VZCZCXRO4484
RR RUEHBZ RUEHDU RUEHGI RUEHJO RUEHMA RUEHMR RUEHPA RUEHRN RUEHTRO
DE RUEHSA #2754/01 3591032
ZNR UUUUU ZZH
R 241032Z DEC 08
FM AMEMBASSY PRETORIA
TO RUEHC/SECSTATE WASHDC 6807
INFO RULSDMK/DEPT OF TRANSPORTATION WASHINGTON DC
RUCPDC/DEPT OF COMMERCE WASHDC
RUCNSAD/SOUTHERN AF DEVELOPMENT COMMUNITY COLLECTIVE
RUEHZO/AFRICAN UNION COLLECTIVE
RUEHBR/AMEMBASSY BRASILIA 0592
RUEHBU/AMEMBASSY BUENOS AIRES 0285
RUEHBY/AMEMBASSY CANBERRA 0785

UNCLAS SECTION 01 OF 03 PRETORIA 002754 
 
SENSITIVE BUT UNCLASSIFIED 
SIPDIS 
 
DEPT FOR EEB/TRA/OTP 
DEPT FOR EEB/TRA/AN/TERRI ROBL 
DAKAR FOR FAA REP 
FAA FOR NANCY ANGELO 
 
E.O. 12958: N/A 
TAGS: EAIR ECON EIND EINV SF
SUBJECT: SAA ANNOUNCES EXPANSION PLAN DESPITE GLOBAL DOWNTURN IN 
TOURISM 
 
REF: A. PRETORIA 2612  B. DURBAN 22 
 
¶1. (SBU) Summary.  South African Airways (SAA) recently announced 
network expansion plans amidst a global downturn in tourism.  The 
airline is expected to complete a two-year restructuring program in 
March 2009, which would allow it to increase service and implement a 
strategy to create hubs in Johannesburg and Dakar, Senegal.  SAA 
leadership would like to position itself to take advantage of 
long-term tourism growth and the 2010 FIFA World Cup with the 
expansion.  However, the global economic slowdown has already 
started to reverse tourism growth trends in South Africa, which 
could limit SAA's balance sheet and ability to borrow funds for the 
expansion.  Industry and government officials expressed skepticism 
about SAA's ability to acquire the required aircraft to meet the 
goals of the ambitious network expansion program.  Given the current 
budgetary climate and criticism from other South Africa-based 
carriers, officials did not believe additional government funding 
would be available for SAA in the near-term.  End Summary. 
 
---------------------------- 
AMBITIOUS EXPANSION PLANS TO 
FOLLOW RESTRUCTURING PROGRAM 
---------------------------- 
 
¶2. (U) SAA CEO Khaya Ngqula unveiled an ambitious network expansion 
plan at a Star Alliance conference on December 12.  Ngqula announced 
that SAA would be launching flights to new destinations as well as 
increasing capacity on some of its existing routes as it is "ready 
to consider life after restructuring and is about to enter a 
moderate growth phase".  He asserted that, "at a time when many 
other airlines are consolidating or reducing their flights, the 
success of SAA's restructuring program has left the airline well 
placed to explore growth plans for the future."  The growth plan to 
take the airline to 2020 is currently being finalized for adoption 
in the new financial year starting April 2009. 
 
¶3. (U) SAA began its restructuring strategy in March 2007 when 
state-owned transport and logistics group Transnet shed the 
loss-making airline (Reftel A).  To date, the South African 
Government (SAG) has provided SAA with more than $1.1 billion in 
subsidies and bailouts to revive and restructure the national 
carrier.  The restructuring program will be completed in March 2009. 
 Revenue grew nine percent to R22.26 billion ($2.3 billion) in 
2007/2008, with revenue growth expected to again exceed the target 
set for the 2008/2009 financial year.  The airline also started to 
post an operating profit (nearly $12 million) in 2007/2008, but this 
figure did not include the costs of the restructuring program. 
According to Ngqula, SAA is now at the point where it can think 
about growth in order to position SAA for the future. 
 
----------------------------- 
SAA MARKETS ITSELF AS AFRICAN 
AIRLINE WITH GLOBAL REACH 
----------------------------- 
 
¶4. (U) The network expansion strategy focuses on making "SAA an 
African carrier with global reach," enhancing Johannesburg and Dakar 
as major international hubs, and moving capacity to more profitable 
African routes.  SAA Head of Network Development Jason Krause 
explained that the airline has managed to acquire fifth freedom 
rights, which will allow it to make full use of its West African 
Qrights, which will allow it to make full use of its West African 
services.  Krause said SAA would be in a strong position to fly 
passengers originating in North America to West African destinations 
as a result of these rights.  North American passengers would be 
able to fly to West Africa from Washington via Dakar or from New 
York via Johannesburg. 
 
¶5. (U) An additional flight is being added to the Libreville (Gabon) 
route from March, which would be extended to fly onwards to Abidjan 
(Ivory Coast) and Dakar in April.  SAA also plans to begin service 
to Douala, Cameroon, which would also connect in Dakar.  The Douala 
flight is still awaiting regulatory approval and is expected to 
operate twice a week starting April.  SAA said it had also forged a 
commercial agreement with the Democratic Republic of Congo's (DRC) 
national airline Lignes Ariennes Congolaises (LAC) allowing for an 
additional two flights from Johannesburg to the DRC. 
 
