SOUTH AFRICA: SAA, Mango And SA Express To Merge

It is unclear what a merger between the three state-owned airlines SAA, Mango and SA Express would achieve that cannot be achieved by each airline individually, Erik Venter, CEO of Comair said.

This was in reaction to a parliamentary response by Public Enterprises Minister Lynne Brown. Brown said it will cost government R12.1m to make use of the services of Bain and Company, the Boston-based consultancy firm appointed to manage such a merger.

“Mango is already a 100% subsidiary of SAA and SAA ensures that its flights do not overlap with those of SA Express. So I do not see any structural change to the network or capacity arising from the merger,” said Venter.

“The airlines already make common use of some of SAA’s back office systems and airport staff, for instance, so I do not see any meaningful saving in overheads arising specifically from a merger.”

At the same time, a merger might consolidate three boards of directors into one and might concentrate control under one CEO, added Venter.

In her parliamentary response Brown said the scope of the work entails the development of an “optimal corporate structure to re-align the state-owned airlines” and that the consultancy will take cognisance of industry best practices.

In October 2016 at a meeting of the Airlines Association of Southern Africa in Namibia, Brown said airlines worldwide were compelled to restructure their operations to address inefficiencies and remain relevant to the markets they serve.

She emphasised though that the “strategic intent” of government is to maintain control and oversight of the state airlines. She said a holding company for the three separate airlines could be created, or they could be merged into one entity. Another possibility would be to sell a 25% stake in the newly formed holding company to a strategic partner.

There have been several calls from business and opposition parties for the national carrier to be privatised.

SAA has in the past two financial years made a combined financial loss of over R7bn, while Mango recorded a loss of R36.9m in the financial year to the end of February 2016.

Both SAA and SA Express are surviving on state debt guarantees at a time when the government is trying to rein in spending and raise revenue amid slowing economic growth.

SOUTH AFRICA: Falling Rand Harms South African Tourism

Less buying power due to the weakening rand has probably resulted in a loss of over R300m in international marketing funds for South African Tourism (SAT), CEO Thulani Nzima said.

“The weakening of the rand against foreign currencies – which we need for marketing purposes in those destinations – have reduced our ability to do all the marketing we had originally budgeted and planned for,” explained Nzima at the 45th annual general assembly of the Airlines Association of Southern Africa (Aasa).

“The weakening rand, therefore, affects our ability to deliver on our mandate as we budgeted at a particular – better – exchange rate.”

As for the view that the weaker rand will benefit the industry, Nzima said SAT cannot market the country on the basis of a weaker currency. SAT rather markets the country as a value for money destination. On top of that the fact that SA is a long haul destination must be taken into account.

SAT is also not allowed in terms of regulations to hedge against the currency weakening.

In order to, nevertheless, be proactive and try to mitigate the impact of the currency weakness on its marketing budget, SAT made four proposals to government.

These included asking National Treasury to protect SAT’s originally budgeted exchange rate or to ensure that the original amount in the foreign currency can still be spent. Neither of these proposals was accepted.

What was accepted, however, was to provide some of the funds to SAT already up front so that it could be transferred into the foreign currencies straight away before the rand became even weaker. In this way the impact on SAT’s spend was at least partially mitigated, according to Nzima.

“Treasury and the Portfolio Committee on Tourism understand our challenges and are very supportive of us,” continued Nzima.

“At SAT we have also taken some steps the past two years, like using internal funding – by sacrificing some other discretionary spending – to enable us to get closer to our marketing target spend.”

He emphasised, however, that he is aiming to avoid cutting any jobs at SAT in the process.

SOUTH AFRICA: Challenges Facing The Aviation Industry

The fundamental problem in the African aviation industry is fragmentation and that protectionism of national airlines will not go away soon, according to Erik Venter, CEO of Comair and chair of the Airlines Association of Southern Africa (Aasa).

This fragmentation in the African industry makes it difficult to achieve the necessary scale to compete with international airlines from outside the continent, Venter explained during a panel discussion by airline CEOs at Aasa’s annual general assembly.

As for tourism, Venter said the product that must be marketed is the destination. Most people do not just fly to fly. They do so to go to a destination for a reason. This is why Venter would like to see more co-ordination in the way tourism, and especially the marketing thereof, is approached.

