This is what should happen to loss making SAA – Prof Adrian Saville

Every few years the future of State-owned South African Airways bursts back into the spotlight. Today it followed Linda Ensor's report in Business Day quoting new Public Enterprises Minister Lynne Brown saying national airline SAA and its affiliate SA Express would not meet the audit profession's "going concern" criteria. With the ANC Government reluctant to entertain thoughts of privatising its airlines and the public servants seemingly incapable of generating sustainable profits, is the SA taxpayer destined to forever keep funding the loss-makers? This was the key question for GIBS Professor and the founder of Cannon Asset Management Adrian Saville on today's CNBC Africa Power Lunch. – AH  

ALEC HOGG: Corporate governance and public finance is in centre stage with the PPC issue. Now South African Airways and SA Express (it's little brother) have failed to meet the criteria of being a going concern. Adrian Saville, Chief Investment Officer of Cannon Asset Managers joins us on the line. The perspective that you would have on this subject is almost unique, given that you're a professor at GIBS as well as running the investments of an asset management company. Are we to take from the Public Enterprise Minister's statement that South African Airways and SA Express don't meet the going concern criteria, that they are technically insolvent or is it just something that the accountants have dreamed up?

ADRIAN SAVILLE: No, I think you've hit it right on the head, Alec. Perhaps the way to think about this is if you were to try to birth the business today, in its current form, it wouldn't float. The business simply doesn't have sufficient substance and stature to maintain itself. What that means is that either it needs to fall over or it needs recapitalisation. There's not much else by way of options.

ALEC HOGG: If you take the Jack Welch school of thought that says 'you either fix it, you sell it, or you close it' then surely the selling option must also be possible. Clearly, Government will not close SAA. Fixing it: well, they've been trying to fix it for many years, but they don't ever seem to get that right. What about the potential to sell it, then?

ADRIAN SAVILLE: Well, I think that the potential to sell it would delight many taxpayers because as things stand, really, the only thing that has kept the airlines going is the funding by taxpayers. A second aspect to put into the conversation is just, to recognise that this is an awful industry. If you add the collective profit and losses of the airline industry from the Wright Brothers to today – 100 years of business history – the industry overall has yet to make a profit. I think that this is an environment which you either have to accept that it requires sponsorship – and for that reason, it's unsurprising that so many airlines are owned in a public enterprise format. Alternatively, you need to push this over to a private shareholding environment where you must accept that there will be frequent change of ownership, and ongoing industry dynamics, as new airlines are born and others die. This is a really tough industry.

ALEC HOGG: What is the pain threshold for taxpayers? How bad does it have to get before we as taxpayers say 'no more', much like is happening with e-tolls and force government to do what the people want?

ADRIAN SAVILLE: Unfortunately, I think here, South African taxpayers show an attribute that's not at odds with one of the attributes in the privately listed company environment, and that we tend to be relatively accepting. As the public, we tend to be somewhat passive and there is more than ample room here for taxpayers to express their concerns, raise their voices, and to establish some type of collective action along the lines of e-tolls. Unfortunately, your pain threshold isn't really decided by yourself. It's decided for you by public enterprise and by Treasury, who will decide whether they will fund this, where the funds will come from, and once again, ultimately the funds don't come from Government. They come from us. We are the shareholders in these State enterprises and we are the funders of these State Enterprises. The pain threshold isn't decided by us.

It's decided for us and it's only when we become sufficiently aggravated or agitated that something will come about. You have to remember that most South Africans don't use airlines, whereas most South Africans do use roads so your chance of getting a public action going here is not as good as with e-tolls.