In response to the publication of the South African Airways draft business rescue plan, economists and aviation experts have taken diametrically opposite views: the optimistic view is that it could work. The pessimistic view is that it can’t and won’t.
But first, what is the plan? In essence, it is rather simple. What the business rescue practitioners, Siviwe Dongwana and Leslie Matuson, have done is go through all of the routes that SAA flies and calculate which were profitable last year and which were not. Eminently sensible.
The problem is that the profitable routes, even taking into account lower costs and reduced salaries, were rather small in number. In 2019, SAA operated its fleet over 30 routes; eight international, 18 regional and four domestic.
Of those, only eight generated a net profit. The international routes generated more than half the revenue but lost the most money, about R3-billion. The regional routes (29% of revenue) lost the least, R315-million, while the domestic routes (14% of revenue) lost R868-million.
The solution presented by the business rescue practitioners is to do three main things:
- Pay off the creditors, so the new SAA will not be lumbered with debt. That will cost the government around R16.4-billion.
- Dump all but 26 of the existing fleet of 49 planes (this excludes Mango). After a build-up period which will last till the end of the year, the airline will fly four or five international routes, 19 regional routes and three domestic routes.
- Retrench a little less than half the staff, leaving SAA with just under 3,000 people. The retrenchment cost would be about R1-billion.
This excludes a whole bunch of problem subsidiaries, like Mango which will need R1-billion, catering company Air Chefs, (R150-million) and SAA Technical, which will require recapitalisation amounting to another R1-billion.
It’s noteworthy that the business rescue practitioners are being massively generous here to the new management of the SAA, assuming it will be able to fly profitably on 26 routes as opposed to the nine it currently flies profitably.
One other thing. For the international airline industry, the years 2015 to 2019 were absolute stonkers. Before the Covid-19 calamity, the airline industry, for almost the first time in its history, had a period of just rolling in money. In 2017, the international industry made $37.6-billion in profit; 2019 was down on that but not by much. For SAA to be losing money while the international industry was going through a huge bonanza really must have taken some doing.
Government’s response has been, as you would expect, kinda non-committal. The Department of Public Enterprises has said it “supports the business rescue plan where it results in a viable, sustainable, competitive airline that provides integrated domestic, regional and international flight services”. Well, that’s precisely the question: does this plan result in a viable, sustainable, competitive airline?
It could work
First, the positive view. Long-time industry watcher and consultant Linden Birns, MD of Plane Talking, says, yes, it could work, but “it’s going to require lots of discipline on the part of government”.
Profitable state-owned airlines do exist, but they have in common some basic ground rules: the government provides a very broad mandate, some capital and lets the management get on with it.
The biggest obstacle is that governments approach the airline from an ideological, not a commercial point of view.
One of the problems that bedevils SAA is that the largest percentage of its revenue is generated in rands and the largest proportion of its costs are incurred in dollars. The company is also trading in a market with limited elasticity.
So, for example, politicians might want SAA to fly to Luanda because the president is trying to form a diplomatic alliance with another important African economy, but jet fuel costs in Angola are beyond extortionate. (This is not hypothetical). Management needs to be able to say, “no, we are not flying there”.
What are the chances of that happening with the new SAA? Who knows, but the omens are not good. Which brings us to:
It can’t work and it won’t work
“It’s madness,” says Michael Power, a portfolio manager and equity strategist at asset management company NinetyOne (formally Investec Asset Management) of the restructuring effort.
He points out that four airlines in South Africa’s time zone have been eating up the skies over the past decade: Emirates, Qatar Airways, Ethiopian Airlines and Turkish Airlines.
Emirates, for example, has doubled its passenger-kilometres flown over the past decade and is now flying as much as airlines that have existed for more than a century, and doing so much more profitably.
What these airlines have in common is fabulous locations, so they can become hubs to travel from almost anywhere to almost anywhere. In addition, the Middle East airlines typically pay very low jet fuel costs because there are big oil producers in their region. And they operate in very low tax environments, so even though staff might get paid less, their take-home pay easily matches the international average. Essentially, they are leveraging their domestic tax systems, says Power.
“It’s simple: they are just impossible to compete against”, not least from the SA point of view, which, stuck out on the end of the continent, has high taxes, and has to pay imported prices for jet fuel.
But there is a solution, Power says.
Instead of “rescrambling the omelette”, the government needs to think out of the box.
What if SA, instead of trying to compete with the hubs, decides to go the precise opposite route and institute an “open skies policy”? Singapore has just done exactly that, taking the profits in the tourism sector rather than trying to fight against opponents with huge geographic advantages.
Economists and aviation experts will argue the toss over the plan, but if the government does go ahead with the rescue, the message it sends out will stretch further than the issues of aviation: it will suggest that even in a dire crisis situation, government’s economic policy is simply unable to countenance dramatic change. BM/DM