SAA cuts China flights to save money

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From May this year, there will be no more direct flights to China by South African Airways (SAA), Finance Minister Nhlanhla Nene said on Friday as the Treasury attempts to bring SAA back to profitability after granting a R6 billion loan guarantee.

“We have approved the cancelation of the China route as government because we have a certain obligation. Part of the implementation of the strategy was the closure of loss making routes,” said the Minister.

He was responding to a question at a South African Airways (SAA) media briefing on its 2013/14 financial results after the airline held its Annual General Meeting (AGM).

Acting SAA chief executive officer Nico Bezuidenhout revealed that close to R1 billion has been lost on the Beijing route in a three year period since SAA introduced the route in 2012.

Bezuidenhout said SAA will stop operating flights to China in April. Air China will take over the route in May with SAA placing a code on flights to China.

This comes as the National Treasury announced this week that the airline is to receive R6.488 billion guarantee.

The guarantees to SAA amount to R14.4 billion against which SAA has thus far utilised R8.345 billion.
“We had to put SAA on a business rescue but with the Long Term Turnaround Strategy (LTTS) on the table together with the 90 Day action plan we had to be convinced that we would now be able to see an improvement in SAA’s financial situation,” Minister Nene said.

He explained that some of the drastic steps that had to be taken included the route closures, adding that was what other airlines were doing to save costs.
“It’s not just about closing the routes but also finding ways of still reaching that destination in a much more cost effective way including code sharing and that is part of the strategy.”

The move comes as part of the airline’s 90 Day Action Plan which was launched in December.

Treasury is also working with the national carrier in revising and refining the existing LTTS which will have the primary mandate of returning the airline to financial sustainability.

Minister Nene said that the focus will be on the 90 Day action plan which is based on the LTTS but with an emphasis on executing quick wins including route closures.

He emphasised that it will take time for the benefits to show on SAA’s bottom line, adding that the guarantee was issued on the basis that the 90 Day Action Plan is robust and provides firm deliverables.
“The work for SAA will not be over and there will still be other tough measures that they will have to take in order to get the airline back on track,” said the Minister.

The airline had to be self-sustaining as no recapitalisation will be forthcoming from the shareholder, Minister Nene said. The National Treasury recently took over SAA after the airline was transferred from the Public Enterprises Department.
“The Shareholder and newly-constituted Board have made it clear to Management that the 90 Day Action Plan’s primary outcome must be the resumption of LTTS implementation. The 90 Day Action Plan period ends on 24 March 2015, where-after implementation of a revalidated LTTS will be resumed, albeit trailing 16 months behind schedule,” SAA said.

The financial results on Friday showed that operating loss before interest, taxes, depreciation and amortization narrowed to R374 million for the year from R425 million reported 12 months earlier.

Cost containment during the 2013/14 financial year yielded savings of R453 million. The SAA group achieved growth in revenues by 12% (from R27.1 billion to R30.3 billion).

In it’s annual financial results, SAA said that intercontinental operations remained loss-making with a R235 million increase in operating losses to R1.6 billion. Re-configuration of loss making routes to Beijing as well as to Mumbai will significantly improve performance.

During the period under review, the SAA Group realised growth in revenues by 12 percent (from R27.1 billion to R30.3 billion) with an operating loss (EBITDA) of R374 million reported (R425 million for FY 2012/13). Cost containment during the financial year yielded sustainable savings of R453 million.

The SAA Group’s domestic operations remain profitable with 10 percent growth in its profit contribution from R722 million to R791 million. Regionally, African routes performed positively with a 17 percent increase from R648 million to R761 million. SAA’s long-haul intercontinental operations recorded an increased loss from R1.3 billion in the previous financial year (2012/13) to R1.6 billion in losses reported for the 2013/2014 financial year.

SAA said some of its ageing aircraft impacted the bottom line, with the seven wide-body aircraft revalued in terms of International Financial Reporting Standards (IFRS) to take into account their anticipated remaining useful life. This revaluation resulted in an impairment of R782 million, as well as an additional R192 million write down on related spares and inventory, which are reflected in the statements.

Further impairments were recognised relating to the delivery of four new A320 aircraft. These form part of a legacy agreement for 20 aircraft, dating from 2002, which was renegotiated in 2009. However, the contract provides for annual escalations which resulted in the purchase price exceeding the market value at date of delivery—thus leading to a further impairment of R369 million. “Unfortunately, similar impairments are expected on future deliveries on this contract,” the carrier said. SAA’s remaining capital commitment for these purchases is R822 million.



Some of the highlights of the 90 Day Action Plan include the introduction of flights between Johannesburg and Abu Dhabi with collaboration with Etihad Airways; expanded partnership with Air China; increased regional frequencies between Johannesburg and several key, high volume regional destinations including Mauritius, Zambia, Zimbabwe and Mozambique among others; and a freeze on staff numbers.