#185 Complement, partner and develop: South African Airways needs a new mandate

QATAR AIRWAYS– There’s no conversation about aviation without touching base with Doha. Vertical and horizontal integration is significantly valuable for airlines with the right financial and institutional capacity: integrated airports, airline services and energy supply. However, not all airlines or countries can afford to do so. The United Arab Emirates must do this because of (a) unit returns from travel and tourism; (b) scale effects from alliance partners using their hubs through their aircrafts; (c) access to appropriate energy; and (d) very liquid economy (mind the pun). For Africa, some countries with significant endowments and authority may adopt this model, but most need national carriers which serve as conduits of opportunities not competitive obstacles for the much needed entrepreneurs in the market.

This past month has been a storm for an award-winning airline’s reputation. Early hints of a bumpy road ahead were between then Finance Minister Trevor Manuel’s 2008/9 statement that the bailouts would not be “recurring”. At the time, the purpose of the financing was to support its turnaround strategy, not bail the company out. However, when the request for guarantees and bailouts began to accumulate, the airline started to attract attention in the wort possible direction. Comair’s complaint that government bailouts were creating an environment in which “private capital competes with state owned enteprises” in 2013 highlights the need to cling to enterprise and inclusive engagement for the aviation industry. 

“We are budgeting for R1.6 billion for South African Airways to support its turnaround strategy, which includes reducing costs and improving efficiency. I am sure that the House will agree with my hope that this will not be a recurring allocation.” Trevor Manuel, Budget Speech 2009.

Even under these circumstances, by 2014 the downward spiral for SAA seemed to accelerate as it was shrouded by instability and corruption which have created an organizational culture which fundamentally poses the airline at long-term risk, regardless of who is in charge. By 2019, some reports argued that there were signs of progress in the airline’s direction under the leadership of former CEO Vuyani Jarana. Financial guarantees, institutional and organizational stability were at the heart of former Mr Jarana’s resignation letter, in which he made it quite clear that this was pivotal for the organisation’s success. However, the union’s seemed to have conflicting views about his resignation. Nevertheless, the organization is under severe risk of internal and external collapse even with the equity partner framework which may include various partnership structures and outsourcing non-core functions as the Financial and Fiscal Commission recommended. The effort seems to be in response to a R21bn offer for 51% stake in the airline. Just yesterday, the parliamentary discussion highlights one theme:

“Government must seek to find partners with aviation expertise to buy equity in SAA so that it can continue to fly the South African flag. We can’t continue subsidizing the rich.”—Khaya Magaxa on SABC News

Deeper framework for reform is necessary

However this reform is considered outside of a broader and deeper context for reforming State Owned Enteprises. With turnaround strategies churned out on a year-on-year basis during this time, the Long-Term Turnaround Strategy (LTTS) appears to be the most stable one. As this is the first year with the current administration, important decisions about the role of government intervention; sustainable market entry; and enabling competition from domestic entrepreneurship are key. 

When kulula.com was launched in 2001 it was followed by the now liquidated 1Time in 2004. SAA responded with Mango in 2006, instead of developing a niche focus and collaborating with entrants as feeders. Why not mandate SAA to serve as a platform for domestic aviation businesses to launch and trade with the world? My recommendation at the time was that the airline needs to be unbundled and shifted toward various types of partnership structures with privatization as a last resort. Even with a significantly valuable turnaround strategy, implementation could be limited simply by internal cultures and practices which may have been inescapably entrenched without appropriate auditing. This is quite clear in the literature of such complex organisations. Labour productivity and development risks is worsened situations where transport unions incentivized to fight for pay rises without accounting for the need for skills, training and labour mobility within the organization. Considering that SA’s primary logistics weaknesses are skills and infrastructure—it is imperative that unions begin to take a new direction to facilitate the realization of specific organizational goals through their constituencies. 

“We know from experience that 40 to 60 percent of intended strategies are never fully realized and we know why—the people inside the business passively resist the required changes.”—John Gattorna

A new world for new entrants and current players

Ideally, new entrants should play on a level playing field, in line with the African Union’s Agenda 2063 and SA’s B-BBEE objectives. Particularly ensuring that the entrants are largely domestic, or African and comply with the appropriate political economic climate considerations of the time. It is important to note that airlines are better off collapsing due to the nature of the aviation industry’s tight margins rather than a lack of an enabling business environment.

Structurally, SAA’s mandate is to compete, instead of developing our aviation industry, skills and participation. InterVistas estimated that Africa’s single aviation market brings a 54% (800 thousand) growth in passenger trips for SA, through implementing the Yamoussoukro Decision. At the heart of the decision is to foster an environment in which African airlines can fly openly and freely without going through the red-tape hoops which cause significant inefficiency and lag. Complementing emerging carriers and other feeder industries, while the airline focuses on a service niche and builds expertise therein is a key part of the strategic direction toward good business. 

The African Continental Free Trade Agreement opens up a new era of regional trade which aviation will play a major role, particularly in the rise of technology, high value agriculture and growing incomes with an appetite to tour. SA will certainly need more domestic airlines going into Africa and the world, but more than that we will need an aviation industry that is competitive and diversified nationwide. Here the national carrier may have a more dignified flag. At the heart of my recommendations are that we need a national carrier:

  1. complements national policy objectives
  2. partners with associated divisions (and new entities) which need to be unbundled and competitively outsourced (priority treatment at first maybe); and
  3. a focus on a specific niche market, service and developmental goals related to ushering a new era for aviation in Africa

That’s my two cents. 

Thank you for reading. More to come.  

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