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Cablegate: Saa Announces Expansion Plan Despite Global Downturn In

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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

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