ASSIGNMENT COVER SHEET

Surname

Shumba
Brighton

First Name/s

133153
Student Number

Strategic Management
Subject

One (1)
Assignment /Project
Number

Shiksha Reddy Dr
Tutors Name

East London
Examination Venue

13 May 2016
Date Submitted

Submission ()

Postal Address

First Submission

.resubmission

16 St George Street
Southernwood
East London
5200
brytshumba@gmail.com

E-Mail
(Work)
(Home)

Contact Numbers

Course/Intake

(Cell) 083 559 6499

MBA Year One Jan 2016

Declaration: I hereby declare that the assignment submitted is an original piece of work produced by myself.

Signature: B.Shumba.

Date: 13 May 2016

SOUTH AFRICAN AIRWAYS

2016 STRATEGIC PLAN

Presented by
Brighton Shumba

May 2016

Table of Contents
2

Executive Summary.................................................................................................. 4
Acronyms................................................................................................................ 5
Introduction.............................................................................................................. 7
South African Airways Background.............................................................................. 7
Vision................................................................................................................... 8
Mission................................................................................................................. 8
Long Objectives........................................................................................................ 8
Values.................................................................................................................. 9
Situational analysis................................................................................................... 9
Industry description /trends..................................................................................... 9
Industry challenges.............................................................................................. 10
Challenges facing SAA......................................................................................... 10
Financial challenges.......................................................................................... 10
Ageing fleet..................................................................................................... 11
Leadership challenges....................................................................................... 11
Macro-environmental Analysis............................................................................... 12
Political factors:................................................................................................ 12
Economic factors.............................................................................................. 12
Social factors................................................................................................... 13
Technological factors......................................................................................... 13
Environmental factors........................................................................................ 14
SAAs competitors................................................................................................ 14
Competitive analysis: Porters five forces.................................................................15
SWOT analysis.................................................................................................... 18
Strengths......................................................................................................... 18
Weaknesses.................................................................................................... 19
Opportunities................................................................................................... 20
Strategy analysis: Potential strategies........................................................................21
Evaluation of potential strategies and recommendations...............................................22
Low cost provider strategy.................................................................................... 22
Focused (market niche) strategy based on differentiation...........................................23
Best cost provider strategy.................................................................................... 24
Broad differentiation............................................................................................. 25
Focused (market niche) strategy based on low costs................................................25
3

Recommendation of strategic direction.......................................................................25

Marketing plan........................................................................................................ 27
Human resources plan............................................................................................. 28
Conclusion............................................................................................................. 30

Acronyms
FoE Friends of Earth
SAA- South African Airways

SACAA South African Civil Aviation Authority

SMS Safety Management System
DPE Department of Public Enterprises
RSA Republic of South Africa
ADB- African Development Bank
IT Information Technology
UJ University of Johannesburg
HRD Human Resource Development
GDP- Gross Domestic Product
MRO Maintenance, Repair and Overhaul

Executive Summary
South African Airways (SAA) is currently experiencing challenges ranging from loss
of market share, negative profits, labour issues, management challenges and
5

dwindling revenues. The airline is wholly owned by the government of the Republic
of South Africa and it relies on government guarantees and bail outs. There is
leadership crisis at SAA, with the troubled national flag carrier having been run by 7
different CEOs for the past 5 years. In the light of the challenges facing the airline, a
strategic direction

will be provided for the airline as a bailout solution. It is

anticipated that the recommended strategies will bring stability to the airline while at
the same time creating a favourable environment for it to return to a profit making
trajectory.

Introduction
In the current turbulent business environment, where business earnings and margins
are not lucrative, organisations need to find innovative

ways to complement their

revenue growth (Fin Week, 2013). Formation of partnerships with hotels, car rental
and travel agencies to bring value added services and products to customers are
crucial in the airline industry. This will attract more customers and hence higher
passenger numbers resulting increased revenue inflow.

Cost cutting through

improved investor management as well contract management and tracking is vital. In

addition to that, investment in IT is essential and this involves using IT as a catalyst
to improve business objectives.
The main objective of this document is to provide strategic direction to South African
Airways. It is anticipated that the strategic plan will drive the organisational
sustainability focusing financial wellness, organisational capability as well as
corporate governance. A situational analysis of the organisation will be done and
this includes industry analysis, competitor analysis, internal and external analysis.
The effect of the macro-environment on the performance of the organisation will be
discussed. Challenges in the Airline industry and those affecting SAA specifically will
also be discussed. Based on the comprehensive situational analysis, the discussion
will recommend strategies that will create a favourable environment for SAA to
achieve its business objectives. The strategic direction will be coupled with
Marketing and Human Resource plans.

South African Airways Background

Founded on 1 February 1934, SAA is one of the worlds largest established airline
(DPE, 2016). It was established after the South African government acquired assets
and liabilities of a private airline called Union Airways to create a new national airline
South African Airways.
South African Airways is regarded as a strategic asset of the government and it is
wholly owned by the state (McDonald, 2014). He argues that although SAA operates
in a highly competitive global environment it remains Africas 3rd largest airline in
terms of its network and frequency of its flights. As a leading carrier in Africa, SAA
services 56 destinations within South Africa and the continent (DPE, 2016). In
addition to these domestic and regional operations, SAA also services 9
7

intercontinental routes.

