#196 SA Express: Regional carrier gets a life jacket

FLOAT OR SINK: Airlines struggle all the time, will South Africa become competitive in this arena? Or will we join the equity market where the government share is lower than usual and the political interference “diminishes”. This is part 1.

Is the ship sinking or singing an old song?

Sinking ship, everyone gets a life jacket! 

At least that is what the average ticket paying passenger expects. What if the shipping company overbooked the ship? Or they just didn’t count their life jackets before the trip commenced because being late at the next port came at a high price? Or if the lifeboats were never inspected as standard practice because doing so would seem unusual. “Business unusual” was the term Mr Nico Bezuidenhout used to describe Ms Dudu Myeni’s organisational philosophy in South Africa Airways (SAA). 

The concurrent developments in the process of reforming the State Owned Enterprise environment in SA, particularly in the transport sector, come under the auspices of an economy in need of development over growth. “Structural limitations” have been cited as the key inhibitors of SA’s underlying challenges since late 2018, and addressing these has been key. From the need to restructure port tarriffs in favour of domestic industrial policy to the reforms in the fuel market, which need efficiency assessments for suitable unit cost estimations. Developments that seem to take the cake in this year are in the transportation sector: Transnet Ltd. new CEO appointment; Passenger Rail Agency South Africa (PRASA) being under administration to fast track strategic implementation; SAA being under business rescue (cutting route coverage, and potentially service frequencies too); and now South African Express Airways (SA Express) also entering the business rescue domain before its dependence on government guarantees become chronic. 

The SA Express situation

SA Express failed to submit their financials for the 2018/19 year due to the “going concern” issue. Their story leading up to this is quite sad. The regional carrier went from transport 1.5 million passengers to transporting 1.2 million passengers between 2012/13 and 16/17. Revenues in the same period dropped from R 1.6bn to R 1.3bn in the same period. While in 2016 the airline requested institutional support to upgrade fleet, and practically be recapitised in order to retain competitiveness and reduce the cost of maintaining gradually ageing fleet. 

Operating profits stood at 7.3% in 2015/16, but then dropped in the following financial year to -4.75%. This is a culmination of a significant rise in irregular expenditure, which in the 2015/16 financial year was just R 35 million, but this blew up to R 408 million according to their 2016/17 report to parliament. That is a 10 fold growth in irregular expenditure. By 2018, the South African Civil Aviation Authority grounded 9 of the 21 aircrafts in SA Express’ wings, largely due to irregularities in their maintenance practices. From a service strategy perspective his may have contributed to the competitive position in terms of reliability and customer attraction. But the 2017/18 climate was not good for SA Express. Entering into another financial year with an unclear going concern status, and probably the continued trend of significant losses by the airline. Perhaps to serve as a safety net, it required another transfer from National Treasury of R 300 million, as a guarantee— this was done in November 2019 through the Adjustments Appropriation Bill

Business rescue again

The debate around the court ruling for business rescue, after an unpaid supplier argued that SA Express is in a dangerous financial position is not unfounded. Th SA Express board has the right to argue that they do not need business rescue; but they need to be supported by the facts in terms of their financial performance— especially without chronic guarantees. However, it seems as if their argument in the statement issued by SA Express focuses specifically on the dynamics underlying various procurement and governance inefficiencies that are due to internal and external factors. Internally, the organisational structure seems to neglectful of compliant behaviour resulting in a network of procurement irregularities (ranging from non-advertising on tenders, to not following the appropriate process). Meanwhile, the statement issued by SA Express argues that some suppliers inflate prices and structure deals in a manner that results in inefficient procurement decisions. SA Express is aware and has reported on its challenges in governance, operations, finance and leadership— no doubt the cases and investigations in progress place the airline under severe scrutiny. Even if it aims to expand its network coverage; even with a decent CEO; even with a competent board— inheriting a “business unusual” organisational climate seems to have eaten many SOEs from the inside out. Will the board take the life jacket? Can they navigate the raging seas against SOEs? The primary avenue to dispel the critics is to state the facts— how well did SA Express do for the 2017/18 and 18/19 financial years? If the symptoms are anything like SAA after 2008/9 when Finance Minister Trevor Manual said that he hopes the bail-out to SAA is  “not a recurring allocation”— the court is in its right mind to cap the toxic spiral and keep a key asset afloat for restructuring. 

Thank you for reading this piece, it’s the first part of this topic. It has been some time since the last post. These past few weeks have been about researching the topic areas in more depth. You’ll see why. Thank you to Tumisang Ndlovu for our session on Power FM (Power Update), and for the Newsroom Afrika Chanel 405 team for the gap this evening.

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