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Growth poses challenges for South African Airways
Journal of Commerce / April 23, 2001

By Larry Luxner

JOHANNESBURG -- Last month's decision by three European airlines to stop serving South Africa will only boost traffic for South African Airways (SAA), the region's dominant passenger and cargo carrier.

Industry insiders say the move by Alitalia, Austrian Airlines and Sabena was prompted by insufficient business-class and first-class passenger volumes, which normally make such routes profitable. Like SAA, all three airlines haul cargo in the bellies of their jumbo jets, and their sudden disappearance from the South African market means more business for SAA.

"Our most important market for cargo is Europe, which accounts for nearly 50% of our total," said Vince Raseroka, SAA's vice-president and managing director for cargo. "We've got 21 flights a week into London. We also fly to Frankfurt daily, and we have a joint-venture freighter operation with Lufthansa."

The United States currently accounts for 12% of SAA's cargo volume, with all of that cargo carried in the bellies of its Boeing 747-400s. The airline offers daily service between New York's JFK and Johannesburg, as well as flights three days a week between Atlanta and Cape Town. Another 20% of SAA's cargo volume is domestic, with South America, the Far East and other African destinations accounting for the remainder.

Until last year, SAA had two Boeing 747-200 freighters in service -- one owned, one leased -- but decided to get rid of them because the market didn't justify having freighters.

"Rates were very depressed," said Raseroka, who was interviewed in his office at Johannesburg International Airport. "Because of our geographical location, you bring the stuff down here and have to wait until you have enough cargo to justify sending the plane back up north. That's dead time for us."

At present, SAA transports 30% of all cargo leaving and entering South Africa, said Raseroka. The 40-year-old official, who ran a Johannesburg plastics packaging company before joining SAA two years ago, estimated that cargo will account for 20% of the airline's $1.3 billion in 2001 revenues, up from 15% in 2000. SAA itself is 75% owned by Transnet, a quasi-governmental agency; 20% by Swissair, and 5% by the airline's 9,000 employees.

In the cargo arena, which employs 950 people, SAA's biggest rivals are Lufthansa, British Airways and Martinair, all of which use freighters. SAA uses freighters only for its domestic express cargo service, with two dedicated Boeing 737s operating among Johannesburg, Durban, Cape Town, Port Elizabeth and East London. About 20% of SAA's cargo business is domestic

"Freighter and belly space are two different products, and freighters are only slightly more pricey than belly, so there's really very little competition," said Raseroka. "We can get the goods there quicker, but the problem is we're weight-restricted."

Raseroka said his passenger planes can carry between three and 10 tons of cargo per flight, depending on the weather and other variables. He charges around $2.20 per kilogram, compared to anywhere from $2 to $2.50/kg on competing airlines.

"The real challenge for SAA Cargo is how we're going to cater for growth," he says. "Passenger traffic is growing at only 4% a year, and if we use only belly space, we're going to miss out on many opportunities, since cargo is now growing at 6-8% a year. We would like to get a freighter for the U.S., but only if we could justify it. Unless the customer is willing to pay for it, there's no point in doing it."

At present, most U.S. cargo bound for South Africa consists of DHL express packages, computer chips and pharmaceuticals. With South Africa having one of the world's highest HIV infection rates, says Raseroka, "anti-AIDS drugs could be a big market for us, once all the issues are sorted out. We can play an important role in this."

Out of Africa, SAA ships mostly perishables, including fish and flowers. Because of headwinds, its flights from Johannesburg to New York consume more fuel than the other way around, and therefore its jets cannot make the trip without refueling at Ilha de Sol in the Cape Verde Islands.

But Koos Engelbrecht, director of AirRep Namibia (Pty) Ltd. in Windhoek, says the Namibian government is planning to enlarge the runway at Walvis Bay Airport so it can handle 747s -- freeing SAA from having to stop in Cape Verde on the way to New York.

"That'll allow SAA to save an hour and a half off the return flight," said Engelbrecht, who ships large amounts of Atlantic hake caught off the Namibian coast to Spain via SAA.

While Raseroka couldn't confirm that SAA in fact plans to use Walvis Bay instead of Ilha de Sol as a refueling stop in the future, he did say that "until last year, we had a freighter dedicated to fish. We were sending 200 tons a week to Spain. It was good business. Now we carry the fish in the belly."

One thing everyone seems to agree on is that the pullout of Austrian, Alitalia and Sabena from the South African market will help SAA.

"It had a big impact, especially on Belgium," said Johannesburg freight forwarder Jaco Vlok of Röhlig PCA. "We used to use Sabena a lot for ostrich meat and flowers, and we distributed into Europe from Brussels. We also used Alitalia frequently, until they terminated their services. Now we face problems in exporting to Milan via other countries, and it's becoming more expensive for the shipper."

Adds Denzil Nair, special projects development manager at Schenker International: "It's certainly going to have an impact on the cargo industry." He estimated the pullout of the three airlines would mean a loss of 300 tons of weekly cargo capacity out of South Africa -- and that it would also affect southbound traffic from Europe into Johannesburg.

"This is happening at a time where demand for capacity out of South Africa is on the increase," he said. "This is also threatening future export orders for large multinational companies located in South Africa."

Nair said the three airlines pulled out because they weren't getting sufficient business-class revenue.

"There weren't enough business travelers supporting these airlines. Economy-class passengers pay for the costs, and business passengers represent profit. Without enough of these business passengers, there wasn't enough profit for these carriers to continue," said Nair. "If anything, it'll benefit SAA. This will become a seller's market as far as air freight rates are concerned, because of the reduced capacity."

Indeed, Raseroka predicts SAA will have its best cargo year, thanks to that and two other factors: natural growth of the market and better utilization of belly space.

"Our GDP grew by 3% last year. Our economy is quite good. Everybody's taking a hammering on the strength of the dollar against the rand, but the fundamentals of the South African economy are very strong," he said, predicting that SAA will show a profit of $100 million this year.

For the past two years, SAA's U.S. agent has been Mercury Air Cargo. Mercury's contract expires at the end of June; the two parties are currently renegotiating the contract.

"We're happy with them," says Raseroka, "but we believe we can do even better."

On Feb. 22, SAA inaugurated the first regularly scheduled nonstop service between the United States and Nigeria. In conjunction with Nigerian Airways, the carrier flies three times a week between New York JFK and Lagos, one of Africa's largest cities.

"We've been busy trying to sort out the logistics," said Raseroka. "We're appointing GSAs to sell both from the Nigerian market to the U.S., and from Nigeria to South Africa."

Raseroka said the airline isn't sending too much cargo into Nigeria, partly because "people going back home to Nigeria try to take valuable goods with them -- stereos, electronic gadgets, everything and anything they can carry. The difference is that in South Africa, most of that stuff is readily available."

Looking toward the long term, Raseroka hinted that SAA would like to pursue joint ventures with other carriers in an effort to boost its bottom line.

"We're not the best in terms of operating freighters. You need to be a low-cost operator," he said. "I'm looking for a partner to bring the hardware, and we can bring the market knowledge. We're talking to a few including Swissair, Lufthansa, Sky Team -- operators with whom we can have synergy, because we've got the market know-how. We believe we should be the gateway to South Africa."

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