SAAs primary business includes provision of passenger

airline and cargo transport services. SAA has subsidiaries namely SAA technical,
Mango a low cost carrier and Air Chefs.
SAA is a member of the Star Alliance, the largest International airline network.
In terms of awards, SAA has been getting Best Airline in Africa award in the
regional category for 12 consecutive years and winner of Service Excellence Africa
for 3 years.
Vision: To be a profitable African airline with global reach (www.flysaa.com).
SAAs vision goes hand in hand with its mission of delivering sustainable profits and
growing the market share by offering world class service to customers. SAA
continues to focus on its operations in Africa, expanding where there are
opportunities. On international routes, the focus is to ensure that the routes are
profitable and sustainable.
SAAs vision has got a gap. It does not reflect short term or long term ambitions of
the organisation. There should be some timeframes so that effort and some
commitment can be put in place in order to achieve this vision.
Mission: To deliver commercially sustainable world class air passenger and
aviation services in South Africa, the African continent and to our tourism and trading
partner (www.flysaa.com).
There is a correlation between the vision and the mission. A combination of these 2
gives SAA a strategic direction.

Long Objectives

To support South Africas national developmental agenda

To achieve and maintain commercial sustainability
To provide excellent customer service
To achieve consistent ,efficient and effective operations
To foster performance excellence

Values
Customer focused
8

According to SAA (2016), SAA anticipates and strives to understand the

unique needs of their customers through tailoring customer specific

solutions.
Integrity
They strive to practise high standards of ethical behaviour in all lines of
work and maintaining credibility by making certain that actions are

consistent (SAA, 2016).

Accountability
Taking responsibility of individual and team actions, decisions and results
by establishing clear plans and goals, and measuring progress against

specified goals is one of SAAs key values (DPE, 2016).

Safety
Safety is a key element in the aviation industry. SAA has adopted a zero
defect mortality and it strives for zero accidents through proper training,
work practices, risk management and adherence to safety regulations.

Situational analysis
Industry description /trends
The land transport infrastructure is dilapidated in most African countries and this
creates a great opportunity for further development of air transport services
throughout the continent (ADB, 2011). The deregulation of the airline has further
created more favourable conditions for airline operators. Over the past 3 decades,
much of the world has moved from a strictly regulated air transport to a more
liberalised one (ADB, 2011). In addition to that, Civil Aviation in Africa has also
embarked on the process of deregulation and this will involve gradual liberalisation of
scheduled and non-scheduled inter-African air services, abolishing limits on the
capacity and frequency of International air services, liberalising fares and granting
traffic rights to airline operators (ADB, 2011).

This whole process will create a

favourable environment for the current and emerging airline operators.

The Aviation industry environment is
market (UJ, 2013).

highly competitive despite a relatively small

Competition from low cost carriers in particular continues

unabated (SAA, 2007). According to Nico Bezuidenut, CEO for Mango, innovation
is crucial in the airline industry as competition intensifies and the industry matures.

He further argues that operation in the airline industry will soon become cheaper but
not sustainable (BDLive, 2013).
Tourism plays a pivotal role in the success of the aviation industry both in Africa and
internationally. According to BDLive (2013), tourism arrivals from Europe, America
and Asia plays a crucial role in the recovery of civil aviation in Africa. Southern Africa
is seen as appealing because of its excellent and diverse eco-tourism products,
mainly game parks, historical and heritage sites.
Globally, the aviation industry constitutes US$3.56 Billion which is approximately 5%
of the worlds GDP. In the African context, the aviation industry drives economic
growth, creates jobs and promotes tourism.
Industry challenges
The main challenge facing the airline industry is terrorism and aircraft hijackings.
This situation places the industry in a situation whereby they need to invest in
technologies that will offer aircraft security and give customers a peace of mind.
High Fuel costs

are a challenge to the airline industry. According Walker (2012),

high fuel price is not the only challenge but the volatility of the price. He

further

argues that jet fuel has become not just the industry highest cost but the most
unpredictable cost.
Structural barriers such as high costs on buying aircrafts, operating licences and
access to airports remain a challenge to the aviation industry.
Challenges facing SAA
Financial challenges
Strong international and domestic competition facing SAA has a negative impact on
its financial position.

