Sunil Shah: SAA will be profitable when pigs fly. MUST READ!

Sunil Shah is a rare breed: he has a natural gift for numbers and words. What's more, he is brave enough to speak his mind and peppers his work with humour. In this article, he applies his considerable intellect to whether South Africans should put any more effort into trying to get national airline SAA back in the air. Shah, an investment specialist and author, sets out a detailed argument backing what many of us suspect: SAA will most likely be profitable when pigs fly. – Editor

SAA portrays the crash landing the ANC seems intent upon

By Sunil Shah* 

In the ever-increasing despair the South African faces, first the carnage introduced by Zuma, including the embedment of a crony corrupt political regime he 'endowed to his beloved' country, then a pandemic of unrivalled economic disruption, my fervent hope was the desperate plight faced by the people would mobilise our government into swift remedial action, a transformation catalysed by circumstance… be it the stricken, gaunt face of a jobless and emasculated father, or a mother whose Covid-induced fever was ignored in the face of her wailing and famished children.

I was sure the "Call of Duty" would be heard and vitalise every Government official to action, to slash waste, sever graft and create jobs with a passion that matched the country's despair.

Does that sound dramatic? Maybe. 

But does it also sound like the basic humane reaction of a responsible politician to the plight of his people. 

I have to stress, seldom do I muster the resolve to write about contemporary SA – the hardship and squandered opportunities that have followed the foundation laid by Nelson Mandela are almost too painful to confront. 

This week again, when I witness the events unfolding, my fingers are compelled to type. For what we are seeing this week is so cataclysmically wrong, immoral and misguided, each and every patriot needs to be aware of the pivotal crossroads our country faces.

A short digression. My last article, Close encounters with 'lying, cheating, incompetent' Malusi Gigaba was voted 'A best of 2017' by BizNews readers. I can only hope it played a small role on ending the ambitions of the lying, fraudulent and conniving political shark Gigaba, once Zuma's primary architect, promoted to the exalted rank of Minister of Finance, but now relegated (hat-tip President CR) to the dusty corridors of the Minister of Home Affairs, to disentangle the mess he created through his genius of unabridged birth certificates for inbound tourists. 

(Read on to understand why I mention the Gigaba article – not to brag, but to segue into a disgraced Minister of Finance and his downfall.)

The bailout of South African Airlines

Before we dive into the details of SAA, it will be helpful to outline the economic rationale why a country deems a national airline to be a sovereign benefit. So why would a country consider a national airline, publicly owned and operated, to be an important strategic asset?

1. Because it's a profitable enterprise that contributes to the state coffers
2. Because it may serve a route that is not deemed economic by other carriers, but that passage provides an externality (an economic term where the benefit is not currently monetised), e.g. the future benefit to SA, for our citizens to visit China so as to improve our understanding of the culture and be better hosts to future Chinese tourists.
3. For a wealthy nation, it can represent a symbol of culture and national heritage, akin to a flying ambassador for international prestige

So, if the above combine to proffer a material benefit, a country might well consider subsidising its operations (loans at low rates or incurring treasury losses) during a dry patch, such as Covid has inflicted on global airlines currently. 

So, let's consider each of the above.

SAA will NOT be profitable before pigs can fly

SAA has been a huge liability to the fiscus for almost its entire existence. The Government could NEVER claim that SAA will eventually add to the budget surplus. In simple terms, if in the last decade SAA has never sniffed a profitable rand, even our current political experts know the prospects for a sustainable profit in a post-Covid and aviation-averse world is as remote as them delivering adequate sanitation to ALL our Metropolitan cities. 

I hope ANC politicians will not miss the analogy. By funding SAA, you are allocating a scarce resource – our fiscus revenue – to a bottomless pit, whereas those very funds could materially enhance the welfare of your people. 

The Cumulative Opportunity Cost of operating SAA

This excerpt summarises SAA's operating record (my emphasis)

According to the statements, as published by the DA's Alf Lees, the airline recorded a loss (after tax) of R5.4 billion in 2017, R5.5 billion and R5.1 billion in 2018 and 2019, respectively.

This marks the first time the airline has presented its financials since 2017, and the first time the public has gained any insight into its financial situation since the group entered business rescue in December 2019.

The airline has not turned a profit since 2011, and has received R57 billion in bailouts since 1994. The group, meanwhile, secured R3.5bn in 'funding' from the state-owned Development Bank in February 2020.

A simple question to our Government: 

If SAA has not come close to a profit in the last decade, in the post-Covid environment where air travel will be severely curtailed, do you expect to make SAA profitable? Also, given the scale of the losses recently, averaging 5.7bn per year, do you believe our welfare would be better served by deploying R5.7bn elsewhere?

