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Plans for SAA and Kenya Airways to form a pan-African airline group may be pie in the sky

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Nyatsumba is a business rescue practitioner, a Chartered Director (SA) and the MD of KMN Consulting. He is the author of Successfully Implementing Turnaround Strategies at State-Owned Companies.

How much of what African politicians promise or commit to is ever accomplished? Not much, it would seem, if experience is our guide.

In October 1998, African transport ministers signed the Yamoussoukro Declaration, an important agreement to promote deregulation of Africa’s airspace. Two years later, that agreement – then known as the Yamoussoukro Decision – was adopted by heads of state during a meeting of the Organisation of African Unity. It was meant to take effect on 12 August 2002. 

Although ratified by many countries, the Yamoussoukro Decision was mainly observed in breach. In January 2018, the African Union established the Single African Air Transport Market (SAATM) to create an open-skies dispensation similar to that which exists in the European Union. The aim was to implement provisions of the 18-year-old Yamoussoukro Decision. As of 2019, 23 countries had signed the SAATM agreement.

In the interim, major regional airlines like SAA here at home and Kenya Airways in east Africa recorded massive losses. SAA has been bleeding financially since 2012, while Kenya Airways has been racking up losses since 2013. SAA’s last profit was R782-million in the 2010/11 financial year, while Kenya Airways’ was 7.8-billion Kenyan shillings (R1.1-billion) in 2013, after more than a decade of profitability following its privatisation and listing on the Nairobi Securities Exchange (NSE). 

This followed the implementation of an ambitious growth strategy called Project Mawingu (Project Clouds). In 2016, the airline lost 26.2-billion Kenyan shillings, which was then considered the worst corporate loss in east Africa. However, even worse was yet to come: in 2020, it lost 36.2 billion Kenyan shillings.

Although the Kenyan Parliament voted to nationalise Kenya Airways in June 2019, undertaking that the process would be completed within six months, it was not until June 2020 that the National Aviation Management Bill was tabled. While the hope was that it would have been finalised by October that year, more than a year later it remains unfinalised, and trade in Kenya Airways’ shares on the NSE has been suspended since April 2021. 

In June, Kenya Airways could not pay salaries on time, but did so a month later – after it had already cut employees’ salaries by between 5% and 30% in January for six to 12 months.

Meanwhile, SAA was placed in business rescue in December 2019 and only emerged from it in April this year, but commenced operations in September, following news that it would be privatised. However, due diligence by the approved suitor, the Takatso consortium – which is expected to own 51% of the carrier and invest about R3-billion – continues, apparently indefinitely. Among the issues which remain to be sorted out is legislation that limits possible ownership of SAA by foreigners to 20% and South Africans to 49%.

However, even as Kenya Airways and SAA were struggling, Ethiopian Airlines was going from strength to strength. Not only has Ethiopian Airlines been consistently profitable since it was established in 1946, but it has since bought or partnered with other airlines across the continent and now benchmarks itself against international competitors like Lufthansa and Singapore Airlines. 

It was one of only three airlines in the world to make a profit in the year ending June 2021, thanks to “agility, quick decision-making and resilience”, according to CEO Tewolde GebreMariam, who has now been in the job for more than a decade. 

Given this background, it was very surprising to learn that, during Kenyan President Uhuru Kenyatta’s state visit to South Africa last week, SAA and Kenya Airways signed a “Strategic Partnership Framework Agreement” to form a pan-African airline group by 2023. 

The airlines announced that they would work together to increase passenger traffic, cargo opportunities and general trade in the two countries and the rest of the continent. Media reports said they “expected that the partnership will improve the financial viability of the two airlines, while at the same time offering competitive prices for both the passenger and cargo segments”.

Coming after the signing of a Memorandum of Cooperation between the two airlines in September 2021, the agreement was said to be consistent with the African Continental Free Trade Area (another African agreement which so far appears to be stillborn), according to the chairpersons of SAA and Kenya Airways, John Lamola and Michael Joseph, respectively.

