SAA’s new CEO, Mr Vuyani Jarana, left a nice job in telecoms to take on the frightening – and perhaps impossible – job of turning SAA around. Guy Leitch managed to get this hard-running CEO to make time for a detailed discussion of his plans and strategy.
SAA has had nine CEOs in ten years. What makes you think you might be able to survive what is known as the biggest ‘hospital pass’ in corporate South Africa?
At the time of taking the decision to join, I looked broadly at the airline: Passenger numbers were okay, revenue was not out of kilter with the size of the airline, but costs were an issue. I might not have had much aviation experience, but I have a strong commercial background. My sense was that the airline is not facing a duality of problems, that is, in its market penetration and the cost structure. I looked at the annual reports and could see no signs that the airline was failing on the market side. If the annual reports had shown that there was no market, and that load factors and revenue were a problem, then I would not have taken the job. However, it was clear the challenge was how to fix the Profit and Loss statement. Therefore, I felt that the airline could be turned around with the right commercial experience and skills, and that was a contribution I could make.
What is the current financial position of the airline? Did government give you R10 billion for cash flow?
No, the government gave us the R10 billion to discharge R7.6 billion in debt that we couldn’t affordably roll over. So about R2.4 billion was used to support working capital requirements. We have reduced the debt level from the big lenders down to R9.8 billion and we have prioritised – in fact colour coded – this debt for presentation to treasury.
The 2017 financials should have been released in September, yet still haven’t been. Is this so you can load all the bad news into your predecessor’s accounts and look good when you report next year?
No, not at all! The results have been finalised and we are just waiting for our shareholder to set a date for the AGM when the results will be formally released.
The Auditor General’s 2017 report released in December has been described as a ‘horror show’. There are claims of a massive understatement of expenses, even with a R5.5 billion loss. Do you believe the airline can ever be profitable?
Yes. Otherwise, I would not have accepted the job.
The state has justified owning the airline by saying it has to fulfil two mandates: operate as a sustainable airline and yet also fulfil a developmental mandate. Can SAA afford to fulfil a developmental mandate?
No, the airline cannot fulfil a dual mandate at this stage. A commercial business has to ensure that it functions optimally commercially. So a developmental mandate cannot come at the expense of commercial sustainability, given our current circumstances. I believe strongly that SAA must focus on its commercial operations. If there is a developmental need, then new instruments must be devised to fund that, and it must be established and run separately – it must be ring fenced. As management we need to make sure that we do not have an escape clause to use as an excuse for not executing profitable operations.
What does commercial sustainability mean? Does it mean profitability?
Yes. If you run a business, it has to be profitable. It is not enough just to break even; how then do you fund retained income so that you can sustain the business through tough years? It is important that the language we use to transform SAA is one of commercial business. Our competitors are working not to break even, but to make real profits and a Return on Investment (ROI) for shareholders.
Do you expect to make enough profit to refund the state’s massive investment?
Yes. The state is the investor in the airline. Firstly, it must recapitalise the business. And then it must get a fair return to shareholders. That means we have to run it on a profitable basis to the point where we can pay a dividend.
So, if the state has invested R25 billion in the airline, is that your benchmark for an ROI?
Yes. But don’t forget that the state’s approach historically has not been to invest, but to raise a guarantee – a credit guarantee is not an investment. Every business has a limit to the amount of debt it can carry, so I support a mixed model of part debt and part equity funding.
Since your appointment on 1 November, you have continued to cut very senior staff. The latest casualties are the SAA Technical CEO and former Acting SAA CEO, Musa Zwanme, and the airline’s CFO, Phumeza Nhantsi, who are suspended pending a forensic investigation. In January, I believe you dismissed the Head of Cargo. Is this continual loss of key staff and their experience base not going to set back your turnaround?
I have not dismissed any senior staff member at SAA. There are a number of investigative reports commissioned by the board of SAA. It is the board’s view that whoever has allegations levelled against them based on these reports must be given an opportunity to clear their names. The suspension of the two executives and subjecting them to a disciplinary hearing is part of following due process in dealing with these reports. We deem them innocent unless the hearing finds otherwise. These are still employees of SAA. We must all respect the due process to be followed.
With regards to the General Manager Cargo, that is a contract position. The contract was due to expire on 30 November 2017, and the incumbent and I agreed on a six months extension until we find a replacement.
You have been cutting routes, yet you will not be able to get your costs down as quickly as you decrease revenue. That means an even bigger loss.
We looked at both long-haul and domestic routes and found that we were making a loss on even the Gross Profit (GP) line. If you don’t show a good GP, you have to look at direct expenditure, like costs of aircraft and pilots and cabin crew, which meant cutting flights. In addition, we needed to look at the market and realised that SAA cannot be everything to everyone. SAA has been stretched from being a full-service carrier that has to compete with low-cost carriers like Kulula, Mango and Safair. So, we are now saying, “Let’s focus on market segmentation.” We have Mango to do battle in the low-cost market space and SAA in the full-service market. When you do capacity management based on market segment, you have to watch how the competition is responding. As an airline group, it means that we are not pulling out, but pushing more capacity to Mango. Therefore, as a combined group we should not be down on revenue.
Talking about direct costs, there has been a lot of pressure to reduce pilots’ pay. Are you going to tackle that?
