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SAA restructuring - pros & cons

It took SAA a month to formulate a plan in response to Alec Erwin's whip-cracking on the 3rd of May. SAA's plan is a good start, but it overlooks other problem areas at the national carrier. For instance, SAA made losses of R500m last year on London to Johannesburg flights, in spite of operating full flights on this route. The losses were explained away as being a result of the high cost of the 747 aircraft they were using on the route, and SAA's magic bullet is to ground the 747 aircraft and continue to operate 3 flights a day between Johannesburg and London, but using Airbusses. This seems a sensible thing to do, but the R500m losses (and do not be in doubt, these are losses to every taxpayer) raise questions about SAA's logistics, pricing and accounting skills:

Logistics

Why didn't SAA realise at the start of 2006 that it would cost R500m more to operate 747's than to operate Airbusses? Surely this information was as available then as it is now? Switching from the 747's to the Airbusses would have saved taxpayers R500m.

Accounting

Ngakula explains that the rentals for the 747s were low in the early years “a holiday period”, but the form of the agreement was such that rentals then escalated sharply and are now subject to “balloon payments” of $28m a year each. Now, surely this was something that SAA's accounting department knew about and they didn't simply enter an expense of zero in the accounts in the early years, but made provisions for the higher expenses which would be incurred in later years? Or were artificially low expenses in the early years the reason for SAA's profitability then (and the resultant performance bonuses which management gained?).

Ngakula also says that the 747 aircraft added R1bn a year to SAA’s costs. However, a balloon payment of $28m equates to R196m per aircarft, which for 6 aircraft amount to R1 176m not R1bn (what's R176m between friends).

Pricing

SAA made losses on a route despite operating full flights. Any Economics I university student can explain that if you're always operating full flights you haven't set your price high enough.

Marketing

With most airline ticket sales occurring online, SAA's online marketing strategy is lacking. While the likes of British Airways, Air France, Virgin Atlantic and Emirates leverage their internet sales through affiliate marketing; SAA have no online affiliate marketing programs set up

Lack of focus

The fact that SAA's CEO sits on 23 boards must be a distraction for him. In total the 10 SAA board members hold 136 directorships. SAA's chairman, Jakes Gerwel, holds 26 directorships.

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Category : South African Airways



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