Turbulence Ahead for SAA

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South Africa's national carrier has hit a patch of rough weather, with more turbulence predicted as South African Airways is mired deeply in the red. The airline has been taking flak from the government for failing to cut costs and being a drain on the public purse and has been fined for breaching competition laws.

In an effort to ward off further criticism and return to profitability, SAA announced on June 4 it would undertake a major restructuring over the next 12 to 18 months to achieve a turn around of $378m.

Among the measures proposed will be the grounding of six of the airline's costly Boeing 747-400s, five of which SAA operates on an expensive lease arrangement. One measure that has been announced is the reduction in SAA's top-heavy management, with Khaya Ngqula, SAA's chief executive officer, saying that 30% of the airline's managers, some 180 out of 600, will be made excess to requirements.

Announcing the restructuring, Ngqula said that all facets of the airline's operations would come within the scope of the cost-cutting exercise.

"In the face of a high cost base created by, among other things, uncompetitive ownership and aircraft lease costs, excessive head count and fuel price volatility, SAA must overhaul its entire business if it wants to survive," said Ngqula.

The airline also said it wanted to renegotiate some of its work condition agreements with staff to help slash its losses, a sensitive issue given that SAA suffered badly during a long-running strike by employees in 2005, which grounded most domestic flights. Though Ngqula said that changes needed to be made to the structure of benefits, allowances and sick leave in order to stave off large-scale staff redundancies among its 10,000 strong workforce, unions have already warned they are prepared to fight to protect their hard-won advantages.

As part of its efforts to revitalise its operations, SAA announced it would expand its activities on the African continent, while at the same time dropping some of its loss-making long-haul routes such as Johannesburg to Paris. It has also postponed having flights to Chicago, Buenos Aires and Rio De Janeiro for the immediate future.

Among the new African destinations to be included on SAA's schedule will be Libreville Gabon, Point Noire in the Republic of Congo and Bamako in Mali. These new routes, plus others under consideration, are expected to lift SAA's international capacity by 8%.

The overhaul can be none too soon in coming. SAA has been given a very clear warning that it needs to get its house in order and quickly, with Public Enterprises Minister Alec Erwin saying on June 4 the state will no longer support the carrier if the restructure programme is not enacted this financial year.

Faced with heavy short-term liabilities that will fall due within the next 12 months, the airline has called for an additional $563m in state funding. While Erwin refused to say how much funding would be provided to SAA, the minister had been quoted earlier in the year as saying that the state had no intention of supporting the airline at all costs.

At the beginning of June, SAA had to pay the final instalment of a $14m fine imposed on it by South Africa's Competition Tribunal after having been found guilty of entering into price-fixing agreements, fixing fuel levy charges and inducing travel agents not to deal with its competitors.

Added to this, the airline faces possible court action from domestic competitors Comair and Nationwide, with the latter having already served a summons on SAA, seeking damages of $38m.

The news of late has not all been bad for SAA, with one bright spot being the performance of its budget subsidiary, Mango. Launched only nine months ago, the low-cost airline was named, in June, the best budget carrier on the African continent, the results of a ballot of international travel agencies.

SAA itself also came away with of its own awards, taking the honours in the categories of Africa's leading airline, leading airline website and leading business class airline.

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