Bringing SAA to market?

Foreign firms don’t invest in countries hampered by highly regulated industries. In late 2001 UK trade minister Caborn suggested deregulating SA’s airlines and removing SAA’s protection by restricted landing slots. UK foreign minister Hain and Western Cape MEC Markowitz called for an ‘open skies’ policy to promote tourism. Citing currency fluctuations, foreign exchange expenses and the costs of operations and jet-fuel, new SAA CEO Andre Viljoen thought the notion premature.

A year later he was justifying ‘perfectly legal’ overbooking and ‘involuntary denial of boarding’ without the reparations made by competitive airlines. While SAA used only 21 of its 34 Joburg landing slots, government hampered tourism and the economy by fending off British Airways and Virgin Atlantic while blaming unavailable Heathrow landing slots for SAA.

Dwarfing its 2003 operating profit of R545m, SAA’s unbalanced rand-hedge gamble lost R6bn with R8.58bn of currency contracts still to unwind. Government provided R7bn of credit guarantees and Transnet injected R6.1bn to prevent bankruptcy. By the end of 2004 SAA had lost R15bn, Viljoen, and a host of top managers.

Impatient at lack of business and investor confidence, government was taking charge of the economy. Asset sales ground to a halt, privatisation revenues in 2004 were a mere R13.3m (from Aventura Resorts), and public enterprises minister Alec Erwin was keeping ‘core infrastructural’ parastatals. The idea of just selling them to the private sector had become ‘a non-starter making no economic sense in the context of our current economy’. Instead government would massively recapitalise them in hopes of boosting economic growth and job creation. There were no plans to seek another strategic equity partner for SAA after the debacle of the collapsed Swiss Air deal, though this ‘does not mean that we are not looking to work with the private sector’.

Fresh from the IDC, new CEO Khaya Ngqula aimed to cut executive perks and other costs by R1.6bn and turn the airline around towards profitability in 3-4 years. He hoped half his 600 middle managers would take a severance offer, but there would be no retrenchment for SAA’s 11 000 employees ‘at this time’. Erwin emphasised that he had always been confident about the future of SAA and ‘we are definitely now facing the right direction’. Since Transnet and SAA added no value to each other, Transnet CEO Maria Ramos would unbundle SAA for transfer to Erwin by April 2006.

For SAA 2005 revealed ‘an increasingly apparent dearth of experience in aviation management’, costly helicopter trips and aircraft charters for CEO Ngqula, R110m wasted in an Airbus leasing deal, unacceptable levels of complaints, and lack of discipline and morale. Low-fare airlines eroded margins, forcing (or enabling) SAA to suspend some low-volume routes. UK/SA talks on air traffic rights were postponed and BA and Virgin diverted capacity elsewhere ‘where we are more welcome’, but Air France added flights and the industry’s outlook was positive.

The competition commission estimated that SAA’s market share fell from 69% in 2001 to 50% in 2005. After only six months as chief operations officer Kyrl Acton left SAA, unable to agree on strategy with Ngqula, whom Erwin backed. SAA blamed its mid-2005 R155m loss on a strike, delayed introduction of new routes, lower passenger yields and higher fuel prices. Although prohibited by the competition tribunal from offering special ‘override incentives’ to travel agents, SAA continued the practice, operating ‘in the twilight zone of legality’. It appealed the R45m fine to delay payment beyond March 2006, and later Erwin told parliament that steps had been taken to ensure SAA’s anticompetitive behaviour does not recur.

For the year to March 2006, SAA released R423m in ‘unused ticket liabilities’ into its bottom line so as to report R65m profit. Transnet sold SAA to government for R2bn in June, to become a standalone firm reporting to Erwin’s public enterprises department. Erwin’s primary undertaking was to ‘stabilise its short-term financial position and develop a pragmatic airline strategy’.

‘There are not, I repeat not, thousands of jobs at stake’, said Erwin, but SAA posted a net loss of R652m to mid-2006. Expenses were growing faster than revenue and R100m was owed in fines for anti-competitive behaviour. In November Ngqula announced plans to retrench over 1000 employees, get rid of inefficiencies and increase productivity, and start low-cost airline Mango.

Unfortunately the National Assembly’s public enterprises committee says ‘state-owned enterprises are in good shape and should not be privatised – government is correct to keep enterprises involved in key sectors of the economy in state hands, instead of privatising them. They’re now fulfilling their mandates from government and performing far better than they had been doing for some time.’ So the object lesson on how well a government can run a business like SAA is likely to continue.

The UK-funded ComMark trust says liberalising SADC skies could boost tourists by 500 000 a year, creating 70 000 new jobs, half of them in travel and tourism. Erwin has said government will no longer support SAA financially. Ngqula wants to recapitalise SAA with R3.2-4bn and list it by 2012. Better would be to offer SAA for outright sale for whatever BA or another airline would be prepared to offer.

Author: Dr Jim Harris is a freelance researcher and writer. This article may be republished without prior consent but with acknowledgement to the author. The views expressed in the article are the author's and are not necessarily shared by the members of the Free Market Foundation.

FMF Feature Article/ 12 December 2006