“If something is not happening, do something. Don’t just say it is out of your sphere of responsibility,” said Venter.

For Irfan Pardesi, CEO of Skywise, the latest low cost airline to enter the SA market, the airline is looking for unique opportunities in SA. He sees the student tourism market as one such opportunity for potential growth.

In his view it would be a great idea for the airlines in SA to work together to offer travellers one pass to use on them all so that they would then end up visiting more destinations in the country and accordingly boost tourism as well.

He also said the new unlimited travel pass that Skywise introduced on the Johannesburg-Cape Town route, is working well.

Nico Bezuidenhout, CEO of Mango, said it is all about meeting the requirements of consumers. He pointed out that the airline industry is one of the few where year after year the unit cost is reduced. He also pointed out that a ticket between Johannesburg and Cape Town is cheaper today than in the year 2000.

“One cannot do that without innovation and therefore the airline industry is a breeding ground for innovation,” said Bezuidenhout.

“We must operate from a position of excellence and best practice.”

For Inati Ntshanga, CEO of SA Express and newly elected chair of Aasa, the important question currently in the SA airline industry is whether it will become cheap but not sustainable.

“It is about selling the right ticket at the right price to the right passenger. A taxi from OR Tambo airport to Johannesburg is already more than R500,” he said.

In his view there is definitely room for consolidation in the SA industry and to him the biggest challenge for the industry is a non-alignment between different government departments in matters relating to the industry.

Sylvain Bosc, chief commercial officer of SAA, said airlines are often blamed for a drop in tourism. He pointed out, however, that SA is a long haul destination, far from the biggest source markets, and the airline industry is very competitive.

He said currently some international airlines are reducing their capacity to SA, because the market is oversupplied with seats at the moment in terms of demand.

“Prices in the market are not aligned with the cost of production. How is this possible?” he asked.

“It is because some of the carriers are not operating in the same playing field as us.”

Ben Dahwa, CEO of Air Botswana, also said Africa’s aviation industry needs to be innovative and cannot just continue to think in the same old ways. In his view the industry cannot afford the luxury of not forming partnerships.

“It is about finding each other. Airlines form just a small part of the big picture which brings tourists to our sub-region of Africa. We must work together by using follow-up forums,” he suggested.

SOUTH AFRICA: Intense Rivalry Not Doing SA Aviation A Favour

AASA CEO Chris Zweigenthal.

The past 12 months have seen “unprecedented animosity levels” in the South African aviation industry, according to Chris Zweigenthal, CEO of the Airlines Association of Southern Africa (Aasa).

Some carriers are competing fiercely, especially after two new low-cost carriers entered the SA market, said Zweigenthal, speaking at the 45th annual general assembly of Aasa on Friday.

At the same time the South African government's new visa regulations have not only caused division in the aviation industry, but also negatively impacted the travel and tourism industry in South and southern Africa, he warned.

He pointed out that no feedback has been given on the issue since President Jacob Zuma announced the creation of an inter-ministerial committee to review the visa regulations.

“We are not suggesting to relax control, but there are better ways to handle the issue while still helping economic growth and encouraging travel,” he said.

Another aspect in the SA aviation industry that needs to be addressed in Zweigenthal’s view is the frequent leadership changes at local airlines.

“It is clear that internal rivalries do nothing to instill customer confidence in the local aviation industry,” he said.

“Leadership stability is needed and I call for this in order to create company successes.”

It is a pity that the window of opportunity lower oil prices and the weak rand created for tourism in South Africa is not fully used by the industry, said Zweigenthal.

He warned that the aviation industry in Africa is in crisis because it is locked in a profitability bind.

He pointed out that air traffic in Africa is only 3% of global air traffic. A few years ago international airlines from outside Africa carried 40% of the African air traffic and African airlines carried 60%.

Today this ratio has increased to international airlines from outside the continent carrying 82% of African traffic. Zweigenthal expects this ratio to deteriorate even further.

“Many airlines in Africa require a turnaround. At our annual general assembly last year, I already proposed the creation of an airline strategic forum with government and role players to identify how to address this crisis in the African aviation industry,” said Zweigenthal.

“We should focus on joint action and address the limited liberalisation of the airways in Africa and constraints in market access as well as the high airline costs.”