Africa: Following the Ethiopian Airlines playbook may be vital for SAA recovery

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The profitable East African carrier has made a business of partnering with regional airlines.
Last month, Ethiopian Airlines announced its results for the 2017/18 financial year, with net profit of US$233 million up just 1.7% from $229 million the previous year. However, what is notable is that the East African carrier reported a 43% rise in operating revenue amounting to $3.7 billion

It comes as no surprise though; Ethiopian Airlines is Africa’s undisputed king of the airways and the only national carrier to report a profit. South African Airways (SAA), on the other hand, has in the past decade endured about eight CEOs and over six turnaround plans, surviving on bailouts north of R46 billion. As it mounts yet another recovery, the southern giant would do well borrow a leaf from its northern peer.

Partnerships
SAA has to mount a strong challenge on the continent given the prospects for intra-Africa trade and increased connectivity. Intra-African trade, as a percentage of gross domestic product (GDP) as of 2013, stood at about 9% – a low figure compared to other regions of the world. But the African Union’s Agenda 2063 projects that the figure will climb to 50% by 2045. Airlines will be central to achieving this. Ethiopian Airlines has opted to collaborate with other carriers, acquiring stakes in national carriers across Africa.

This year, it acquired a 45% stake in Zambia Airways and concluded an agreement with the government of Chad for the launch of Chad’s national carrier (it will own 49% of this business). These moves add to its presence in Malawi where it operates Malawian Airlines.
“If you look at the industry globally, African airlines are the ones that least work with each other,” says Raphael Kuuchi, International Air Transport Association (IATA) VP for Africa. “If you want to benefit from traffic from other operators, you need to have a relationship with other operators on the market and Ethiopian has done that.”

No government intervention
Over the years, the Eastern African carrier has found the correct management recipe: the government intervenes as little as possible in the day-to-day management of the airline. With a mandate to run the carrier as a self-sufficient business, maintenance, catering and even the operations of the pilot school are handled by Ethiopian airlines. What happens behind the scenes is another matter. “The government is most definitely involved in setting the playing field, determining the regulatory environment and airport environment,” says independent aviation expert Linden Birns

SAA has had a tough decade with numerous CEOs and six years of operating losses raising many questions about what will happen now that the loss-making carrier has been moved back from National Treasury – where it has been for four years – to Public Enterprises. In the aviation industry, management stability is critical for success and SAA has not enjoyed stability in the past decade. “If you look at an airline that wants to start a new route, it takes between six months to one-and-a-half years for the route to break even, so if you don’t have a stable management to see this through you just can’t succeed,” adds Kuuchi. Direct government intervention in South Africa has in the past bred entitlement with some civil servants benefiting from a stipulated number of free flights per year, which is simply not the case for Ethiopian Airlines.

Debt lark
Speaking at the IATA AGM in June, SAA CEO Vuyani Jarana revealed that the carrier had R9.2 billion in existing debt commitments, and said he needed a further R12.5 billion of working capital to take SAA to the break-even point. In addition, SAA’s debt and the cost of servicing that debt has been exacerbated by the rand’s volatility, as depreciation adds more pressure to dollar-denominated debt, says Birns. “SAA incurs the majority of its costs in hard foreign currency, but it’s generating the bulk of its revenue in rand and whenever the rand weakens, the gaps it needs to close opens wider.”

As SAA borrows to try to move itself back into the black, Ethiopian Airlines’ debt is being put to better use: it is funding more long haul, next-generation aircraft, which are cheaper to operate. This was confirmed last year when it secured a $159 million loan from the African Development Bank to boost its fleet.

SAA has arrived at a crossroads with commercial lenders still sceptical of the carrier’s performance. This leaves Treasury as the lender of last resort. However, the debt does not necessarily have to come from the government, says Kuuchi. “Government can accept to cede part ownership to private investors who might be interested and they will attract the capital they need because they have a good network.”

Source: moneyweb.co.za

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