There are doubts about the future of SAA as it struggles to

maintain profitability amid fuel costs and poor dollar exchange rate (Parliament of
RSA, 2014). The high fuel costs coupled with the weakening rand against dollar
erode route profitability. According to DPE (2016), jet fuel is the biggest cost to SAA
contributing approximately 35% of the total operating costs. SAA is in a position
where it is always begging for financial guarantees from the government for
sustainability (Parliament of RSA, 2014). In admitting to the financial crisis, the then
CEO Monwabisi Kalawe made the fact bare and mentioned that SAA was in a
10

deeper crisis than people realise (BDLive, 2013). He further highlighted that the
airline survived on financial guarantees from Treasury. Currently, SAAs balance
sheet is weak and the cost position is too high (MarketLine, 2015). SAA has got huge
staff costs and this has posed a lot of financial stress on the organisation. In recent
years, management allowed staff numbers to grow to 11 000 from 9000 for the same
revenue (BDLive, 2013). This increase in staff negatively impacts on the
organisations expenditure and hence on profits. To add to this stress, SAAs longhaul international routes are loss making. SAA long-haul international flights
increased their loss from R 1.3 billion to R 1.6 billion in 2013/14 financial year (SAA,
2015).
Rand volatility has got a negative impact on SAAs financial performance. More than
60% of input costs are priced in foreign currency and foreign revenue represent 40%
of gross income. This disparity when measured against international competitors
places SAAs business in a challenging competitive position (SAA, 2015).
Ageing fleet
The geographical periphery has created problems for SAA on its long distance
international routes and this is because SAA has got an ageing fleet and these
aircrafts are fuel inefficient. (McDonald, 2014). The ageing fleet is uneconomical in
terms of fuel consumption and has often breakdowns. In addition to that, these
planes are frequently payload restricted.

Moreover, SAAs load factors for

international flights are poor and this further erodes its financial position. This poses
a lot of challenges on SAA in terms of revenue generation. Reduced revenue inflow
results in negative financial performance for SAA.
Leadership challenges
According to the Mail and Guardian (2015), 6 SAA Board members resigned in
September 2012. Following that, 6 Directors did quit in October 2014. In December
2014, the responsibility of the troubled airline was transferred from the Minister of
Public enterprises to Treasury. Subsequently, in November SAA suspended a couple
of other executives (Mail and Guardian, 2015). This was followed by resignation by
the organisations Chief Financial Officer. This is a reflection that there is a
leadership crisis within SAA. Such a situation brings instability to the organisation
and it is very difficult to achieve sustainable organisational performance under these
circumstances. This leadership crisis has negatively impacted on the overall
11

performance of the organisation especially given that SAA is on a loss making spree.
MarketLine (2015), argues that the recurring regime changes at SAA has destroyed
management focus on costs and productivity. Cooperation and commitment in terms
of setting up proper governance structure is crucial to addressing leadership issues
at SAA. According to BDLive (2013), the success of any organisation depends on the
quality of leadership and their ability to manage.

Macro-environmental Analysis
In an effort to understand the challenges facing the National flag carrier, an analysis
of the external factors was carried out. In addition to that, the impact of these
external factors on South African Airways was evaluated.
Political factors:
The political environment has adverse effects to any business and the airline
industry is no exception.

Political environment affects tourists inflows into the

country and this affects revenue inflow for the aviation industry. In addition to that,
terrorist attacks and airline hijackings is a cause for concern for the airline industry.
Tight security and screening technologies need to be put in place as a way of
addressing this safety threat. The above mentioned crisis has a negative impact on
passenger traffic as people get worried about their safety and this result in reduced
revenue inflow, and hence reduced profits for the airline industry players.
The inclusion of South Africa into the BRICS will foster rapid economic growth and
SAA has got an opportunity to expand its awareness of being the gateway into Africa
(SACAA, 2015). This will position it for improved performance and profitability.
Governments call to keep aviation charges has a positive financial impact on SAA.
Aviation charges are a huge cost to SAA and by keeping these charges low; the
organisations revenue will be increased.
Economic factors
Increase in competition in domestic markets and the entrance of new players in the
industry has created a huge need to increase safety audits among airline operators.
In addition to that, the demand for aviation skills significantly increased. This
situation puts SAA under financial pressure as it tries to up its safety standards.
Moreover, skills shortage maybe a challenge that is likely to affect SAA if they do not
invest Human Resources Development.
12

An increase oil price has resulted in increase in airline operating costs. Huge
operating costs reduce revenue and erode profitability.
The weakening rand has posed a lot of challenges in the airline industry. Firstly, the
situation has contributed to losses on international routes for SAA. In addition to that,
tourist movement in and out of the country has been affected and this has resulted in
financial stress for the airline operators including then national flag carrier.
Social factors
Labour unions strikes in the public and private sector have created more harm than
good. These strikes have got a negative impact on business operations and this
result in reduced travel. These strikes have a negative financial impact on the airline
industry. In some cases, if the airline employees are on strike, it means that some of
the flights are cancelled while others are delayed. This situation tarnishes the image
of the airline resulting reduced customer loyalty and hence affecting sales.
The current high levels of illiteracy and unemployment in the country has posed a lot
challenges on the aviation industry. The industry is under pressure to employ people
who are not literate and this means that they have to train these people soon after
recruitment and this comes at a cost.
The recent xenophobic attacks in some parts of the country have reduced inflow of
tourists and business people into the country and this reduction is a result of safety
concerns. This social crisis impacted negatively on the financial performance of
many regional airline operators including SAA.
Technological factors
Rapid advances in technology and aerospace technology require new skillsets and
this involves training which comes at a cost. In addition to that, these changes in
technology have resulted in the introduction of new regulations and guidelines which
are difficult to implement.
Environmental factors
The outcry for the ozone layer depletion has caused a rift within the airline industry
as governments have tightened regulations around carbon emissions. The airline
industry is one of the largest contributors of carbon emissions accounting for
approximately 30% of global carbon emissions (SAA, 2013). Aeroplanes emit carbon
13

