Thebe Mabanga
As the deadline approaches for workers at South African Airways (SAA) to accept a severance package offer from Business Rescue Practitioners or take government’s route of investigating alternatives, it is worth considering whether the airline is worth keeping or be allowed to finally go under after 86 years in service.
It is hard to recall that the airline would occasionally deliver a profit under former CEO Khaya Nqgula, on one such occasion it delivered a R1 billion profit and even paid a small dividend to the shareholder.
That was until Ngqula flew to a holiday at the Kruger National Park in the middle of a strike.
According to this year’s Budget Review from National Treasury, between 2008 and 2019, SAA received R 22 billion in transfers.
Over the same period, SAA suffered losses of R32 billion and before COVID-19 budget reprioritisation government had allocated R16.4 billion over the next three years to cover SAA’s guaranteed debt and interest servicing costs.
This is probably why giving the airline more money, feels like throwing good money after bad and in the wake of the COVID-19 crisis, turning down R10 billion request for funding.
The single biggest reason that South Africa should keep a national carrier is that South Africa is a long haul destination, located far from almost everyone else.
A country that is the most industrialised on the continent, with ambitions of retaining a status as a gateway to the continent and to attract investment from various parts of the globe must have a flag carrier on the runways of the world’s capitals.
Engagement between government and unions have yielded a leadership compact and a desire to create “a national asset which is internationally competitive, sustainable and profitable.”
One of the unions at SAA, National Transport Movement, has alluded to plans to launch a new airline, although this has been denied by the National Union of Metalworkers (Numsa) the largest union at SAA, have denied this, talking instead of restructuring SAA.
The problem with the choice faced by unions is that the severance package, set to cost R 3 billion, may need o be funded through the sale of assets, which can take a considerable period with creditors likely to be paid before employees. Unions are opposed to asset sale as they believe the assets should be used in the creation of a new airline
Ofentse Mokwena, an independent transport economist says SAA “cannot be kept in its current shape” and argues for either a regulatory business model where SAA is set a range of targets and if they are met, it can access more government funding and pay a dividend when it turns a profit.
Mokwena says an alternative is for SAA to be viewed as more than just an airline and viewed as a key part of aviation value chain supporting a range of suppliers, such as publishers of in-flight magazine and food suppliers and use that as a rationale to keep supporting the airline.
What is clear is that any new or restructured entity would mean a much leaner airline, with a much smaller fleet servicing profitable routes and certainly with a much smaller staff complement than the current 4700.
The airline would have to probably focus on domestic, regional and international routes as a full service airline, offering all classes and in flight services. Diplomatic routes may have to be shelved for the short term, with strategically important route to trade growth areas which may be initially unprofitable considered later, on a case by case basis based on their potential.
The problem with discussions about SAA is that they do not distinguish how much of the airline’s problems are due to lapses in governance, maladministration or malfeasance and how much are due to market factors like the rising costs of jet fuel and fleet maintenance, which are dollar denominated and influenced by the Rand Dollar exchange rate. Yet market factors have been the bigger of SAA’s problems.
But it is said that corruption played a role in making SAA Technical, one of the divisions not currently not under business rescue, to be hollowed out as a once respected revenue earner that serviced other airlines to being a shadow of its former
One way to contain these costs is to hedge against significant currency movement, most likely the weakling of the Rand. Except SAA once did that and it had disastrous outcomes.
In 2003, when SAA was still part of Transnet, its Group Auditing Services picked up that their hedging contract were sitting with a loss of R 2 billion. SAA sat on the problem and by the time the losses were made public they stood at R 6 billion.
Maria Ramos had just taken over as Transnet CEO and used the catastrophe as a basis to take SAA out of Transnet and move passenger rail (Metrorail) out of Transnet to create Passenger Rail Agency of South Africa (PRASA) and make Transnet a focused rail, ports and pipeline operator. The hedging disaster also led to the dismissal of the SAA board.
SAA needs a Strategic Equity Partner that can shield from this risk and Middle Eastern airlines like Emirates or Etihad are best placed.
An airline from an oil rich country can maintain a reserve account to subsidise the cost of jet fuel or lease some of its relatively new but frequently retired fleet.
COVID-19 has been the most devastating event to befall the airline industry since the September 11 2001 terrorist attacks in the United States.
The pandemic has already sent Air Mauritius into administration. According to the International Air Transport Association (IATA) in its passenger market analysis for February 2020, industry-wide revenue passenger kilometres (RPKs) contracted by 14.1% year-on-year in February, the worst performance since the 9/11 attacks IATA estimates that the airline industry will lose $ 314 billion (55%).
The September 11 attacks brought about the demise of Swiss Air which at the time was a as a strategic equity partner and held a 30% stake in SAA, which it had purchased in 1999 for R1.3 billion.
When Swiss Air collapsed, South Africa bought back the 30% stake for R 300 million, netting the country a profit of R 1 billion.
The late economist Howard Preece used to call it South Africa’s most successful privatisation exercise since democracy.
SAA can take a leaf out of Swiss Air’s book.
Swiss Air was relaunched in 2004 through the purchase of its subsidiary Crossair, before being taken over by Lufthansa in 2008 and reinstating the Swiss Air logo in 2011.
A major problem for airlines is that they are run on very thin liquidity. An analysis of balance sheet liquidity by IATA looking cash and equivalent coverage of revenues shows that airlines in Africa run on a maximum four month worth of cover, with a median figure closer to two months.
The picture is the same for airlines in Latin America and North America.
Only airlines in the Asia Pacific and the Middle East seem relatively cash flush, with their liquidity cover running to about 9 months, although their median figure is also closer to two months.
Any new airline would have to take these dynamics into consideration.
Of course, the winners in any concession by an airline like Emirates is that we may be lucky and fly to parts of the continent on a Airbus A 380 before it goes out of production in 2021.
That alone is worth considering a partner for.
