Mere conjecture cannot fly for airline expansion strategy

THE current economic slump has negatively affected all countries and no economic sector has been spared. South African Airways’ (SAA’s) turnaround strategy is being implemented against the background of a long and deep global economic recession.

For SA, this recession has not only affected economic growth prospects, but has also had an effect on our currency.

The government has put in place various measures to mitigate the effects of this global decline on our economy.

Some of these are the development of domestic industries to reduce reliance on imported products and services. SAA, as part of the South African public sector, has a responsibility to support government initiatives. To this end, strategy involves reducing its exposure to currency volatility, creating and supporting domestic capacity, and improving its financial position.

The SAA strategy has been subjected to intense public scrutiny and debate. The challenge for SAA and its shareholders has been that this debate is taking place without comprehensive and true information.

Unfortunately, most of the media reports have not been able to provide readers with a proper analysis of the issues and choices that are under consideration.

Most of the reports have simply focused on personalities.

This is not useful — South Africans need to know what is at stake and what the choices are, so they can make up their own minds in favour of, or against, the strategy that is being proposed.

SAA’s strategy, like most successful business strategies, is based on managing costs and building up secure revenue streams by winning new markets and protecting existing markets.

For the airline, the rest of the African continent provides new and exciting growth opportunities. Our aim is to expand our footprint on the continent aggressively. This will not only help us grow our business, but help contribute to SA’s growth potential; opening new markets for South Africans.

In so far as existing markets are concerned, SAA needs to grow and defend market share, especially in the long-haul markets of Asia, the Americas, Europe, Africa and the Far East.

The intense competitiveness of these markets requires that we focus on cost-effectiveness and providing world-class service with greater efficiency.

For SAA to continue to attract new customers and retain existing ones, it will have to ensure that it keeps up with developments in the market.

For customers, it means state-of-the-art aircraft with the latest technologies and world-class service.

New aircraft not only provide our customers with a superior flying experience, they help us provide our service with improved efficiency.

The A330s that SAA seeks to acquire will enable the airline to service long-haul routes more cost-effectively.

These aircraft are more fuel-efficient and thus economic, and they can fly longer distances without needing to refuel. Refuelling stops are costly and contribute to loss of market share as most customers prefer more direct, nonstop flights.

The process and terms of acquiring these aircraft have been part of intense speculation and debates, mostly based on half-truths. The facts that are often left out are that SAA’s relationship with Airbus is not new, and is not based on the proposed acquisition of these aircraft only.

The nature of developments in the industry requires that airlines and aircraft manufacturers have an ongoing and engaging relationship. It is common practice for agreements, orders and schedules to be reviewed regularly.

The SAA and Airbus aircraft purchace/lease relationship started in 2002 with an order for 41 aircraft. Most have been delivered and paid for. However, as the market and economic conditions have changed, SAA and Airbus have renegotiated terms of the agreements for their mutual benefit.

These negotiations have always been cordial and have sought to improve SAA’s market position.

In our current discussion, we have agreed with Airbus to swap delivery of 10 outstanding A320s for five A330s, which are more suitable for long-haul flights. Although the cost of five A330s is more or less the same as that of 10 A320s, the A330s will help SAA capture more market share and also manage costs better.

The swap from A320s to A330s is not under debate. As always, the issue is how it will be funded.

Airbus has agreed to consider an alternative funding transaction for the envisaged swap transaction.

SAA has put forward a number of principles to guide the new agreement, including a sale of the aircraft to a South African leasing company, with SAA leasing from the South African company instead of directly from Airbus.

Leasing directly from a South African company will ensure that SAA is not exposed to currency fluctuations, as the lease agreement will be rand-denominated. As most of the airline’s revenue is in rand, SAA always needs to manage its foreign currency exposure.

In most cases, such exposure, such as for fuel purchases, cannot be avoided.

However, where such risk can be mitigated, SAA has the responsibility to do exactly that.

SAA has received a number of written formal proposals from registered financial institutions and banks in SA to facilitate the full payment of the purchase price for the five A330 aircraft.

We have informed the finance minister of the offer and the minister has indicated that he is not opposed to the alternative proposals, on condition that the final transaction is in the best interests of SAA.

• Myeni chairs the SAA board

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