SAA makes remarkable turnaround


South African Airways (SAA) has bucked global airline industry trends to post a remarkable R398-million net profit for the year to March, a massive swing from a R1.085 billion loss the year before.

The state-owned airline`s good results comes after the International Air Transport Association (IATA) earlier this month upped its forecast for global airline losses to $11 billion this year compared with its January forecast of $9 billion.

It also said that the industry would post losses of $3.8 billion in 2010. Industry revenue in 2009 is expected to be $80 billion below last year`s levels because of the sharp decline in fares and air travel following a sudden and severe global recession in the wake of a lingering banking crisis.       

Acting SAA CEO Chris Smyth says he expects the national flag carrier to only “break even” next year – but that would depend on economic conditions not deteriorating any further, the Rand not weakening, fuel prices not spiking significantly – as it did last year – and passenger and freight demand not falling further.

On the latter, IATA this morning indicated the August passenger demand was down 1.1% on August last year and freight demand slumped 9.6% year-on-year, although the figures were an improvement on last month (-2.9% and -11.3% respectively).

“Demand continues to improve, but profitability remains ever distant,” IATA CE Giovanni Bisignani said this morning. “Fares have stabilised, but at profitless levels. Meanwhile cost pressures are mounting from reduced aircraft utilisation and rising oil prices. The industry is not out of the woods yet.”

Reports indicate Smyth is now confident SAA will not need to ask the state for further financial assistance next year.

He says the airline had started its turnaround at the right time, netting R2.5-billion in cost savings and revenue growth, R200 million more than targeted.

“SAA delivered a profit for the year despite unprecedented fuel prices, associated hedging losses and the onset in the second half of the worst recession since 1929,” acting chief executive officer Chris Smyth told a results presentation yesterday.
“You must be surprised, just as we were surprised.”

SAA is not only one of a few profitable airlines but is, along with fellow airline SA Express, also one of the only successful state-owned enterprises. State arsenal Denel lost R544 million for the year to March 2009 and power utility Eskom R9.7 billion.    

SA Express posted a net profit of R235.4 million in July on turnover of R1.86 billion.

CFO Kaushik Patel noted that posting a profit was “gratifying” following seven years of losses for the airline.

Noteworthy was SAA`s operating profit of R1.9 billion against a small operating loss of R72 million the previous financial year.

This was, however, offset by a fuel hedging loss of R1.04 billion and restructuring costs of R474 million, leaving a loss of R10 million.

Taking it from –R10 million to +R398 million was a R408 million reversal of a R727 million provision last year regarding the botched cancellation of an unwanted order for 15 Airbus A320 aircraft.     

Smyth said the airline that thought it had cancelled the orders in 2002 would now take delivery of the aircraft between 2013 and 2015.

The R727 million provision had to be made last year after Airbus last year demanded that SAA make pre-delivery payments on the aircraft and SAA found it was contractually bound to do so following the bungled cancellation. Deliveries had been scheduled to commence next year.

SAA has also signed a memorandum of understanding with Airbus to lease six A330- 200s to replace its ageing fleet of A340-200s.

Meanwhile, SAA revenue grew 19% to R26.4-billion, despite falling passenger and cargo volumes.

It carried 6.8-million passengers, down 7% on the year before.

Freight and cargo volumes also dropped, leading to a 12% decline in freight and mail revenue.

“SAA is a much smaller airline than before, as we have cut capacity, largely through the grounding of the Boeing 747-400 fleet,” Smyth said.

He added the airline`s North American and European markets had been hardest hit by the downturn, while its African markets were now the most profitable.

Despite the savings achieved from the restructuring, operating costs rose 10% to R24.5 billion due to a 28% rise in fuel costs to R8.58 billion.

“We managed to contain the rest of our expenses at 4%, but there was little we could do to control the fuel price, which makes up 30% of our overall costs,” Smyth said.

Patel said SAA had elected to pay off some of its long-term debt, while the government earlier this year converted a R1.5 billion subordinated loan into equity. Net assets rose 7% to R2.503 billion.

Pic: SAA plane at OR Tambo International Airport