Business Maverick

OP-ED

SAX non-appeal: Take SA Express off life support and let it die

The logo of South African Airways Express is seen on an Bombardier Dash 8 Q400 airplane at OR Tambo international airport in Johannesburg, South Africa on 08 November 2015. EPA/MIKKO PIHAVAARA

SA Express has been bailed out with around another R300m, but no one is saying under what conditions. The question must be asked: are we as the taxpayers not keeping the airline on life support, despite all reasonable expectations that it will never recover?

Let’s be clear upfront about one thing: The death of any airline is a huge loss in jobs and air transport connectivity, but there’s a strong case to be made that SA Express (SAX) should be put out of its misery and allowed to die.

Figures presented to Parliament last week show that SA Express is still losing R40-million a month on its routes. Almost all of its routes are loss-making, so it cannot even cover the costs of flying, let alone its bloated overhead expenses. And the thing about SAX is that it doesn’t have a case for its existence, as it has a direct competitor in Airlink that operates profitably and, like Comair and Safair, pays taxes to support its dysfunctional competitor.

If Finance Minister Tito Mboweni got his way and took SAX off life support, his decision would go straight to the heart of the ongoing debate on state ownership of airlines. In 2018, Mboweni attempted to pull the plug on further funding for SAX’s big brother SAA, but was overruled. For SAX he has a stronger case and tried to refuse to pay yet another R300-million demanded by the airline.

Airlines are among the most difficult businesses to run, particularly as they are highly capital intensive with frighteningly low margins. To top it all, they exist in a stringently demanding legislative environment. Government has shown itself inept at coping with these requirements at SAA and SA Express.

No further SAX bailouts would not just be the death knell for SAX, but would be a shot fired across the bows of SAA. If Mboweni succeeded in cutting off funds to SAX, he may well succeed in doing so for SAA as well – unless SAA gets its act together, and fast.

The signs are not good – it has taken SAA four months just to advertise the position of a new CEO. If SAA fails, the scale of the disaster for South African enterprise and tourism will be far greater than the failure of SAX. And SAA employs 10,000 people, in comparison to SAX’s 800.

The current noise about combining the three airlines, SAX and Mango with SAA, is just a distraction, akin to rearranging the deckchairs. The costs and difficulties of such an amalgamation would far outweigh any long-term operational cost saving. None of the airlines has the management capacity or the funds to contemplate such a merger.

The reality is that SAX should have been euthanised in May 2018 when it was grounded by the Civil Aviation Authority (CAA). At that stage it was clear that it was not viable as it was unable to fund its own operations; in particular, its maintenance. And yes, contrary to SAX interim CEO Siza Mzimela’s claims to Parliament, an airline that cannot afford to maintain its aircraft is not as safe as an airline that can. Think about parts being cannibalised from one airliner to keep another flying. It happens.

The Air Services Licensing Council (ASLC), is the regulator of airlines and requires that an airline be solvent. Yet SAX is hopelessly insolvent. Further, its accounts have been qualified by its auditors since 2012/13, and its 2016/17 accounts are still unaudited. Without audited financials and a solvent balance sheet, the ASLC is obliged to shut SAX down.

In a press release in early September, SAX made vague assertions that it is returning to profitability. The route profitability figures show otherwise, and it must be remembered that Mzimela had promised to return the airline to profitability by April this year. The key problem SAX faces is that it lost its market to Airlink, and has also lost the confidence of its passengers.

When SAX was grounded by the CAA last year, SAA asked Airlink to step in and fly SAX’s passengers. This immediately muddied the waters of what little route division between SAX and Airlink had been arranged for them by SAA, somewhat to the Competition Commission’s displeasure. When SAX returned to the air in August 2018 it was unable to get its exclusive routes back, as the Competition Board would not approve a division of the market back into a cosy little duopoly. It is perhaps ironic that one of the culprits for the closure of SAX is the Competition Board as, if SAX closes, and with CemAir gone, the market will become a monopoly.

The harsh reality that few seem prepared to openly admit is that SAX is beyond saving. It has been cancelling around half its flights and according to Acsa’s figures, less than 50% of its flights are on time. These figures directly contradict SAX’s On-Time Performance numbers presented to Parliament. So, you have around a 25% chance of getting to your destination, or connecting to your long-haul flight, on time. Yet Airlink has one of the best On-Time Performances in the industry.

For passengers, it is difficult to differentiate between Airlink and SAX – or even SAA – as they all use the SAA booking system and even the branding is similar. This makes market differentiation almost impossible. Still, the biggest single reason for the failure of SAX has to be appalling management.

Under the glib and jolly CEO Inati Ntshanga, SAX superficially seemed to be doing okay. However, below the waterline it was leaking and even worse, a culture of a complete lack of consequence spread like metastasising cancer throughout the business. It became fertile ground for corruption, as evidenced by testimony to the Zondo Commission. This meant that the airline was ripe to be exploited by the State Capture gangsters, with fat contracts being awarded to front companies for fuel and tyres, among many other corrupt deals, which precipitated an exodus by much of the competent, non-corrupt management. Yet still Ntshanga, as the CEO, had his hands off the wheel, and it was inevitable that the airline would bankrupt itself.

The contrast between SAX and Airlink is an object lesson in airline management. Airlink has tight hands-on management and made a great effort to build a solid balance sheet, which gives it the financial strength and reserves to undertake expansion “adventures” rather than operating on a hand to mouth basis and unable to maintain its aircraft. This is business school basics – and someone with the business consulting experience of Ntshanga should have known better.

The reality is that SAX has been powerless to compete against Airlink on almost all of its routes, and where it is operating successfully, to international destinations such as Lubumbashi in the Democratic Republic of Congo, it is flying under the protection of SAA.

The government can no longer afford to subsidise any of its loss-making airlines, and SAA is just a larger example of SAX. Like SAX, almost all of SAA’s routes are unprofitable. It must be extremely worrying for SAA that Mboweni no longer wants to support its junior sister. SAA’s turn must surely be coming next. This makes the government’s need to respond to pressure from trade unions to find a strategic equity partner, or more realistically, a joint-venture partner that will have operational control, all the more urgent.

Of course, the saddest part of any airline failure is the human cost, particularly in livelihoods. Unfortunately, SAX chose to operate the now discontinued Bombardier airliners and its pilots will have to be retrained if they move across to Airlink’s Embraer fleet – or upscale to Safair or Mango’s Boeings, both of which are short of pilots. Fortunately, SAX pilots are held in high regard and have been in demand around the world, particularly by the Middle and Far Eastern airlines.

The cost of the death of SAX in terms of air transport connectivity is harder to quantify. Almost all SAX routes are either already operated by Airlink, or could easily be taken over by that airline. This makes the CAA’s killing-off of CemAir all the more tragic, as it will give Airlink a monopoly on the regional and feeder routes. Already the prices of these regional airline seats are exorbitantly expensive. Thus, we see a thriving bus industry between towns such as Hoedspruit and Nelspruit and OR Tambo, but at the cost of tourism growth.

The reality is that no country can afford to support a failing airline, least of all South Africa in its current predicament of bloated demands on the fiscus, with a simultaneous much-reduced tax base due to the contraction in the economy. A quick calculation indicates that if SAX has used R1.5-billion of taxpayer money over the past year and carried 500,000 passengers, then each passenger was subsidised by R3,000. This is a grotesque subsidy of the affluent expense account business traveller by the poor who need the money for service delivery, and is all the more reason why the government must stay out of the airline business. DM

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