About 20 months ago, when Harvard-educated but little-known Inati Ntshanga was thrust into the position of CEO of South Africa’s state-owned regional airline, very few noticed.
One of the main reasons, of course, was that 18-year-old South African Express (SAX) had always been in the shadow of its bigger and much older brother, South African Airways (SAA), which has been a dominant force in the continental airspace for more than 75 years. So much so that SAX’s resilience has gone largely unnoticed, notwithstanding the fact that in its short life, not only has the airline survived several one-time competitors that have since gone under, it is now also debt free.
Now SAX wants to conquer Africa.
Whereas SAA has gone, cap-in-hand, to the South African government to beg for R6 billion to fund operational costs, its growth strategy and fleet renewal, SAX will be using its own balance sheet to raise the R4.5 billion it intends to spend on 15 new aircraft for its new growth plan. Seven of the aircraft have been delivered, while the rest will arrive between now and 2015 to coincide with the end of current leases of the “oldish” aircraft that the airline still has on the tarmac.
Most of SAX’s old fleet was acquired when jet fuel was in the $20-$30/barrel price range, airline industry analyst Linden Birns points out.
“With fuel today soaring above the $130/barrel mark, the economic model for these planes no longer holds any validity. Not only are they unable to generate sufficiently low seat-mile costs—the standard measure of the cost of production in the airline industry—but they are also rapidly losing their residual book value as demand for these aircraft in other markets has fallen off a cliff.”
In addition to several domestic routes—Johannesburg, Cape Town, Durban, Port Elizabeth, Bloemfontein, George, East London, Kimberley, Pietermaritzburg, Upington and Phalaborwa—SAX also flies to neighboring Botswana, Namibia, Mozambique and the Democratic Republic of Congo.
“All of them are profitable,” according to Ntshanga. He is now adding Malawi, Ghana and Uganda to the list and is in negotiations with several other African countries that subscribe to the idea of “open skies”.
While the continent has been slow to embrace open skies—an international policy concept calling for an easing of restrictions, for the liberalization of rules and regulations and for minimal government intervention in the airline industry—Ntshanga says those who have already done so are seeing the economic benefits.
He points to the latest International Air Transport Association (IATA) report, which analyzed the relationship between a country’s level of connectivity to the global air transport network and its level of productivity and economic growth, across 48 developing and developed countries during a 10 year period.
Not only is aviation a major industry in its own right, employing large numbers of highly skilled workers, the report said it is also an essential input into the rapidly growing global economy. The study found that greater connections to the global air transport network can boost the productivity and growth of economies by providing better access to markets; enhance links within and between businesses; and provide greater access to resources and international capital markets.
Noting how air traffic demand increased as economies grew, the report concluded that global economic growth has been a key driver of growth in air traffic demand.
This has not been confined to
North America, Europe, South-East Asia, Australia, Latin America and India, Birns points out: “If you want [further] proof of this, just look at
how the size of the South African domestic market grew with the advent of our low-cost airlines, kulula.com, 1Time and Mango, in the 2000s to see how the liberalized regulatory environment gave rise to mushrooming growth.”
THE PROBLEMS OF THE AFRICAN AIRLINE INDUSTRY
The rest of the African continent, though, is uniquely different, something Ntshanga is ready to concede upfront, if not to acknowledge that his ambition could even be thwarted by it.
SAX’s home base, South Africa, and the other countries the airline has been flying to until now adhere to high safety standards. The same can’t be said about many of the other countries on the continent, where carriers are notorious for their tendency to skimp on safety. The most recent IATA statistics reveal that in 2010 Africa had 7.41 accidents per million flights, the worst among the world’s regions and 12 times worse than the global average of 0.61.
Other common complaints usually cited by established airlines’ indifference to Africa are:
– too few airports;
– inadequate investment in infrastructure;
– inconsistent government policies and laws.
Birns explains some of them, and their impact: “The artificial barriers to market access, known as the Bilateral Air Transport Agreements, which are applied in Africa, should be reviewed and liberalized. These agreements currently prescribe which airlines may operate on given routes, the number of flights each airline is permitted to operate on the route, and in some cases, even stipulate the maximum weekly or monthly capacity each designated airline may put into the market. The net effect is that airfares on intra-African routes remain artificially high. And with the global and regional economies under pressure, fewer people can afford to fly. If free or freer competition was permitted, fares would come down and the market would grow exponentially.”
THIS IS AFRICA’S NEXT BEST AIRLINE
“But the challenges do not mean it can’t be done,” Ntshanga says. He has confidence that he’s doing the right thing and is poised to strike gold.
The reason for his calm confidence, and some would say rather rapid expansion?
“Africa is, in fact, low hanging fruit for us… Our market research says we’ll be profitable within two months—and that’s even before those markets reach maturity.” Besides, the economist-by-training reckons, Africa is poised for unprecedented levels of growth, even though that’s admittedly off a low base.
Birns says SAX’s Africa route expansion strategy is “a good one in principle”, but to be sustainable it requires focus on markets with sufficient demand for business and tourism traffic.
That word—focus—is what Ntshanga says SAX swears by. “We have a very good, tried and tested model,” he says.
SAX doesn’t have its own distribution and handling systems but uses SAA’s for a fee. A lot of other services, including ground handling, are outsourced, leaving the airline with a staff complement of only 1 100.
While others still prefer jets, Ntshanga says SAX is opting for 50- to 100-seater aircraft that use turbo propellers but consume relatively less fuel, are as quiet as jets, are just as fast, and are more comfortable. Add to that the fact that the destinations the airline flies to are within a three-hour distance to and from South Africa.
“The lure of money, which often looks like easy money,” is one cause, Ntshanga believes, why other airlines fail. “You won’t catch us flying long routes, or very busy routes where we are a small boy playing with the big boys. We focus, we don’t straddle,” he says.
Birns believes SAX “never competed directly” with Nationwide, Velvet Sky, Sun Air, Flitestar or Phoenix—all of which went under—but was competing against SAA and Comair (the BA and Kulula operations) and 1Time. “It’s precisely because the high-density mainline routes are so fiercely fought over that SAX deliberately operates on different gauges and networks to the others.”
Birns thinks Velvet Sky went out of business “largely due to its failure to have sufficient economies of scale to offer a comprehensive domestic and regional service. Nationwide failed, not because of the engine incident and subsequent grounding—these were factors, but not catalysts of the failure—but because once it resumed operations, the shareholders and management failed to appreciate that they needed to invest heavily in restoring brand credibility and market confidence. They assumed, wrongly, that they could simply pick up where they’d left off and all would continue as if the crisis hadn’t happened.
“SAX is feeling the same economic pressures as every other airline around the world, ie. rampant fuel prices and soaring user charges, levies and taxes. We would be naïve to think these won’t negatively impact SAX’s bottom line. And like every other airline, SAX will want to invest in the latest available technology to help it keep those additional costs in check,” he says.
With humility, but also with authority, Ntshanga goes back a couple of years, before he was appointed CEO. Then, he was part of a crack team that achieved an important strategic tilt—developing and implementing strategies that led to the doubling of revenue and saw SAX become solvent for the first time since the airline’s inception 18 years ago. And that’s when everyone got up and noticed.
Ntshanga believes it’s a matter of time before others see that SAX is no longer the Cinderella operation that was established back in 1993 by black investors Thebe Investments (51%) and a Canadian consortium (49%), only to be sold to the government a few years down the line because it wasn’t doing that well.
Back in the day, SAX would fly to Bloemfontein twice a day. Today it flies there 10 times a day as well as to destinations across Africa dozens of times every month.
“This is Africa’s next best airline,” Ntshanga says.