dioxide and carbon monoxide, and these gases contribute to the depletion of the
ozone layer resulting climate change Carbon tax charges have been increased by
most governments and this impacts negatively on profits of the airlines as the
charges push the operating costs high.
Older planes with high emissions have been affected by the new regulations.
Operators running these planes have been hugely affected since the planes have
been restricted. In addition to that, emission penalties imposed are too ridiculous
and this negatively affects the finances of airline industry players.
In addition to the above factors, natural disasters such as earthquakes, heat waves
and volcanoes pose a lot of challenges for the airline industry.
Legal factors
SAA needs to pay carbon taxes and adhere to health and safety standards. In
addition to that, it has to remit tax to the South African revenue authority. All these
factors are associated with costs and this has got a negative impact on SAAs
financial position.
SAAs competitors
SAA is currently facing domestic competition from low cost airlines and these include
Kulula.com and FlySaFair. It has to respond in order to remain competitive and
maintain its market share. Low cost airlines have got newly minted professionals
(Hough et al, 2011).

In additional to that, they offer their staff lucrative salary

packages to keep them motivated. Competition from these low cost airlines has got a
negative impact on SAAs revenues since these budget airlines offer lower fares
which attract customers.
FlySaFair is eroding SAAs market share. FlySaFair competitive move has been built
around low costs. Customers pay additional money on baggage, seat selection and
meals. This kind of flexibility creates a favourable environment for customers.
FlySaFairs competitive position is a threat to South African Airways.

According to

Hough et al (2011), low cost competitions are dangerous in the sense that they
redefine the entire competitive landscape. In addition to that, they transform its
value chain to reduce prices drastically.

14

Competitive analysis: Porters five forces

Source: Hough et al (2011).

Bargaining power of buyers
The airline industry is divided into distinct segments namely business, leisure and
personal travellers. Customers have a bargaining power especially given increased
variety of airlines available. In the light of this plethora of options, customers can
decide to go for low fare airlines, quick service or quality service airlines. This
situation puts airlines under pressure to offer value for money to their potential
customers and this means offering best service at a low cost. SAA needs to offer
best service at low cost if they are to win customers.
Bargaining power of suppliers
SAA imports jet fuel since local suppliers are expensive and this means that it has no
control over the supplies as well as the price. In addition to that, the exchange rate
which is unstable worsens the situation. It is difficult to get a stable price offer on the
jet fuel and suppliers tend to use this loop hole to rip off buyers
In terms of aircraft supply, there are 2 main suppliers of aeroplanes namely Boeing
and Airbus, and these suppliers have a high bargaining power over SAA due to

15

limited suppliers of aircrafts. In addition to that, airlines cannot easily switch suppliers
and in most cases airlines have long time contracts with their supplies.
Employees as suppliers of human resources make use of collective bargaining
power through trade unions to increase their bargaining power. This puts SAA under
pressure to pay high salaries which are not justifiable there is little room for
negotiations. This collective bargaining power puts SAA under financial stress due to
increased staff costs.
Rivalry due to existing competitors
According to Tarry (2008), during the years of regulation, the extent of competition
within the airline industry was largely based on non-price differentiation such as
customer service differentiation, in-flight meals and in-flight entertainment. After the
deregulation, the market competition forced airlines to come up with a more efficient
way of using their fleets to compete for customers on the basis of low cost,
attractive service and convenience (Tarry, 2008). This competition has shaken the
industry resulting in frequent price changes and variation of prices depending on
time of purchase of ticket and class of service. SAA is facing competition from low
cost airlines such as Kulula.com and FlySaFair. This competition from low cost
airlines puts SAA under pressure to respond and offer competitive prices while at the
same time providing best service.
Threat of substitute services
Road, rail and ocean transport industries offer substitute services which are a threat
to SAA cargo and the entire airline industry. The impact of these substitute service
apply mostly to goods shipment, since it is cheaper to use rail or ocean transport in
goods shipment. However in cases where customers are more concerned about
quick service the impact is relatively low. Nowadays convenience, speed and safety
are now key elements to customers. In addition to that, the fact that the road network
in Africa is derelict, this offers a great opportunity for the aviation industry.
Threats of new entrants
This aspect is a low threat to SAA and the entire airline industry. The industry
requires huge capital investment and without a strong customer base it is difficult to
thrive in the industry. New entrants are vulnerable and their chances of them making
substantial profits are slim. In addition to that, low switching costs between brands
16

make it possible for customers to go for well-known brands and leaving new entrants
at risk. This scenario offers SAA a better competitive edge over new entrants.
Key success factors
According to Hough et al (2011), key success factors affect the ability of an
organisation to prosper in the market place. The following success factors are
instrumental in ensuring that SAA remains competitive in the airline industry. In
addition to that, they create a favourable environment for SAA to grow its revenue
and become sustainable.

