South African Airways may split into six to slash costs

Cape Town - SAA is considering splitting its business into six stand-alone divisions in a bid to reduce the soaring costs that are undermining the profit the airline should be making from rising passenger numbers and revenues.

Khaya Ngqula, the airline's chief executive, revealed the turnaround plan, which was advised by consultants, to the Association of SA Travel Agents (Asata) at its annual conference at the weekend, said Amanda Herrod, the association's president, and Thulani Nzima, the chief executive of SA Travel Centre.

Ngqula said the consultants had advised splitting the airline into focused segments, and postponing a promised enlargement of the airline's route network that would have introduced new destinations and beefed up existing routes.

SAA has already warned that up to 1 000 retrenchments would be unavoidable.

This reflects the experience of state-owned airlines in other countries, as many have cut staff numbers to cope with rising costs, particularly for fuel.

The profits of full-service airlines all over the world have been hit by low-cost airlines.

While the cheap airlines have stimulated air travel, they have also captured a large share of the market and forced down the fares of economy class.

Competition from new airlines from the Middle East, which are buying market share by offering indirect routes to popular destinations worldwide at lower fares, has also affected state-owned airlines.

SAA introduced its own low-cost airline, Mango, which is run as a separate division, in October.

Other divisions that Australian consultancy Seabury suggest should be run independently are: SAA Technical, which services aircraft for other airlines as well as SAA; in-flight caterer Air Chefs, which includes other airlines among its clients; wholly owned travel agency SA Travel Centre; SAA Cargo; and the full-service airline itself.

Ngqula's address to Asata has caused mixed reactions.

Anton Thompson, the chairman and chief executive of Thompson's Travel, said giving more independence to SAA's divisions could be beneficial by resulting in more focused management.

But he emphasised that the divisions must be run by managers with the requisite skills.

"A group chief executive should ensure that the managers possess skills that he, personally, does not have in order to achieve balance," Thompson said.

Herrod said she had always assumed that SAA's divisions were "pretty autonomous. I am not clear how far the split will go."

She said that proposed new routes announced by SAA earlier this year had been put on hold, except for one to Munich that would be launched in July as planned.

Although SAA's ticket sales were doing well, some of its fares were lower than those offered by Mango, "so I don't know what their yields [the profitability of each passenger] are like," Herrod said. "I flew from Johannesburg to Cape Town for R800, less than the cheapest seat on Mango, although SAA was providing meals, drinks and full service from cabin attendants.

"SAA's full-service airline must get its yields right and its costs under control," she said.

Nzima said he did not know whether shares in some of the divisions would be offered to investors.

He thought some might be partially privatised before shares in the full-service airline were offered.

Nzima said it was right to delay the launch of new routes while their long-term potential was investigated, despite South Africa's need to attract tourists.

It would be undesirable to launch new routes only to withdraw from them later, he said.

By AUDREY D’ANGELO