Struggling for altitude: An SAA Boeing 747 jumbo jet. The airline’s growth rate has been slow relative to its major African and non-African competitors. Picture: BUSINESS DAY
Struggling for altitude: An SAA Boeing 747 jumbo jet. The airline’s growth rate has been slow relative to its major African and non-African competitors. Picture: BUSINESS DAY

South African Airways’ (SAA’s) high cost structure and heavy debt burden will keep the state-owned airline firmly in the red this financial year.

The financially fragile company projects a net loss of R853m in 2017-18 and while this is a significant improvement on the projected loss of R4.5bn for 2016-17, doubt has been expressed about the reliability of what could turn out to be an optimistic forecast.

The airline concedes in its corporate plan tabled in Parliament on Monday that it failed to meet its budgeted revenue for the past three years, falling short 12% in 2014-15, 4% in 2015-16 and a projected 9% in 2016-17.

According to the corporate plan tabled in Parliament, revenue of R34.4bn is forecast but operating costs of R29.7bn, aircraft lease costs of R2.9bn, finance costs of R1.7bn and depreciation and amortisation of R692m translate into a forecast bottom-line loss of R853m.

DA deputy finance spokesman Alf Lees said that while the loss of R853m might seem like an improvement on the 2016-17 projected loss of R4.5bn it was not good enough. He also believed that the R853m loss could be an "optimistic scenario" given SAA’s past failure to meet its profit forecasts.

"The airline should at least be working towards break-even for the coming year," Lees said.

Among the causes of the losses is the airline’s weak balance sheet, which means SAA has to rely on borrowings to fund its working capital needs. It has no equity and is entirely debt-funded.

The Treasury has committed itself to an equity injection this financial year and consultancy group Seabury is re-evaluating the airline’s long-term turnaround strategy.

Other failings cited by SAA have been "change fatigue" in the organisation, leadership instability, the complexity of the approval process, critical skills shortages and a "chronic" culture of nonperformance.

The corporate plan says "radical steps are required to achieve financial sustainability", such as aggressive revenue-generating programmes and cost containment. Urgent action needs to be taken on loss-making routes and to optimise the utilisation of the SAA fleet.

SAA also plans to "optimise" the co-ordination of SAA and its subsidiary Mango over the next few months.

"Passenger unit revenue is constantly declining as airlines pass cost savings to the consumer. Any airline that is unable to address its cost base will cease to be financially viable."

SAA’s cost structure is much higher than rival regional airlines. Rising oil prices are expected to drive up jet fuel prices from $52.10 per barrel in 2016 to $64.90 in 2017. Jet fuel prices are expected to account for 18.7% of the industry’s cost structure in 2017.

The corporate plan notes that SAA is facing intense competition from non-African airlines and low-cost carriers.

Its share of international long-haul routes declined from 25% to 19% between 2011 and 2016, while more than 50% of domestic capacity is now generated by low-cost carriers.

SAA believes the launch fares that new domestic carriers are offering are not sustainable.

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