South African Air Plans HK, Brazil Code-Shares in Sales Push

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South African Airways plans to announce code-sharing agreements with airlines in Hong Kong and Brazil in the coming months, as the unprofitable state-owned carrier continues efforts to boost revenue and reduce costs.

SAA expects to implement a deal with a partner in Hong Kong in the next few months, and will unveil an agreement with Avianca Brasil “in due course,” acting Chief Executive Officer Nico Bezuidenhout said in an interview on Tuesday at the Johannesburg-based company’s headquarters. SAA is also in talks with EL AL Israel Airlines, and is considering the potential for more cooperation with LOT Polish Airlines SA, he said.

Under code-sharing agreements, airlines can sell tickets on each other’s flights to expand the number of cities served. The South African company’s board is reviewing a proposed expansion to its partnership with Dubai-based Emirates Airline, the world’s biggest carrier on international routes, that could involve widening an existing code-share network and cooperating in areas such as catering and maintenance services.

“I am awaiting the board to conclude their deliberations on the matter for us to move forward on it,” Bezuidenhout said. “I think that we’ve negotiated a good position for SAA.”

SAA, which has been surviving off government-guaranteed loans and posted two consecutive years of losses, is trying to reduce costs and improve efficiencies under Bezuidenhout, who became acting CEO in November. The company this year closed unprofitable routes to Beijing and Mumbai and has renegotiated airline leases and supply contracts.

Bezuidenhout replaced Monwabisi Kalawe, who was suspended last year and resigned in April.

Reducing Headcount

SAA, which is in the process of reducing headcount by as much as 10 percent to cut costs, is also seeking to improve funding expenses. The carrier has started a process toward lengthening the average term of its debt, which includes a number of mostly short-term facilities, Bezuidenhout said. The has company issued a request for proposals from funders and will aim to reduce its interest obligations.

“Our interest bill is going to amount to 1 billion rand ($80 million) 28 months from now,” he said. “We have to do everything in our power to try and get that cost down.”

Bezuidenhout said SAA’s capital structure needs to change in the “medium term.” An equity injection of cash by the government would improve the returns of the business by helping to reduce debt and interest levels, he said.

Stake Sale

The government could also sell a stake in the carrier. While Public Enterprises Minister Lynne Brown said last year government would search for buyers for a stake in SAA as part of a recovery plan, Bezuidenhout said he’s not aware of any discussions with potential investors. The Department of Public Enterprises has since handed over responsibility for SAA’s turnaround to the National Treasury.

If the government were to sell a stake, it would make most sense if the buyer were a strategic investor, such as another airline, Bezuidenhout said.

“Do I see that happening in the short-to-medium term? Probably not,” he said. “But ultimately that remains a shareholder prerogative.”

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