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Is This The Beginning Of The End For SAA?


The recent failure of the government’s efforts to sell 51% of SAA to Takatso Consortium may mean the beginning of the end of the airline, argues Dr Kaizer Nyatsumba


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, nevertheless, 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 yet spell the beginning of the end of the national carrier. Although, from the outside it was beginning to look as if 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 (SEP).


Subsequent to the announcement of what is referred to as a mutual decision to end the Takatso deal, Public Enterprises Minister Pravin Gordhan subsequently assured SAA employees that the airline would not collapse. In a clear effort to rally the troops, Gordhan urged SAA employees to be grateful that the national carrier had staved off liquidation during the COVID-19 pandemic and expressed confidence that SAA has a great future ahead of it, provided that they work together as a team “to prove the naysayers wrong”, according to news report.


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


SAA last recorded a profit in 2011 and over the next 13 years its losses totalled R28 billion and it gobbled much more in government bailouts. SAA’s losses between the 2019 and 2022 financial years added up to R23.5 billion, thus 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, which indicates that the loss would have been much higher had the national carrier operated for the full year. In its report to Parliament last month, the 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 understandable 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 SEP 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 danger of being delinquent directors. It was only when the union Solidarity turned to the High Court to apply for the airline to be placed in business rescue that Ramaphosa eventually gave in.


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 that it once had”.


For that to happen, SAA would need to have a SEP with deep pockets and operational expertise in commercial aviation, and it would need to be run like a commercial entity, freed from the shackles of the Public Finance Management Act (PFMA) 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 71 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 both exogenous factors like natural disasters and to seasonality and cyclicality. 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 COVID-19 pandemic, generally it has very thin margins. As aviation academic Chattopadhyay put it in a 2015 article on the industry: “Airlines use capital-intensive equipment that is useless unless flown.”


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:

Internationally, some of the best-known legacy carriers which fly the flags of their respective countries are no longer fully owned by the governments of those countries. Among the best-known examples are British Airways (which is owned by the International Aviation Group), Lufthansa, Air France, and KLM (the last two have since merged to form Air France-KLM) and even Singapore Airlines.


However, given the nature of the industry and its origins, most governments still limit foreigners’ ownership and effective control of airlines in their respective countries if these airlines are to operate in the domestic markets and to qualify for designation in bilateral air services agreements. The USA, for instance, has some of the most stringent requirements in that regard: it requires that US citizens should own a minimum of 75% of an American airline, and that a minimum of two-thirds of members of American airlines’ Boards of Directors should be American. South Africa, on the other hand, limits foreign ownership of South African airlines to 25% and to 20% in the case of SAA, while the SAA Act restricts private ownership of the national carrier to 49%. Therefore, one of the hurdles that SAA’s deal with Takatso had to overcome was the need for the SAA Act to be amended to allow for the private-sector player to own the majority stake of the national flag carrier. That requirement gave ample opportunity to those within the ANC-led tripartite alliance who were ideologically opposed to SAA’s “privatisation” to scupper the deal.


South Africa is not unique when it comes to its restriction of foreign ownership of local airlines. In the table below, indications of the regimes which obtain in other countries are given:


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 that agreed valuation that deals are concluded. When I interviewed him in 2019, experienced 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 are some valuable landing slots at some international airports, that seemed like a good deal. It seems very opportunistic, therefore, to insist—on the eve of the deal’s closure—on a new valuation for the airline.


The government’s continued full ownership of the national airline is not viable. An SAA fully owned by the impecunious State will not have the capital to acquire the latest, fuel-efficient aircraft so that it can be competitive in the market. Since the airline is likely to continue to make losses in its cut-throat industry, it will continue to hold a begging bowl to the National Treasury, with the latter’s ability to provide such handouts increasingly constrained by the economy and the cost of servicing South Africa’s debt burden.


The most successful African airline which now benchmarks itself against the best international carriers, Ethiopian Airlines (EAL), has previously reached out to SAA and Gordhan with an intention of buying a stake into the local airline or concluding a strategic partnership, but in the end the disillusioned leadership of EAL chose to walk away. Upon conclusion of its due diligence, the EAL team was worried about a number of factors, among them the lack of alignment between then-Finance Minister Tito Mboweni and his Public Enterprises counterpart about SAA’s future. Also worrying for EAL, which wanted to assume full operational control of the struggling carrier, was the influence of the Department of Public Enterprises and the effects of the country’s PFMA. The Ethiopians felt that it would not be easy to manage SAA because of rampant government interference, radicalism by the unions at the airline, and SAA’s legendary corporate governance failures.


The Management Team and the Board are not appointed on the basis of merit. They are put there because of political connections,” EAL Deputy Board Chairman Dr Arkebe Oqubay told me in 2020.


In recent years, SAA has been very unfortunate to have as Shareholder Ministers some of the individuals who have held those roles. In particular, the current incumbent at Public Enterprises was the most unpopular with the Magwaza-led Board in 2019, whom they described in 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 even going as far as saying he 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 also coined the anxious-principal theory to refer to the harmful impact of all-knowing Ministers who heed no counsel and who, while meaning well, actually cause more damage than they realise.


Dr Kaizer Nyatsumba is a turnaround strategy expert, business rescue practitioner, author, Chartered Director (SA), and MD of KMN Consulting.


The original article can be read here.


dre aviation

London



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