Business Maverick


Why would anyone want to own an airline?

Why would anyone want to own an airline?
Illustrative image | Source: Flickr / Ludovic Bechler

Although the government has notionally agreed to sell 51% of SAA to the Takatso consortium, unscrambling the egg that is the national airline is proving to be a lot harder than expected.

Do you ask yourself difficult questions? What is the most difficult question you have ever asked yourself? Or someone else?

The most difficult questions often relate to abstract things, because abstractions are by definition slippery. So you could ask yourself, for example, what is success? What is joy? What is happiness? Etc, etc.

So let’s take those off the table. What is the world’s most difficult question that isn’t abstract by nature? Something concrete. Something specific. For me, one question that immediately comes to mind is this: why in heaven’s name does anyone want to own an airline?

One big advantage of the airline industry is that it’s heavily regulated, so unlike many other industries, we know many of the facts on a global scale. And fact No 1 is that the global airline industry lost $140-billion in 2020, the International Air Transport Association (IATA) tells us. So that was a bad year, but understandable because of the Covid-19 pandemic. In 2021, the industry lost $60-billion. Also understandable — Covid. But still a bad year. In 2022, the industry looks likely to lose money again, but less, about $10-billion, give or take.

The incredible thing about these losses is that if you take them together, they add up to more than the airlines made collectively over the past decade. And the decade before Covid-19 was absolutely the blooming era of the airline industry. There were profits. Consecutive years of profits!

Before that, it was a good rule of thumb that it was almost impossible to run an airline profitably. Airlines in the US were going bankrupt at the rate of two or three a year, in the good years! In the bad years, around 2012, even the big ones like American Airlines and Delta went bankrupt. But as many die, many more are created or resurrected.

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Why is the airline industry such a tough business? Surely, it should be benefiting from the global rise in tourism, Covid notwithstanding? I suspect the answer is that it’s massively difficult to create meaningful differentiators. Flying on different airlines is, let’s face it, not that different. It’s still cramped, uncomfortable and generally nauseating in cattle class. It’s comparatively fabulous in business or first, but you do know you are going to have to explain to St Peter at the pearly gates how and why you made your company or your government pay an absolutely extortionate amount of money so you could have a lie-flat bed and the drink before take off, when you need it most.

Airlines have tried everything to circumvent the lack of real differentiators. Clubs, loyalty packages, even nationalism. And, of course, discounts, which forces competitors to discount, which trims margins. And then there are the massively vacillating fuel costs. It’s just brutal.

Locally, during the good years, our national airline SAA managed the conceptually impossible: it managed to lose money hand over fist. And every time it did, it went to the government, asked for a bailout and got more. There was corruption, of course, but arguably more pertinently, there was just brain deadness of galactic proportions. This is a well-known story.

So now, the government is trying to unscramble the egg, and this will surprise no one, but it’s obviously turning out to be much harder than it seems. Notionally, the government agreed to sell 51% of SAA to the Takatso consortium on 22 February this year.

Ever since, people have been asking, when is this deal going to be finalised? Finally, Scopa, the parliamentary committee on public accounts, got in on the act and asked what on earth was going on. A meeting was held last week. 

Historical liabilities

Reading between the lines, Treasury is not at all that happy with what the Department of Public Enterprises (DPE) agreed. The committee was supposed to get a detailed report on the Treasury’s concerns, but that agreement was apparently rescinded at the last moment.

One of the problems is what to do with SAA’s low-cost carrier Mango, because the buyers want to bring in their low-cost carrier Lift. Another problem is who pays for the historical liabilities of SAA. DPE committed to settle all the historical liabilities of SAA before the acquisition and Treasury is obviously not wild about that.

The DPE says it will put in working capital of R2.8-billion, retrenchment costs of R2.2-billion, R3-billion provision of unflown tickets, payment to creditors of R2.2-billion. That’s all money already announced and provisioned for by former Finance Minister Tito Mboweni, which of course doesn’t make the cost any less. But you can understand the Treasury’s sense that they are being taken for a ride yet again by SAA, with the implicit threat that the airline will go bust hovering in the background if they don’t capitulate. 

And, of course, they are being taken for a ride. Because the government has made such an awful, confounded mess of SAA, it has no negotiating position. Anything, anything, would be a win. The government’s negotiating position is rather like the World War 2 Japanese government after the atom bomb explosions. What did the Japanese Emperor Hirohito say in the armistice agreement? Certain events had developed “not necessarily to Japan’s advantage”. Yup. That. Same with SAA.

Ah, well. The good news is that the deal does seem to be progressing slowly forward and, in future, the lies that taxpayers will be told about the government no longer bailing out SAA will, with any luck, be less frequent and involve less of our money. The airline will then be subject to the normal dreadful dynamics of the airline industry, as opposed to the abnormal, dreadful dynamics of the airline industry over the past few years.

And none of that answers the question about why anybody wants to own an airline. BM/DM

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