Viewpoint

South African on life support

In the same month that Cyprus Airways was forced to give up the ghost, another zombie flag carrier staggers on thanks to government aid.

South Africa’s treasury last week guaranteed another R6.5bn ($566m) for broke national airline South African Airways (SAA), which needed the cash to remain a going concern despite receiving R5bn ($436m) last year.

The European Union outlaws such double-dips into the public pot, and two weeks ago forced the closure of Cyprus Airways by ordering it to repay a second tranche of state aid that it ruled illegal.

Naturally, SAA isn’t bound by the same rules, but rival South African carriers are concerned that their government is contravening South Africa’s Domestic Air Transport Policy agreement, drawn up in 1990 to liberalise the country’s aviation market and intended to ensure equal treatment of operators.

British Airways franchise Comair has challenged a previous SAA guarantee in court.

At the time, Comair CEO Erik Venter said: “Comair’s sole objective is to attain a level playing field in the domestic aviation market to ensure that all airlines face the same risks and the same requirements to operate on sound commercial principles.

By receiving government bailouts SAA avoids this commercial reality and this negatively impacts on all current and potential airline operators.”

After missing its income and cost targets in 2013/14, SAA’s latest bailout is conditional on it creating a viable turnaround plan and presenting weekly progress reports to the treasury.

Yet its problems are severe: South Africa’s domestic market is small and periodically beset by over-capacity, and the country is poorly located to become a long-haul hub.

Meanwhile, SAA’s gas-guzzling A340s compare poorly with the modern widebody fleets of the Gulf airlines, which are steadily eroding SAA’s market share in and around its home continent.

This year will also mark a third-consecutive annual operating loss, following a R1.3bn ($113m) total loss for 2013/14.

Cheaper oil may provide some respite, but the SAA has a reputation for making poor hedging bets, which some estimate to have cost R8bn ($698m) between 2004 and 2010.

Currently about 40 per cent of its fuel requirements are hedged, which should allow it to realise some gains from the oil slide, although until now these have been offset by hedging losses.

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