FLUG REVUE May 2002: South African switches to Airbus

SAA DUMPS BOEING IN FAVOUR OF AIRBUS

By Ralf E. Krüger

South Africa's national carrier, South African Airways (SAA), has taken advantage of the slack in the order books of the aircraft manufacturers to bring off a bargain purchase: 41 aircraft with a list price of $3.5 million.

But, as CEO Andre Viljoen was eager to point out, the airline, which is based in Cape Town, was not paying that price. There were in fact plenty of good reasons for the bidders to grant generous discounts. After many months of tugging in front of and behind the scenes, the terms were so good that in March there was a surprising turn-about: SAA was taking advantage of the present buyer's market to make a complete switch and exchange its present Boeing fleet, which includes some virtually brand-new 737-800's complete with winglets, for Airbus alternatives.

Airbus A340

The traditional South African airline, which has several times won awards for its good service and technical competence, will now have not only the biggest route network but also the most modern fleet in the entire continent. Over the next eight to nine years, Airbus is to supply nine of the four-engined A340-600 and six A340-300's. These are to replace two Boeing 767's, five 747-200's, six 747-300's and three 747SP's. As well as these purchases, SAA is to lease eleven A319-100's, final assembly of which is carried out in Hamburg, and a further fifteen medium-range aircraft of type A320-200. The eleven A319's are to replace 22 elderly Boeing 737-200's by the year 2005, when their leasing contract expires. The fifteen A320 jets will then replace a total of sixteen new Boeing 737-800's belonging to the South African airline in 2010/2011. SAA purchased the Boeing jets for 4.3 billion rand (Euro 430 million) only two years ago, when it was modernising its short- and medium-range fleet.

SAA initially was offered a choice between Boeing's “triple seven” model, the 777-200, and the Airbus A330/A340 sister models. Latterly the airline also considered offers from European and American airlines for relatively new second-hand aircraft. For originally when it issued the invitation to tender last September, the airline had only planned to replace its ageing longhaul fleet, consisting of 14 Boeing 747 jumbo jets. In the event, it was not just the favourable terms that tempted the SAA board, but also the flexibility as to how the new Airbus products can be deployed and their cockpit commonality.

The airline, which was less affected by the post-11 September slump in demand for air travel than many other airlines because of its relatively modest presence on Atlantic routes, is planning to court new customers with its ambitious millennium project. This includes a new cabin interior complete with newly designed seats, and new uniforms for the cabin crew, who, however, apparently are not yet entirely convinced by the fashionable elegance of their attire. When the new terminal II at Johannesburg's international airport opens at the end of the year, SAA customers will find things a lot more relaxing on the ground as well.

The 68-year old airline has been flying to Germany for 50 years since services were resumed in 1952, and enjoys a good reputation not just within Africa. At the end of last year SAA won the title of “best African airline”, for the second time since 1998. The South Africans also won the prize for the best cabin crew. “It confirms our determination to look increasingly to Africa, given its future growth and profit prospects,” said SAA CEO Andre Viljoen.

With these words he was confirming the course set by his American predecessor, Coleman Andrews, who was sent back home with a settlement of 232 million rand (Euro 23.2 million) before his contract had expired. The official line was that the change of personnel would simplify the imminent partial privatisation of the airline, but unofficially there were disagreements with the state-owned majority shareholder, TransnetHolding, which has now reverted to 100% ownership of the airline, having picked up the missing shares for a bargain price. The 20% stake in SAA owned by the liquidated Swiss airliner, Swissair, was bought back by Transnet for the relatively modest sum of 382.5 million rand (Euro 38.2 million). Swissair's parent company, SAirGroup, had had to fork out 1.38 billion rand for those shares in 1999. The buy-back price had been arrived at under the influence of the crisis in world aviation after the terrorist attacks of 11 September, so it was said.

The national carrier of the young post-apartheid state today has bilateral agreements with 41 out of the 54 African states. Gone are the days of political isolation on the black continent, which had forced SAA flights to Europe to make long detours. “We believe there is great potential to be gained from development of our services right across the continent, either alone, through strategic alliances with African partners or through new joint ventures,” explained Viljoen.

After the first democratic elections in Cape Town, the airline had seen itself suddenly confronted with a quite different set of conditions to work with. The direct routes across the continent that had once been refused now offered new opportunities, while at the same time the competition pouring into the country made it necessary to perform more accurate costings. On top of this came the re-orientation of the Government, which sees itself more and more as a trend-setter leading the way on the continent.

The state airline SAA increasingly sought partners in Africa with a view to creating regional hubs. Although SAA does not want to be drawn into a global alliance, it has several alliance partners, including El Al, Emirates and Ghana Airways. The South Africans, who last November resumed flights between Johannesburg and Kinshasa in the Democratic Republic of the Congo after a three-year suspension, are permanently on the lookout for partners in Africa.

