SAA - difference between capital injections and recapitalisation

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LongRangeCruise
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Re: SAA - difference between capital injections and recapitalisation

Unread postby LongRangeCruise » Thu May 17, 2018 8:39 am

How's does Ethiopian buy up almost defunct carriers and turn them around successfully ?
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Re: SAA - difference between capital injections and recapitalisation

Unread postby HJK 414 » Thu May 17, 2018 9:17 am

evanb wrote: .........trimmed for brevity

While I agree with the general feeling here, and share in the doubts regarding an ability to turn it around, I still think it's false to blame it one leases and massive overheads. SAA's cost structure isn't great, but it's not fundamentally terrible either. This is quite surprising given how much looting there has been, so without the looting it's not a lost causes. Nobody seems to be able to show any data that costs are the problem (we've seen some pretty embarrassing attempts to show that they're overstaffed with 50,000 people). Looking at SAA's financials, they met their operating unit cost target in the year to March 2017 (last published financials), in fact they beat it by about 4%, however they missed their unit revenue target by 10%. So they target was a 1% operating margin, which was pretty dismal, and they missed it by a mile, not because of costs, but they were not able to raise the revenue.


I agree ......
The airline seems to have a reasonably "normal" fixed cost profile.
Their fuel costs seem to be in line with the market as a % of revenue (slightly higher - but that can also be an affect of the low revenue / RASM) That only leaves (other "costs") most probably being "looting" and "preferential" suppliers.
At the end of the day - I still believe the basics are there for the airline - but it is a matter of making sure that you do not structurally fly passengers below CASM - and if that means reducing the schedule - or trimming overhead - so be it.

Only when the airline is above BEP - they could consider adding bottom line result by flying passengers for a price that does not cover the entire fixed cost portion (variable +) ..... but that would only be for limited seats.

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Re: SAA - difference between capital injections and recapitalisation

Unread postby Mouser » Thu May 17, 2018 1:20 pm

Thanks very much evanb - good point about bankrupt vs insolvent and the "looting". But as you say the missed revenue targets and not cost overruns seem to be responsible for the "losses". But over time the amounts seem disproportionate to simply bad management decisions unless these are consistent and ongoing to the point of negligence i.e. poor revenue due to poor and ongoing route selection, under charging (??) or too many free passengers (??). But I accept it may be way more complicated than that.
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Re: SAA - difference between capital injections and recapitalisation

Unread postby GL » Thu May 17, 2018 3:17 pm

Mouser wrote:(??) or too many free passengers (??)..

On this point correct me if I'm wrong by my impression is that SAA carries very few 'free passengers" as they have in fact been very strict about this? And they don't carry the parliamentarians - which BA is paid for anyway?
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Re: SAA - difference between capital injections and recapitalisation

Unread postby evanb » Thu May 17, 2018 6:50 pm

LongRangeCruise wrote:How's does Ethiopian buy up almost defunct carriers and turn them around successfully ?


Ridiculously low wages, cheap aircraft financing and government paid for infrastructure. When Emirates and Qatar did it the US carriers accused them of subsidies.
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Re: SAA - difference between capital injections and recapitalisation

Unread postby evanb » Thu May 17, 2018 7:04 pm

Mouser wrote:Thanks very much evanb - good point about bankrupt vs insolvent and the "looting". But as you say the missed revenue targets and not cost overruns seem to be responsible for the "losses". But over time the amounts seem disproportionate to simply bad management decisions unless these are consistent and ongoing to the point of negligence i.e. poor revenue due to poor and ongoing route selection, under charging (??) or too many free passengers (??). But I accept it may be way more complicated than that.


Absolutely, the revenue shortfalls are a function of many things, all ultimately a responsibility of management. It's about the network, revenue management, sales, marketing, brand, product, etc. While costs are always something to be concerned about, obsession with costs can also cannibalize revenue.

