Cemair’s vd Molen on secret SAA bailouts, pilot and engineer emigration and more

Airline entrepreneur Miles van der Molen shares an insider’s perspective of the local aviation sector where SAA continues to fly despite losing a bundle (so who’s funding it?) and how, despite having less than 10 aircraft, the State-owned airline wants to open a route to Brazil. Cemair’s founder and CEO explains the implications of a growing shortage of skills locally after SA pilots and engineers are being sucked into a global industry desperate for staff as volumes return to pre-Covid pandemic levels. He spoke to Alec Hogg of BizNews.

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Relevant timestamps from the interview

  • 00:08 – Introductions
  • 01:11 – Miles van der Molen on what’s happening in the Aviation market
  • 02:40 – International flights
  • 03:35 – Cemair is now number three airline in South Africa
  • 06:27 – What are the routes within South Africa that are still expanding or areas where you are able to add more aircraft?
  • 07:04 – Semigration’s impacts on the airline industry
  • 08:53 – On SAA
  • 11:59 – Is there a commercial viability in having a connection between South Africa and Brazil
  • 14:48 – Covid grants
  • 17:30 – The skills decline
  • 18:37 – The inflow of new SA talent
  • 20:09 – Conclusion 

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Edited transcript of the Interview between Alec Hogg and Miles van der Molen

Alec Hogg: Well, it’s more than half a year since I’ve caught up with Miles van der Molen, our go-to guy when it comes to what’s happening in the aviation sector. Miles is the founder and chief executive of Cemair, my favourite airline. And we will be finding out from him what’s happening to traffic, why SAA is kind of not hitting the headlines in the way that it should and getting more context so we know more. Miles, you’ve been real busy and I guess that’s why it’s taken us so long to do this catch up, but I’m glad I’ve managed to, well, not me, but Lucy’s managed to nail you down to today. Good to see you. I suppose the best place to start is what’s happening in the aviation market. I’m seeing that they are getting, we can get better prices now by shopping around. It looks like perhaps capacity is, is growing a little.

Miles van der Molen: Good to chat to you again. It’s been a long time, as you pointed out, and, yeah, it’s been a busy year. Never a dull moment in aviation, both domestically and globally. There is a lot of capacity that’s returned to the South African market, and I think the rate of recovery was overestimated by some carriers, so perhaps too much capacity. I think a lot of people were looking at the pre-COVID graph and expecting to get back there in this year, but we seem to be quite well short still.

Alec Hogg: How far are we from the pre-COVID era?

Miles van der Molen: There’s a fairly broad range of statistics that are indicative and surprisingly large differences between them. The number that seems to make the most sense from our assessment of the market is domestically about 77% of pre-COVID levels, internationally a bit higher, into Joburg about 85, with the numbers I’ve seen, and Cape Town has done particularly well. I believe that’s stronger than COVID, pre-COVID figures.

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Alec Hogg: So Cape Town is ahead of pre-COVID. That’s interesting. It’s a bit of a shift in the market.

Miles van der Molen: Interesting, but not unexpected. We saw a lot of people leave Johannesburg for various reasons during that time, including you of course. The Western Cape did well out of that. So over the last decade, a lot of economic masses moved to that Cape region. I think that trend line is likely to continue.

Alec Hogg: One of the things that I’ve discovered only after moving to the Western Cape is that quite a lot of your international flights, you still have to go through Johannesburg. Why would that be?

Miles van der Molen: I think most major carriers have a direct route into Cape Town. Some of them are still seasonal, but I think just about all the big names are there. Joburg is still seen as the hub. Cape Town, just geographically, it’s really the last station on the line. So Johannesburg does have better regional connectivity options if you want to travel to neighbouring countries. A lot of that stuff still comes through Joburg, whereas Cape Town would simply be a little bit further for that. But yeah, it certainly has lost its dominant status that it had a decade ago.

