South African Airways long-haul partnerships: Hong Kong JV and re-examining Qantas opportunities

South African Airways needs more partnerships

This is Part 3 in a series of reports examining the outlook for SAA.

The first report analysed the ongoing attempts to turnaround the carrier's highly unprofitable long-haul operation. The second report looked at the outlook and position of the SAA Group (including budget subsidiary Mango) in the domestic and regional international markets as competition with LCC intensifies.

See related reports:

• South African Airways long-haul turnaround continues with Accra-Washington launch & A340 extensions
• South African Airways Part 2: SAA & Mango plan short-haul expansion as LCC competition intensifies

As CAPA previously highlighted, South African Airways (SAA) has been making significant changes to its long-haul network since the beginning of 2015 as part of a turnaround plan. In recent years SAA's domestic network has seen profitability while intra-Africa international services have been highly profitable and long-haul has been highly loss-making.

In early 2015 SAA decided to suspend services to Beijing and Mumbai from Mar-2015 while forging an expanded partnership with Etihad Airways. More recently SAA decided to switch the stopover point on some of its Washington Dulles flights from Dakar to Accra.

New partnerships and expansion of existing partnerships (in addition to the already concluded deal with Etihad) are an important component of the new SAA business plan which remains unfinished. A solution for North Asia, where SAA now only serves Hong Kong following the suspension of Beijing, is particularly pressing.

Cathay Pacific JV for Johannesburg-Hong Kong could help SAA cover North Asia

Hong Kong is SAA's fourth largest non-stop international route based on ASKs. It is also its fifth largest overall route including domestic flights. Cape Town-Johannesburg is SAA's third largest route overall based on ASKs and no other domestic routes are in SAA's top 10.

South African Airways top 10 international routes ranked on ASKs: 6-Jul-2015 to 12-Jul-2015

Source: CAPA - Centre for Aviation and OAG

Hong Kong is SAA's only Asian service after it cancelled Mumbai and Beijing. SAA interim CEO Nico Bezuidenhout told CAPA that SAA is examining options for a joint venture covering Hong Kong. The options include working with Cathay Pacific or Hong Kong Airlines. A final decision has not been announced but is expected to be made within a few months.

Cathay is the more logical partner by far. Unlike Hong Kong Airlines, Cathay operates to Johannesburg with one daily 777-300ER service. Johannesburg is Cathay's only destination in Africa.

Cathay could provide numerous connections to Japan, which accounts for approximately 25% of SAA's beyond market.

Despite Japan's importance, SAA has ruled out Japanese service as such a flight would not be profitable.

Hong Kong is also the third largest international market for All Nippon Airways (ANA), which like SAA is a member of Star Alliance. Star carriers generally have to try to work with each other before seeking external partnerships. But SAA does not see ANA providing a solution for SAA's Hong Kong service as ANA would cover only Japan, an important - but not the only - beyond market.

ANA has fewer services than Cathay between Hong Kong and Japan in terms of city pairs and capacity. ANA also has strong point-to-point sales, making it difficult and expensive to secure codeshare seats. In early Jul-2015, Cathay and Dragonair operate approximately 39,000 weekly seats between Hong Kong and Japan compared to 7,000 from ANA.

Cathay (including Dragonair) and ANA weekly Japan-Hong Kong frequencies by Japanese city: 6-Jul-2015 to 12-Jul-2015

Source: CAPA - Centre for Aviation and OAG

A Hong Kong-based carrier would provide support for other Asian markets and would preclude needing to work with multiple carriers. Hong Kong Airlines sees limited service to Japan as its sister HK Express mostly serves the country, including the key cities of Tokyo and Osaka. HK Express is also a LCC and has not yet commenced partnerships although it plans to.

Asia-Africa market is growing but Asian airlines are becoming smaller

A Cathay partnership would also help SAA on their overlapping Johannesburg-Hong Kong service. Each serves the route daily, SAA with an A340-600 and Cathay a 777-300ER. Both have near midnight departure times from Hong Kong, arriving in Johannesburg in the early morning.

SAA's Johannesburg departure is in the late afternoon, arriving in Hong Kong at midday while Cathay leaves Johannesburg around midday and arrives in Hong Kong early in the morning. Each carrier's schedule allows it to reduce ground time at the foreign port.

The JV would consolidate some competition. In recent years Malaysia Airlines and Thai Airways have exited the African market. Korean Air's Nairobi service was performing weakly and was cancelled during the 2014 Ebola crisis.

Korean Air initially planned to resume its Nairobi service in mid-2015, but it has not eventuated and Korean Air has not yet filed schedules for it. 2015 was initially expected to see the entry of Air China (Beijing-Addis Ababa, Beijing-Johannesburg) and China Southern (Guangzhou-Nairobi) into continental Africa but Air China is now unlikely to launch Johannesburg.

