South African Airways needs a culture reset as it approaches take-off

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South African Airways (SAA), which takes off on September 23, will need to develop a stable management culture under its future owners to be successful, analysts say.

The airline, which left administration after 17 months in April, will operate initial flights from Johannesburg to Cape Town, Accra, Kinshasa, Harare, Lusaka and Maputo, with more to be added later.

Repeated attempts to turn the airline around ahead of Covid-19 have not borne fruit, with the company recording losses of R26.9 billion ($ 1.8 billion) from 2007 to 2019. The airline also has suffered from chronic leadership instability, with 14 CEOs between 1994 and 2020. Current CEO Thomas Kgokolo is the third acting appointment in the past three years.

The Takatso consortium, which plans to become the majority shareholder, said in early September that the deal was at “advanced stages”, with due diligence mostly completed and no major issues were found. The consortium, made up of a private equity firm Harith General Partners and based in Johannesburg Global Airlines, which also owns the low cost airline Elevator, will own 51% of SAA, while the government will retain 49%.

“Good management and a better economic environment” are the key factors that will determine the success of the airline, says Fabien de Beer, director of risk at Mergence Investment Managers in Cape Town.

  • Although it will be “difficult” for the airline to regain a foothold, De Beer is encouraged by the privatization. This decision indicates that the government “is ready to deal with non-performing public entities which deplete public resources”.
  • The decision to make future capital injections will now not be up to the government alone, adds De Beer. The government will remain responsible for the old liabilities while the consortium provides new capital.
  • President Jean Lamola said on September 19 that the airline “will no longer be constrained by the complexities of state governance” and that it will have “the competitive agility of a partially private enterprise”.

Industry crisis

SAA has a better chance of success if and when the deal is done, says Johann Els, chief economist at Old Mutual Investment in Cape Town. “With majority private ownership, the airline is unlikely to be subject to the previous interference and will be better managed on commercial principles. This will also eliminate the tax drain. Yet he notes that the deal remains to be finalized.

The only first challenge is to bring the privatization deal to fruition. The company has “a Herculean task ahead of it,” says Marcel Langeslag, director of African aviation at Netherlands Airport Consultants in Johannesburg.

  • While a significantly reduced workforce and a streamlined route network are positive signs, the restart comes amid perhaps the biggest crisis in the aviation industry of all time, he says.
  • “Demand in the market is still weak and load factors and high profits will remain elusive for some time.”
  • Fitch Ratings in July reduced its 2021 and 2022 assumptions for air traffic resumption in Europe, the Middle East and Africa due to the continued emergence of new variants of Covid-19.
  • The recovery is “even more limited by weak domestic markets and uncoordinated travel policies,” argues Fitch.
  • Revenue passenger-kilometers (RPK) will only reach approximately 35% and 65% of 2019 levels in 2021 and 2022, respectively, Fitch’s forecast.

At the end of the line

SAA will need to quickly learn to operate as a private enterprise to have any chance of success.

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