Alec Hogg: Well, Cemair now number three in South Africa, or certainly was the last time we spoke. Are you still in that slot or moved up or down?

Miles van der Molen: I think we are still in that slot. There hasn’t been a lot of shuffling. There’s no new entrants since we last spoke, and I don’t think there’s anybody on the horizon. The demise of Cemair seems to be permanent. There were some discussions about people buying in and resurrecting it, but I haven’t heard anything recently. It doesn’t mean it’s not happening. It just certainly isn’t in the public domain. Mango has… That sale has not materialised, it seems. There’s some stuff in the press about that. So there’s been more stability, but, sorry, I’m just getting rid of my Outlook notifications as you are, so they seem to have come back accidentally. So we’re seeing all the carriers sort of growing their fleets. That includes SAA. The direction and strategy of SAA has been a little bit opaque. Performance has not been shared with the public as it should have. So we don’t know exactly what’s happening there. But it seems that they are in the market at least trying to grow.

Alec Hogg: Perhaps we can start with Cemair first and then move on to SAA. Over the past few years, you’ve been growing at break-net speed. You’ve been adding new airliners. Almost it appeared at one point in time, certainly every year anyway. Has that stabilised a little now?

Miles van der Molen: We’re continuing to grow, and that’s our strategy of six months ago remains where we want to add an aircraft every two to three months for the next couple of years, particularly in the larger regional class aircraft, so around about 100 seats. That’s where the bulk of our growth is. We share that capacity between our schedule network and our leasing operations where we offer what’s known as ACMI wet leasing. We have aircraft based outside the country working for various reasons, either for regional airlines, NGO type operations, and peacekeeping. So that’s always been a strong line for us. We balance the two revenue streams, and the capacity goes to both. But we always took a view that in that pre-COVID phase, the Southern African airline industry was destroying value and eventually its date of commercial destiny would come. And that arrived not at COVID, actually, slightly before we started seeing it unravel. And we wanted to be positioned for what we saw as the next phase, and we still hold that view.

Alec Hogg: What are the routes within South Africa that are still expanding or areas where you are able to add more aircraft?

Miles van der Molen: To most major centres at this point, we haven’t got a presence on Joburg, East London, and we just haven’t got the capacity at the moment to add that. It’s been our intention to add that out of Joburg, and a few destinations out of Cape Town, including Cape Town Port Elizabeth, increasing our density on Cape Town, East London, and a few other routes out of there. We also take a view that the Cape Town market is likely to grow consistently over the next period, and we want to be positioned for that.

Alec Hogg: So the sea migration is having an impact on the airline industry.

Miles van der Molen: Yeah, huge. Not only out of Cape Town, but a lot of our Western Cape destinations, we see commuter-type traffic. For example, Plettenberg Bay, a lot of people have moved there for lifestyle reasons, but there’s not a lot of economic density there, and they’re of an age where they still have a commercial footprint and travel a lot to a business centre. So that’s an important passenger line for us.

Alec Hogg: So it’s possible now to live in Plett or George or anywhere else, I guess, along the coast, Port Elizabeth, East London, and of course Cape Town, and do quite a lot of work in Johannesburg, the old traditional hub, because the airlines are servicing it to that degree.

Miles van der Molen: Exactly. So lifestyle choices a lot of people have made. A strong flow to the Garden Route area and the KZN area. Both of those have done particularly well out of it.

Alec Hogg: And you following clearly those changes. But what about South African Airways? It was the giant in South Africa. It was bailed out by us, we, the taxpayers, many, many times, which of course must have been incredibly irritating if you happen to be competing with that subsidised airline. It doesn’t appear as though those bailouts are going to continue into the future. And yet the airline’s supposed to have been sold and it hasn’t been. What’s happening there, the insider’s view?

