This SAA parrot is dead – pushing up daisies – analyst exposes ongoing farce

CAPE TOWN — Even the best run companies seldom bounce back when billions are continually poured into them in a so-called bail-out. The longer it goes on, the more the financiers are likely to ask why the band-aid-turned-bandage, turned life-support, isn’t working. It’s the same with SAA, only here it’s moved into the realm of true farce with ruling politicians arguing that if they just keep metaphorically mending the broken wing and throwing the bird back into the air, it will fly. It won’t and it hasn’t. And we’re paying for it. Here, in a feature article for the Free Market Foundation, author and analyst James Peron, makes a breathtakingly simple argument, backed by historical facts, as to why SAA should simply be wound up as a failed concern. He debunks the much-quoted political arguments that stumbling blindly on is vital for tourism and our economy- the very opposite being true. Luckily the reformists, headed by Finance Minister Tito Mboweni, seem to have come around. Whether this will translate before several more billions are thrown to the four winds, remains to be seen. – Chris Bateman

By James Peron*

There is a humorous saying: “The definition of insanity is doing the same thing over and over and expecting different results.”

James Peron

It’s often attributed to Albert Einstein, but he isn’t the one who said it. It isn’t the definition of insanity either — but it does describe a trait we could call crazy. Our species tends to repeat past mistakes hoping our “good intentions” will be enough to change the results — this time.

It also describes government policy with regard to South African Airways. Every few months the same thing is done as was done before, even though the results from the last round were as unsuccessful as the results from the round before that.

SAA, with begging bowl in hand, comes to the government asking for bailouts. Politicians line up to explain why the faltering airline should be allowed to reach into the pockets of taxpayers yet again while SAA officials solemnly promise that, this time, things will be different.

Then, a few months later, it starts all over again – the only change being the SAA debts that continue to grow along with the size of the bailouts.

Yet what can only be described as one massive, financial disaster is not how the partisan supporters of SAA see things.

Consider SAA supporter President Ramaphosa: “Here is the reality — SAA is laden with debt right now, as we speak, it is laden with debt for a whole number of reasons… If you were to say today sell SAA, we would not be able to get any value for it.”

The logo of South African Airways sits on the tailfins of Airbus Group NV A340, left, and A330-200 aircraft parked at O.R. Tambo International airport in Johannesburg. Photographer: Waldo Swiegers/Bloomberg

His solution is to keep doing what we’ve done so far, which has only resulted in larger and larger debt. The solution to unpayable debt is not more debt.

SAA’s chief executive Vuyani Jarana reported that as of 31 March they had just R13 billion in assets and R26 billion in debts. Four months later he said debt had increased by another R2 billion, without any increased value in assets. Jarana estimated total debt for the financial year would increase by another R6 billion.

SAA has consumed R30 billion in wealth to date and wants more. That’s R30 billion that can’t be used for proper government functions — such as crime fighting. That’s R30 billion that taxpayers no longer have; to feed their families, put a roof over their heads, or educate their children. That’s R30 billion in jobs destroyed in the prosperous sectors of the economy to prop up a relatively small number of jobs at SAA.

Read also: Get real, SAA is neither a “strategic” nor a “national asset” – analyst

It is estimated SAA will require yet another R21 billion over the next three years. Yet, Mr. Ramaphosa argues that unless taxpayers are put on the hook for R21 billion in additional debt they will have to repay current SAA debts of R22 billion.

All this assumes that, this time, the bailouts will miraculously work the magic that failed to materialise from previous ones. But, if history is any indication — and it usually is — the cumulative debt in three years’ time will be greater and politicians of the future will be lamenting how yet another bailout is necessary to prevent the much larger debt from immediately coming due.

Each day the cumulative debt of SAA grows and in political logic it means another bailout is more urgently needed. To avoid paying debts the government argues it must go further into debt. That’s like ending famine by confiscating food.

Read also: Other global airlines thrived after privatisation: So too can SAA. Here’s why.

Tito Mboweni got it right when he said SAA “is loss making, it’s unlikely to sort out the situation… we should close it down.”

Taxpayers were told SAA creates jobs because of tourism and trade, yet SAA has been cutting flights and ending services and has promised to cut even more. Minister of Public Enterprise Pravin Gordhan said the airline will not open new routes — it doesn’t have the funds.

So, what has been happening as SAA cuts routes? One thing we discovered is that markets work – competitors are increasing their services to cover the very routes SAA abandoned. While the state-owned airline fails, private competitors such as British Airways and Lufthansa are increasing the number of seats on their airlines. Instead of doing so at taxpayer’s expense, they also happen to be taxpayers.

Read also: SAA mess: 1944 book on management incentives provides insight

In 2012, SAA cancelled direct flights between Cape Town and London because it couldn’t make a profit. British Airways happily took on the route at a profit. During summer, they fly twice daily between Heathrow and Cape Town with additional flights going in to London Gatwick. They have also added direct flights between Durban and Heathrow.

Lufthansa and its affiliated airlines now offer direct flights from Cape Town to Frankfurt, Munich, Vienna and Zurich.

Even the lucrative Johannesburg/London route is showing SAA falling further and further behind with BA adding flights so they have 18 per week. SAA planes have a maximum of 1,743 seats per week to London, BA flies larger planes with room for 7,422 passengers, four times what SAA is capable of doing.

The reality is, as SAA shrinks, South Africa isn’t losing tourism. Instead, competitors are stepping in with larger planes and the amount of tourism has increased. SAA is actually hampering tourism with its smaller planes and less frequent flights. Even its once thriving market in regional African flights is suffering. When SAA cut off Cape Town, insisting passengers fly first to Johannesburg, Cape tourism attracted flights from Air Botswana, Airlink, Kenya Airways, Rwandair, Air Namibia, Air Mauritius and others.

SAA’s failures have not led to the death of tourism at all. It has opened up slots for better-managed airlines to fill the gap and grow tourism.

Mr. Ramaphosa asks whether South Africa can afford to close SAA – evidence suggests he should be asking whether South Africa can afford NOT to close it.

  • James Peron is the president of the Moorfield Storey Institute and author of several books including Exploding Population Mythsand The Liberal Tide.