SAA has no place in South Africa

16 August 2017
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Good Luck to Vuyani Jarana, new CEO of SAA. Unfortunately, he will need much more than that. Why, oh why, did he accept to take over SAA? None of his Vodacom experience, where the main objective is to make a profit, will be of much use. 

He will fail, of that there can be little doubt. Let me explain, as I doubt if anyone at SAA knows why.

SAA’s glory days were in the last century when it thrived on a domestic monopoly, limited global services into Africa and apartheid boycotts. None of these conditions exist today, however, and now, in the 21st century, SAA is irrelevant.

Prior to 1992, the domestic market was highly regulated. Private airlines were limited to operating on secondary routes, leaving SAA with a monopoly on the primary routes. After deregulation in 1992, SAA tried every means to eliminate competition on its domestic routes, first by purchasing and shutting down new entrants (Flitestar and Sun Air), and thereafter, by illegal, anti-competitive commercial conduct. These attempts to eliminate the competition failed. By 2017 SAA’s domestic market share has declined from 98% to about 23%. Mango has about 13%. Despite its legacy advantage, gross mismanagement and incompetence dashes any hope of it ever competing with the more efficient private sector in the domestic market.

SAA also enjoyed close to a monopoly position in connecting sub-Sahara Africa to the world in the 20th century. Most Southern African travel moved through Johannesburg before flying north to Europe or America, and SAA benefited enormously from grandfather bilateral rights between its Johannesburg hub and many African destinations such as Luanda, Maputo, Nairobi, Lusaka, Harare, Kinshasa, etc. Until recently, these African connections were where SAA made most of its profits and it fought aggressively to stop other South African airlines from gaining rights on these routes.

The spread of middle-East carriers into Africa, however, made travel via Johannesburg to connect into Africa unnecessary. Emirates started its big global expansion in the mid-90’s, and today serves 20 destinations in Africa and connects onwards to another 121 destinations via Dubai. Turkish Airlines has been even more prolific since its growth drive in 2004. It serves 44 African destinations that connect onwards to a further 183 global destinations via Istanbul. The introduction of a costly South African transit visa for anyone travelling through Johannesburg as an African hub has only exacerbated the situation and SAA’s golden routes into Africa have consequently faded away.

The apartheid era also gave SAA an unnatural commercial advantage in connecting Southern Africa to the world, particularly during the period of boycotts when few international carriers operated to South Africa. After 1994, many of the legacy international carriers returned to South Africa, but the real pressure, once again, came from the entry of the globally dominant middle-East carriers. Their scale achieves a lower cost per seat than what a relatively smaller SAA could ever hope to achieve. Not only do they offer a huge global network onwards from their hubs, but they also enter all three key points in South Africa (Johannesburg, Cape Town and Durban) thereby taking SAA’s historic domestic feed traffic between these points and Johannesburg.

Today, while SAA carries only a small percentage of the global traffic into South Africa, it is being forced to compete on price with airlines that have economies of scale that SAA could never match, even if it operated efficiently and with the latest aircraft. Furthermore, the global airlines have international brand presence that allows them to sell the majority of their tickets on the South African routes at a premium in hard currency, while SAA still sells the majority of its tickets in rands and at the lower fares that are affordable to the South African consumer.

Despite the proliferation of competing airlines into South Africa, the routes to South Africa are typically very lucrative for foreign airlines as tickets to South Africa remain relatively expensive. This is because the South African government still limits the amount of capacity by foreign airlines in an effort to contain competition against SAA, which drives up ticket prices. As a very distant destination for most tourists, this constraint on competition and the resulting high ticket prices limits the growth of South Africa’s entire tourism sector. The elimination of this protectionism would flood the market with more capacity and lower ticket prices to South Africa, likely creating far more jobs in the whole tourism sector than the few protected at SAA.

Even an efficient SAA would not be able to reverse any of the above factors given the globalisation of the aviation industry. SAA is located at the very worst location for a geographic hub – at the southern tip of Africa. The latest generation of long-haul aircraft have eliminated any feasibility of South Africa as a hub for east-west traffic. If SAA did not yet exist, there would certainly be no business case for establishing an SAA today. No amount of turnaround plans will change that.

On second thoughts, Mr Jarana could succeed and make taxpayers for ever grateful if he managed to closedown SAA altogether.

Author Terry Markman is a transport consultant and was on the Airline Deregulation Committee. This article may be republished without prior consent but with acknowledgement to the author. The views expressed in the article are the author’s and are not necessarily shared by the members of the Free Market Foundation.

 

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