“Flights to Africa are generally not subject to as much competitive pressure and are more profitable. Hence Africa is the strategic key region for SAA.” So Viljoen describes the course that his airline is pursuing as it comes up against more competition on limited international routes. On the other hand the problematic joint venture with Nigeria Airways was terminated on 24 March in the face of high losses. This meant that the Johannesburg-Lagos-New York service only introduced in February 2001 was now discontinued. This had allowed Nigeria Airways to offer flights to New York again, eight years after suspending its direct flights. The Nigerians were allowed to sell 109 out of the 330 seats on board a Boeing 747-300 provided by SAA. But despite the end of the joint venture, the airlines will continue to co-operate on the Johannesburg-Lagos route.

In its search for a regional hub in western Africa, SAA now has its sights set on Senegal. SAA has a good relationship with Mozambique Airlines, which is based in the neighbouring country of Mozambique, where tourism is on the increase. Other codeshare partners are Delta Airlines, Lufthansa, Varig, Thai International, Scandinavian Airlines, Qantas, Cathay Pacific and British Midland. SAA is particularly hopeful about the European destinations, now that South Africa, which is relatively new to tourism, is being discovered by increasing numbers of Europeans as a distant destination where the sun can be relied upon.

Meanwhile the airline is suffering from the rapid decline of the national currency. Last year the South African rand lost almost 40% of its value compared with the US dollar. “Business travel is down, and the drop in the rate of exchange for the rand is not helpful for our operating costs, 51% of which are settled in dollars,” explained SAA's Executive Vice-President Richard Forson. At the end of last year the airline tried to avoid slipping into the red by laying off 13% of its managers (82 altogether), introducing a recruitment ban, discontinuing company cars and taking a number of other economy measures.

“Between May 1999 and October 2001 the management structure leaped from 480 to 668 staff, a 39% increase,” Viljoen complained at a management meeting in Johannesburg at the end of last year. The measures were intended to save the airline 250 million rand in its general costs and 600 million rand in its operating costs. If one includes SA Airlink and South African Express, which are about to join forces with SAA, the present fleet numbers 91 aircraft, ranging from Boeing 747-400's through to the latest Boeing 737-800 or the Jetstream. Without these partners, SAA has 59 aircraft and 90 offices world-wide.

The Airbus fleet renewal programme is the most spectacular part so far of SAA's re-orientation. Boeing, like Airbus, had been trying for months of tough bargaining to secure the big order for itself. In the young post-apartheid state, the aircraft manufacturers were attracted not only by the prospect of winning one of the few orders likely to be placed this year for longhaul aircraft, given the difficult economic conditions. But for the negotiators from Toulouse and Seattle what was at stake was a landmark decision that would have major repercussions.

For, as a loyal Boeing customer, SAA had so far flown only US-manufactured aircraft. This meant that the company's lucrative maintenance subsidiary specialised in Boeing aircraft. For other African airlines which have their aircraft maintained in the Cape, this argument must surely count for something when it comes to purchasing decisions. Boeing's deputy head of sales, Douglas Groseclose, was predicting only a few months ago that Africa would see above average growth over the next 20 years. Given that there was a modernisation backlog, he calculated that the continent would need 533 aircraft between now and 2020. But then that was before the disaster which the terrorist attacks on the World Trade Center and the Pentagon inflicted on global aviation. Even so, the world's biggest aircraft manufacture claims a market penetration of 68% for itself in Africa. To the Americans it was extremely important to hold on to SAA.

On the other hand Airbus too had good reason to work flat out to win the business. For the Europeans it was a matter of solving a problem that had arisen due to the demise of Swissair. As a result of the bankruptcy of the traditional Swiss airline, Airbus had suddenly found itself with already ordered aircraft on its hands. These included the latest and longest model, the A340-600, into which a considerable amount of investment had flown. It was therefore important for the market launch to get off to a good start. The European aircraft manufacturer met the requirements of the South Africans the most closely: not only did they have longhaul jets available immediately to replace SAA's ageing jumbo jets, but on top of this they were offering the most modern aircraft on the market. Skilful negotiations gained the South Africans a few extras – conversion training for pilots and cabin crew through to technicians. “The new fleet will give us flexibility as to how we deploy our planes on most of our routes and networks, along with 10% more seat capacity,” said Viljoen in Johannesburg.

From 1 October 2002, SAA will fly the Johannesburg-Copenhagen route three times a week, leaving Johannesburg on Tuesdays, Thursdays and Saturdays. Negotiations are also under way with Swissair's successor, Swiss, regarding a codeshare service between Johannesburg and Zurich. The route network covers a total of 700 destinations world-wide, which are looked after by a total workforce of 9,500. 87 of these work in Germany.

Since the beginning of the year SAA Deutschland has been headed by the former Lufthansa manager, Michael Bentele (38). On 1 July he will be able to celebrate a quite special anniversary: exactly 50 years since SAA's service from South Africa to Frankfurt was resumed. To celebrate the event, SAA is offering all travellers and their partners (a maximum of one person) who are celebrating their 50th birthday on the date of departure a free upgrade to the next higher class, subject to seat availability.

From FLUG REVUE 5/2002

Last updated 10 April 2002

FLUG REVUE, Ubierstr. 83, 53173 Bonn, Germany