SAA and KQ consider working together to survive

In a year as Africa’s airlines continue to battle the long effects of Covid-19, the stakes are particularly high for two of the continent’s largest airlines as they tentatively pool their resources in a fight for survival.

Kenya Airways (KQ) and South African Airways (SAA) signed a strategic partnership framework in South Africa last November which, if implemented, should improve the financial viability of the two airlines through cost reductions and an increase in the fleet available to their disposal through code-sharing and potentially up to Lead to a new pan-African airline group in 2023.

Kenyan President Uhuru Kenyatta told his audience during his New Year’s address that KQ and SAA will “join hands” to overcome the economic difficulties they are both facing. The agreement could boost tourism, trade and social engagement in Africa, he said. Airline spokesmen have denied a full merger, but praised the proposed collaboration.

Both KQ and SAA have lost market share in Africa to profitable Ethiopian Airlines over the past decade, while the strategic advantages that Middle Eastern airlines enjoy due to cheap fuel, ideal hub locations and strong support are moving to Africa. and flying out wealthy governments has exacerbated problems caused by financial mismanagement, debt and pilot shortages.

“It’s impossible to survive if you don’t have critical mass, so in their heyday SAA had maybe 30 to 40 planes, Kenya Airways has 34 planes and if I look at the future of airlines in Africa then we have very little chance to survive on our own in the long term without continuous taxpayer support because our size is simply too small to be cost-effective and to compete on an equal footing with the big ones,” says KQ Chairman Michael Joseph.

“We need some sort of merger or joint venture agreement between airlines to give us that critical mass,” he says African business.

With the odds slim, KQ and SAA are betting on returning to profitability together after years of heavy losses and bankruptcies.

The severe travel restrictions imposed by African governments during the pandemic caused severe revenue losses over the past two years, causing Africa’s airlines to lose nearly $8.6 billion in total in 2021, according to a report by the African Airlines Association (Afraa ).

With traffic down 42.3% across Africa from January to December 2021 and after a stuttering start to 2022 in the wake of Omicron, Africa’s airlines are once again struggling with liquidity problems.

Are you planning a new group?

Some industry experts believe a new airline group could cut costs by collaborating on employee training while sharing maintenance tasks, catering, staffing and aircraft purchases. This could create economies of scale, allowing the group to remain competitive and offer cheaper tickets and fares for both passenger and freight segments, Joseph says.

The partnership means each airline will continue to retain its own brand, aircraft, hubs and strategic positions while increasing traffic density and the sharing of knowledge, expertise, innovation and best practices.

KQ reported losses of more than $333 million in 2020 and then lost another $100 million in the six months ended July 2021. Despite converting its operations to freight to minimize casualties during the worst of the pandemic, the carrier’s business operations are hanging by a thread. In June last year, KQ failed to pay its employees on time, even after cutting employee salaries by 5% to 30% for six to 12 months in January 2021.

2013 was the last fiscal year that KQ turned a profit when it posted $72 million in profits following its privatization and listing on the Nairobi Securities Exchange after a decade of profitability. After years of losses, the Kenyan Parliament voted to nationalize KQ in June 2019 and share trading on the NSE was suspended. However, the National Aviation Management Bill has yet to be finalized and the IMF says the government has now dropped plans to nationalize the flagship.

The government’s 48.9 percent stake in the airline remains in place, and a $473 million cash injection was provided in direct budget support for the fiscal year ending June 2022. Kenya’s Finance Minister Ukur Yatani said the government would assume $827 million of KQ’s debt.

SAA’s fortunes were similarly dire, with the airline posting massive losses until bankruptcy in December 2019 required the South African government to embark on a painful restructuring process.

After 17 months in administration, SAA completed its “business bailout” in April 2021, only resuming commercial flights in September last year after announcing it had made it through the sale of a 51 percent stake to the Takatso consortium of Global Airways, would be privatized. which owns the low-cost airline LIFT, and infrastructure investment firm Harith General Partners.

Marcel Langeslag, director of aviation for Africa at Netherlands Airport Consultants in Johannesburg, says that a codeshare agreement – numbering a flight with the airline’s code even though the flight is operated by another airline – and interlining – a voluntary commercial agreement between individual airlines to handle passengers traveling on itineraries that require multiple flights with multiple airlines – will likely form a first part of the collaboration, expanding both airlines’ international reach.

“Once both management teams work together with this low-hanging fruit, they can work their way up to more difficult things like buying airplanes together,” says Langeslag.

Airline partnerships are difficult to pull off, especially when it comes to flag carriers. The Air France-KLM group has grown significantly since its merger in 2004. However, their unity was tested by labor disputes between the two airlines. A sense of injustice has spread following claims that French pilots are paid more than Dutch ones, and disputes over old cost structures have fueled further divisions among staff.

A scientific study has shown that 50% of strategic alliances fail due to cultural differences, distrust or poor operational integration. Airlines based in high-income countries operating in liberalized airspace with large domestic transport bases fare much better.

“The two airlines hold the national and political prestige [SAA and KQ] because letting a big company that employs a lot of people go bankrupt is a tough sell to your constituents. One could consider which geographic locations complement each other well in this partnership. But if you look at it from a business perspective, it’s very hard to see how they’re really going to pull it off,” says Langeslag.

Market liberalization is essential

More important than partnerships to the future profitability of African airlines is the liberalization of air travel on the continent, says Eric Tchouamou Njoya, lecturer in aviation economics at Britain’s University of Huddersfield. Africa has at least 350 mostly small airlines facing high operating costs and market protectionism.

In 1999, at Yamoussoukro, Ivory Coast, 44 African countries agreed to deregulate air services and encourage the opening of regional air transport markets to transnational competition, but implementation has been painfully slow and patchy.

The latest incarnation of this attempt is the Single African Air Transport Market (SAATM), launched in 2018 and signed by 35 of Africa’s 54 countries. The African Union says air travel would be boosted, leading to lower taxes, more competition and airfares an average of 26% cheaper for the average intra-African passenger.

“Africa will soon be close to 2 billion people and so the market is there when the connectivity is there. African airlines need to build stronger hubs and KQ and SAA are well positioned to do so. But they need market liberalization, the right business strategy and the right aircraft,” says Njoya.

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