🔒 SAA and other SOEs putting the country on trial – Gidon Novick

Former co-Chief Executive Officer of Comair, Gidon Novick brought the low cost airline business to South Africa. But he grounded himself in 2011, headed Vitality for three years and became an entrepreneur in the tourism sector, that he believes still has immense untapped potential. In an interview with Alec Hogg, he has also weighed in on the debate on whether it makes any sense in holding onto the ailing national airline, South African Airways and whether he would consider stepping in to run SAA. – Linda van Tilburg

Responding to a question whether South African Airways were ‘playing unfair” when he was in charge of Comair; Novick said it was always a bit of a mixed bag. Comair would complain in the media bitterly about the unfair subsidies and the fact that they were paying taxes that were effectively subsidising their competitor which was blatantly unfair. But the other side of the coin about which Comair complained less about was the fact that he thought that SAA didn’t do a great job in the market. One could compete quite successfully with them by doing the basics right and building a brand and building a customer base. He said for many years Comair was able to compete quite well against SAA.

Novick said that the bigger issue for South Africa was that the SAA story was really putting the country on trial. “We all saw the Richard Quest kind of interview where it was specifically mentioned, and I think the rest of the world was watching.”  SAA was however not the biggest issue South Africa had to deal with especially if it was compared to Eskom. The way in which SAA is handled is an indication of the kind of decisions and the courage that the government has to take, to take the country forward.

The former airline executive said the country did not need SAA. ‘I think we’ve kind of known that for a long time”. There were enough case studies around the world where previous national airlines were successfully privatised. They even kept the national name in many instances. British Airways, American Airlines, Qantas, Lufthansa were examples of this and they kept the national flag but they were private businesses and they competed in the open market.

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But would Novick, who says he has the airline business in his blood, consider running South African Airways? He said he thought the business rescue process was the right process for the airline. SAA had to be wound down, whether it was slowly or quickly. He said he thought everybody knew that it was the answer and he certainly would not be the best person to wind down an airline. There was a competent team in place that was “hopefully doing that”. He said the business rescue team wanted to wind down SAA but whether they would be allowed to continue doing so, was a different question; but the job had to be done. He believed the job would be done whether painfully over many years or quickly over a shorter period; it needed to be closed down, of that he was absolutely sure.

“If you look at the quantum of funds and I did an interesting little calculation and it’s a rough calculation but there’s roughly R5bn that’s been going into it for…let’s call it the last decade; that’s R5bn a year. There are 10 000 precious jobs that are being protected as part of the rationale for not closing it down and for supporting it. Now if you do the maths; that R500 000 per job could be used to create new jobs. And what we’ve seen certainly in the hospitality and tourism sector is that R500 000 can very easily create a brand new job which really means that the R5bn going in annually trying to protect 10,000 jobs could be creating 10,000 jobs.” He said it was the story of the evolution of our country; this massive effort to protect existing jobs and they are precious people with livelihoods, but it is happening at the expense of creating new jobs and new opportunities in South Africa.

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Commenting on the possible impact of tourism if SAA was wound down, Novick said tourism was a phenomenal sector for South Africa and it was a sector that the country competed in really well. South Africa, he said had magnificent tourism products; our pricing is good because our currency is weak; our people are hospitable and we honestly have one of the best tourism products in the world and yet we are very small players in the tourism landscape. “South Africa’s tourism market was about one tenth of the size of Croatia which is a beautiful, but small country. The potential for tourism in South Africa was massive.”

Novick said the country clearly did not need a national carrier to bring in tourists. SAA pulled out of the Cape Town London route, which was a major tourism pipeline and several Middle Eastern countries had created airlines that were globally competitive. “They have compelling propositions; their pricing is good and they are supporting South Africa.”

He referred to Emirates which had eight flights into the country per day. SAA was not needed to bring tourists into the country and that was a hard reality, he said.

Speaking about his new venture Home* Suite Hotels; Novick said it was a relatively new hotel brand in the South African landscape. It is trying to fill the gap between traditional hotels with all the services that they offer and the growing trend towards more localised, a more personalised kind of Airbnb offering. Home* Suite Hotels tries to fill the gap in the middle and they have opened their first hotel in Rosebank and Novick said it was  going really well. There are three additional hotels under construction; one in Sandton and two in Cape Town. He said, tourism had massive potential in South Africa; the country was just scratching the surface. The funding structure of Home* Suite Hotels was through a 12J fund which is very efficient; “it’s a phenomenal government incentive to promote job creating industries like hotels and it’s going exceptionally well.”

He said they were looking for more funds, but people always left tax payments to the last minute. Novick said he found this year that people were nervous about South Africa as an investment home for their money and were thinking more and more about offshore investments. It meant that they had to create a much more guaranteed structure where the exit was very clear after five years and the return was fixed and guaranteed. ‘We’ve worked hard to achieve that just to give investors a real option when they compare it to taking their money offshore.

Asked whether SAA with good pilots and good plans could be sold to someone in the private sector, Novick said he was not sure what assets the airline had. Liabilities exceeded the assets on the balance sheet, so there was no tangible net asset value. He did not think there was much intangible value in terms of the brand equity of SAA and route rights. With regard to brand equity, what had happened over the last year and in particular over the last six months was going to be very difficult to recover from, particularly when people had a choice and airline tickets were bought upfront. People were putting their money down upfront and would not want to take a risk that the flight might not depart.He thought that it was going to be very difficult for SAA to dig itself out of its problems.

With regard to a viable private owner or private buyer, he said South Africa was a very small state with a handful of very select international routes. On the domestic side there were very strong competitors and it was open for new competitors to enter the market. The barriers to entry were not massive. If anything, it would be very small and the problem with small is that it would not be big enough to cover fixed overheads. He said it was easy for SAA to talk about cutting routes when there had not been cuts in central overheads and unless that was trimmed, the financial situation was not going to improve at SAA. Unless there were large scale retrenchments, they were just throwing good money after the bad.

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