SAA should be on the first flight out of the state

Newly appointed Minister of Public Enterprises, Barbara Hogan, has been berated by other members of the ANC government for suggesting that unprofitable state owned enterprises (SOEs) should be sold off. Her suggestion is a marked turnaround from the previous Minister’s stance that certain industries ought to be protected because they are considered strategic assets. One SOE in particular, our ‘national carrier’, has been a viscous void for taxpayers’ money and has caused a considerable amount of harm to genuine businesses through its anti-competitive behaviour over several years. The opportunity cost of the money lost through South African Airways (SAA) is staggering.

It has been suggested that the failing airline requires yet another bail out estimated to cost anything between R5- and R11-billion. But what guarantees are there that this will be the last time? The problem with all SOEs is that they have no economic incentive to be profitable and many of them have a monopoly on the disservices they provide. In the case of the airline sector in SA, where real enterprises are allowed to compete, SAA has repeatedly been caught cheating and engaging in uncompetitive practices.

In July 2005, SAA was found guilty of abusing its dominant position and ordered to pay a fine of R45 million for the practice of paying incentives to travel agents to book flights on SAA at the expense of private carriers. With SAA back in the spotlight for further transgressions after that initial rap on the knuckles, one wonders if the SA treasury will be called upon again to use taxpayers’ money to bail-out the failing national carrier.

SAA has been a perennial loss maker as the results reported in their financial statements indicate. For the financial year 2000/1 – net profit R408 million; 2001/2 – net profit R2.144 billion; 2002/3 – net loss R5.977 billion; 2003/4 – net loss R8.610 billion; 2004/2005 – net profit R648 million; 2005/6 – net profit R65 million; 2006/7 – net loss R883 million. Over the period 2001-2007, SAA posted a net loss of R12.205 billion.

For the 2008 financial year, it is estimated that the company will post yet another loss of approximately R1 billion, which will bring the loss for the period to over R13 billion. The above shows that SAA is unlikely to become profitable any time soon. Indeed, acting CEO Chris Smyth has indicated that SAA probably will post yet another loss in 2009, for the third year running. How much more ammunition does Ms. Hogan need?

Instead of reducing the burden on taxpayers by curtailing operations, SAA has expanded its operations through the introduction of the subsidiary low cost carrier Mango, and, on top of this, it intends to provide additional services into the rest of Africa. If Mango was introduced to help return SAA to profitability, has it been able to make a profit? This begs the question, when is Mango going to release financial statements relating specifically to its stand-alone operations? And with Mango now also operating a kind of pseudo business class model and SAA trying to attract more low fare passengers, surely the two entities are competing against one another? It seems that, far from assisting SAA’s turnaround strategy, Mango is actually increasing the burden on the taxpayer.

Why doesn’t government leave the business of business to business and get on with addressing other pressing issues – such as creating an enabling environment in which real businesses can function profitably and competitively. The losses incurred by SAA to date run into billions of rand, money that the government could have spent on improving the lives of the poor.

If the Minister is serious about reducing the public’s liability by getting rid of the loss-making SOEs, she will win over the hearts and minds of the general public. In June 2006, SAA was transferred from Transnet to the Department of Public Enterprises because Transnet did not consider the airline to be a core operation. It was at this point that the government should have cut its losses. However, the opportunity to genuinely turn around SAA still exists. SAA, its subsidiaries, and sister outfit South African Express Airways (SAX), should be auctioned off. The government will receive funds from the sale and a new source of tax revenue will be created – there is no time like the present. Any money that the government receives now for SAA should be seen as a boon considering the poor macroeconomic forecasts.

Through the decades, successful privatisation has shown that private sector managers who are free to innovate and use their initiative, manage businesses more effectively than public sector officials. A system where individuals and private enterprises have the freedom to make decisions produces more efficient results than one in which government constantly interferes. This is not because people are always rational and seldom make mistakes, but rather because most people are more rational and make fewer mistakes when promoting their own interests than well-intentioned government officials.

The idea that over 6,000 jobs will be lost if SAA is privatised, is simply nonsense. The majority of the skilled personnel who work at SAA will find employment with other airlines or new ones that will enter SA after the sale of SAA. Furthermore, the fiscus will save money, not lose money as some have suggested, as a result of clipping SAAs wings. It will gain money through the sale of the assets and through the taxes paid by profitable airlines.

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 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. 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 / 17 June 2009