Hilka Birns/JOHANNESBURG
high-flying Safair is emerging as Africa's own jetliner leasing giant offering affordable Rand-based solutions to South African carriers whose home currency is weak compared to the mighty dollar.
Steady fleet expansion since 1996 has made Safair the largest commercial airliner leasing and charter company on the continent. When the local market was deregulated in the early 1990s, Safair captured a niche by providing the cash-strapped industry with reasonable deals for late-model first-generation airliners.
It now owns more than 40 aircraft comprising Boeing 727s, Boeing 737-200 Advs, Casa CN235s and MD 80s. A fleet of eight Lockheed L100-30 Commercial Hercules makes it the biggest civil Hercules operator in the world, following the closure of Southern Air Transport last year. Its assets have doubled to more than R1 billion ($143 million) since last year with the acquisition in May of 13 737-200 Advs from South African Airways and a 737-200 from British Airways subsidiary Comair. More recently, it added two Boeing MD 82s from Austrian Airlines.
Safair chief executive Ralph Boëttger says the company aims to increase its bottom-line by no less than 20% per year. Last year it contributed more than 85% of the R36 million ($5million) income generated by the aviation division of parent company, Imperial Holdings, which is listed on the Johannesburg Stock Exchange.
The division - comprising of Safair, Dublin-based affiliate Air Contractors and South African general aviation and charter operator National Airways - posted a turnover of R605 million ($86 million) in 1999. Boëttgerr says at least 65% of earnings are dollar-based. Latest results will be published in late August and reflect "significant growth", he says.
Safair is able to use Imperial Holdings' financial muscle to pay up-front for an aircraft in dollars, but raise a loan in rand against the dollar value of the aircraft. This way the dollar purchase price is converted into a rand liability, protecting Safair from currency fluctuations and allowing it to lease-out its aircraft in rand at amounts covering its purchase price repayments. This makes the company competitive on the local market, while it gains a dollar-based asset and a foreign exchange hedge. Borrowing is typically done on the strength of Imperial's balance sheet, which means that Imperial effectively underwrites the loans.
For domestic carriers the benefit lies in having a fixed cost in rand. BA subsidiary Comair "dry" leases a 737-200 and six 727-200s from Safair, which also maintains the latter. "At least 80% of our revenue is earned in rand and it helps to be able to co-ordinate most of our costs in the same currency," says managing director Piet van Hoven. BA-Comair plans to replace its leased 727s from next year. Van Hoven says the airline is currently studying the latest generation 737s, Airbus A320s and MD 82s.
Airline Advantages
Advantages of sale and lease-back deals for airlines put forward include cash generation, strengthening of balance sheets and facilitating improved fleet flexibility and planning. It also saves carriers' the risk and complexity of the inevitable and eventual phasing-out and subsequent re-marketing of a fleet of aircraft.
SAA, which recently concluded a R500 million 51/2-year sale-lease-back deal with Safair for all of its 737-200s, says it is a useful way of relinquishing its ownership of the aircraft. At the same time, it realises equity which will be used to offset the procurement of five new 737-800 from Boeing, part of an acquisition of 21 aircraft finalised earlier this year.
SAA vice president corporate finance, Richard Forson, says the replacement is necessary because of ICAO noise and emission regulations to which South Africa will have to adhere to by 2010. A decision on whether to replace the 737-200s after the lease period expires with new or second-hand aircraft will "depend on circumstances at the time", he says.
Safair's current high-life has been won through much soul-searching and a fundamental metamorphosis. Established by South Africa's maritime concern, Safmarine, apartheid saw Safair provide military air transport services to the South African Defence Force.
The dismantling of apartheid brought hard times for Safair, which was left without its only customer. It embarked on various loss-making businesses and established Swift Ground Handling Services (subsequently sold to Lufthansa, which sold it to the SAirGroup). It upgraded its engineering and maintenance facilities and worked on a campaign to win third-party maintenance contracts from African carriers. It also established a heavy maintenance and 727 freighter conversion facility, which offered a hushkitting service.
The expansion was badly timed. The local industry slipped into a recession, resulting in big retrenchment programmes in the early 90s. The closure in 1994 of Flitestar was a big blow for Safair. Flitestar was one of its biggest customers and a major income provider for Swift. Safair had secured a contract to sell cargo space on Flitestar's A320s and ATR 72s, after cancelling the leases on its BAe 146s. "Flitestar's closure was probably the final nail in the coffin of Safair's scheduled freight services," says Boëttger.
He says the company had begun building a fleet of passenger aircraft in 1992, but the biggest turning points came with a new business plan and new owners. "We re-examined our whole business and decided to concentrate on leasing, operating and maintaining our own aircraft. From 1996, we started making a profit."
In November 1998, Safmarine sold Safair to Imperial Holdings, whose core business is ownership, operation and leasing of transport assets.
The ownership change has been mutually beneficial. "It unshackled Safair," Boëttger says. Imperial executive director Tak Hiemstra agrees that Imperial's decentralised style empowers Safair management to act fairly autonomously. "Financial reporting of Safair is timeous and thorough and this is followed meticulously by Imperial. If the right opportunity arises, we will seriously consider further investment in this industry," he says.
Safair's new business direction resulted in it selling its 727 freighter conversion centre to State-owned aerospace and defence group Denel Aviation. Together with Belgian company Maritime Belge, it purchased Irish-based Air Contractors, which operates seven Stage 3 727-200 freighters and six Airbus A300-A300B4 freighters transporters, mainly on behalf of DHL Worldwide Express. Boëttger says the A300 fleet will be increased, while all B727s will be phased out in the next three years.
Building Blocks
NAC was acquired last year to further strengthen Safair's position in Africa. It is the largest general aviation company in Southern Africa, encompassing aircraft and helicopter sales, maintenance, charters and pilot training.
Safair's aircraft operate far and wide. The 727 passenger fleet is leased out to BA-Comair, European operators and African charter operators. Two MD-82s are currently leased to Air Liberté (with two more to follow), another MD-82 is leased to Dinar Lineas Aereas in Argentina, while its 727 freighter does overnight express flights for DHL and South African cargo carrier Air World SA. Two MD-81s formerly leased to now defunct domestic airline Sun Air are undergoing extensive modifications and will be delivered to Spirit Airlines later this year on eight-year leases.
The Hercules are active worldwide, performing relief aid missions on behalf of the United Nations and the World Food Programme, charter flights to Antarctica, oil spill clean-ups, control missions in the UK and Singapore and, most recently, express cargo flights for Federal Express in Europe.
Safair plans to upgrade its fleet in the next five years by replacing its 727s and 737s with new- generation 737s and A320-type aircraft. With newer aircraft, it will be ideally placed to supply carriers in Southern Africa currently operating, or who plan to enter the market with non-ICAO-compliant equipment. "There is no commitment or firm plan at this stage, but we have taken an important step towards modernisation with the MD-80s," says Boëttger.
"We're not planning to compete with big international leasing companies, but aim to be a successful niche operator in Southern Africa," he says. "What sets us apart, are the rand-based leases to local companies, a hands-on, customer-orientated approach and the customisation of 'wet' or 'dry' leases to include comprehensive FAA, JAA and RSA CAA-approved maintenance, insurance, cockpit crew, cabin staff and airline operational support. We understand the credit risk in sub-Sahara Africa better than international lessors, because we're from Africa and operate in Africa."
Source: Flight International