Competent staff with aviation experience

Talented workforce
Skilled human capital
Quick service
Excellent customer service
Extensive operational network
Appropriate organisational structure
Successful frequent flyer loyalty programme
Cohesive turnaround aspiration
Attitude change
Support from Treasury
Support from the Department of Public Enterprises

SWOT analysis
As part of situational analysis, a review of the organisation was undertaken. This
involved identifying the strengths and weaknesses as well as potential opportunities
and threats that have an impact on the business performance.
Strengths

Weakness

SAA contributes to the countrys

GDP
Strong

safety

programmes

an

Labour strikes and issues

Leadership challenges
Poor management resulting

in
17

regulations
Strong alliance with other airlines
Widespread operational network
SAA has a Cat 1 status in terms of

the 8 critical ICAO elements

Frequent flyer loyalty programme
Opportunities

negative profits
SAAs organisational performance is

ever fluctuating
Fuel inefficient aircrafts
Reliance on government guarantees

Threats

Growing global tourism industry

Globalisation
Airline industry in Africa

anticipated to grow rapidly

Anticipated growth in the MRO

industry
Student tourism market
Creation of a National Aviation

is

Volatility in jet fuel prices

Intense competition
and

price

discounting
Risk of epidemics
Terrorism and plane hijackings
Xenophobic attacks in South Africa
Skills drain in technical areas

Academy to address innovation and

transformation
Talent identification in the rural
areas

Strengths
a) Widespread operational network
SAA has got an extensive operational network and runs a huge fleet base which
enables it to offer services to key markets while allowing it to enhance its revenue
base. According to MarketLine (2014), for local domestic flights, SAA operates 660
flights per week. Internationally, its network has links to all major continents through
10 direct routes, with daily flights from Johannesburg to London (MarketLine, 2014).
b) Strong safety programmes an regulations
SAA has got safety programmes and regulations in place to ensure competitiveness
within the airline industry. Safety is critical when it comes to customer needs and an
airline well known for strong safety initiatives tends to attract more customers. In
addition to that, the above mentioned safety programmes and regulations make sure
that SAA successfully implements the industrys Safety Management Systems
(SMS).
c) Strong alliance with other airlines
18

SAA has got strong alliance with various international airlines. Currently SAA has got
codes share agreements with 27 airlines across the world. This strong alliance
enables SAA to offer increased flight frequencies and provide new standards of
convenience and customer service, thereby earning it a competitive advantage over
its rivals.
d) Contribution to the GDP
SAA contributes about 0.3 % of South Africas GDP which is approximately ZAR12, 4
Billion (MarketLine, 2013). In addition to that, SAA promotes job creation and tourism
resulting in increased economic growth.
Weaknesses
a) Labour strikes
SAAT a subsidiary of SAA is associated with labour strikes and these are influenced
by the workers union. SA Transport and Allied Workers Union is a labour union which
represent SAAs employees. Labour strikes cause delays in flights and this creates
inconvenience on the part of the customers. In addition to that, the reputation of the
organisation is ruined.

b) Leadership challenges
SAA is rocked by leadership challenges and scandals, and these are characterised
by resignations and suspensions of Board members and senior managers. These
leadership problems create instability within the organisation resulting management
losing focus on core business.
Companys leadership has been involved in a number of scandals which have
negatively impacted on the brand image. According to MarketLine (2013), former
CEO, Monwabisi Kalawe was involved in a scandal where he defrauded customers
by charging baggage wrapping.

c) Fuel inefficient aircraft

19

SAA has got fuel inefficient aircrafts and this leads to high fuel costs. As mentioned
earlier on, fuel costs account for approximately 35% of the total operating costs.
Having fuel inefficient planes further cause bleeding to the already troubled national
flag carrier. According to Monwabisi Kalawe, the then CEO, SAA planes are fuel
guzzlers and this result in huge fuel bills and hence reduced profits (Parliament of
RSA, 2014). He further mentioned that their planes were manufactured during times
when fuel was $40/ barrel and now it is at $110 per barrel, so fuel cost was not an
issue.
d) High debt burden
SAA has got a substantial debt burden which limits its ability to plan while at the
same time reducing its operating margin.
Opportunities
a) Student tourism market
This market has potential for growth. According to Engineering News (2015), offering
travellers one pass for use on all airlines in South Africa will attract customers. This
means that through offering this one pass, passengers will end up visiting more
destinations in the country and according boosting tourism. Sky Wise introduced the
new unlimited travel pass on the Johannesburg Cape Town, and this is working
well (Engineering News, 2015).
b) Creation of a National Aviation Academy
This academy will be aimed at addressing innovation and transformation within the
airline industry. Apparently, there is skills shortage within the aviation industry and by
establishing the academy, a platform to address skills shortage as well foster
innovation will be created. Talent identification in the rural areas can form part of the
Academys responsibility and this will go a long way in addressing inequalities.
c) Growth in the MRO industry
There is anticipated growth in the MRO industry. SAAT a subsidiary of SAA operates
in this industry. Growth in this industry will boost SAAs financial muscle.

