South African Airways posted a profit of R398m

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AT A time when the International Air Transport Association expects the global airline industry to report a combined loss of 11bn this year, it comes as somewhat of a surprise that South African Airways (SAA) posted a profit of R398m in the year to March.This was the airline that reported three successive losses of close to R1bn and requested billions from the government for its recapitalisation .

“No one is more surprised than us,” acting CEO Chris Smyth said at the results announcement yesterday. “The airline industry has been one of the hardest-hit sectors in the global economy.”How did management achieve this turnaround and is it sustainable?Smyth points out that the recently completed restructuring programme could not have been better timed. The programme saved the airline R2,5bn in costs, keeping the rise in operating cost to an overall 10% despite a sharp rise in the fuel price.

“Thrift is the new fashion. This savings culture has to become part of our culture,” says Smyth. These were not one-off savings and could be repeated in the future .A key aspect of the restructuring was a focus on generating and managing revenue.Despite the programme’s grounding of SAA’s fleet of Boeing 747-400 s, the company managed to improve passenger yield through more attention to revenue management.

Passenger-kilometre revenue rose to 79c, an 18% improvement in the year under review. This means that the airline was able to extract more for every seat available and every kilometre flown.This will become more important in the year ahead as passenger numbers continue to drop in the first four months of the year. “We will not be reducing capacity for now. However, we are combining domestic flights when it becomes clear that we are not filling flights. We are also combining flights on some long-haul routes where we have two daily flights, such as London,” says SAA Technical CEO Jan Blake.

The fact that SAA has managed to secure an agreement to defer the delivery of the 15 Airbus A320s is another key element in SAA’s success .Not only has it allowed it to partially reverse its pre-delivery payments to Airbus — to the tune of R408m — it has also allowed SAA to roll over the lease of its fleet of 17 Boeing 737-800s at a time when lease agreements are favourable.

Smyth was not willing to be drawn on the saving that will be achieved on the new lease agreements, but it is bound to be substantial.The airline is also close to securing a lease agreement with Airbus to lease six new 330-200 aircraft to replace its A340-200 fleet.Blake says while the lease costs on the new aircraft are likely to be higher than on the older jets, the savings in terms of operating costs far outweigh the lease costs.

The postponement of the A320 deliveries will now allow the airline to build up its balance sheet and hopefully acquire the new jets without the support of the government.

Barring a dramatic further weakening of the travel market, says Smyth, SAA is unlikely to ask for further assistance.The only blight on its income statement was the R1,085bn fuel-hedging loss. But airlines around the world have been caught out by the sharp rise in oil prices to a record 147 a barrel followed by a sudden drop in the second half of last year. Finance director Kaushik Patel says the airline used hedging judiciously and carefully.“We will only hedge 40% to 60% of our fuel requirement for a year out, while on foreign exchange we will hedge 50% to 75% of our requirement.”

An issue that must be resolved is that of a permanent CEO. Chairman Jakes Gerwel said SAA was moving closer to appointing a CEO and that Smyth was a candidate .But based on this set of numbers, a revitalised SAA looks set to continue on the road to profitability.

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