South African Airways’ had hidden vulnerabilities while it was in Transnet Ltd. up to the mid 2000s. But leading up to that, it operated in an environment where the Department of Public Enterprises had ambitions of transforming SOEs through equity partnerships and listing them on the JSE. This required significant governance reforms, which as we have seen from the Organisation for Economic Cooperation and Development is very complex, and each country will have unique approaches to managing their SOEs.
The issues start when Transnet Ltd restructured to focus on freight logistics, and SAA would operate as a stand alone SOE. In 2005 the airline had planned to improve its financial position, through a diversified strategy that would focus on reducing its cost base and enhancing its service offering. However, by 2009 the airline had already committed to increasing its fleet capacity—ahead of achieving the goals it had set for itself in 2005. This strategically premature step would then expose SAA to increase fleet capacity, a need to justify or protect its operational offering, and changes in governance made the issues worse.
Today, the airline is facing a complex situation, with its existence under scrutiny, cost of a lifeline being a moral debate, and the possibility of partnerships could enable a soft landing—not necessarily saving the airline.
Blame the lack of conditions
Increasing fleet capacity implies much higher costs—more aircrafts meant more potential revenue, yes, but it also meant higher fuel, labour and airport related costs, in addition to the cost of ownership or leasing of aircraft.
At the same time, from an economic regulation perspective, SAA was embroiled in direct and indirect anti-competitive practices which were an instrument to help justify the massive cost base—starting off with unfair incentives to travel agents, and maturing into the consistent perpetual bail-outs from the state.
Lastly, the board which was involved in the original strategy of 2005, was changed from 2009 on wards—the new board was not sufficiently acquainted with the base plan, and found an airline already trapped in an aircraft deal. A bi-product of this was the massive procurement of Turnaround Strategies from various service providers being published almost every year, but limited implementation.
For starters, to find someone to blame is nearly impossible, however the role of the Department of Public Enterprises in overseeing the implementation of a shareholder compact, possibly represented in the Turnaround Strategies was expected. In other words, the bail-outs were equivalent to handouts because they were unconditional and this is not consistent with international best practice. An airline is bailed out with conditions: maybe to retain staff, reduce fleet, lower costs and improve efficiencies all within a specific timeframe.
A picture bigger than privatisation
The privatisation of SAA has emerged as a critical debate, but it can not occur in a vacuum. From a revenue perspective, we are talking about an over R30bn turnover company—pre-COVID19, with multiple integrated divisions. Another factor is that the airline has a developmental mandate, which is about labour retention and supply chain development—providing jobs and boosting black economic empowerment. As a result, privatisation may be at the far end of the spectrum, but performance based management contracts could be a sweet spot.
Management contracts are instruments used to bring executive teams and related staff into a state-owned entity with the intention to achieve certain performance targets, maybe from the DPE. The ownership of the airline does not shift away from the state, but the management of operations is performed by private sector—potentially consortiums. With limited government interference as a condition, the management team would be incentivised to manage the airline over a certain period of time, quite similarly to a concession agreement. However, in terms of structuring a concession agreement for the restructuring of SAA, the private sector and financiers would need to structure a deal that is bankable and can result in a decent return within the time frame of the concession agreement. Legislatively, this would take the form of a Public-Private Partnership according to National Treasury, but politically it would mean the DPE will lose their current degree of influence, unless certain provisions are made.
Clawing back to the skies
Based on the Business Rescue Report, it is quite clear that for the airline to resurface it will need a base of R10bn, that would be to reduce its labour profile and pay some creditors. From there, it will still need a few billion, but this state bail-out would be declining. If the airline does not increase its flight frequencies, destinations and fleet for, say 5 years, but focuses on improving service design and aviation technology, it could become very lean and effective. The lean period is largely where building a capital and service base is done. Doing this well could make it more affordable for the airline to finance and govern a bigger fleet and more staff.
In the broader aviation sector for South Africa, the Single African Air Transport Market is one of the most important developments. The SAATM is practically the implementation of the Yamoussoukro Declaration and Decision, which are basically policies that enable African airlines to operate in an Open Sky environment. In other words, African airline market will be liberalised with the first five freedoms of the air open for all. More so, the plan on paper focuses on improving the competitiveness of African aviation, and some estimate significant increases in passenger and freight volumes. For South African Airways it means a bigger market to explore, but also greater competition from new or expanding airlines.
The most important issue currently for SAA is not only securing the R10bn or more, but instead, focusing on retaining a leaner cost base, but still offer good service quality. Strategically, it might need to consider strategic partnerships either by employing highly competent executive teams, pursuing performance based management contracts with a consortium, or strategic equity partnerships that still protect the asset base. The airline may need to be lean for longer, in costs and politics. Neither of these are easy to do, but with the right agreements and conditions attached, all that will be left is implementation—that is the hard part.