Our Investor Community enables you to discuss, analyse, blog, live chat and engage with likeminded people on JSE and USA-listed companies and more. FREE to join!
Op-Ed: Why does the government hold on to SAA?
Op-Ed: Why does the government hold on to SAA?
Published Date: 2017-10-19 | Source: DailyMaverick | Author: Guy Leitch | Comments
It is a truism that governments have no business running an airline. The airline industry is notoriously capital and skills intensive and yet has hair-thin margins. By GUY LEITCH.
Richard Branson famously said that the airline business has made more millionaires - out of billionaires - than any other industry. So why does the South African government persist in throwing billions at the now terminally afflicted SAA and its stunted sibling, SA Express? There is no reason to believe that this time around SAA will magically become profitable.
What happened to the intention to privatise SAA in the late 1990s? One of the reasons the state claims it won't consider privatising SAA is the "development agenda".
I have on my desk a copy of SAA's latest turnaround strategy - "Corporate Plan April 2017 to March 2022". Like the countless turnaround plans before it, this plan claims that SAA fulfils a "developmental agenda". However, what this agenda entails is not defined, other than to state in sweeping terms that SAA's role is to "support South Africa's National Developmental Agenda through: transformation, job creation and connecting RSA to trade and tourism partners".
Notably though, the National Development Plan makes no reference to SAA, or indeed to any airline, other than to say, "Increased airline competition would help lower costs of travel."
It's therefore probably fair to conclude that SAA unilaterally decided that it should fulfil a development agenda. Perhaps the reason is that having a development agenda is a great excuse for incurring billions of rand in losses.
What does this self-appointed development agenda mean? A good example occurred when SAA's now infamous chairperson, Dudu Myeni, demanded that 30% of the airline's procurement be from black-owned suppliers. In response, both the National Treasury and the Department of Trade and Industry shot her down, pointing out that this 30% requirement does not comply with either the B-BBEE Act, or the Codes of Good Practice, or the procurement legal framework. This was in response to an attempt by Myeni (despite being a supposed non-executive director) to remove a ground handling contract from Bidvest, which was already 63.24% empowered, and appoint an unknown and unproven (crony?) to the contract.
Worldwide, it has been shown that there is no space for non-profit driven interference in airline operations. Yet the South African government doggedly persists in owning airlines that are diverting money, from those who need subsidies, to already wealthy airline passengers.
The "development agenda" is claimed to be a good reason not to privatise the airline. Yet it has been conclusively proven around the world that privately owned and operated airlines generally do a far better job of providing essential transport links than badly run and heavily subsidised government-owned airlines. SAA proudly claims that its contribution to the South African economy is 0.3 percent of GDP and 34,000 jobs, or 0.3 percent of the country's workforce. But just imagine how much greater this contribution would be if it was not haemorrhaging passengers to foreign carriers and if it could actually grow its business. And it needs saying yet again: turn the endless wastage of government bailouts into taxable profits.
Occasionally a compelling case may be made for an airline to fly to a non-profitable destination in order to ensure that destination's economic survival, or for purported long-term strategic reasons. If this really is necessary, and there is little evidence to support it, then that route should be ringfenced from the profitable routes and subsidised for a limited period. But free enterprise, like nature, abhors a vacuum. It there really is demand for a route, the private sector will find a way to make it work long before government can.
An example of such a route for SAA was Beijing which, over the three years it was operated, cost the airline around R1-billion. Since SAA stopped flying it, Air China has stepped into the gap with little in any loss of connectivity and indeed seven other airlines offer a one-stop service from Joburg to Beijing.
Given SAA's membership of BRICs, Beijing may arguably have been a defensible route, although Shanghai would make far more economic sense. People fly to business centres, not capital cities. But other interference is unpardonable. SAA is under intense pressure from Myeni and other KZN-based politicians to reinstate SAA flights between Durban and Cape Town. For SAA this route is profitable only when operated by a low cost carrier - Mango - yet Myeni demanded SAA fly the route as the politicians wanted business class seats.
Is this the development agenda that justifies "borrowing" R25-billion over the past 15 years from the poor, and which would now threaten not just their pensions, but further imperil South Africa's sovereign debt rating?
The government has run out of excuses for owning SAA and SA Express. Sell it off - or liquidate it. DM
Photo: A passenger passing a South African Airways (SAA) plane and the tailfin of another at OR Tambo, Johannesburg's international airport, South Africa, 05 July 2013. EPA/UDO WEITZ