20

Threats
a) Xenophobic attacks and terrorism
Safety and security are key elements customers consider when travelling. The
recent xenophobic attacks and aircraft hijacking are a threat to SAA. They attacks
have reduced the number of people travelling and this has resulted in reduced
revenue.
b) Outbreaks of epidemics
Outbreaks of epidemics such as Ebola limit movement of people and this negatively
affect SAAs core business as passenger traffic is reduced.

Strategy analysis: Potential strategies

There are limitless variations in the competitive strategies that organisations employ
and this is because companies have different strategic approaches which suit their
own circumstances and industry environment (Hough et al, 2011). In addition to that,
companies have custom tailored strategies and this makes it difficult for other
companies in the same industry to employ such strategies (Hough et al, 2011). In
trying to craft a strategy, managers need to know whether their market target is
broad or narrow. Moreover, they need to check whether their competitive advantage
is linked to low cost or product differentiation.

a) Low cost provider strategy

This strategy focuses on striving to achieve lower overall costs than rivals. A low cost
provider has to be appealing to a broad spectrum of customers and this is usually
achieved by under-pricing rivals (Hough et al, 2011:149).
b) Broad differentiation
This strategy seeks to differentiate the companys product offering from the rivals in
such a way that appeals to a broad spectrum of buyers (Hough et al, 2011:149).
c) Focused (market niche) strategy based on low costs

21

The strategy focuses on making sure that the organisation concentrates on a narrow
buyer segment and outsmarting rivals by having lower costs than rivals and hence
the ability to serve niche members at a lower price (Hough et al,2011:149).
d) Best cost provider strategy
Giving customers more value for money by incorporating well to excellent product
attributes at a lower cost than rivals is the main focus of the best cost provider
strategy (Hough et al, 2011:149). The whole idea is to have the lowest costs and
prices compared to rival offering products with comparable attributes.
e) Focused (market niche) strategy based on differentiation
The strategy ensures that an organisation concentrates on a narrow buyer segment
and outcompeting rivals by offering niche members customised attributes that meet
their tastes and requirements better than their rivals products (Hough et al,
2011:149).

Evaluation of potential strategies and recommendations

Low cost provider strategy
Currently SAA is making use of the low cost provider strategy on its subsidiary low
cost airline Mango. Mango offers significantly lower costs than its rivals SA express,
Kulula.com and FlySaFair while at the same time making sure essential service
features are not compromised. In addition to that, Mango use lower cost base to
underprice its rivals and attract cost sensitive buyers. Through this strategy
application, Mango is able to maintain its present price and market share which is
crucial for its sustainability. Capturing all possible economies of scale, operating
facilities at full capacity and pursuing efforts boost sales volumes is the core focus of
SAAs low cost carrier. According to SAA (2015), Mango is doing well in terms of
profit making with a 10% growth in profit in 2014.
Given that this SAAs low cost carrier is servicing the domestic routes and it is profit
making, it is therefore recommended that SAA continues to apply low cost service
provider on Mango operations. Continued application low cost leadership increases
potential for the organisation to increase its market share as well as profitability.
Moreover, increased profitability result in the accumulation of capital reserves which
22

can be used to pursue other strategic alternatives such as investing in strategic

marketing.

To increase revenue inflow, it is recommended that Mango expand its

domestic operational network and offer services to routes that do not have budget
airlines for example Johannesburg to East London route, Johannesburg to Mthatha,
and Durban East London.
However, there is a risk associated with continued application of low cost provider
strategy and imitation is one of the risks. SAAs low cost carrier is currently facing
intense pressure for the new entrant, FlySaFair and there is a possibility that
Mangos market share can be eroded. FlySaFair has to some extent imitated the
Mango model. It is there for recommended that Mango monitors its business model
so that it does not only focus on cutting costs but also respond to the dynamism of
the business environment.

Focused (market niche) strategy based on differentiation

SAA is currently using the focused strategy based on differentiation through their
business class service. The business class offers a unique service to customers and
this includes entertainment, luxury seats, best customer service and expensive
meals and beverages. These services are considered unique and there is a niche
market prepared to pay a premium in exchange for these unique services. This kind
of differentiation leads to brand loyalty and customer retention, and this shield SAA
from competitive rivalry in the industry. In addition that, customer retention results in
increased revenue inflow.
However, there is a major risk associated with this differentiation strategy. Investing
too much in differentiation is risky especially given that customers may end up
sacrificing some of the unique features if the premium becomes too high. Given the
current economic situation in South Africa, a few customers are prepared to go for
the business class. Customers are now cost sensitive and every rand saving counts.
This has created a challenge for SAA as few customers pay for the business class
and this has resulted in reduced revenue inflow, and hence continued losses. SAAs
business class service offering relies on senior government officials who travel on
business trips and with the recently announced austerity measures by Pravin
Gordhan, SAA might find itself in a more financial stress as a result of these
changes.
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In the light of the above analysis it is therefore not recommended for SAA to
continue to applying focused strategy based differentiation as this will continue to
hammer the organisation in terms of profit making.

