SAA restructuring – will it work?

South African Airways is planning a massive restructuring to cut costs and squeeze some profits. Bruce Whitfield asks Guy Leitch, the publisher of SA Flyer magazine, the question — will it work?

Bruce Whitfield:
A story out from South African Airways today, it looks like it could be chopped up in an effort to return it to profit and bits of the national carrier could actually be sold off, with the chief executive Khaya Ngqula telling a briefing this morning that he will announce the restructuring plan in April.

The airline is going to report significant losses for the year to the end of March. Remember, in the first half it lost something like R650-million. Someone who knows the airline industry very well and who knows SAA very well is Guy Leitch and Guy, what do you make of the strategy or the beginnings, the outline, of an early part of the strategy suggested by the chief executive of SAA today?

Guy Leitch:
It is very hard to say at this stage Bruce because one doesn't know, from what I have heard, exactly how far these divisions will go. In other words, will they actually cut them up into separate companies or will they simply be a silo if you like with separate operating entities, which is what they are already to some extent. And I mean clearly, Mango is already a separate company and there are questions that need to be asked as to why for instance SAA needs to have its own travel agency, which could obviously quite usefully be cut away.

But there is an element here I think of, I don't want to say rearranging the deckchairs on the Titanic, that would be a little too extreme perhaps, but we are looking at R652-million losses for the year to the end of March. Those are large numbers by anyone's standards and I think that it is probably a little dishonest if I may be so bold as to claim that SAA can simply leave its ugly children behind in the taxpayer's hands and make off with the family silver, because it is not going to happen that way.

There will always be certain internal cross subsidies that won't be detectable and which will give those entities which are easy to make money in, an unfair advantage, and it goes to this whole issue of whether there will be free and fair competition for the other truly independent airlines.

Bruce Whitfield:
In terms of the SAA structure just how complicated is it? Would it be fairly easy to chop it up, chop out certain bits, flog certain bits? You mentioned the SAA travel agency as one example.

Guy Leitch:
The airline already has natural divisions. It already has the six natural divisions which are proposed but they are internal divisions. I mean SAA technical is its own profit centre already, as is Air Chefs, as is the Travel Centre and SAA Cargo and of course SAA itself.

These are all from an accounting point of view already internal cost, or rather loss centres, and there is no reason why that shouldn't continue because it does provide an opportunity to create more as the joke goes — bums (business unit managers) — and you know promote people yet one more level. I think the obvious cynical response here is that he is creating an opportunity to appoint more chiefs and perhaps less indians.

Bruce Whitfield:
But certainly the unions have been quite challenging. Apparently, the airline got into quite a lot of trouble last year when they announced those plans at the half-year stage to cut 1000 jobs.

They hadn't really done enough consultation. They hadn't gone through the hoops sufficiently. They got into trouble and certainly selling off parts of the business may certainly solve a staffing issue for example. We know the Airports Company South Africa privatised a whole bunch of the functions of the Airports Company and has turned in a massive profit as a result of outsourcing a lot of its functions. Could SAA do that?

Guy Leitch:
SAA can do that, and in fact, SAA has a history of doing that to quite a large extent and at times very critically so. Selling off for instance the spares inventory was even in the days of Coleman Andrews a very contentious issue because although it freed up a lot of capital on the balance sheet it probably left the airline in a much weaker position going forward, which was perhaps one of the structural problems it has now.

Of course, breaking the airline up into individual units makes it that much easier to prove redundancies for the need of getting rid of a thousand jobs. But one also looking at the history of just what Khaya has been announcing for the last couple of months, I am seeing no clear strategy going forward.

First, he was going to broaden the airline route structure enormously and then he pulled all the way back and decided just to go with the Munich route. He was asking for R7-billion to buy new aircraft, again those are not necessary if he is not going to expand the route. I think the question we must ask ourselves is; does South Africa need a flag carrier, and if so, what should the nature of that flag carrier be?

Perhaps it should just be an international operator flying the flag around all the major international destinations and not local destinations and from that point of view surely rationalisation would be a good thing.

Bruce Whitfield:
In terms of the practicalities though, Parliament the other day criticised Khaya Ngqula for his 38 directorships. Surely if there was a bit more business focus in terms of the top of SAA on the business itself things might be wind up and sorted out a little bit more quickly.

Guy Leitch:
Well of course and this goes to the perhaps classical South African problem of just a sheer shortage of skills, and I think that that problem is felt more strongly in SAA than probably any of the other major corporations that we inherited from the state.

Bruce Whitfield:
Guy Leitch thanks very much indeed, always valuable insights into the SAA story. He is the publisher of the publication called SA Flyer.