Opinionista Simon Mantell 14 January 2020

Mango low-cost airline — a story of profitability that is too good to be true?

It appears unlikely that all Mango’s expenses have been accurately reflected in its accounts and that perhaps the SAA Group, with the assistance of some creative accounting, has been of the view that a more palatable story to sell taxpayers and the Department of Public Enterprises is of a group with one profitable carrier as opposed to two loss-making airlines.

Since its incorporation in 2006, the narrative of profitability and self-sufficiency of state-owned enterprise (SOE) low-cost carrier Mango has been unflinchingly communicated by its board to a financial media that have simply regurgitated the same. Little or no effort has been made to establish whether the Mango “success story” is probable or even possible in the environment of paper-thin margins in which low-cost carriers the world over operate.

The absence of margin fat means that key metrics such as passenger load factors, aircraft fuel efficiencies, staff productivity per passenger and number of staff per aircraft are paramount while the generation of significant ancillary streams of revenue outside the original air ticket price is critical to sustaining any modicum of profitability and sustainability.

When things are too good to be true, they generally are, and the Mango success story of profitability becomes more problematic when audited financial statements are never released for public consumption, as evidenced by Mango CEO Nico Bezuidenhout explaining to the financial media in 2009 that “Mango was not releasing its financial statements owing to sensitive information and that Mango had never promised to publish audited financial reports”.

While the abysmal performance of the external auditors of SOEs over the past decade has certainly contributed to the inadequate disclosure and lack of confidence in SOE financial statements — KPMG being responsible for the audit of Mango in recent years — simply accepting management’s representations that Mango paid back a loan of R 100-million to SAA in 2007 just 18 months after incorporation and that it has a solid history of profitability is akin to being suckered by Steinhoff’s Markus Jooste’s smooth talk and creative accounting.

Ultimately, Mango’s true performance can only be quantified if all operating expenses are reflected in its own books of account as opposed to being conveniently absorbed into income statements of other companies within the SAA Group.

The nature of the consolidated SAA Group AFS means that they will be noticeably shy with respect to key Mango expense disclosures, but when read with a comparison of key performance metrics of Mango versus leading low-cost carrier Ryanair, a clearer picture develops with respect to establishing the veracity of Mango management’s claims of financial independence and profitability.

Comparison of key performance metrics

While world-leading Ryanair has similarities with Mango in that it also uses Boeing 737-800 aircraft and its average passenger trip distance and price per standard ticket in euros approximate the Mango trip distances and rand prices, the harsh reality is that this is where the similarities end.

In 2015, Ryanair had 308 aircraft with 9,400 employees including maintenance staff with a ratio of 30 employees per aircraft where Mango had 10 aircraft and 700 employees at a ratio of 70 employees per aircraft and no maintenance department.

In the same year, Ryanair flew 91 million passengers at a ratio of 9,680 passengers per employee where Mango flew 2.4 million passengers at a ratio of only 3,400 passengers per employee. Ryanair confirms a load factor of 88% in its audited financial statements, meaning its planes are on average 88% full whereas Mango claims about 80% which appears to be only a management representation.

Interestingly, Ryanair with all its efficiencies makes a loss on every ticket sold and only becomes profitable when ancillary revenue which comprises 25% of total turnover is added to the standard ticket revenue. A significant portion of this ancillary revenue flows from the Ryanair policy of charging €15 for a 9kg carry-on bag and €43 for a 20kg checked-in bag — which is eye-watering considering that a standard Ryanair ticket excluding baggage costs about €50.

Mango allows a free carry-on bag and checked-in bag and is unable to generate the ancillary revenues which allow Ryanair to get into the black. The absence of this significant revenue stream raises questions as to how Mango achieves profitability unless there is a significant understatement of expenses — or if Mango management is a master of productivity and cost containment.

Certainly, the proposition of cost containment by Mango management seems rather remote given the dismal failure by Mango to be close to competitive with Ryanair in any of the key metrics referred to above.

The SAA directors and SAA Group AFS shed little light on Mango performance

In the absence of available audited Mango AFS, the SAA Group AFS offer little insight into material Mango expense line items such as aircraft fuel, aircraft leasing and aircraft maintenance, although in 2016, the SAA board confirmed that SAA had provided aircraft to Mango at discounted aircraft leasing rates, meaning that SAA was absorbing the additional aircraft lease expenses in its own income statement.

The SAA Group AFS from 2006 to 2015 compared with Mango management claims:

Mango had start-up expenses of R65-million and received a further R100-million loan from SAA in 2006 and Mango repaid the R100-million loan to SAA within 18 months.” — Mango management.

The SAA Group 2006 AFS reflect an investment in a subsidiary of R69-million and a year later, the SAA 2007 AFS reflect the SAA investment in Mango increasing to R336-million. In essence, SAA had to increase its original investment of R169-million to R336-million to simply keep Mango afloat — in today’s money, the original 2007 investment amounts to more than R1.1-billion of taxpayers’ funds

At incorporation, Mango originally leased aircraft at fair market rental from SAA but then negotiated and paid its own leases independently of SAA” — Mango management.

From 2006 until 2015 the amounts disclosed for aircraft lease costs in the SAA and in the SAA Group income statements approximate one another. This means that all the lease costs for aircraft in the SAA Group up to 2015 were paid by SAA and it appears that the disclosure contained in the consolidated SAA Group AFS simply confirms the charging of aircraft lease costs by SAA to Mango at discounted rates — something which is at odds with Mango’s claims.

While Mango’s key metrics fail dismally when compared with those of Ryanair, the prospect of underreported fuel expenses also looms large when one considers that Mango’s 2015 disclosed fuel bill expressed as a percentage of ticket revenue was 24% lower than that of Ryanair, which had far higher load factors, newer aircraft and was not subject to the vagaries of rand-dollar fluctuations for fuel purchases.

Based on the available evidence, it appears unlikely that all Mango’s expenses have been accurately reflected in Mango’s accounts and that perhaps the SAA Group, with the assistance of some creative accounting, has been of the view that a more palatable story to sell taxpayers and the Department of Public Enterprises is of a group with one profitable carrier as opposed to two loss-making airlines. DM

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