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SAA’s failed sale may signal the beginning of its end

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Nyatsumba is a business rescue practitioner, a Chartered Director (SA) and the MD of KMN Consulting. He is the author of Successfully Implementing Turnaround Strategies at State-Owned Companies.

On its own, the airline will inevitably gradually wind its way down to liquidation – if no action is taken by its board within the next few months to place it in business rescue again.

While it may not have come as a complete surprise, given how long it has taken for the deal to be consummated and the high levels of secrecy which have surrounded it, the news that the government’s efforts to sell a majority stake (51%) of South African Airways (SAA) to private sector player Takatso Consortium have now been called off may spell the beginning of the end of the national carrier.

From the outside, it was beginning to look like the airline was on the verge of stabilising; a lot hinged on the successful conclusion of the long-running deal with Takatso as a strategic equity partner.

After the announcement of what is referred to as a mutual decision to end the Takatso deal, Public Enterprises Minister Pravin Gordhan assured SAA employees last week that the airline would not collapse. 

In a clear effort to rally the troops, Gordhan urged employees to be grateful that the national carrier had staved off liquidation during the Covid pandemic and expressed confidence that SAA had a great future ahead of it – provided that they worked together as a team “to prove the naysayers wrong”, according to one news report.

The truth, however, is that Gordhan’s words were no more than an attempt to calm the nerves during a crisis.

SAA last recorded a profit in 2011. Over the past  13 years, its losses totalled R28-billion and it gobbled up much more in government bailouts. 

SAA’s losses between the 2019 and 2022 financial years added up to R23.5-billion, averaging R5.9-billion a year, when rounded off. 

In the first six months following its return to operations, the airline registered a loss of R3.7-billion – a figure that would have been much higher had the national carrier operated for the full year. 

In its report to Parliament last month, National Treasury revealed that in the first nine months of the current financial year, SAA suffered losses of R770-million, which suggests that it was close to breaking even.

Notwithstanding efforts to downplay the significance of the end of the Takatso deal, the fact remains that SAA’s future depends heavily on the acquisition of a strategic equity partner with deep pockets and, ideally, commercial aviation experience. 

On its own, the airline will inevitably gradually wind its way to liquidation – if no action is taken by its board within the next few months to place it in business rescue again. 

Even the latter action will be no guarantee of success because the JB Magwaza-led board had resolved six times to place SAA in business rescue, and six times Gordhan and President Cyril Ramaphosa overruled them and exposed them to the risk of being delinquent directors. 

It was only when the trade union Solidarity turned to the high court to apply for the airline to be placed in business rescue that Ramaphosa eventually gave in.

Damaged brand

Following my extensive study of the implementation of turnaround strategies at SAA, Kenya Airways and Ethiopian Airlines for my PhD thesis, I concluded that the SA national carrier’s brand is almost irreparably damaged and that it would take “an aggressive marketing campaign over a sustained period, accompanied by reliable performance when it comes to on-time departures and arrivals, for the airline to win decent market share and restore the great reputation it once had.”

For that to happen, SAA would need to have a strategic equity partner with access to considerable funds and operational expertise in commercial aviation. It would also need to be run like a commercial entity, freed from the shackles of the Public Finance Management Act and the burden of a so-called dual mandate. 

Agility in making and implementing decisions is vital, hence the airline’s board needs to exercise the full powers given to it by the Companies Act of 2008, and not to have its decisions second-guessed or ratified by the minister within 30 days.

The commercial airline industry is among the most heavily regulated in the world; in addition, it is capital-intensive, ultra-competitive and vulnerable to exogenous factors like natural disasters.

On top of it all, its services cannot be inventoried, hence the passenger load factor (much like Eskom’s energy availability factor) is crucial every time an aircraft takes off.

Although the industry had a very good decade before the onset of the pandemic, generally it has very thin margins.

While there was a time when most airlines were owned by their governments, that time is long gone. 

Even the few that are still state-owned, like Ethiopian Airlines, are run along commercial lines, with their boards – and not their shareholders – calling the shots.