This agreement enjoys the support and blessings of Kenyatta and President Ramaphosa, who announced a series of other important agreements to increase trade and ease travel between the two countries. Speaking at a press conference with his Kenyan counterpart, Ramaphosa remarked: “The decision of our respective national airlines to deepen their collaboration is further testament to the growing ties between our countries.”

In principle, this mutual cooperation between SAA and Kenya Airways makes sense. However, a few questions immediately come to mind. Which SAA has entered into this agreement – is it the SAA currently fully owned by the state? Or is it the to-be-privatised SAA which will have Takatso as the majority shareholder? If so, does the agreement have the support of Takatso?

More importantly, however, how can two airlines which have struggled so badly over almost a decade be in a position to form a pan-African airline group? Shouldn’t their immediate focus be survival, before they begin to dream big? 

After all, SAA has survived on government bailouts since 2013, while the heavily indebted Kenya Airways can hardly service its debts and is only managing to pay off the interest. Kenya Airways has been battling with the implementation of its turnaround strategy, “Operation Pride”, which was adopted in 2015, and has now engaged the services of London-based Steer Group to review it.

How, then, can Kenya Airways – a heavily indebted, privately owned airline in which the Kenyan government is now the largest shareholder, and which is on the verge of nationalisation – and a limping SAA whose future is uncertain, commit to such ambitious projects as the formation of a pan-African airline group? 

Could this strategic route be one which has been seriously considered by the boards of the two airlines, or is it yet another product of political dreams by the two governments?

The fact remains that Ethiopian Airlines, which is by far the most successful African airline, has long offered to partner with SAA and to assist Kenya Airways wherever possible. Both SAA and Kenya Airways pilots have been trained at the Ethiopian Aviation Academy, which is owned by the Ethiopian Aviation Group which houses Ethiopian Airlines. In October last year, Ethiopian Airlines entered into a short operational joint venture with SAA, which saw it offering operational assistance (which involved “pilots, maintenance and aircraft”) to the South African national carrier.

The truth is that Ethiopian Airlines is already that “pan-African airline group” envisaged by SAA and Kenya Airways. The Ethiopian carrier has a presence throughout the continent, where it has equity in different airlines and offers operational and management services. 

Closer to home, it already owns Mozambique’s LAM (99%) and has significant equity in Zambia Airways (45%) and Malawi Airlines (49%). In west Africa, it owns 40% of AfricanSky Airline and 49% of Guinea Airlines, and in central Africa it owns the same percentage (49%) in Chad Airlines.

According to Ethiopian Airlines deputy chair Dr Arkebe Oqubay, Ethiopian Airlines was one of the suitors of SAA, but backed off when it realised, following a preliminary due diligence, that “it is far too late” given the extent of SAA’s challenges. 

When asked to manage SAA, Ethiopian Airlines again declined for at least three reasons: “Rampant government interference, the unions’ radicalism and the airline’s corporate governance failures.” 

It seems reasonable to conclude, then, that not much will come of the SAA-Kenya Airways agreement to form a pan-African airline group, among other things. BM/DM

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  • Patrick Millerd says:

    An excellent considered assessment of two failed airlines planning to become one large failed airline! Definitely “another product of political dreams by the two governments?” and giving these dreams fancy-sounding names will not be the sauce for success.
    Let’s accept the successful Ethiopian Airlines assessment of SAA following their preliminary due diligence, “it is far too late”.

  • Michael Joseph says:

    Whilst most of the article is accurate in terms of the financial status of each company, the “Strategic Partnership Agreement” was not meant to merge the airlines – quite the contrary – each airline would retain its brand, aircraft, operations etc but would, in time, create a structure that would combine the back office operations such as training, maintenance, catering etc to lower the unit operating cost. It is not a political dream of the respective governments although highly supportive by them, but a way in which each country will have its national airline for economic and political strategic reasons, but ensure not only the survival of each airline but also allow the airlines to grow in a post-Covid world being part of a pan-African airline group. It’s not a closed club but will eventually, as the structure is perfected, be open to other African airlines.

  • Chris Hill says:

    Good article telling us what most people already know. Too late for SAA. I’m not sure if the author is a journalist, but looking at his qualifications shouldn’t he be helping to “fix” South Africa. Seems he would be a much better choice than most of the carder appointments we have at present.

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