Even with only the two new routes Asian carriers will begin to make up for the reduction in Asian capacity left by MAS and Thai's exit. Singapore Airlines (SIA) has also reduced capacity to Africa in recent years.

Major African-Asian seat capacity by Asian carrier: 2005-2015

Source: CAPA - Centre for Aviation and OAG

In 2007 and 2008, Asian carriers accounted for approximately 65% of the seats between Africa and Asia amongst major competitors (excluding fringe airlines like Afriqiyah and Air Zimbabwe, as well as carriers in the Indian Ocean). In 2015 the share will be only 25%.

Market share loss has occurred with net size loss. But the overall market has expanded as African carriers - namely Ethiopian and Kenya - have grown. Ethiopian Airlines alone accounts for 51% of the market, and has doubled since 2012. Kenya Airways has grown 32% since 2012. There is a slight contraction in the market in 2015 compared to 2014.

Africa-Asia non-stop seat capacity by carrier geography: 2005-2015

Source: CAPA - Centre for Aviation and OAG

Ethiopian's size presents a challenge for Cathay and SAA, but there are marked differences: Ethiopian benefits from central geography in Africa while a combined SAA and Cathay would have the lesser advantage of feed around Asia.

Benefits could be outweighed by loss of competition on the not insignificant O&D market of Hong Kong-Johannesburg. In the Africa-Asia market, transits through the Gulf are circuitous but common given the lack of Africa-Asia travel options.

South African Airways remains uninterested in Beijing service. Air China had dithered on its Johannesburg launch

SAA has no plans for returning to mainland China as market conditions are likely to remain unfavourable. When SAA ended its loss-making Johannesburg-Beijing service in Mar-2015 it expected Air China would launch the route in May-2015 with a SAA codeshare.

See related report: South African Airways outlook brightens as recovery plan and partnership strategy roll out

Air China initially announced in early 2015 its intent to open Beijing-Johannesburg service, effectively done at the Chinese government's direction. But the launch has since been delayed and is now presumed to be cancelled. Air China attributed the delay to xenophobic attacks on Chinese in South Africa, as well as South Africa's unusual requirement for children to produce unabridged birth certificates.

Air China on 06-Jul-2015 restated its intent to launch the service from the northern winter 2015 season, three times weekly with 777-300ERs. But clearly Air China would prefer not to launch the route. While the route appeared cancelled, SAA's Mr Bezuidenhout affirmed SAA had no interest in resuming Beijing service, adamantly declaring that "the fundamentals of the route have most definitely not changed". SAA originally launched the Beijing service under South African government pressure.

South Africa's most recent visitor statistics are for Feb-2015 and show a 32% year-over-year drop in visitors from China (including Hong Kong), following a 52% drop in Jan-2015. This was before SAA's exit, xenophobic attacks and South Africa's changed entry requirements. These factors will further pressure Air China on what was already a route that had almost no chances of making a profit.

But the Johannesburg route holds strategic importance for Beijing. Likewise with China Southern's African service. China Eastern has also been told it needs a presence in Africa.

See related reports:

• Air China's entry into Addis Ababa and Johannesburg would further China's objectives in Africa
• China's airlines pivot towards Africa, after making inroads in Europe, North America and Australia

South African Airways hopes to revive a Qantas partnership

SAA's only other route besides Hong Kong in the broader Asia-Pacific region is Johannesburg-Perth. SAA operated the service until early 2014 under a block codeshare arrangement with Qantas' Johannesburg-Sydney service.

SAA and Qantas argued to regulators the South Africa-Australia market was too thin to support further competition. Australia began to cast doubt on the public benefits of cooperation and in 2012 renewed the cooperation for a short period rather than the five years the two airlines sought. It was understood the codeshare was unlikely to be further approved, prompting Qantas to end the partnership. Qantas has maintained Sydney-Johannesburg service while offering Perth passengers a link to Johannesburg via Dubai on partner Emirates.

SAA has maintained its Perth-Johannesburg service and forged a codeshare agreement with Virgin Australia which was implemented in Oct-2014. Virgin Australia had operated Melbourne-Johannesburg service (as V Australia) for a short period before CEO John Borghetti entered the airline and restructured the long-haul network, cutting the loss-making Johannesburg route.

Although Johannesburg was loss-making, it was still in its start-up phase and some expected it would eventually have become profitable. The possibility is slim for further South Africa-Australia competition.

Mr Bezuidenhout said the Virgin Australia partnership is working, and partnering with Virgin indirectly contributes to SAA's partnership with Etihad, which has a significant equity stake in Virgin. The Johannesburg-Perth service is currently profitable but SAA would in the medium term want to partner with Qantas under conditions regulators would accept. SAA would like a presence in Sydney and would ideally work with Qantas' existing route rather than place its own metal in Sydney as either a non-stop flight from South Africa or tag from Perth.

