South African Airways Cargo: A hard road to travel

South African Airways Cargo (SAA Cargo) general manager Tleli Makhetha is a man with an infectious laugh, but he also does not beat around the bush when it comes to outlining current market conditions.
“2016 was probably one of the toughest years for airfreight and therefore for us,” he says.
His thoughts are reflected in cargo figures for the 2015/2016 financial year, which show a 13% year-on-year demand decline to 114,000 tonnes.
But it is not just the cargo side of the business that is facing up to tough market conditions – the overall airline group registered a loss of ZAR1.5bn ($114.8m) during the 2015/2016 financial year, although this was an improvement on the ZAR5.6bn loss registered the year before.
Makhetha goes on to outline a range of reasons why cargo demand took a hit in 2016, with currency effects playing a big role in performance.
Currency effects
“In terms of the intra-African market our major destinations, which are Nigeria and Angola, are oil-based economies,” he explains.
“Because of the collapse of the oil price, there were two problems. First, the people were not as wealthy as they were, so the consumption of South African goods has suffered and we move a lot of cargo into those areas.
“Second, the shortage of foreign exchange means that the [South African] retailers were having low sales but also facing problems repatriating their money from those countries.
“So the exports from South Africa into Nigeria literally almost collapsed, and that hit us big time in terms of volumes.”
It was not just retailers that faced issues in repatriating money from Nigeria and Angola; the airline industry also took a hit.
Last year, IATA revealed that Nigeria and Angola were two of the five countries with the highest amount of funds being blocked from repatriation.
According to IATA statistics, Nigeria was blocking $591m in airline funds, while Angola was blocking $237m.
Makhetha says currency also had another negative impact on SAA Cargo’s performance in 2016, with the strong South African rand over the last couple of months of the year having an effect on the conversion rate and export demand.
“When you are selling in dollars and pounds and then convert that into our local currency then we are getting less money than we had anticipated.
“We report in terms of rands so the strong currency really did not help our revenue and also did not help South African exports.”
Droughts hit perishables
Makhetha says that the country also suffered from droughts in 2015 and 2016, which had an impact on the export of perishables.
“Looking forward, we seem to be over the worst of the drought and I think that you will see the perishables market recover in the coming months,” he says. “But I do not expect that the recovery is going to be dramatic. 
“People that used to import perishables from South Africa, in the last two years, when we had the drought, found alternative sources, so our market will recover fairly slowly.
“So all of those things combined made the trading environment [in 2016] quite a challenge − we really felt it, without sounding too dramatic about it.”
It is not just external factors that have affected SAA Cargo’s performance over the last 12 months; some internal changes have also had an impact.
Makhetha explains that over the last couple of years the passenger side of the business has axed services to Beijing, Mumbai and Abu Dhabi, which had a “big impact” on cargo volumes and revenues.
“The decision makes sense when you take into account the overall picture, because on the passenger side these routes were not profitable,” he explains.
Creating efficiencies
To combat the difficult market conditions, Makhetha says the cargo division has been carefully analysing its cost base, trying to create efficiencies and moving closer to its customers.
“Creating efficiencies is the starting point. We try to do more with what we have and try to eliminate any duplication in our business processes.
“The second area for improvement is really to get closer to customers even more aggressively than we did before.
“They are facing the same challenges as us, so we sit down with them and almost start re-designing our process and our offering with the customers.
“Our customers, the freight forwarders, not only use SAA Cargo but also other airlines as well, so if you are the one closest to your customers in terms of your processes then you are more likely to win that business.”
The airline has also been keeping an eye on costs, with its workforce numbers down slightly on previous levels, and it has also been more circumspect when it comes to flying its four Boeing 737-300Fs.
“We did well in terms of containing our costs − that is the only thing that really saved us as cargo,” Makhetha explains.
“Our workforce numbers were slightly down and we did quite a bit of cost cutting where we could and that really helped.
“For instance, we were more circumspect when flying our freighters and we actually reduced [flying] hours quite dramatically, to keep the operating costs down.
“We did not actually stop any routes but we restricted frequencies where we could and where we could tag on some of the regional destinations, we would.
