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Air New Zealand vs SAA

August 15, 2016

 

Why is Air New Zealand so much better than South African Airways? They have a much smaller population and are even more isolated geographically – yet their airline makes good profits – oh and New Zealand play better rugby.

I am often asked if I think SAA can ever be profitable. All too often I am tempted to be pessimistic and reply no, it just cannot compete against the Gulf Three ’super-connector’ airlines internationally. Furthermore, regionally, the great African renaissance to which it had pinned so much of its hopes of ‘Bringing the world to Africa and taking Africa to the world’ has proved to be largely imaginary.  
Yet compared to Air New Zealand (ANZ) SAA has some significant advantages and should do better. Its Johannesburg hub serves the whole of Sub-Saharan Africa. By itself, South Africa has 53 million people, many of whom are an emerging middle class who can now travel to visit friends and relatives (VFR) by plane instead of bus or train. At US$350 billion, South Africa’s GDP is twice New Zealand’s US$185 billion. New Zealand has just 4.5 million inhabitants (excluding sheep), is not a natural hub as it is surrounded by water and lives in the shadow of its nearest neighbour – Australia. Yet, even more than the All Blacks wiping the floor with the Springboks, ANZ makes SAA look really pathetic.
Air New Zealand’s CEO, Christopher Luxon, says that his airline is one of only about seven airlines globally that are rated as investment grade, a reflection of its consistently profitable performance. ANZ reported a record net profit of NZ$327 million (US$208 million) for 2014 – its fourth consecutive year of earnings growth and its thirteenth of profitable trading. Yet despite the South African economy being twice the size of New Zealand’s and better located, in terms of size SAA and Air New Zealand (ANZ) are remarkably similar.
ANZ has a fleet of 54 aircraft – SAA 53. SAA has 11,500 employees, which gives some comfort that the airline is not as badly overstaffed as is often claimed, as ANZ has 11,000. SAA flies to 42 destinations – ANZ 51. 
There are no excuses about the state airline having to fulfil a developmental role. The key results are in the all-important bottom line. ANZ made a profit of US$212 million (R3.3 billion) compared to SAA’s loss of US$136 million (R2.3 billion). 
How can SAA be so bad? No doubt a large part of the difference is that there is little or no political shit at ANZ. This is probably because a large chunk of the airline is privately owned. 47% of ANZ is listed on the New Zealand Stock Exchange and the stock pays an excellent dividend yield of 5%, making it popular with risk adverse investors such as pensioners. 
Private investors will show very little patience with managers who try use an airline for crooked self-enrichment, cronyism or political favours. It is impossible to imagine ANZ’s Chairman, Tony Carter, being allowed for one nano-second to indulge in what are locally called ‘shenanigans’ such as Dudu Myeni’s purge of senior managers – from the CEO and CFO downwards – to appoint cronies into a stupidly expensive, and all but impossible, Airbus local lease deal.
The point is, ANZ is a very useful role model for what can be done with SAA. It too was one of the many bankrupt state owned airlines. After acquiring Ansett Australia, ANZ was essentially bankrupt in 2001. The airline was bailed out by the government, recapitalising it by buying a 75% stake. The New Zealand government invested NZ$885 million (US$761 million) in 2001. Good management was put in place and the state bailout was only needed once. So far the New Zealand government has received more than NZ$500 million (US$430 million) in dividends. The government is steadily reducing its share, so it has more than handsomely recouped its US$761 million investment bailout. 
What is ANZ doing right? Quite simply it is just better managed, without the burden of incompetent affirmative appointments. Two key measures reveal how ANZ runs rings around SAA. While SAA flies 23 million revenue producing kilometres, ANZ manages 28 million. And not only does ANZ fly more, despite having essentially the same number of aircraft, it beats SAA hands down in that all important metric – load factor. SAA manages a reasonable 75%, but ANZ manages to fill 84% of its seats. 
These are important performance indicators, but the key is margins and costs. SAA’s competitors, particularly Comair, complain that SAA does its best to drive them out of business by selling seats at a loss. They were supported by the Competition Board who found SAA guilty of unfair competition in the demise of Sun Air and Nationwide and in Comair’s ongoing struggle to survive against a competitor with apparently limitless taxpayer funds. 
So compared to ANZ, it’s probably safe to assume that SAA is selling seats at an unreasonably low price – and yet still manages only a 75% load factor.
And then of course there is the basic business management requirement to control overheads. It needs consistent management to keep a lid on expenses, yet SAA has an appalling record of turning over CEOs and appointing often wholly unsuitable candidates – purely because of the colour of their skin. It would be absurd to think that Air New Zealand could only appoint a Maori or some other ‘First Nation’ as CEO.
Perhaps ANZ has a geographical advantage in that the other major airlines think New Zealand is too far and too small to bother with, whereas they are all eyeing Africa as the big growth story in the light of Europe’s troubles. Luxon (who looks like he should be an All Black forward) notes that his airline’s long run of profits has been achieved despite external forces such as economic shocks in the European, US and Asian markets, volatile oil prices, and fluctuating exchange rates. 
Meanwhile SAA is watching its lunch being eaten by the Gulf Three, particularly Emirates, and made faltering steps to partner first with Etihad and now Emirates. For ANZ the threat is from an influx of Chinese airlines, with the big three either increasing or planning to launch services to New Zealand. ANZ is, however, not worried its small size will make it a junior partner. It’s partnering with Air China on flights from Beijing. 
Other threats to ANZ are the impending expansion of Australia’s Jetstar to New Zealand regional routes, and the prospect of American Airlines or Qantas entering the US-New Zealand market. 
To take on the competition, Luxon has the advantage of having good reserves and a strong balance sheet. He points out the obvious – that dealing with volatility in global markets is an inescapable reality of the airline industry. The carriers that can adapt to new situations the quickest are the ones that will thrive, he says. 
ANZ is also unfazed by the prospect of new competition on North American routes, its largest long-haul market. Luxon says Air New Zealand has always assumed it would face competition on US mainland routes. However, he reckons that US carriers have previously found the New Zealand market tough to crack. It features relatively thin routes and inbound traffic is predominantly leisure with a low ratio of well-paying business travellers. 
Despite these moves by its competitors, ANZ is growing aggressively. The carrier launched two new routes to the Americas in December – one to Houston and one to Buenos Aires. The Buenos Aires route, in particular, is intended to draw significant connecting traffic from Australia. 
The carrier’s robust financial results are supporting a fleet growth and replacement programme, spurred partly by the arrival of Boeing 787-9s. Thanks to its success, ANZ has been able to build a young fleet. It has received five of its order of 12 787s, and is due to receive another in the next few months. The latest deliveries have freed up the Boeing 777-200ERs it has been using on its new North American routes. The airline completed the replacement of its 737-300s with A320s in its domestic fleet in September 2015, ending its 47-year association with 737-family aircraft. A mix of 13 A320neos and A321neos is due to start arriving in 2017 to begin replacing the A320s in its short-haul international fleet.
I can only pray that South Africa’s government will mature past naked corruption and cronyism and set its airline free to follow ANZ’s example. Then we will really have a flag carrier to be proud of.

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