South African Airways (SAA) would expand and modernise its aircraft fleet over the next few years as it expanded its network and attempted to cap soaring fuel costs.

The state-owned carrier finds itself in the predicament of having to spend millions on new aircraft to remain competitive at a time when soaring oil prices are putting its profit margins under severe strain.

CEO Khaya Ngqula said that though the restructuring plan launched last March was on track, soaring oil prices were a real challenge for the airline. SAA management had budgeted for an average oil price of $84 a barrel with a profit margin of 7,5% in 2008-09, but with international oil prices reaching $126 a barrel last week, Ngqula said a profit margin of 3%-6% was more realistic. “The oil price is a wild card in the airline industry and that is what we have to live with,” he said .

The airline had yet to put a cost to its expansion plans, nor did it detail how it planned to finance the new aircraft. Jason Krause, SAA head of business development, said the airline would be in a position to put a cost to its plan by the end of the month when it would be clearer what aircraft were available, and it had conducted a cost analysis. “We will have to weigh up the revenue from the expanded network versus the cost of the new fleet,” said Krause.

A modern, more fuel-efficient fleet will help SAA trim its surging fuel costs and ease pressure on profit margins.

SAA planned to lease six additional aircraft in this financial year and open a supply competition to Airbus and Boeing for the acquisition of new aircraft over the next 12 years.

The new aircraft would also help SAA cope with the additional capacity it planned to add to existing routes and the introduction of several new routes this year. In October SAA will launch a new flight to Maun, Botswana, while adding extra capacity to 11 existing destinations, including Cape Town, Luanda, Dar es Salaam, Mumbai, Munich, Perth and Sao Paulo.

While the grounding of its six ageing, fuel-heavy Boeing 747-400s in November had saved the airline R600m in the past financial year, it also meant the rest of the fleet was operating at capacity and the airline is at a point where it needs additional aircraft if it hopes to take advantage of new network opportunities and maintain its market share.

SAA’s immediate priority was to secure three narrow-body and three wide-body aircraft on lease and is actively in the market. The airline has held preliminary talks with Airbus and Boeing regarding potential orders and will open a supply competition to both manufacturers later this year.

Krause admitted the aircraft market was extremely tight with few modern aircraft available for lease and delivery . However, with several airlines going out of business in the past few months, Krause said supply constraints would have eased.

Ngqula said the restructuring process had put the airline in a better position to renew its drive to profitability and has to date reduced costs by almost R1bn. “ We are now focused on ensuring that the airline is properly positioned, both financially and operationally, for future growth.”