Best cost provider strategy

SAA makes use of this strategy on its international routes. The main focus is around
giving customers relatively value for money and this involves providing the best
service at a relatively low cost. SAA has managed to provide attractive and world
class service at a lower cost than its rivals on all long haul international flights.
SAAs competitive advantage is based on lower cost than rivals and this is low cost
coupled with upmarket attributes meant to attract customers.

Although SAA is

providing world class service to international travellers, these international routes

have hugely impacted on SAAs financial position. According SAA (2015), most
SAAs long haul international routes are loss making. This loss is partly due to
ageing planes which are fuel inefficient. High fuel costs also play a role in this loss
making spree. In addition to that, the weakening rand has further increased SAAs
financial bleeding. With few tourists movement, SAA has suffered a big blow from
international operations.
In the light of the above analysis it not recommended that SAA continues applying
best cost provider on international routes since it is clear that the routes are not
profitable. Partnership with other airline industry players in these international routes
might work well, just to share the costs and reduce losses. Promotion of tourism and
loosening immigration regulations might create a favourable environment for people
to travel and hence promoting the airline business.
However, it is recommended that SAA apply this strategy on its domestic flights as
competition intensifies. In order to be competitive and gain a bigger market share,
SAA needs to provide value for money services. By so doing, it will attract more
customers and increase its revenue inflows, and hence profitability and sustainability.

Broad differentiation
An introduction of Mango by SAA has created some diversity and this has addressed
peoples different preferences and tastes. SAA offers a combination of business and
economy options to travellers and this flexibility creates a broad differentiation
resulting in increased number of customers. However in trying to differentiate
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products, organisations end up investing a lot of money in the process and this
erodes profitability. In addition to that, it is difficult to understand customers
behaviour and trends. As much as this strategy is working for SAA, application of this
strategy is not recommended as it is a trial and error method which is
unsustainable.

Focused (market niche) strategy based on low costs

Currently SAA is not using this strategy. The strategy aims at securing competitive
advantage by servicing buyers in target markets at a lower cost. The strategy is
almost similar to low-cost leadership but the difference is in terms of the size of the
buyer group which can be based on geographical uniqueness. Application of this
strategy is not recommended since competition is intense and finding a unique buyer
group may be challenging.

Recommendations: Strategic direction

An application of a low cost leadership strategy. SAA need to make sure that it
introduces more low cost airlines on the domestic market. This means that they
will offer low price with no frills. The low price will attract high number of
passenger traffic resulting in increased revenue inflow for the airline. In addition

to that, this strategy will increase SAAs competitiveness and profitability.

Application of a best cost provider. Nowadays customers want value for money.
SAA need to find innovative ways that can ensure that they provide best service
at a low cost. This will involve cutting costs and increasing efficiency. This
strategy has worked well for South West Airlines and Easy Jet. Fast turnaround
approach for example 4 to 8 shifts daily on domestic routes may bring profitability
instead of focusing on loss making international routes.
This hybrid of low cost leadership and best cost provider is critical reviving the
troubled airline.

Pruning marginal products and services

As price competition stiffens and profit margins get squeezed, having many
services might increase operating costs. Pruning service offering create a
platform for cost saving while at the same time allowing for concentrating on
routes whose profit margins are highest. In other words broad differentiation
25

strategy wont work as price competition intensifies. SAA needs to prune its loss
making long haul international routes and focus on profit making domestic and
regional routes and by so doing they concentrate on where they have a

competitive advantage.
Improving value chain efficiency
Reinventing the industrys value chain might work well for SAA. They need to
lower costs while at the same time providing the best service. This involves
improving labour efficiency for example self service check in. In addition to

that, SAA can use home-based sales representatives to reduce overhead costs.
Trimming costs
Stiffening price competition gives companies extra incentives to drive costs down
according to Hough et al (2011). SAA need to embark on a drive where they
negotiate better prices with their suppliers while at the same time implementing
tighter supply chain management practices. This will result is reduced

expenditure and hence increased net profit.

Global strategy
Expanding internationally into markets that are not saturated is an alternative
approach for SAA to reduce its financial stress. According to Hough et al (2011),
expanding to foreign markets where attractive growth potential still exists and
competitive pressures are not so strong is crucial. SAA can give it try in China,

Argentina and India.

Outsourcing
SAA needs to outsource some of their support services to other service
providers. According to Hough et al (2011), managers spend a lot time, energy
and resources focusing on support activities instead of focusing on core primary
activities of the business. Outsourcing administration activities might work out
cheaper than doing it internally. Some of the advantages of outsourcing include
increased response time to changing environment and reduced overhead costs.

Private partnership through bringing a private equity partner can address some

of the financial challenges affecting SAA.