In a number of areas, SAA compared least favourably to the other two African airlines:

The excuse given for the collapse of the Takatso deal does not make much sense. 

An asset being placed on sale is valued at a particular moment when the deal is being done, and it is on the basis of the agreed valuation that deals are concluded. 

When I interviewed him in 2019, transport consultant Terry Markman jokingly valued SAA at R1. According to reports, the price agreed upon with the Takatso Consortium for a 51% stake was R51, in addition to a commitment to inject R3-billion into the business. 

Given that all SAA had at the time were valuable landing slots at some international airports, that seemed like a good deal. It seemed very opportunistic, therefore, to insist – on the eve of the deal’s closure – on a new valuation for the airline.

In recent years, SAA has been unfortunate to have had certain individuals as its shareholder ministers. The incumbent at Public Enterprises was highly unpopular with the Magwaza-led board in 2019, who described Gordhan in the most uncomplimentary ways.

Members of that board to whom I spoke felt that Gordhan sought to be too intimately involved in the airline’s operations and that he took forever to make decisions, with Magwaza going as far as saying the minister did not even understand the SAA strategy approved by the board.

In my thesis, I not only designed a framework for a successful implementation of a turnaround strategy, but I coined the anxious-principal theory to refer to the harmful impact of all-knowing ministers who heed no counsel and who, while meaning well, cause more damage than they realise. DM

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  • Charles Butcher says:

    The Takatso consortium just have to wait for the inevitable liquidation, as an anc governmunt bbeee cadre tenderpreneur they were probably behind the failed sale and the minister Gordhan will be blamed and accused of being a traitor to the anc governmunt. Ha,haha lmfao saw this coming a mile away

  • Alan Watkins says:

    “On its own, the airline will inevitably gradually wind its way down to liquidation”

    And while it goes down that route, corners will be cut, and all sorts of desperate measures will be followed to stay in business as long as possible while hoping for the government or a white knight to bail it out. And that means safety WILL be compromised, increasing the chances of a fatal crash. Of course a fatal crash will probably be the last straw and will accelerate its implosion. For your own sakes, I urge you to stay away from SAA, NEVER fly SAA. And I will hope that I am wrong, and that SAA disappears into oblivion before the inevitable fatal crash that kills it once and for all.

    • Hendrik van Zyl says:

      Agreed 100%. SAA has been on my “avoid” list for more than 2 decades. Luckily I pay, and therefore I will decide who I trust with my travel requirements. Fly SAA at your own peril, as all those with aviation knowledge will confirm.
      Hopefully SAA will disappear sooner rather than later. They are undercutting prices already, which might lead to other profitable airlines failing.

  • Rae Earl says:

    If a successful business deal is needed, leave ALL the negotiations to people who know how to run businesses. Do NOT ever engage cabinet ministers in the back-and-forth exchanges. Today’s ministers are unequalled experts in screwing up every business they have involved themselves in. Our SOE’s provide glaring proof of that. Despite their severe shortcomings, the previous regime left the business of business to the business experts and our SOE’s were envied worldwide. Eskom, Denel, SAA, the Post Office, municipalities etc. All were in perfect working order until 1994.

  • Alan Watkins says:

    “An asset being placed on sale is valued at a particular moment when the deal is being done, and it is on the basis of the agreed valuation that deals are concluded……. It seemed very opportunistic, therefore, to insist – on the eve of the deal’s closure – on a new valuation for the airline.”

    And that has killed any chances of SOE’s in the future. The ANC does not understand the basics of a purchase/sale agreement, or if they do will not be bound by it. They cannot be trusted and any business attempting to buy a full or part share in an SOE needs to have its head read. One can already see the next iteration in the part privatisation of Spoornet, which will undoubtedly also end in tears.

  • Michael Thomlinson says:

    This comment at the end says it all: “the harmful impact of all-knowing ministers who heed no counsel”. Why do these ministers get involved and then not take any advice? Perhaps this has got a lot to do with bribes and feathering their own nests?

  • Middle aged Mike says:

    I wouldn’t fly SAA for free.

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