South African Airways is now in a terminal spiral dive. Government, as the owner of the airline, has had to bail out the airline with a R2.3-billion grant to replace the Standard Chartered loan. What is telling is that the airline was unable, despite its best efforts and the benefit of supposedly copper-bottomed state guarantees, to entice any commercial lender to step in. By GUY LEITCH.
Is the state the national airline finds itself in the first real consequence of the downgrade of the South African state’s creditworthiness to junk status? And if so, how on earth is the airline going to find the next R9-billion which is due at the end of July? If it defaults on any one loan, almost all the others will automatically become due – including the aircraft lease deals. An Airbus A330 costs around R4-billion, so the airline will instantly have to find in the order of R50-billion if it is to continue as a going concern.
How did SAA get to death’s door? The government would have us believe that airlines have a dual mandate: to perform not just a key transportation function, but also a social development one.
The social development function is beguiling in that it is tempting to use a high-profile, First World industry such as airlines to uplift disadvantaged communities. However, experience across the world has shown that this development function becomes an excuse to have badly run airlines that make a loss. The irony is that this in effect becomes a completely counter-developmental diversion of funds from the poor to rich airline passengers, who don’t need their air tickets subsidised.
SAA is a case in point. A simple calculation dividing the expected annual loss of R3.5-billion into the 7-million passengers flown (excluding Mango) reveals that the South African taxpayer is subsidising every SAA ticket sold by R500.
Historically, since SAA was spun out from Transnet in 2006, SAA has cost the taxpayer an average of about R1-billion a year. Thus, there is a R20-billion loan guarantee from the state. Although for many this is still an unconscionable subsidy of the rich, there are policy-makers in government who consider this to be an acceptable level of loss as the airline supposedly fulfils an essential development role. This role is threefold – first, it is claimed to be good for national prestige to have a “flag carrier”. Second, it is important for skills development in that as a state-owned corporation it can enforce racial quotas far more vigorously than truculent private enterprise. And third, credible studies have been produced to show that the airline provides an essential connectivity for trade, and that this enables far more value creation than it costs.
Those in favour of state ownership claim these three reasons repudiate those who argue that governments have no business running an airline, and that SAA should be privatised. Champion of the state ownership proponents is (now Finance) Minister Malusi Gigaba, who became Minister of State Enterprises in 2009. Since then, there has been no serious discussion of any privatisation of SAA.
Also in 2009, President Jacob Zuma appointed his close friend Dudu Myeni to the SAA board, and since then the airline has been treated as an asset to be looted and managed by inept cronies. Losses have increased from R1-billion to R4-billion per year and much of the skilled management has left – or been purged.
The state enterprise agenda remains, bad management will be appointed and the losses will continue. The question is; how much can taxpayers tolerate? Can we afford to bail out the airline to the tune of R9-billion at the end of July – or possibly R50-billion if we don’t bite the bullet at the end of this month?
Can SAA be turned around in time – or at all? There is a new board in place (without a plan) and reports say Vodacom’s Vuyani Jarana is the likely candidate to take over as CEO. Yet he has, as far as I can see, no aviation experience. Further, I see that his pay last year was R8.1-million. I doubt if he could be enticed from a cosy telecommunications company to the snake pit that is SAA without a huge pay increase. It is after all the ultimate CEO hospital pass, particularly while Ms Myeni remains chair. Can the airline afford him? And can someone with no aviation experience be expected to know how to turn it around? South Africa and the airline cannot wait the year or two it will take for him to learn enough about airlines to stand his ground against entrenched interests.
For Gigaba, using the airline’s development function as an excuse, R1-billion a year may have been a tolerable subsidy, but R4-billion a year can never be. The state cannot afford the R2.3-billion it has just given the airline and it certainly cannot afford a R9-billion or more bailout.
It is time for a groundswell revolt demanding that the airline be privatised and removed as a burden from the state, the taxpayer and consequently the poor. DM