“We looked at a lot of our contracts as well − suppliers, service providers. 
“The cost containment was quite positive. It is an ongoing process because you don’t want to cut today and then get those costs back in tomorrow.”
Freighter fleet
With regards to its freighter fleet network, Makhetha says there are no current plans to add new aircraft or destinations at the moment because of the current volatility in the market place.
He explains that the carrier has been looking to add new destinations over the last couple of years, but the market has been changing so quickly that it has gone “back to the drawing board” when it comes to the new routes.
He says the airline had been considering adding a new flight to Tete in Mozambique, to cater for new mining projects that were being launched, but in the end the investors pulled out of the projects and the plans for new services were scrapped.
B737 aircraft have been proving popular with the e-commerce industry, but Makhetha says that at the moment there is not enough demand to fly the daily services that this sector requires.
“We have spoken about [e-commerce] and it is something we have to look at. The challenge with the regional market is that some of the markets are so thin and for e-commerce you need to fill the plane every day.
“If you look at the southern Africa region, the only places where we can sustain maybe three flights a week are into Lusaka in Zambia and Harare in Zimbabwe.
“We take a lot of flowers out of those places but in terms of filling the aircraft both ways on a daily basis, it would be a big challenge and isn’t really possible.”
On the passenger front SAA is taking delivery of A330-200 aircraft, which will be used to launch services to São Paulo and Accra.
However, Makhetha says the aircraft are not very cargo friendly because of payload limitations. 
Volatile market
Looking ahead, Makhetha says it appears that the demand situation will remain volatile, although there are some positives.
As well as an improvement in perishables in line with the ending of the drought, oil and gas prices do appear to be creeping back up and certain areas of the automotive industry in South Africa are performing well. The mix of cargo carried from the country is also improving.
“Nobody seems certain in terms of trade,” he says. “So the freight forwarders are not committing and I would suppose the shippers are also not committing.
“The South African economy has a growth rate of around 1%, which is very low for our type of economy, so that has had some impact on the ability of people to buy goods.
“I think the one positive is that the mix of goods that are being exported out of South Africa is actually a nice spread, not entirely reliant on perishables or automotive, so that gives us a hedge.
“Unlike in the past, when South Africa was predominately an economy that exported perishables, we now do quite a lot of automotive and quite a bit of pharma as well.”
He adds that the Nigerian economy is also becoming more balanced as other sectors look to fill the void left by the declines experienced in the oil and gas market.
Horses for courses
The airline has also been looking to pick up one-off business, such as flying horses to Mauritius.
Makhetha explains that because of African horse sickness, which is a highly infectious and deadly disease, importers from the Middle East and Asia quarantine their horses on the island, where the disease does not exist, before flying them on to their final destination. There is also a huge horse racing scene on Mauritius.
The carrier has also been picking up project business.
“Project cargo is not as consistent as other cargo but if there is a project going on we try to understand what the shipper is looking for and try working with the agent to come up with a solution for the shipper,” he says.
“We have to understand exactly where the shipper is coming from and work as closely as possible with the forwarder without angering the forwarder — not going behind their back.”
Staying on the transport of animals, SAA Cargo recently opened a new pet facility for domestic pets at Cargo OR Tambo International Terminal. 
The lounge is specially designed for the pets’ comfort and safety, ensuring they experience a stress-free environment during their journey, the airline says. 
In addition, the facility also minimises any environmental factors that are likely to cause distress. 
Makhetha says the facility has been a success so far: “We have always handled pets but we did not have a bespoke area for them before. The market has really warmed up, it is actually doing well for us.
“Not only is it a good initiative for the cargo business, it is a good initiative for the passenger business; if you are a pet friendly airline, people like you. It’s not going to be a huge money spinner, but it will all add up.”
The company is also considering other investments in cargo infrastructure, but given the current tough market conditions every investment is highly scrutinised.
“We are pushing for investment to upgrade our facility in Johannesburg, not expanding the space, but modernising in terms of the handling and the warehouse logistics. We are in the process of appointing consultants to re-design the space,” he says.