Daily Maverick

SA Express amplifies SAA’s burden to the taxpayer, without much hope for a turnaround

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The government is asking the taxpayer to believe that this time around it will be different, and that despite about 10 previous failed attempts to make the airline profitable, they can still pull it off.

SA Express has limped back into the air – and will soon require another taxpayer-funded bailout. In the three months it was grounded by the South African Civil Aviation Authority for poor maintenance record keeping, it has lost most of its routes to its competitors, particularly Airlink. Yet it has held on to its fleet of tired aircraft and most of its pilots and support staff. It thus has greatly reduced revenue to pay for undiminished overheads. Its losses will be even greater.

Airlink, as a privately owned competitor, makes steady profits and provides a better and more reliable service to smaller towns. The comparison between SA Express and Airlink reinforces the case of those who argue that the government has no business trying to run an airline.

The arguments for and against privatisation of airlines are often ideologically driven, but let’s put ideology and national pride aside for a minute and look at the practicalities.

Those who argue that airlines should be state-owned have several valid arguments – most notably, that if airlines are operated purely for the annual statement’s bottom line, then they will chase short-term profits, often at the expense of long-term benefits.

An example is the need to operate unprofitable routes to key trading countries. These create value for the country as a whole, but at the expense of the airline. Or, on a regional scale, providing essential air transport connectivity to small towns that may not be big enough to be a profitable airline route, but which would wither and die if they didn’t have a reliable air transport connection. Thus, it is argued, air transport is a basic service such as road and rail transport, and so should be provided by the state.

However, the counter-arguments to state ownership are equally strong – that airlines are capital-intensive businesses with small margins and there is simply no room for a developmental agenda or any other inefficiencies, such unprofitable routes.

The debate on whether a state-owned airline should be privatised lurks like an elephant in the room every time a struggling airline asks taxpayers for a bailout. But it has once again come to centre stage in the debate over the future of South African Airways and its largely overlooked junior sibling, SA Express.

The latest SAA management team has been granted an enormous R21.7-billion to turn it around. There is also an unbudgeted intent to merge SAA and SA Express. This will probably require yet more bailout funds. Yet the government is asking the taxpayer to believe that this time around it will be different, and that despite about 10 previous failed attempts to make the airline profitable, they can still pull it off. And this despite a far more difficult trading environment than in the past.

Fearing for its members’ jobs if the airline does not succeed, trade union Solidarity threatened to force the airline into business rescue. To his credit, SAA CEO Vuyani Jarana sat down with Solidarity and agreed a compromise – that he would expedite the search for a buyer for the airline – and thus essentially privatise it.

However, the reality is that this is not going to happen. The Air Services Licensing Council limits non-resident ownership of South African airlines to 25% and no foreign airline is conceivably going to invest billions of rand into an airline of which it has at best, a minority non-controlling share.

Jarana has said that if necessary, the Air Services Licencing Act must be changed to allow for a 51% or greater shareholding of local airlines. But there is no sign of any movement to actually change the legislation.

So South Africans are stuck with 100% of their disastrously loss-making airline and will have to hope and pray that this time around it will miraculously be different. Even with R21.7-billion to burn through to do it, it’s a frighteningly tough task.

Sick airlines consume money, that should have been spent on social services for the poor, to subsidise airline seats. The government needs to urgently revisit the limitations on airline ownership and sell off Mango, then SAA and SA Express. DM

Guy Leitch is editor and publisher of SA Flyer and FlightCom.

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