Long and lean road to reviving South African Airways

lign="center">The North-West University’s Ofentse Mokwena, a transport economist, takes a look at South African Airways’ dire financial and management situation. He also elucidates on some possible solutions.

South African Airways (SAA) had hidden vulnerabilities while it was in Transnet Ltd up to the mid-2000s. But leading up to that, it operated in an environment where the Department of Public Enterprises had ambitions of transforming state-owned enterprises (SOEs) through equity partnerships and listing them on the JSE. This required significant governance reforms, which, as we have seen from the Organisation for Economic Cooperation and Development, are very complex, and each country will have unique approaches to managing their SOEs.

The issues started when Transnet Ltd restructured to focus on freight logistics, with the SAA intending to operate as a stand-alone SOE. In 2005 the airline planned to improve its financial position through a diversified strategy that would focus on reducing its cost base and enhancing its service offering. However, by 2009 the airline had already committed to increasing its fleet capacity – ahead of achieving the goals it had set for itself in 2005. This strategically premature step would expose the SAA to increasing its fleet capacity and a need to justify or protect its operational offering, and changes in governance made the issues worse.

Today the airline is facing a complex situation, with its existence under scrutiny, the cost of a lifeline being a moral debate, and the possibility of partnerships that could enable a soft landing, though not necessarily saving the airline.

Blame the lack of conditions

Increasing fleet capacity implied much higher costs – more aircrafts meant more potential revenue, yes, but it also meant higher fuel-, labour- and airport-related costs, in addition to the cost of ownership or leasing of aircraft.

At the same time, from an economic regulation perspective, the SAA was embroiled in direct and indirect anti-competitive practices, which were an instrument to help justify the massive cost base – starting off with unfair incentives to travel agents, and maturing into the consistent perpetual bailouts from the state.

Lastly, the board that was involved in the original strategy of 2005 was changed from 2009 onwards. The new board was not sufficiently acquainted with the base plan, and found an airline already trapped in an aircraft deal. A by-product of this was the massive procurement of turnaround strategies from various service providers being published almost every year, but with limited implementation.

For starters, to find someone to blame is nearly impossible. However, the role of the Department of Public Enterprises in overseeing the implementation of a shareholder compact, possibly represented in the turnaround strategies, was expected. In other words, the bailouts were equivalent to handouts because they were unconditional, and this is not consistent with international best practice. An airline is bailed out with conditions: maybe to retain staff, reduce its fleet, reduce costs and improve efficiencies – all within a specific time frame.

A picture bigger than privatisation

The privatisation of the SAA has emerged as a critical debate, but it cannot occur in a vacuum. From a revenue perspective we are talking about a company with a turnover of more than R30 bn pre-Covid-19, with multiple integrated divisions. Another factor is that the airline has a developmental mandate, which is about labour retention and supply chain development – providing jobs and boosting black economic empowerment. As a result, privatisation may be at the far end of the spectrum, but performance-based management contracts could be a sweet spot.

Management contracts are instruments used to bring executive teams and related staff into a state-owned entity with the intention to achieve certain performance targets, maybe from the DPE. The ownership of the airline does not move away from the state, but the management of operations is performed by the private sector – potentially consortiums. With limited government interference as a condition, the management team would be incentivised to manage the airline over a certain period of time, quite similarly to a concession agreement. However, in terms of configuring a concession agreement for the restructuring of the SAA, the private sector and financiers would need to draft a deal that is bankable and can result in a decent return within the time frame of the concession agreement. Legislatively, this would take the form of a public-private partnership according to the National Treasury, but politically it would mean that the DPE would lose their current degree of influence, unless certain provisions are made.

Clawing back to the skies

Based on the business rescue report, it is quite clear that for the airline to resurface it will need a base of R10 bn. It should reduce its labour profile and pay some creditors. From there on it will still need a few billion, but this state bailout would be declining. If the airline does not increase its flight frequencies, destinations and fleet for, say five years, but focuses on improving service design and aviation technology, it could become very lean and effective. The lean period is largely where building a capital and service base is done. Doing this well could make it more affordable for the airline to finance and govern a bigger fleet and more staff.

In the broader aviation sector of South Africa, the Single African Air Transport Market (SAATM) is one of the most important developments. The SAATM is practically the implementation of the Yamoussoukro Declaration and Decision, which are basically policies that enable African airlines to operate in an open sky environment. In other words, the African airline market will be liberalised with the first five freedoms of the air open for all. More so, the plan on paper focuses on improving the competitiveness of African aviation, and some people estimate significant increases in passenger and freight volumes. For the SAA it means a bigger market to explore, but also greater competition from new or expanding airlines.

The most important issue currently for the SAA is not only securing the R10 bn or more, but instead focusing on retaining a leaner cost base, yet still offering good service quality. Strategically, it may need to consider strategic partnerships, either by employing highly competent executive teams, or pursuing performance-based management contracts with a consortium or strategic equity partnerships that still protect the asset base. The airline may need to be lean for longer, in terms of costs as well as politics. Neither of these is easy to do, but with the right agreements and conditions attached, all that will be left is implementation – which is the hard part. 

 

Submitted by BELINDA BANTHAM on Tue, 11/10/2020 - 16:25