Miles van der Molen: It’s all very opaque, and we don’t have much more than is in the public domain. The sale, it’s now two years into the supposed sale, and there’s no progress. I saw something recently from the Minister of Public Enterprise saying that they want to reconsider the price they’re selling it at, which was a bit astounding. So I always questioned whether or not it was going to materialise and whether or not it was somewhat of a smokescreen to allow them to continue with the business rescue process. But we just don’t know. There’s been no financial information out of SAA for some years. I saw recently how there was some pressure from Scopo for them to provide long, outstanding financial info. But it’s all very opaque. They are active in the market, and they are trying to lease aircraft again. But they are a much smaller airline than they used to be. I think pre-business rescue, they were around about 45 to 50 aircraft, now they’re sub 10. It was a very, very different operation fundamentally. And I think a large portion of the market has moved on. The international, the long-haul routes that they had, that capacity has been provided by other carriers. And the regional network they had, which they were very strong on, that too has moved to other carriers. So it’s a very different landscape for them. And any significant comeback, I mean, I think the prospects of return to the form of significance is limited. But at the same time, we do see a lot of political support for it, and I think that will continue into the future. My personal and profound and substantiated view is that they are still receiving external funding because it’s the only way they could keep the wheels turning, but I don’t need to base it on other than just a gut feel, I guess.

Alec Hogg: We’ve seen nothing yet in the national accounts of money going to South African airways, but I guess there’ve been so many bailouts that there might still be bits and pieces there.

Miles van der Molen: Indeed. We did in the last phase see non-disclosure items. So money was transferred from Transnet to SAA on some basis, and it came out well after the fact. So we have seen in the past that it hasn’t been completely transparent as it should be.

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Alec Hogg: It’s interesting. And Transnet is now looking for more money, billions and billions, I think over 100 billion that it’s looking for. Some of that could find its way to South African airways as well, as you say, very opaque. What is the story about Brazil? Because if you stand on the outside, we have the BRICS event, and it’s a little bit like the politicians saying, well, now we need to open a route to one of our BRICS partners. That’s what it looks like from the outside. But from inside, is there a commercial viability in having a connection between South Africa and Brazil.

Miles van der Molen: I’m not privy to the rationale of why that route was first. Obviously, they were very vocal about their intention to open a long-haul route. I guess one of the reasons why Brazil may have been attractive is because there’s really no connectivity with South America at all from South Africa. There’s no alternate carrier. I think out of Angola, Targ might fly to Brazil. So that may have been something that was attractive, whereas if you look at the US, the United and Delta have provided a lot of capacity. Europe, there’s an enormous amount of capacity that’s been provided. And to compete against that, it wouldn’t be easy. I would have thought that Perth would have been high on the list because at the moment you either need to really travel via the Middle East or via Sydney, which is a long way past. And there’s an enormous South African community there, but the decision was resolved.

Alec Hogg: And now, again, how do we actually make sense of that, given that South African Airways is in the process of being sold as far as we know, no more bailouts from government. It appears to be very overstaffed. It appears to have relatively few airlines, aircraft. So now it’s opening a new route to Brazil. I’m just battling as a kind of non-insider to understand what’s going on there.

Miles van der Molen: Well, as an insider, I’m better as well. You know, traditionally, the airline has made decisions largely on political grounds. We’ve seen that and it’s quite likely that this is one of those as well, I guess. But it’s early days for that route, so it would be difficult to assess whether or not they’ll get the following that they hope to need in order to make it sustainable, but it will be an expensive route to run, so certainly the stakes are high. Also, you mentioned about how there’s no further bailout. I think every bailout that they’ve received has come with the phrase that this is the last one. So I’m not sure why the last one would be any different. I don’t see that it can operate in its current form without artificial funding from the state, realistically, and if the buyer actually closes on the sale definitely from them.

