Open skies for SA with economic discipline for SAA

Business Day correspondents Linda Ensor and Julius Baumann report in their article “SAA must adapt to ‘open skies’ – minister” (1 Mar, 2011) that “Further liberalisation of the airline industry is inevitable and will require South African Airways (SAA) to give up some of the “overprotection” it has enjoyed until now”. Of course SAA are vehemently opposed to any situation that will increase competition in the market but the vast majority of South Africans will benefit from an open skies policy. The increased competition will reduce prices as foreign airlines vie for positions in the South African airspace market. This will also increase the connectivity of the African continent with the rest of the world, improving both business and tourism ties.

However, if history is anything to go by, taxpayers will inevitably foot the bill for this increased competition because SAA has consistently been bailed out over the years with taxpayer’s money due to the fact that it is considered a “strategic asset”. Therefore, if the Minister is serious about improving the conditions in the SA market he should insist that SAA, its subsidiaries, and sister outfit South African Express Airways (SAX), should be auctioned off. The government will receive funds from the sale and tax revenue from the ensuing private company.

The reason privatisation works is that private companies, no matter their size, are subject to the ruthless discipline of insolvency or to being taken over by more efficient competitors. As long as firms, in order to survive, are not protected by government-granted monopolies (such as a “closed skies” policy) or taxpayer-guaranteed finance, they are compelled to provide a profitable and efficient service to customers when in competition with all other existing and potential suppliers. When governments protect public enterprises by keeping out potential competitors or making taxpayers pay for their mistakes, that discipline is removed and the result is poor management and poor service to customers.

Author: Jasson Urbach is an economist with the Free Market Foundation. The views expressed in the article are the author’s.

FMF Policy Bulletin/ 1 March 2011