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Why it’s worth trying to save SAA

Business Maverick

Op-ed

Why it’s worth trying to save SAA

Photo: EPA/UDO WEITZ

Let’s not lose perspective – SAA makes an enormous contribution to the SA economy – far greater than the R6bn a year it has been getting from taxpayers.

Like a punch-drunk boxer, SAA continues to stagger from crisis to crisis. Each time the embattled airline holds out its cap to be given another chance, the jeering from the mob shouting for it to be counted out increases.

Now finally we have the first clear signs of another turnaround strategy – this version from the business rescue practitioners. With half of its routes and flights cut, the airline is being reduced to a pale imitation of the once proud flag carrier it once was. The unions say they will go to court to have the business rescue practitioner removed. Is there no way out of this mess? Why not just put it out of its misery and be done with this endlessly drawn out pain? And at the same time take the opportunity from its having been forced into business rescue to close down its dysfunctional little sister, SA Express.

SAA has never been in a worse position. The airline is burning cash at an appalling rate. Thanks to strikes and having no money to pay for fuel, there is an understandable crisis of confidence in its being able to keep flying, and so it has very poor load factors. Now the business rescue practitioners will slash yet more routes and revenue, yet the high fixed costs will probably continue. Plus there is the additional burden of the huge cost of the business rescue practitioners and their expensive American advisers. And there were plenty of other urgent debt holes to fill.

Let’s for a moment look past our feelings of anger and helpless frustration at the once proud airline that has been holding out the begging bowl for the past 20 years, and ask the simple question – is SAA worth trying to save yet again?

I would argue that the answer is unequivocally yes.

There are a couple of quick and easy reasons why it would be a hugely costly mistake to close it down – or as Tito Mboweni seems to want – to choke off its funds and let it die:

First, it will cost too much to close it down, and we can’t afford it. SAA is about R40-billion in debt to the state and to banks and it has about R80-billion worth of aircraft leases, which will cost plenty to wriggle out of. Without flight operations to service that debt it just becomes a deadweight that the state (we the taxpayer) will still have to pay for.

Second, we seem to forget that SAA is actually a really good airline. It has once again won the Best Airline in Africa award, beating Ethiopian off top spot. And many travellers prefer SAA’s service to the big European carriers. It has world-class pilots and wonderful cabin crew. Its on-time performance is right up there with the best (that is when it isn’t shooting itself in the foot by cancelling flights) and its safety standards are unimpeachable. What more could you want?

Third, the airline employs 5,000 people – and 10,000 in the SAA Group. If SAA were to close, about 80% of those jobs would be lost. The pilots would accept jobs at overseas carriers and Mango may be able to continue. But without SAA as their primary customer, SAA Technical and Air Chefs would collapse. And this is only the loss of direct jobs. Thousands more high-value jobs in support industries would also be lost. The cost, both in terms of human suffering and to the national economy would be huge.

Fourth, the airline performs an essential enabling function to the South African economy – and the rest of Africa as well – in that it provides essential air transport connectivity. The facile response to this claim is that private sector airlines will move into the gap left by SAA. After all, capitalism abhors a vacuum.  But not so fast. The world airline industry is entering a sharp downturn, having just had its worst year in 11 years, and airline bosses will be reluctant to risk expanding into African routes that even a subsidised state-owned carrier struggled to operate successfully, and where there is a good chance you can’t get your money out.

In the fifth instance – building on point four: SAA provides essential connectivity that transports the people, goods and services necessary for economic growth. In 2017, Oxford Economics updated its seminal study on the value of aviation to South Africa, and the results are startling. Headline numbers show that the aviation sector supports 490,000 jobs and adds R160-billion to South Africa’s GDP. In addition, by buying goods and services from local suppliers the sector supported another 130,000 jobs. Foreign tourists arriving by air to South Africa, who spend their money in the local economy, are estimated to support an additional 230,000 jobs.

In 2014, the Oxford Economics study revealed that the aviation sector contributed R50.9-billion (2.1%) to South Africa’s GDP. This total comprises: R20.1-billion directly contributed through the output of the aviation sector (airlines, airports and ground services, aerospace); R21-billion indirectly contributed through the aviation sector’s supply chain; and R9.8-billion contributed through the induced effects of spending by the employees of the aviation sector and its supply chain.

A notable feature of air transport jobs is that they are high productivity and thus high value. The average air transport employee generates R721,132 in Gross Value Added (GVA) annually, which is over four times more productive than the average in South Africa. Oxford Economics calculates that an additional R5-billion of government revenue is raised via the aviation sector’s supply chain and R2.3-billion through taxation of the activities supported by the spending of employees of the aviation sector and its supply chain.

This is only a small snapshot of the importance of air transport to South Africa. The airline industry’s wealth creation ability is spectacular, and the numbers mind-boggling.

Yes, it’s true that SAA only contributes a fraction of those totals. SAA’s role has shrunk dramatically. I estimate SAA’s specific share of that contribution to be between just 10-15% of the total South African air transport industry. Assuming a conservative 10%, then SAA is still responsible for supporting R11-billion of value to the GDP, plus a further R7.5-billion in tourism. And that’s each year.

While it’s true that much of the gap left by the closure of SAA may be replaced by private sector carriers over time, there is no incentive for private carriers to invest in uneconomic routes that are important trade links. The CEO of a privately owned airline admitted to me recently that state-owned carriers do a great job opening up a non-economic route and then, when the route becomes big enough to be profitable, privately owned airlines move in and take over the market.

My plea is, let’s not lose perspective – SAA makes an enormous contribution to the South African economy – far greater than the R6-billion a year it has been getting from taxpayers.

It would be foolish to close it down. Especially as there is no reason why it should not be run profitably. Other airlines located at the end of a spoke in the hub and spoke networks that have come to characterise air transport have shown that South Africa’s position of not having a natural hub like Ethiopia’s Addis Ababa is not a terminal affliction. Look at Air New Zealand, Qantas and LATAM in South America. Between them they produce R20-billion in profit. Given good management and right sizing, SAA can be equally profitable – to at least R1-billion per year.

In conclusion, it’s unarguably worth persevering with yet another bail-out and turnaround strategy. But this time let’s make sure the turnaround team gets the political and financial support it needs. The fallback to the Development Bank for emergency funding has not been a good sign. And as long as government continues to hold the purse strings there will always be interference. We can only hope that the business rescue people can get enough done to turn it around. DM

 

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