Alec Hogg: Interesting stuff. I suppose you, when you just think about what’s, what the politicians do to our national treasury, we have had a COVID grant, if you recall, which costs 33 billion Rand a year from taxpayers, almost two percentage points of VAT. And that should have been for the emergency of COVID. Well, COVID is over, but the grant continues. So it’s, it’s one of those things. And the ANC says, well, they can’t stop the grant, otherwise they’ll lose a lot of votes. So clearly a political decision. And it appears as though what you’ve said to us now in South African Airways as well. But when you’re operating in this market, Miles, how do you structure your business given that you’ve got the possibility of a state-owned or new owned airline that used to be the dominant player coming back in and potentially with some kind of artificial support continuing into the future.

Miles van der Molen: Look, we’re still in the honeymoon period because if you consider the pre-COVID period, it wasn’t just SAA with 40-odd airplanes. It also was Mango in the low-cost space. It was also SAA Express on the route directly competing against us in the regional space. So the total number of seats flown was very high. And at that time, Air Link was nestled very tightly under the umbrella of SAA and operating or selling seats on their code. So that was the real big monster that we were competing against. So SAA with 10 aeroplanes is a playing field that may not be completely level, but certainly is far more favourable than what the head winds had pushed up against before.

Alec Hogg: And so where does Cemair go from here?

Miles van der Molen: I would consolidate in this space. We want to see the global market consolidate. There’s still a lot of concerns about deep recession in the Western world. Aviation is an odd game because you need to make long-term decisions on it with a market that makes very short-term decisions. But we just want to see the market stabilise domestically and regionally and continue with a managed growth strategy that we’ve maintained for the last couple of years. We don’t think it’s the time to make any bold moves. We’re seeing a lot of crew shortages around the world. Seeing a lot of very high rates of immigration from South Africa as the concerns grow about the direction. So, you know, we’re worried about things like that hampering our progress in the future, and those mitigations are where a lot of our attention is going.

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Alec Hogg: We’ve heard from construction companies, for instance, that they’re worried about the immigration of engineers. So the skills from this country that are being lost elsewhere. You would have thought that airline pilots who are also highly skilled would be pretty mobile around the world. Are you seeing that happening here?

Miles van der Molen: Yeah, we’re seeing very high rates of departure. And a lot of the European carriers, during COVID, a lot of the old airline pilots retired and didn’t return to the industry. So now that we’re seeing in the Western world, flight numbers returning to not far from those levels, there’s a shortage of crew. And just recently, for example, Ryanair came to South Africa for a road show, and I know they’ve taken a significant number of crew. Also these markets, if you look at the number of pilots in a place like the US versus South Africa, they could take every single pilot from South Africa and would hardly make a dent in their numbers simply because their market is so enormous. So yeah, there’s a very high rate of immigration in all disciplines in aviation. So it’s not just pilots we’ve seen engineers looking abroad, everybody is looking at whether or not South Africa is a place they see themselves retiring in, and a lot of them not coming to a positive conclusion on that.

Alec Hogg: And what about the inflow of new talent, in South African bred talent?

Miles van der Molen: People that are acquiring skills are normally acquiring them with an eye to leaving, that’s what we’re seeing. So we’re not seeing very high rates of patriotic South Africans developing themselves to build a better South Africa. They’re looking quite inwardly in our experience and saying, you know, when I have this, I’m creating an opportunity for myself to have a better life outside of the country.

Alec Hogg: How do you compete, how do you meet that challenge from a Cemair perspective?

Miles van der Molen: Well, it is developing the guys that hit hardest are the charter market guys where those crew are normally looking for airline style employment. So we all claw from that market, and they’re quite desperately short. But there’s not really a lot you can do in the long run. My guess, what you end up with is an expat type model, which we see across Africa. The only way you can get people to stay is by throwing higher salaries at them and they could get in a primary market. We aren’t there yet, but I think in the next decade we might well get there. What we are seeing is the economic state of the country has probably had an effect on those passenger numbers. So the lower overall, the smaller overall market does help in the other direction because the overall number required is a little lower than it was now for crew engineers or personnel in aviation. But it is a real concern for us.

Alec Hogg: Miles van Der Molen is the founder and chief executive of Cemair. I’m Alec Hogg from BizNews.com.

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