South African Airways Seeks A340 Upgrade Pending New Jets

South African Airways Ltd. said it’s seeking to upgrade the engines of its aging Airbus SAS A340 wide-body fleet to cut fuel costs while it decides between new long-haul models from the European manufacturer and Boeing Co.

Chief Executive Officer Monwabisi Kalawe held talks last week on making the jets more efficient as he seeks to end the state-owned carrier’s losses, he said in an interview. SAA has a mix of A340 variants, with the upgrade focused on nine of the newest A340-600s which can seat as many as 317 people and are powered by Rolls-Royce Holdings Plc Trent engines.

“The engine manufacturers I met with will be coming to do a pilot on our fleet at the end of October,” Kalawe said yesterday in Johannesburg, where the airline is based. “If this pilot works, we could save between one and five percent.”

SAA has yet to decide between Boeing’s 787 Dreamliner and the rival A350 from Airbus as it moves toward a less fuel hungry long-haul fleet, Kalawe said. Chief Financial Officer Wolf Meyer said in July that the carrier had asked manufacturers to tender for an order for 23 wide-body aircraft for delivery from 2017, and upgrading the A340s will help limit costs in the interim.

Exactly how many long-range jets the airline will actually buy hasn’t been decided, Kalawe said, adding that “the figure will be finalized as part of the network and fleet plan.”

Profit Target

SAA is renewing its fleet as part of a turnaround strategy aimed at returning to profitability by 2017, after suffering a 1.36 billion-rand ($135 million) loss for the year ended March 2012. The government gave the carrier, Africa’s biggest, a 5 billion-rand debt guarantee in October 2012 to ensure it can borrow from financial markets to support a recovery.

Near-term steps are aimed at cutting costs before new jets are available. Rolls-Royce, sole engine provider on the A340-600, has developed upgrades to improve fuel efficiency by about 1 percent for the latest Trent 500 engines, with a retrofit now available delivering a further 0.5 to 0.75 percent gain for in-service aircraft. The improvement should generate a saving of around $200,000 per aircraft per year, the company has said.

SAA also has 12 older A340-200s and -300s in its fleet which are powered by engines from the CFM International venture of General Electric Co. and Safran SA of France.

Single-Aisle Arrivals

The fleet plan includes the introduction of new Airbus A320 narrow-body planes, with the first two of 10 for which financing has been secured having arrived in July and the rest due by 2017, Kalawe said. Funding for an additional 10 aircraft is still being sought.

Kalawe is the airline’s third CEO in a year after Siza Mzimela resigned in the wake of a dispute between board members and the government last October. His successor, Vuyisile Kona, was suspended in February over unspecified allegations.

The chief said in the interview he expects better financial results for 2012-2013 fiscal year, though will continue to need state funds over the next four to five years.

“We have already submitted a request for the amount of money we need and the Public Enterprises Ministry is currently considering it and will get back to us on a fair number,” he said. “In the fourth year we expect to see a profit.”

Currency Pressure

A weakening rand and growing competition in the African market pose a risk to SAA’s recovery, with Gulf carriers including Dubai-based Emirates, Qatar Airlines Ltd. and Etihad Airways of Abu Dhabi representing the biggest threat, he said.

“The guys from the Middle East have new equipment and a very low cost structure so they are extremely price competitive,” Kalawe said.

The rand has declined 15 percent against the U.S. dollar in 2013, making it the worst performer of 16 major currencies tracked by Bloomberg. It strengthened 0.4 percent against the dollar to 9.9922 as of 11:48 a.m. in Johannesburg.

The currency’s performance is crucial to SAA’s path to profitability, Kalawe said. About 60 percent of the airline’s bills are dollar-denominated, compared with less than 50 percent of income, according to CFO Meyer.

SAA flies to 26 countries in Africa, together with 11 destinations outside the continent, according to the carrier’s spokesman Tlali Tlali. Mergers within the group, which includes discount unit Mango and SA Express, remain a concept that’s being explored amid the drive to cut costs, Kalawe said.

At the same time, the company is looking to establish a hub in either East or West Africa and will reach a decision by mid-2014, he said. SAA faces competition from Ethiopian Airlines Enterprise and Kenya Airways Ltd., the No. 2 and No. 3 carriers in sub-Saharan Africa, as it seeks to extend its regional clout.

(Updates with CEO’s comments on wide-body order in fifth paragraph, narrow-body jets in ninth, hub expansion in 18th.)
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