To help your decision making, a budget of R5.7bn per year could:

• build and fund the entire staff costs of 47 hospitals, each comprising 200-beds (at a PDE of R1,665/day source: govt paper) per year
• 1,000  fully-built houses, each 200 m2 cement/brick (low-cost) houses in a design community. 5.7Rbn would fund 25 such community projects each year. A family of 5 would lead to homes for 125,000 family members a year.

It's important to highlight this is the opportunity cost our government has chosen, each and every year for the last 4 years: using taxpayer money to fund SAA's losses rather than build 47 hospitals or house 125,000 people. 

Does SA need the luxury of a sovereign airline given our current per capita income?

Parliament may defend the bailout by pointing to the trend overseas, where many subsidies have been approved for national carriers. Yet I would point to one important difference. A German or French national may well promote his/her country during an excursion to a foreign land, but he/she normally has a full stomach when taking off and a home to return to after the trip. 

It is simply ludicrous to prioritise a loss-making airline given the economic status of the average South African. Those scarce resources, about R5.7bn a year, could hardly be spent more irrationally than SAA losses. 

Lack of Management Expertise in Government

I draw your attention to the last long-standing CEO SAA appointed. Dudu Myeni was summoned to Parliament in Cape Town in 2014, to explain SAA's chaos under her helm. She had the audacity to fly first-class on a competitor's airline. If that doesn't summarise her lack of judgement and business acumen, nothing will. 

I raise this point because our political leadership has demonstrated a conspicuous lack of management depth and talent. Our ministers should be painfully aware of the acute shortage of management talent in their ranks. This article, Municipalities still in financial disarray, audit reveals depicts a catastrophic majority of municipalities lack management expertise. 

"A clean audit goes to an auditee who has credible financial information, whose performance information is useful and reliable and where we have not found significant non-compliance with key laws and regulations relating to financial and performance management," explained Auditor-General Kimi Makwetu. 

Of the 257 municipalities audited, 20 received a clean audit. 

If most municipalities can't deliver water or electricity why on earth does Government think they can run an airline!

The Significance of Tito Mboweni's Capitulation

On 17th July, the Minister of Finance, Mr Mboweni, attempted to use an emergency procedure to have an additional SAA bailout expedited through parliament. The Democratic Alliance, the ANC's Opposition party, believed Mboweni 'unlawfully' used the emergency provisions of the PFMA to release funding for the airline's rescue. The rationale was perfectly straightforward, as stated by DA Spokesperson Geordin Hill Lewis:

The DA argues that it has a "clear, alternatively prima facie, right to an interdict" because the use of Section 16 is "clearly unlawful" as the requirements laid out in the section do not apply to SAA's case. 

Lewis-Hill said there was no emergency that warranted the "extraordinary shortcutting of usual appropriation processes" as the company had been in financial decline for over a decade. Further, there was "nothing exceptional" about the required funding and postponing the funding would not prejudice the public interest. 

Mr Mboweni's response chilled my soul:

"I think it is incorrect to use this house to try and present yourself as of superior mind [with a] superiority complex which seeks to undermine the efforts of those of us who work day and night to make a success of this country," Mboweni said. 

"I do not take kindly to anybody who comes and displays some kind of racial superiority here. I hate it. I don't like it. I desist from that. We know what we are doing and we will continue doing what we are doing."

In my estimation Tito Mboweni is one of the most competent Ministers in Parliament. His appointment has added enormous credibility to the country's international reputation. I have held his skill and judgement in the highest esteem, particularly as he has often rejected the pervasive subsidisation of loss-making parastatals. In fact Mboweni has often explicitly rejected further handouts to our uneconomic and mismanaged SAA.

 Tito Mboweni, the new finance minister who was brought back to the frontline of government after president Cyril Ramaphosa started cleaning up on corruption, has been making noises that it is time to pull the plug on SAA. 

This brings me to the conclusion of my fears. There can be little doubt that our finance minister's judgement has been side-lined by his cabinet. Many DA members believed Mboweni to be a staunch pillar of economic reason, a man of principle with his heart and mind in the right place. Yet here we witness him pulling the 'race card' of disparaging the unassailable voice of reason as a 'superiority complex'.

I cannot overstate the significance of this capitulation. I don't wish to delve into the pressure Mboweni may have been subjected to, to coerce him to tow the party line. But I leave you, the reader, to decide where this path leads. And I ask those politicians, like Tito Mboweni who still believe their singular responsibility is to serve the nation: Will you, one day, regret your submission.

• Sunil Shah is an entrepreneur and investment professional who has worked as a fund manager for Schroders in London (US Desk) and Coronation in Cape Town (midcap/small cap Fund Manager and Strategist). He is also an author. His  debut novel, White Man's Numbers provided a fascinating insight into the underbelly of financial markets. To read a free sample chapter click here.