Africa: Despite recent tragedy, Ethiopian Airlines is an example of what SAA should strive for
African aviation is expected to grow at 5.4 % a year over the next 10 years and forms a key part of the economic lifeblood of the continent. SA Airways (SAA) and Ethiopian Airlines (EA) are the two top-rated African airlines based on size and customer feedback, and should therefore benefit most from this potential growth.
The diverging fortunes of these two African giants deserves a closer look.
While Ethiopian Airlines has consistently projected a profit over the past five years, SAA has consistently shown negative profitability year-on-year. The SAA fleet size remained little changed over the five-year period, while EA nearly doubled its fleet size based on sustainable growth.
Like SAA, EA is a fully government-owned and operated company. The airline is the fastest-growing and most profitable in Africa to date, making a profit of R3bn a year, while SAA is losing, on average, R3bn a year.
Both SAA and EA employ about 11,000 people and have adopted an “open skies” policy, which affords them to access similar foreign routes. Both airlines have a mix of aircraft models, which is supposed to result in mid-range cost performance, but the average age of SAA’s aircraft is 10 years, while for EA it it is only six years. SAA has an aging fleet, which requires high aircraft maintenance, resulting in a yearly increase in maintenance cost.
It has also lacked leadership with the necessary skills and knowledge. Though members of SAA’s appointed boards of the past five years were recognised leaders, none of them had the in-depth aviation knowledge and expertise required in this highly specialised industry with its unique challenges.
In contrast, EA is being run by experienced and skilled senior managers and staff. The current management team has combined experience of about 421 years, with a record of successful leadership. They have established an advanced, fully enabled aviation academy, rated the best in Africa, that provides top-class training for employees. EA has established a multi-hub system and its route expansion has made it Africa’s largest carrier. The airline continues to invest in modern aircraft to enhance customer comfort and improve efficiency.
As a strategic government asset that is wholly owned by the state, SAA positions itself as a contributor to SA’s national development agenda and seems to be less concerned about its competitive position in the market. Financial sustainability and operational efficiency were encompassed in the company’s various turnaround strategies in the past five years. Its strategic plans include reducing operational costs, consolidating routes by cutting unprofitable long-haul destinations and pursuing expansion to more African markets.
EA’s ability to execute its strategy to the contrary is depicted in its successful achievement of its Vision 2010 strategy, as well as the objectives and milestones of Vision 2025, which aims to increase the cargo fleet from eight to 18 aircraft, increase its passenger fleet from 85 to 150, and grow revenue to $10bn a year. EA CEO Tewolde Gebremariam has indicated that seven years into vision 2025 most of the objectives have already been achieved, with some of the targets even being exceeded.
EA currently has 65 aircraft on order, of which 29 are the Boeing 737 Max 8 . These aircraft has now become very controversial as one of the first of these received by EA crashed tragically shortly after takeoff on March 10 with 157 people on board, which led to a worldwide grounding of this newest version of the 737.
EA has distinguished itself as a high-performance and innovative organisation focused on continuous improvement, innovation and knowledge-sharing and always seeking and applying the best ideas regardless of their source. The leadership values employee contributions, acknowledges, and recognises and rewards employees for their performance and for demonstrating integrity and respect to others.
EA has further been run on the best practices of business through a clear differentiation between ownership and management. The airline is government-owned, but managed by a professional team that has been in the aviation industry for years. Indifference, inefficiency and bureaucracy are frowned upon and there is a zero-tolerance approach towards such characteristics.
In contrast to the consistency, clarity and long-term planning of EA, SAA has experienced a tumultuous period in the past decade, having had seven CEOs in the past five years. It has further been embroiled in controversy due to corruption allegations and complaints against its former chair as well as general mismanagement.
SAA continues to lose money, with the following worrying factors: Revenue has remained flat while operational costs continue to rise. The operational costs are further compounded by continuous wage increases and unexplained wasteful expenditure despite a stagnant revenue base. Whereas EA has a clear vision with targets for each business unit, SAA appears to be floundering due to its changing leadership and numerous failed turnaround strategies.
SAA is still ranked among the top 70 airlines in the world in terms of the size of the business. This is an indicator of its potential; its infrastructure and market position provide a good base to achieve its objectives and become successful. The airline’s inability to exploit its resources to remain competitive and profitable is a symptom of the lack of consistent, strong leadership and vision, as well as poor cost-control and inefficiency. The airline is further plagued by internal corruption at almost every level.
EA is the most networked African carrier, both in terms of scheduled routes and international connectivity, and SAA will struggle to compete for the title of number one carrier in Africa. EA’s fleet remains the largest and youngest in Africa, and it carries more cargo than any other carrier on the continent. The strategic capture of the African market through shareholding in other African airlines, and the expansion of Addis Ababa’s Bole airport, have also enhanced future opportunities for EA to increase passenger and freight numbers.
Fixing SAA is not complicated and its challenges do not need the intervention of foreign business consultants. The first important principle is the initiation of a consistent management system so the airline can be run as a business — and not an arm of the government with politicians and state employees using it as their free carrier.
The mandate of a new board should be to operate and manage SAA along business lines, using EA as a model. The senior management team should be strengthened by the appointment of competent and qualified people with industry experience who can develop the strategic vision to take the airline forward as a business.
SAA has a sound operational foundation and infrastructure, with an excellent reputation for delivering quality service, which should be maintained and built upon. Decisions for future funding by the state or private equity should be based on the principle of future return on investment, not financial bailouts. The airline must seek to position itself as a successful competitor in the market aimed at sustainable future business growth, instead of focusing on national political ideals that do not serve this purpose.
By KOBUS JONKER