South African Airways losses quadruple; will it survive?

UPDATE 05/12: After writing, South African Airways has entered bankruptcy protection. As yet, it’s unclear what this means for the long-term future of the airline, but the airline must show appointed financial practitioners it can secure the funds to avoid liquidation according to South African law.

Happier times: South African Airways receives its first leased A350, currently deployed on the Johannesburg – New York route. Can this fuel-efficient type turn around a heavily loss-making long-haul operation?

The trials and tribulations for South Africa’s national carrier have been documented for years.  It has not been agile due to political interference in commercial decisions – a challenge for state-owned carriers across the world.  And it has been damaged internationally by a number of factors. It now seems a rescue loan may be a bridge too far for the South African government.

South African Airways fleet: A340s not suited to hot-and-high Johannesburg

A key pitfall in recent years was the airline’s decision to order A340s. These aren’t well-suited for the challenges of long-range operations from its hot-and-high hub, Johannesburg (5,500ft). In addition, as fuel prices rose from 2007, the four-engine type was less capable than rival twins or higher-capacity quads used by Emirates, among others.

Route performance: declining yields as load factors fall

The airline has been steadily reducing mainline capacity at Johannesburg since 2013, in a bid to cut losses as part of its ‘Long Term Turnaround Strategy’.

Source: OAG Traffic Analyser

The majority of long-haul capacity to/from the African continent is served by non-African carriers. This market is saturated, yet we see startups attempt to serve such routes and ultimately fail to make a profit. South African Airways, even being a legacy carrier of over 80 years’ standing, is no exception.

Source: OAG Traffic Analyser

This can be seen in deteriorating fare performance, as rivals gain market share and poor load factors (with 76% the highest in a five year period for South African) force the carrier to loss-lead to attempt to fill aircraft. This is particularly telling on its three longest routes – Hong Kong, New York JFK, and Washington Dulles – with each posting at least 9% drops. Indeed, the carrier has announced the suspension of Hong Kong flights, with fares significantly below the trend curve.  Guangzhou will be served instead, but Johannesburg – Guangzhou has even lower average fares across all airlines.

Source: South African Airways annual reports

Lower competition in Southern African markets historically meant the airline could enjoy healthy profits on such routes. However, results from the airline’s short-haul profit lifelines have been steadily declining.

Cash runs out as debt set to reach $3bn 

Ultimately, amidst the network difficulties and strategic missteps, the crux of the issue crippling South African Airways is relatively simple: rising costs, debt, and revenues failing to match. Tellingly, since 2017, the airline has opted to stop releasing annual statements; a year in which net losses quadrupled.

Source: South African Airways annual reports

Despite the lack of published statements, the trend is clear. Liabilities have been increasing steadily at 20% p.a. on average since 2013, from $1.1bn in 2013 to a projected $3.3bn in 2019 based on this rate. Meanwhile, shareholder equity has been steadily declining, and unit cost rising.

Source: South African Airways annual reports

After a promising 2016, losses almost quadrupled in 2017 as costs surged against stagnant revenue. Could the answer for South African Airways be to park its loss-making long-haul fleet, and refocus around a simplified short-haul operation? Until the last reported statement at least, this side of the business posted small but vital operating profits. The carrier could also benefit from the long-awaited Single African Air Transport Market, which 27 nations have signed an initial commitment to join.

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