Privatise SAA to stop needlessly squandering scarce resources

Privatise SAA to stop needlessly squandering scarce resources
by Terry Markman

SAA should be privatised to make the country’s airline industry more responsive to market forces. This will create a more stable environment and encourage more airlines to enter the market.

The management of a privatised SAA and the private airlines will be able to focus on running their businesses rather than face political issues or spend senior management time dealing with the Competition Commission. Government will become the referee and not be an operator and regulator at the same time. Unfair competition will be eliminated as SAA, unlike the private sector, has its losses paid by taxpayers.

Increased competition from international airlines would benefit all passengers, the tourism industry, and employment in tourism. Just as passengers have benefited from deregulation of domestic air transport, so will international passengers benefit from more competition from international airlines.

The SA airline industry has undergone a major change, probably the biggest change in its 70-year existence, since deregulation of the domestic airline business in the early 90’s. At that stage it was estimated that SAA had more than 95% of the domestic airline market. Since then SAA has lost market share to airlines such as Comair (which in 1990 had one or two per cent of the market), and other newcomers, which are now estimated to have between 50% and 55% of the domestic airline market.

Passengers have benefited enormously from the increase in competition arising out of the deregulation. Prices of air travel have reduced dramatically and frequencies have improved. More passengers than ever before are flying, many of whom could not afford to do so before the deregulation occurred.

At the time of deregulation it seemed likely that SAA privatisation would level out the playing fields. In 1999, 20% was sold to strategic equity partner Swiss Air for R1,4bn, giving SAA a total value of R7bn. When Swiss Air went bankrupt the SA government bought back the shares in 2002 for R382m. While this might appear to reflect a ‘profit’ of R1bn, it really meant that the value of SAA had declined by about 72% - from R7bn to R1,9bn.

SAA’s operating figures over the past six years do not reflect a healthy airline. It is not easy to obtain consistent figures as every year the method of disclosure is changed; the figures invariably incorporate the sale and leaseback of aircraft, or exchange gains, or other revaluations to reflect the most positive situation. In fact, SAA has lost billions of rand. This is in stark contrast to Comair, which has made a profit every year since 1946 when it commenced operating.

In March, the Minister of Public Enterprises told a parliamentary briefing that as the second-oldest commercial carrier in the world, SAA was ‘a national asset that had to be preserved’. In light of the substantial losses SAA should surely be referred to as a liability rather than as an asset.

In July last year Transnet declared that SAA was not part of its core business, cut its losses and sold the airline to the Department of Public Enterprises for R2bn, in the process writing off an R8,4bn loan. The SAA Bill to be passed some time this year will formally sever the airline’s links to Transnet. A major concern about the transfer is that the Department of Public Enterprises will not produce future financial statements and thus there will be no public accounting for future losses.

There is a growing consensus that SAA should be privatised to save taxpayers billions of rand. The CEO of SAA is on record as saying that he would like to see it privatised. However, the Minister of Public Enterprises has said that the airline should remain state-controlled. He says that selling shares on the stock exchange is an attractive idea but the timing is not right as the company is financially weak and will take a few years to turn around. His priority is to stabilise the company’s finances and recapitilise it. The Minister has also written to SAA chairman Jakes Gerwel stating that SAA “cannot and will not be supported at all costs”.

South Africans will benefit substantially if this “national asset” is privatised because taxpayers will no longer have to subsidise the airline. It is estimated that SAA’s losses have exceeded R20bn. These losses, paid for by the SA taxpayer, are made up of an accumulated loss of R11,2bn and an outstanding loan to Transnet of R8,4bn. The loan arose from a R6bn recapitalisation in 2004 and a further net R2.4bn added to equity in 2006.

SAA’s balance sheet is still weak and it remains dependent on taxpayer funding. That the company is again facing a serious financial crisis was revealed last year when the CEO announced that it needed another R4bn ‘recapitalisation package’ as a turnaround strategy – a proposal that apparently has the support of the Minister. Such support is surprising given that external auditors, Deloitte & Touche, reported that SAA spent R283 million ‘without proper controls’ in 2004/5. According to the company’s chairman, Jakes Gerwel, he has “never, or seldom, entered an organisation where systems were so lacking”.

Air travellers are among the wealthier members of society. In SA, we have the strange anomaly of these passengers on loss-making SAA being subsidised by poor taxpayers who never travel by air. While this may not be government’s intention, it is the consequence of current policy. Does it really make any sense for government to continue struggling to run an airline serving predominantly rich people at massive losses when private operators, if permitted, can and do provide all the economy’s air travel needs efficiently and profitably? The answer must be a resounding ”NO”.

Privatising the airline will save taxpayers from the cost of subsidising its perpetual losses. And the fiscus will be able to reduce taxes as a result of the combination of increased tax revenue from a profitable privatised SAA plus the losses they will no longer have to pay.

Author: Terry Markman is a consultant. 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 Foundation.

FMF Feature Article / 31 July 2007 - FMF Policy Bulletin / 17 June 2009