As a short term strategy, improving efficiency in operations by restructuring the
operations through streamlining and focusing on routes which are competitive
and profitable. Apparently SAA is making huge losses on long-haul international
routes and by minimising these routes; its financial stress can be reduced.

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Marketing plan

Frequent flyer program

Frequent flyer program attracts customers and this result in increased revenue. It is
recommended that SAA introduce a frequent flyer loyalty programme on their low
cost carrier, Mango. This will give them a better competitive advantage over their
rivals.

Tourism

Focus on tourism is crucial to SAA since there is direct correlation between the
tourism industry and the airline industry. SAA has to be a market leader and link local
tourism with the world. Finding a strategic partner in the tourism and hospitality
industry will go a long way in finding solutions to financial challenges facing the
national flag carrier. A combined marketing strategy that talks to both the airline and
the tourism industries is essential.

Increasing sales
Increasing sales to present customers can boost revenue inflow. In a mature
market such as the airline industry, growth through grabbing customers away
from rivals is difficult according to Hough et al (2011). It is therefore
recommended that SAA expand sales to existing customers and this involves

sales promotions and provision of ancillary services.

Use of travel agents minimises overhead costs. The fact that the agents get

commission means that they will work hard to find customers.

Use of social networks can promote the brand
Mobile apps brings convenience to customers
Big data- SAA can reach potential customers through data mining
Inflight entertainment needs to be upgraded and this will go a long way in
providing excellent customer service

Human resources plan

Human resources development
Through application of human resources development as a strategic partner, SAA
can be in a position to achieve its strategic objectives and improve its profitability and
27

sustainability.

This will involve training and development of staff, modernising

knowledge, upgrading skills, attitudes and perceptions in order to achieve

operational excellence. A capacitated and motivated team offers excellent service
which attracts more customers. In addition to that, HRD creates a favourable
environment for creative thinking and innovation (Meyer, 2012)
Having skilled and experienced employees improves overall performance of the
organisation and hence reducing the vulnerability of failure for the organisation. In
addition to that, through increased profits, the company can be in a position to
reward its employees resulting in employee loyalty. Rewards brings about motivation
and hence loyalty. This contributes to staff retention and reduces the costs of
company since they wont be a need to bring new inexperienced staff. Of course
they are costs involved in developing human capacity but there more benefits in the
long run. Human resource development brings about a situation where by
organisations relies on internal resources and do away with outsourcing skills from
the external environment. This brings about long term sustainability of the
organisation.
Application of HRD principles by SAA will create an enabling platform for the
synthesis and application of knowledge for continued improvement. This innovation
is critical especially given the current turbulent business environment
SAA needs to adopt a paradigm shift as shown in the table below.
Table1.0. Paradigm shift towards a knowledge organisation
Traditional approach
Production driven
Functional (silo)
Tangible Assets
Top Down approach
Incremental change
Management
(Source: Cribb, 2006).

Modern Approach
Customer driven
Process (Integrated)
Intangible assets (Knowledge, skills, experience,
talent)
Bottom up approach
Transformational change
Leadership

According to Meyer (2012), provision of training and support to employees is crucial

in attaining organisational efficiency and hence sustainability.

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Instead of hiring a lot of people, it is better to develop the current team and make
them more productive. Investing in Human Resources Development has got long
term returns. Increased efficiency and productivity from HRD will counteract current
costs of human development.
SAA need to reward employees for good performance so that they retain staff and
offer best service to their customers.
In addition to that, SAA needs a highly skilled and motivated CEO. According to
Walker (2012), a highly skilled, respected and motivated CEO can improve employee
productivity and even lower labour costs. A strong negotiator who knows the market
can bring SAA back to profitability
Establishing management performance standards
These are crucial in improving employee engagement and operational excellence
resulting in increased productivity and efficiency, and hence profitability.

Corporate governance
SAA should make sure that execution of strategy is monitored and controlled by
management and the board of directors. In addition to that, the board should ensure
that executives are rewarded for success.

Establishment of a Cadet school

The Parliament of RSA has recommended that there be an aviation cadet school.
This school will be responsible for identifying and managing talent in the aviation
industry. In addition to that, the school should spread recruitment and prioritise rural
black people. According to the Parliament of RSA (2014), 80% of SAAs pilots are
white males. It has been noted that there are few female pilots and few black pilots
(Parliament of RSA, 2014). The main objective of establishing the cadet school is to
address issues of gender and race in the aviation industry.

Establishing management performance standards to improve employee

engagement and operational excellence

Hiring for attitude
SAA need to hire for attitude and train for skills. It is easier to train an employee
for skills but it is difficult to change a persons attitude.

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In summary, the whole idea about having a clearly defined human resources plan
that talks to the organisation strategy is to increase productivity, retain staff and
foster innovation for the benefit of the organisation.

Conclusion
Given the current ever changing business environment, competitive strategies are
needed for the success of businesses. Embracing innovation and technology is
crucial in todays business. Human resource development is crucial in achieving
long term business objectives in the airline industry.

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