Does South Africa need a state owned airline? This is the question critics of the cash-strapped South African Airways are posing. Notwithstanding financial challenges bedevilling the national flag carrier, SA president Cyril Ramaphosa is upbeat of its future. “I am pretty gung-ho about the future of a new South African Industry, and I am also gung-ho about the future of the aviation industry,” the president said. He added that the flag carrier is respected across the continent. Ethiopian Airlines – a state airline, is a shining light of how a state owned firm can be run aptly and profitably. SAA can work efficiently, but it needs independence and a competent management office. – Stanley Karombo
By Jonathan Katzenellenbogen*
South African Airways (SAA) is suffering a tortuous demise as decisions on its future are delayed, to the heavy cost of the taxpayer. Government now wants a new state airline, despite the wretched condition of the aviation industry, and the distress of most enterprises that it runs.
The airline is a case study of why state-owned enterprises (SOEs) should not exist in South Africa.
SAA has been grossly mismanaged over the years. It failed to grab big opportunities taken by its agile competitors like Etihad and Ethiopian. There has been gross corruption, key posts are mostly political appointments, it expanded through unprofitable routes to make political points, it has an outsized cost structure, and the unions do not allow agility. These are a few of the reasons for its poor state. In addition, government has not had the ability to deal with its financial distress, other than to provide more bailouts. And finally, government seems unable to recognise that liquidation could offer the best solution.
Lack of accountability
There has been a gross lack of public accountability in the way the airline has been run, with information on its distress dribbled out to taxpayers. The latest annual report on the SAA site is for the year ending in March 2017. That is all legal, as the Minister of Public Enterprises is able to ask for 60-day delays in the submission of accounts. By contrast, under Johannesburg Stock Exchange listing requirements, companies have to publish interim and final results within sixty days of the end of the relevant period.
For most of the past ten years the airline has racked up losses, which have required a series of government bailouts. These now amount to more than R30bn. There are many alternative uses to which that money might have been put. Borrowing and taxes might have been lowered. That amount comes to about 80 percent of what government planned to spend on provincial hospitals in this yearâs budget. Government has also issued nearly R19bn in loan guarantees for SAA to private creditors, which has contributed to South Africaâs borrowing constraints.
Six months ago when the airline was placed into business rescue, (South Africaâs form of bankruptcy protection,) there were grounds for hope of a resolution.
Business rescue hampered
Business rescue should, in theory, have allowed âpractitionersâ, whose role is similar to that played by administrators in the past, to take control. This could have paved the way to a sustainable solution and no further bailouts. Another hope was that the downsizing, sale, or liquidation of the airline would allow a beachhead to possible reform of the other troubled state-owned companies.
It has not worked out that way. As government and unions have objected to the proposals to wind down the company, the administrators have been forced to delay the publication of their report five times. Monday saw the latest delay, at the indulgence of creditors, who had to give approval. The Minister of Public Enterprises, Pravin Gordhan, and the unions dislike any talk of liquidation and favour a new state airline.
Once it is published the plan can be put to creditors, government as sole shareholder, and employees to vote upon. The agreement is to deliver the plan next week, but that has to be uncertain given that every deadline so far has not been met.
To add to complications around the process, SAAâs unions and the Department of Public Enterprises have been in separate âLeadership Compactâ talks to try and sort out a way forward.
The plan put forward by the business rescue practitioners, which has been heavily criticised by industry experts, is insufficiently detailed in its costing calls for further bailouts. It proposes a working capital injection of R2bn to restart the airline when the Covid-19 pandemic abates and R2bn in retrenchment costs, plus R600m for selected creditors. And a new state airline will require an injection of about R20 billion to cover losses in the first three years.
Alf Lees, the DA MP who sits on Parliamentâs Standing Committee on Public Accounts (Scopa) says suggestions for further bailouts are âimmoralâ given South Africaâs deep fiscal problems. He insists the airline should have been liquidated many years ago.
âGood futureâ for SAA says the President
President Cyril Ramaphosa has promised to turn around the SOEs. âCovid-19 will give us greater capacity to reset, reposition and even repurpose SOEs,â he said a few weeks ago at a meeting with the South African National Editorsâ Forum. âI see a good future for SAA, and similarly I see a better future for Eskom,â Ramaphosa said.
The extent to which government is committed to yet more bailouts to turn around the public enterprises will be seen in the forthcoming adjustment budget later this month.
In the adjustment budget that will be presented on the 24th of June, details will have to be given of how R130bn will be re-prioritised as part of the spending to deal with the Covid-19 emergency. There is simply no fiscal room for government to subsidise the pilots, the unions, suppliers, and management of SAA.
Arguments that South Africa needs a national carrier or that it needs SAA as the lynchpin of an aviation sector are simply outmoded in todayâs world. For the moment private carriers could fill the diminishing gap left by SAAâs demise. Comair, which is in business rescue, is halving its fleet as part of its plan and could be back in the skies soon. Overseas carriers would continue to provide international services. In time it is highly probable that an airline group or an entrepreneur might begin a new flag carrier for South Africa. The argument that SA might need planes in the event of an emergency is invalid as these can always be hired.
All signs are that the government is fixated on the idea of the country having a state-run flag carrier and that it wants to start a new airline. The African National Congress seems to have a strong ideological commitment to a majority state-owned airline. It could be a matter of pride. No longer seeing the South African flag on the tail section of aircraft parked at Heathrow would be a reminder of failure on their watch.
Now is not the time to start a state airline. The travel market is not expected to recover for a couple of years and the industry is undergoing massive cuts in capacity.
There are successful state-owned national carriers, but there are very few. Many European airlines were privatised years ago. Even SwissAir went bankrupt and was taken over by Lufthansa. Ethiopian Airlines has been state-owned since its start and survived a Marxist dictatorship. The reason for its survival is straightforward. Management has been given complete independence.
Perhaps the realities of South Africaâs dire fiscal situation might help change the governmentâs ideological commitment to state enterprises and a flag carrier.
- Jonathan Katzenellenbogen is a Johannesburg-based freelance financial journalist. His articles have appeared on DefenceWeb, Politicsweb, as well as in a number of overseas publications. Jonathan has also worked on Business Day and as a TV and radio reporter and newsreader.