SAA's Emirates partnership to grow in addition to its new Etihad partnership. But no equity stake

SAA in Mar-2015 launched a partnership with Etihad Airways which led SAA to launch daily Johannesburg-Abu Dhabi service with onward Etihad codeshares to over 30 points, including 10 in India.

Prior to Etihad, SAA had a long-standing partnership with Emirates. In fact, SAA says it was Emirates' first codeshare partner. But the codeshare has always been limited to the services between Dubai and South Africa.

SAA does not plan to unwind the Emirates partnership and is looking at ways to grow it. However, SAA categorically denies media reports Emirates was close to acquiring a stake in the airline. Mr Bezuidenhout notes any selling of the airline is for the owners and is "beyond my remit" as CEO.

Although Emirates and Etihad are significant competitors, SAA sees gains from working with both, especially Emirates given its size. As CAPA previously wrote:

Emirates now has about 52,000 weekly seats in the German market compared to about 36,000 weekly seats in the South African market although the South African market is about one-tenth the overall size.

Combined the three Gulf carriers and Turkish Airlines now have 83 weekly flights to South Africa. This will increase to 90 weekly flights in late Oct-2015 following the launch of a second daily flight to South Africa from Turkish. In comparison the entire SAA long-haul operation consists of only 70 weekly flights, increasing to 73 as Accra-Dulles is launched in Aug-2015.

London is by far the most common one-stop destination for the Gulf carriers and Turkish. Emirates alone has about a 20% share of the South Africa-London market. SAA also competes against two other non-stop operators, British Airways and Virgin Atlantic. BA currently operates four daily flights to South Africa while Virgin Atlantic operates one daily flight.

Emirates is currently the largest airline in South Africa's long-haul market, slightly ahead of SAA based on current seat capacity. BA is the third largest while Qatar and Virgin Atlantic also make the top 10. Turkish will break into the top 10 in Nov-2015 while Etihad is smaller (currently number 14) but has a partnership with SAA.

See related report: South African Airways long-haul turnaround continues with Accra-Washington launch & A340 extensions

Europe and North America: feed is a challenge at London Heathrow while JetBlue helps at New York JFK. Third North American point?

Partners are critical for SAA in its two other major long-haul markets, North America and Europe. SAA also serves Sao Paulo 10 times weekly, where Avianca Brazil's forthcoming joining of Star should provide some help in that market.

As CAPA previously wrote, in Europe, the London route has been accumulating large losses (approximately USD30 million per year) while Frankfurt and Munich have been performing much better but are affected by European economic weakness. SAA partners with Lufthansa in Germany but is lacking a strong airline partner in London, as is the case for many non-oneworld long-haul carriers into London. There is some tradeoff as SAA's London route sees higher O&D traffic.

In North America, SAA is able to codeshare with independent carrier JetBlue in addition to fellow Star carrier United Airlines. JetBlue is based at New York JFK, which SAA serves, while United had a limited presence at JFK and now plans to exit the market in favour of Newark.

From Washington Dulles, SAA's other North American point, JetBlue only serves Boston and New York JFK, creating difficulties for SAA to have partner options. United Airlines is the largest at Dulles but likely prefers to route African traffic over Lufthansa as part of their JV. Although Dulles is challenging, SAA believes it could maintain its presence there and open a third (unspecified) North American destination; but there are no immediate plans. New long-haul destinations in Asia-Pacific and Europe in the medium term are unlikely.

Long-haul is coming into focus, but re-fleeting necessary. HNA-Comair not a worry

SAA's partnership focus for long haul routes is sensible and was likely overdue. Through a combination of adjustments, SAA has been able to improve its long haul performance, but ultimately must replace its inefficient A340 fleet. SAA would like a decision in a year but this will likely be highly political and previous re-fleeting attempts failed. Some of SAA's network changes required significant political discussions.

There is much at play, but one element SAA is not concerned about is China's HNA Group purchasing a small 6.2% stake in South African competitors Comair, which operates as British Airways under a franchise agreement. SAA sees the Comair stake being part of HNA's fragmented airline ownership and believes the stake is "dormant".

See related report: HNA/Hainan Airlines buys 6.2% of South Africa's Comair, accelerating China-Africa aviation links

SAA still has some way to go, with the holdup still at the political level and not internal capability. However, the flag carrier is at a point where it can think about long haul growth in the long term, following a few years of cutbacks.

Regional Africa international growth is more promising financially. SAA had a small win with securing limited Dakar-Washington Dulles fifth freedom rights, but overall African air traffic rights remain elusive.