter has been settled, we can confidently approach the capital markets with certainty as a 100 per cent state-owned company.

“Based on the revalued SAA with a debt-free balance sheet and an unencumbered property portfolio worth roughly R6 billion (US$325.6m) – we are optimistic of our prospects of finding a suitable minority shareholder, and even medium-term funding from banks, if so required.”

SAA has been very measured – some critics say slow – to rebuild its long-haul route network and widebody fleet. Since emerging from business rescue, it has only restarted the Sao Paulo route, and, in April this year, the Perth route.

When asked about how the two long-haul routes are doing, Lamola replied, “The performance of the Sao Paulo route has been a remarkable success, exceeding our own expectations.

“The inaugural flight to Perth achieved an impressive load factor, affirming the strength of our strategic decision. The robust forward bookings further validate our choice to establish Perth as our second intercontinental destination following Sao Paulo, marking a significant triumph in our expansion efforts.”

When asked which long-haul routes the airline was planning to open next, Lamola hedged his bets by saying: “We will share that information when we unveil the next new long-haul destination.”

Under business rescue, the airline lost almost all its widebody fleet – apart from an Airbus A340-600 and an A330-200. When asked about the airline’s shortage of competitive long-haul aircraft and fleet expansion plans, Lamola remarked: “Procuring suitable aircraft has been a challenge in an environment where there has been a shortage of aircraft globally. This is not only an SAA challenge. Fortunately, our situation is not acute. We are rolling out a plan that includes deploying two additional Airbus A330s this financial year.”

One of the objectives of the SEP deal was to strengthen the SAA balance sheet, so that state guarantees would no longer be required for aircraft leases. With the SEP deal not happening, Lamola was asked if the balance sheet was strong enough for competitive leases without a state guarantee. He replied: “Our balance sheet is in fact very strong. As mentioned above, there is now certainty on the SEP matter, plus our balance sheet is debt free, with a substantial property portfolio, which we hope to leverage for future financing needs.”

SAA has, for the past 25 years, been an Airbus-only airline. Given this legacy, and Boeing’s current problems, Lamola was asked if they would consider Boeing. “We are researching fleet options to develop a request for proposals with all OEMs,” he replied.

Given the slow pace of SAA’s return to many long-haul routes, the question arises as to whether SAA is having problems justifying its unused Heathrow slots, and its latent codesharing/interline partnerships.

Lamola noted: “We are not experiencing any problems with holding on to current slots. Partnerships and alliances form part of our growth and expansion strategy and Heathrow is key to that, and to the inherent value in the SAA business.”

It had been expected that the SEP deal would inject key human resource skills which the airline had lost during its restructuring. With the ending of the SEP deal, SAA started advertising for key staff.

The airline remains state-owned and small, with critics expressing doubts as to its viability. Lamola was therefore asked if they are able to attract the right calibre skills. He replied: “We remain competitive in the aviation talent market, as evidenced by our ability to retain talent, and we are in a continuous search for great aviation talent.”

The government’s black economic empowerment requirements have been seen as a possible hindrance to attracting the best talent (which may not be black). Lamola noted though that SAA is in fact open to recruiting the best talent globally.

Lamola was initially appointed as non-executive chairman, but also took on the role of interim CEO in 2022. There is speculation that he will make himself available for the permanent CEO position.

He pointed out that: “The current SAA executive is an interim structure. It was used as a stop-gap measure until the SEP took the reins of the airline. Now that the SEP is out of the picture, the board will consider both internal and external candidates to fill the advertised permanent positions to bring about leadership stability.”

There is considerable debate as to whether state-owned airlines should be purely profit driven. When asked if he was confident that the new slimmed-down SAA V2.0 can operate sustainably, or profitably, or merely aim to cover its cost of capital, he said that “SAA 2.0 will be able to operate sustainably”.

One of the reasons advanced for SAA remaining a state-owned airline is that it fulfils a development mandate. When asked whether the airline is currently meeting any development mandate objectives that are uneconomic – that is, which make it more difficult to be profitable, Lamola said: “We do not measure developmental and transformative achievement only in monetary terms. Our growth and route expansion plans are measured and well-considered – considering their financial viability, which is a critical aspect in SAA 2.0.”

SAA is not just an airline – it has two subsidiaries: SAA Technical – for maintenance and Air Chefs, for in-flight catering. Lamola says that the performance of the subsidiaries as integral service providers to SAA is pleasing, and they are also expanding into third-party services providers.

Finally, in response to assertions that there is a global pilot shortage, and thus whether SAA is having trouble attracting pilots and maintaining competency checks, Lamola noted that: “We have managed to recruit pilots since April 2023 and most have completed their currency and other route checks. For example, the African female first officer who flew the inaugural flight to Perth is one of these.”