SAA will only ever fly again if politics trumps commercial reality, says former long-term partner

Business Insider SA

When will SAA return
(Photo by Nicolas Economou/NurPhoto via Getty Images)
  • Embattled national airline SAA is hoping to re-emerge from business rescue as a leaner, cost-effective carrier.
  • But competition in the aviation industry has become much fiercer due to the Covid-19 pandemic.
  • Both international and domestic markets will be near impossible to crack, says one of SAA’s closest former partners.
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If South African Airways (SAA) returns to the skies, it will be because of stubborn political will, with no basis in commercial rationality. The national carrier, which has been in business rescue for more than a year, will not find a gap in the post-pandemic world, argues one of the airline’s major former partners.

The global aviation industry is one the greatest commercial casualties of the Covid-19 pandemic. Passenger traffic recorded in January 2021 was still 72% lower than pre-pandemic levels, with total losses incurred by the airline industry reaching $118.5 billion, according to the International Air Transport Association (IATA).

“The history books will record 2020 as the industry’s worst financial year, bar none,” says Alexandre de Juniac, IATA’s Director General and CEO, warning that travel bans and mandatory quarantine measures will continue to hurt the industry.

For SAA, the pandemic piled more pain onto the already-excruciating business rescue plan which has demanded R10.5 billion from government’s already hollow coffers. The business rescue plan aims to save the flailing state-owned airline from liquidation and secure an equity partner.

But SAA hasn’t operated a commercial flight in almost a year and discussions with potential partners, like Ethiopian Airlines, have stalled due to debt uncertainties and ongoing labour issues.

SAA hopes to re-emerge as a leaner carrier, retaining just 20% of its pilots and six aircraft. It’s not yet clear if this business rescue plan will pan out as intended. But, even if it does, the airline is unlikely to be sustainable, according to a former partner who recently ended a 23-year relationship with the flag carrier.

“There’s logic and reason and rationality and then there is political will and those are not aligned,” says Rodger Foster, the CEO of Airlink, which was formed in 1992 and served as a major regional partner under SAA’s umbrella, until the relationship soured in 2019.

“We’ve seen a political will and, albeit that it will be very difficult for SAA to get back into business again, I believe that there’s a likelihood that we will see it [SAA] return.”

The bitter breakup between SAA and Airlink was finalised during the business rescue process and involved Airlink losing more than R500 million in flown-ticket revenue.

The default was the final straw which led to Airlink ending its franchise agreement with SAA and separate itself – through rebranding, a name change, and renewed commercial relationships with other airlines – from the national carrier.

“We don’t believe we’ll ever get that money back,” says Foster with reference to a recent High Court judgement, upheld by the Supreme Court of Appeal, which deemed SAA “immune” to legal challenge, with the business rescue process defining Airlink as a concurrent creditor.

“Concurrent creditors have been promised seven-and-a-half cents to the rand on the basis that SAA one day implements its business rescue plan and returns a profit… and we don’t expect that will happen. It may get back into business again but we don’t expect, in the current and foreseeable environment, that there will be any payment forthcoming.”

Despite its balance sheet suffering a blow due to SAA’s default, Airlink had pre-empted SAA’s demise and built a war chest of cash in case of such an emergency.

Shortly after parting ways with SAA, the Covid-19 pandemic halted air travel. But while other airlines have struggled to stay afloat, Airlink has managed to grow its network and presence.

Where other airlines have abandoned direct regional routes in Southern Africa, Airlink has introduced new flights to Walvis Bay, Harare, Lubumbashi, Lusaka, Maputo, and Dar es Salaam while, at the same time, launching new services on domestic trunk routes between Cape Town, Johannesburg, and Durban.

Airlink has also signed vital interline agreements with Qatar Airways, Emirates, Lufthansa, British Airways and United, which, once travel bans lift, will offer a large network of regional connections for international travellers.

“We’ve had the agility, absorption, determination and vision to expand our horizons. We are the most comprehensive airline network system throughout the SADC sub-region,” says Foster.

The airlines which have managed to hold on throughout the pandemic, like Airlink and Ethiopian for example, are considered most likely to thrive when international travel returns to some semblance of normality. It is not clear that SAA will be able to compete, with the vacuum it left already filled.

“British Airways and Virgin will close the gap [to the UK]," says Foster. "In Frankfurt, Lufthansa will increase its capacity. In the US, United has jumped on the route from New York [to Johannesburg], so that gap has been closed. The Middle Eastern carriers are offering comprehensive network services to just about every point in Asia and that gap has been closed. The gap in Australia will be closed when Qantas starts to operate again.”

“All these gaps have been completely and comprehensively closed.”

And while the international market will prove difficult to break for a returning SAA, the domestic market will be near impossible due to overcapacity which is driving down prices, argues Foster.

“There’s a flood of capacity in the domestic market and that’s going to permeate into operations between South Africa and the rest of the region,” says Foster. “The over-capacitation situation is unsustainable and has led to air fares being cheaper than driving a motor vehicle and that’s unprecedented… it’s never been like that in the history of aviation.”

In terms of the potential for reconciliation between SAA and Airlink, Foster remains cautious, scorned by the bitter breakup and business rescue practitioners’ unwillingness to repay the flown-ticket revenue.

“We’ve been terribly badly scarred and we’re not happy about SAA’s default of monies.”

“If it makes commercial sense, [if] SAA gets back into businesses and has a relevance to our route network then, we would reconsider continuing a partnership,” adds Foster, noting that Airlink and SAA currently have an interline agreement, although it’s not operational due to the business rescue process.

“Once bitten, twice shy. We wouldn’t want to be taken to the cleaners again.”

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