¶6. (U) On its overseas network, SAA announced that it would increase 
its Perth, Australia service from five to six per week starting 
 
PRETORIA 00002754  002 OF 003 
 
 
July.  SAA plans to operate non-stop service to New York from May. 
SAA would also launch a new route to Buenos Aires, Argentina to 
complement its existing daily South American service to Sco Paulo, 
Brazil.  Flights on the route between Johannesburg and Buenos Aires 
would begin on April 8, 2009, with a twice weekly service. 
 
¶7. (U) SAA executives hope that adding a second destination in South 
America would strengthen the airline's position as the preferred 
carrier between South America, Asia, and Australia. "We are positive 
that by adding more seats in the market we will meet the strong 
demand from both continents wishing to benefit from our shorter 
flying times and superior service via the South Atlantic route," 
said Ngqula.  Johannesburg would serve as a hub for these 
connections. 
 
----------------------- 
SAA TO CAPITALIZE ON 
WORLD CUP TOURISM BOOST 
----------------------- 
 
¶8. (U) SAA is hoping that long-term tourism growth and the 2010 FIFA 
World Cup would provide the impetus required to sustain its 
expansion.  The SAG is estimating about 500,000 foreigners would 
travel to South Africa for the World Cup.  According to projections 
South Africa is on track to receive 10 million tourists per year by 
2010 (Reftel B).  Fewer than 600,000 thousand tourists visited the 
country in 1994, but the numbers have increased exponentially since 
the end of the apartheid regime.  In 2007, over nine million 
tourists visited South Africa. 
 
¶9. (U) In the short-term, the global economic slowdown could impact 
SAA's bottom-line and ability to borrow money for the expansion. 
The latest statistics from Stats-SA revealed that the global 
economic downturn has already hit tourism.  Monthly tourism arrivals 
data from August and September revealed the first signs of decline 
in years.  During the month of September 2008, the total number of 
overseas tourist arrivals declined 12.9 percent compared to 
September 2007.  The greatest declines were in arrivals from key 
European and Asian markets.  Growth declined in arrivals from the 
top three overseas markets (the UK, the U.S., and Germany).  A 
comparison of figures from September 2007 and September 2008 shows 
that there were significant decreases in the number of travelers 
arriving from UK (down from 35,915 to 29,976); the U.S. (down from 
23,405 to 21,590) and Germany (down from 21,796 to 17,377). 
 
------------------------- 
AIRCRAFT ACQUISITION COULD 
ALSO PROVE PROBLEMATIC 
------------------------- 
 
¶10. (U) Industry analysts questioned SAA's ability to acquire 
aircraft for the planned network expansion.  SAA announced that it 
would use an Airbus A340-200 for the Buenos Aires flight, but did 
not provide aircraft details for any of the other slated new routes. 
 SAA has been trying to lease three narrow-body aircraft for some 
time to address short and medium-term needs.  Krause noted that 
aircraft such as the Boeing 737-800 would be an ideal interim 
solution, but funding remained a challenge.  He said SAA would 
reactivate its long-term aircraft acquisition program once the 
restructuring was completed in 2009.  "We want to rationalize our 
fleet.  Ideally we would like not more than one supplier for the 
narrow body aircraft and one for the wide bodies," he told the 
Qnarrow body aircraft and one for the wide bodies," he told the 
press. 
 
¶11. (SBU) Officials at the Department of Trade and Industry (DTI) 
and Department of Foreign Affairs also expressed skepticism about 
SAA's ability to meet the new network expansion goals.  Enterprise 
Florida had recently lobbied these officials to initiate talks for a 
re-instated Cape Town-Miami service without much success.  Officials 
told Transport Officer that they did not believe the technical 
(aircraft) and economic conditions were right to pursue the Miami 
route expansion at the time.  In response to Embassy queries 
following the SAA network expansion announcement, DTI officials 
agreed to discuss the Miami route proposal again early next year. 
However, they still expected SAA to approach the SAG again for 
additional financial support, which is likely to increase criticism 
from competing South Africa-based low-cost carriers (Reftel A). 
 
------- 
 
PRETORIA 00002754  003 OF 003 
 
 
Comment 
------- 
¶12. (SBU) Comment:  SAA has targeted projected high-growth regions 
for its network expansion plan.  Africa is expected to be the region 
with the most potential for growth in the aviation/tourism sectors 
due to the lack of existing service/routes.  SAA will need to expand 
and modernize its fleet in order to implement this network expansion 
plan.  However, given the current global economic slowdown and the 
domestic political and budgetary climate it will experience 
difficulties convincing the SAG to continue to provide additional 
funding as it completes its restructuring program and revise its 
network strategy.  Many industry analysts and SAG officials remain 
critical of SAA management, despite the strides the company has made 
in reducing costs and increasing revenue growth.  End Comment. 
 
BOST