So for example, from 2014 to 2017, SAA group revenue declined by 14% in inflation adjusted terms, at the same time operating costs declined by 8%. So they're trying to cut costs, but they're losing revenue quicker.
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Re: SAA - difference between capital injections and recapitalisation

Unread postby GL » Thu May 17, 2018 10:42 pm

evanb wrote:So for example, from 2014 to 2017, SAA group revenue declined by 14% in inflation adjusted terms, at the same time operating costs declined by 8%. So they're trying to cut costs, but they're losing revenue quicker.


Egzactly my point about the current route cutting - but HJK disagrees :roll:
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Re: SAA - difference between capital injections and recapitalisation

Unread postby evanb » Fri May 18, 2018 1:52 am

GL wrote:Egzactly my point about the current route cutting - but HJK disagrees :roll:


I agree, cutting capacity and routes can certainly reduce costs, but it can also have externality effects on the network which reduce revenue. Obviously, there are egregious examples of a route that might burn money, but that is the exception rather than the rule.

My recent favorite example is JNB-PLZ-JNB where SAA cut the frequency to two mainline services per day. Most of this capacity was shifted to Mango. Specifically, the last JNB-PLZ departure was cut (6:15pm), which meant the early morning PLZ-JNB departure (6:30am) was consequently lost (since the aircraft overnighted at PLZ). Mango's replacement didn't include an evening departure on JNB-PLZ with the early morning PLZ-JNB departure since one of Mango's ways of reducing costs is not overnighting away from JNB, CPT and DUR. The result is that SAA lost connecting options on JNB-PLZ from Washington, and on PLZ-JNB lost connections to Sao Paulo, Nairobi, etc. While a lost connection to a single flight might seem inconsequential, they all add up, especially when you're trying to centralize a network and build a hub. Airlink have now come in and replaced the flight, but it's been missed opportunities and revenues for several months.
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Re: SAA - difference between capital injections and recapitalisation

Unread postby Mouser » Fri May 18, 2018 7:24 am

Thank you particularly evanb. Seems like the margins are very fine and you just have to know your stuff otherwise you can lose, and keep losing, money in buckets; as SAA have done. A little bit like construction companies maybe.
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Re: SAA - difference between capital injections and recapitalisation

Unread postby GL » Fri May 18, 2018 8:07 am

evanb wrote:My recent favorite example is JNB-PLZ-JNB where SAA cut the frequency to two mainline services per day. Most of this capacity was shifted to Mango. Specifically, the last JNB-PLZ departure was cut (6:15pm), which meant the early morning PLZ-JNB departure (6:30am) was consequently lost (since the aircraft overnighted at PLZ). Mango's replacement didn't include an evening departure on JNB-PLZ with the early morning PLZ-JNB departure since one of Mango's ways of reducing costs is not overnighting away from JNB, CPT and DUR. The result is that SAA lost connecting options on JNB-PLZ from Washington, and on PLZ-JNB lost connections to Sao Paulo, Nairobi, etc. While a lost connection to a single flight might seem inconsequential, they all add up, especially when you're trying to centralize a network and build a hub. Airlink have now come in and replaced the flight, but it's been missed opportunities and revenues for several months.

Fantastic example of network knock-on effects - thank you Evan.
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Re: SAA - difference between capital injections and recapitalisation

Unread postby HJK 414 » Fri May 18, 2018 9:04 am

GL wrote:
evanb wrote:So for example, from 2014 to 2017, SAA group revenue declined by 14% in inflation adjusted terms, at the same time operating costs declined by 8%. So they're trying to cut costs, but they're losing revenue quicker.


Egzactly my point about the current route cutting - but HJK disagrees :roll:


Well - thank you for the rolling eyes .....
Always nice to see the Mods being civil in the debate.

You are however missing the point .....

Evanb gave a perfect example of what I stated earlier - the feeder flights for the long-haul are important.
And that means that flights from the main hubs to JNB are required to "feed" the departing flights to p.e. LHR and JFK in the evening / and the other way in the morning against the arriving long haul flights.