It is important that all stakeholders of SAA including labour, suppliers and lenders understand that the business has to be market driven. This means that whatever we do at SAA must take customer needs, overall market and competitive environment into account. We engaged with all the people of SAA, all the labour unions, including the Pilots’ Association, to find the right configuration of the line and to agree on what kind of trade-offs and sacrifices ought to be made by all of us – pilots included – to bring SAA into a competitive position in the market. Of priority is to get productivity up and optimise the cost to income ratios across all cost line items. We are navigating the issues and I think everyone is aware that we don’t have many options in this regard, nor do we have the luxury of time to get ourselves out the situation in which we find ourselves. What is important is to get everyone to commit to the plan. Whilst it is important to take everyone along into this journey, I am acutely aware that not everyone is going to be excited about the journey we have to walk. I also think that, under the circumstances, people are not necessarily expecting us to agree on everything. At some point as the CEO, I will call things for the benefit of the airline.
What is morale like?
Morale has been low. The reason is that no one can be happy when you are working for a loss-making organisation. No one can be happy when there is such a lot of negativity about the brand out in the market. There are, however, a handful of divisions where morale is high because they are delivering world-class services. There are people with many years of experience at SAA who want the airline to succeed. These are the people whom I care about a lot. We have to walk the difficult path to build a new culture at SAA, a winning culture with the customer at its centre.
What is the current status of the many attempts to create a ‘unified state aviation entity’?
There is an Inter-Ministerial Committee of Transport and Treasury looking at combining the airlines. This includes pulling SA Express into the group. The Singapore model of a state-owned airline is applicable.
Talking about state owned airlines, under the new post-Zuma government, is there any desire to re-look at privatisation?
The call has already been made: find a strategy to bring in a new strategic equity partner (SEP). We recognise that we want to get operating leverage from a partner to help us get to scale. We need to get to the point where we would be attractive to a 25% minority partner, as limited by the Air Service Licensing Council, and if that is not happening, then we need to engage with government to find a way around that. Fortunately, there is now a much stronger intent to find an SEP. However, we have to be clear about the conditions. Firstly, if we sold the business in its current form it would be a give-away. Secondly, there may not be enough interested investors. So we have to do a lot more work to get SAA to a point where an SEP would make sense. The one big asset is our traffic rights and track record, but we still have to do a lot more.
But any SEP investor would probably want a 51% controlling share.
Of course, and today we are restricted to a 25% limit on foreign ownership. But there are instruments that we will talk about towards the end of March when the board hopefully meets for the AGM. Government may have to look at it to decide whether to relax that Air Services Licensing limitation. This might take the SEP option further down the line, as we will need to look at law and policy changes.
So let’s talk about alliances, rather than SEPs. Nico Bezuidenhout almost formed an alliance with Emirates. I think they would still make a good partner. Is there any activity in that area?
The way I see it, scale is critical. If an airline is sub-scale, it is almost irrelevant.
Okay. But let me remind you that you are scaling down.
I am scaling down to build. This is more like a pruning to deliver fruit. Where we are today is that we don’t have a strong enough commercial delivery engine. Therefore, I need to pull back to gain composure and then momentum to lay the basis for expansion. But I still have to be realistic in recognising that we will never be the scale of the Gulf three airlines. That means we have to find partners who are like-minded and look at alliances beyond codeshare, like joint ventures (JVs) and so on, to form a coalition of the willing – of people who share the same aspirations.
Yet the more routes you cut, the more you damage your ability to interconnect with your other Star Alliance and codeshare partners.
It’s about finessing the details. Strategically it is indeed the case that when we optimise our network we have to work with our partners to readjust how they interconnect. What I am very careful about is that I can’t have a lose-lose scenario, so I have to redesign the network to get to the optimum route networking point. Of course, this will mean unhappy partners and customers who used to just rock up in Johannesburg and expect to get a flight every 30 minutes that connects to anywhere. We have to manage the market expectations. As I said, if we try to be everything to everyone, we are going to die.
Under the previous Chairman’s regime, SAA’s route management department lost a lot of skilled staff. Are you up to strength now?
We have now appointed a Commercial Head, and we have international consultants to make up any skills shortfall. But we are beefing up the teams at the commercial side. Revenue management in particular is critical for us. We need to inject data scientists who are able to do the analysis of our customer profile so that we can get optimum delivery. So far I am comfortable that we have the skills, but we still have to do more.
I often get asked why SAA is not able to compete on international routes, as your loads and ticket prices, and thus your yields, are good?
There are a couple of scenarios: If you look at the feeder hub scenario, aircraft efficiency is critical for us. Load factors are good, and prices are reasonably good, but we are being depressed by competition. Also, our product quality is important. Newer aircraft, good service and state of the art in-flight entertainment (IFE) are basics to compete. Yet our long-haul fleet is getting old.
I disagree with the perception that SAA has an old long-haul fleet. The A330-300s are all but new – the A330-200s are only seven or eight years old. Even the A340s are not that old, and their IFE is not bad. With still-low fuel prices, you can still afford to fly the A340-600 quads.
Yes, but also keep in mind that we have to keep on improving the overall onboard experience. People want a direct flight from here to the USA. That’s 17 hours where they do nothing. Some business passengers say they would rather go via Dubai and enjoy four hours on the ground where they are online and can work.
So are you going to put wireless into the A340s?
We have no option but to move in that direction. We have to improve the service offering. I do not see how we can be competitive without that service offering.
What about aircraft utilisation? I see you are still using A340-600s on the Cape Town route. Surely, that cannot be profitable, even at the Gross Profit line?
What we did immediately was to pull a lot of them off the route. So now we have only one in the morning and one in the afternoon. We have done the analysis, and it works if you look at both the cargo and passenger economics blend, especially considering that we are reviewing the domestic freighter strategy.
Continued next month …