Yet - flying a schedule to p.e CPT all day - every hour or 90 minutes may be detrimental - as you are then competing with the LCC's at those slots. Look at the flight prices for a flight at the prime slot times - and the revenue for a mid day departure.
The point I was trying to make is that sometimes - not flying (at a certain "competing" price) is better for the bottom line - as you do not have to fly below your CASM. Which would increase your overall average RPM.

A passenger that wishes to use a LCC as a feeder to a long haul / or is prepared to accept a long layover may always do so - but runs the risk of missing a connection and being on 2 tickets - and most passengers will try to fly on 1 ticket (locking them into the SAA slots)

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Re: SAA - difference between capital injections and recapitalisation

Unread postby GL » Fri May 18, 2018 9:12 am

HJK 414 wrote:The point I was trying to make is that sometimes - not flying (at a certain "competing" price) is better for the bottom line - as you do not have to fly below your CASM. Which would increase your overall average RPM.

JK

This is the essence of where we are missing each other. I think we can take it as a given that it makes no sense to fly below CASK. But I still hold the view that if the yield is above CASK and the route is cut - as SAA appears to be doing - then you are cutting revenue far faster than you will be able to cut costs (overheads).
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Re: SAA - difference between capital injections and recapitalisation

Unread postby GL » Fri May 18, 2018 9:20 am

I would like to move on to CASK calcs. I have my suspicions that accounting methodologies differ widely and SAA's are worth questioning.
A key issue to determining the viability of long range routes is the allocation of costs to the route. The practice at SAA has been to determine CASK using ASKs as the denominator, rather than simply Cost per Available Seat (CAS), which some argue may be more valid. If CAS is used to determine the profitability of long haul flights they will, almost without exception, all be profitable.
The allocation of costs is also a problem: - eg: how do you allocate the marketing costs and out station office and base costs - to the route, or to the airline's general expenses?
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Re: SAA - difference between capital injections and recapitalisation

Unread postby HJK 414 » Fri May 18, 2018 11:23 am

GL wrote:I would like to move on to CASK calcs. I have my suspicions that accounting methodologies differ widely and SAA's are worth questioning.
A key issue to determining the viability of long range routes is the allocation of costs to the route. The practice at SAA has been to determine CASK using ASKs as the denominator, rather than simply Cost per Available Seat (CAS), which some argue may be more valid. If CAS is used to determine the profitability of long haul flights they will, almost without exception, all be profitable.
The allocation of costs is also a problem: - eg: how do you allocate the marketing costs and out station office and base costs - to the route, or to the airline's general expenses?



Guy,

Can you explain this question a bit more please ......

CASK (or (M) Mile), using the ASK as a denominator ....... how else ?
Total cost / distance flown / seats ... leads to a cost per seat per km.

You could opt to make a distinction between domestic / regional and long haul / but at the end of the day - the length of the routes determines the cost allocation in % / (% of total fixed costs + actual variable ) and that is measured in Miles flown ....

What is the difference with CAS ?
You will have to add the distance flown / otherwise the whole sum makes no sense.
The load factor determines RAS(M)

Or am i missing the point here ?

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Re: SAA - difference between capital injections and recapitalisation

Unread postby evanb » Fri May 18, 2018 6:14 pm

GL wrote:I would like to move on to CASK calcs. I have my suspicions that accounting methodologies differ widely and SAA's are worth questioning.
A key issue to determining the viability of long range routes is the allocation of costs to the route. The practice at SAA has been to determine CASK using ASKs as the denominator, rather than simply Cost per Available Seat (CAS), which some argue may be more valid. If CAS is used to determine the profitability of long haul flights they will, almost without exception, all be profitable.
The allocation of costs is also a problem: - eg: how do you allocate the marketing costs and out station office and base costs - to the route, or to the airline's general expenses?


I think CASK/M is the best, but I think that is what SAA do. There are challenges in how you allocate any fixed costs to individual flights, and in many cases they just create averages, i.e. costs that are clearly not divisible get averaged per ASK.

Costs are actually quite easy to divide, however, revenue can be more difficult. Where tickets involve a connection, they are often not priced as individual segments but between the origin and destination. How the revenue gets divided between segments is sometimes surprising.



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