SAA – Is it time to privatise?

The question of whether or not South African Airways (SAA), the country’s national carrier, should be privatised, has been asked many times over the past few years. SAA is facing a series of challenges, the most prominent being its ongoing financial struggles. With issues in the board and the apparent continued need for monetary support from government (and ultimately, the taxpayers), would privatisation be the better alternative?

While the resounding answer might be yes, with the likes of the Democratic Alliance (DA), the Freedom Front Plus (FF+) and others supporting this move, some believe it may be better to just give it away.

South African Airways

Professor Jannie Rossouw, head of the School of Economic & Business Sciences at the University of the Witwatersrand, notes that SAA has been in financial difficulty for many years. The airline has government guarantees to the value of R14 billion, and has asked for an additional R5 billion. What’s concerning too is that the national carrier has been unable to produce its recent set of financial statements.

According to Rossouw it is completely unacceptable that SAA continues to delay the release of its financial results.

When Justmoney asked for comment, SAA responded by sending through a press statement. In it, the airline notes: “SAA needs a going concern government guarantee in order to finalise its Annual Financial Statements (AFS). The matter has been brought to the attention of the shareholder representative (National Treasury) and there are extensive, on-going engagements on the matter with the aim of finding a resolution and to provide certainty to all concerned. This does not mean the company is facing liquidation as no such decision has been communicated by government - the sole shareholder of the airline.

“Similarly, SAA does not need to be placed under business rescue as the airline is able to and continues to pay its debts as and when they become due and payable. The airline has neither defaulted nor been unable to meet its obligations to service its debts – a key determining factor to justify placing a company under business rescue. Those advocating for business rescue are making an absurd misdiagnosis,” claims the airline.

Should SAA be privatised?

Dr Pieter Groenewald, parliamentary leader of the Freedom Front Plus (FF+), says that from the FF+’s viewpoint, government should seriously consider privatising SAA and sell it to experts in the aviation industry.

Natasha Mazzone, DA Shadow Minister of Public Enterprises, noted in March this year that privatisation of SAA should be considered as a solution to financial strain that the national carrier is placing on the economy.

“The DA believes that the only viable solution to the problem of our ailing SOEs (State Owned Enterprises) is to initiate a privatisation programme, guided by Treasury, to begin a process of disposing of increasingly inefficient and mismanaged state entities,” said Mazzone in March.

When asked whether or not SAA should be privatised, Chris Gilmour, investment marketer and analyst at Absa Stockbrokers & Portfolio Management notes: “This always evokes a very emotional response. If you try and scrape the emotion out of it, then there is no contest, of course it should be privatised, completely not partially. If you look around the world you will see that most countries have long ago decided to privatise their national airline. At the end of the day, professional airline managers across the board know how to run airlines in the increasingly competitive world. Not just is it competitive, it is also an incredibly cash hungry industry.”

However, taking into account the airline’s current financial status, Rossouw by contrast believes there’s no value in it. “I don’t think SAA is a case even for privatisation, just give the thing away, it would be cheaper for the taxpayer. There is just no value in it, expensive due diligence will get you nowhere.”

Mike Schussler, an economist at Economists.co.za, says that there are not many reasons why SAA should still be in operation. “They own hardly any assets. They are bloated as regards the number of employees etc. The national assets they have are the following: landing slots at very busy international airports which have a value; they have technical expertise in the fixing and maintenance of aircraft which is the best in Africa and one of the better one's worldwide. They have good pilots and crew. They have good operations, people, too.”

However, despite these positive assets, the airline does not own any aircrafts as these are rented, according to Schussler. He adds that the national carrier should probably have different aircrafts for the various routes it flies, and he believes that SAA overcharges on overseas and African routes, hindering tourism growth. He believes that the country does not need a national carrier, but rather an airline that can deliver on the potential tourism boom the country has the potential to enjoy.

The cost of SAA

According to Schussler, the privatisation of SAA would save the country billions of Rands. “It is clear that SAA will never pay back the loans so taxpayers will be stuck with them. SAA is not worth R16 billion and banks are only lending money because they have been assured that taxpayers will pick up the tab.”

Rossouw points out: “It’s too expensive even to try and do a due diligence on SAA. To make it viable you will have to recapitalise fully. The government will have to put in money with the reasonable expectation that there will be a return on such money rather than just throwing money into a pot now and never seeing the end of it, you will have to put in a new board and new management.”

When asked if it would be cheaper for SAA to cease operations due to the airline’s apparent continued need for financing, Schussler states: “Yes it would as the bill is then only about R14.7 billion. But the cost in tourist numbers in short term could be high.”

Gilmour emphasises that airlines require a lot of capital and cash, something that SAA unfortunately does not possess. He believes that ultimately some form of privatisation may be needed. “Whether that means selling the ownership, or partially privatise it, or just professionalising it in the sense of getting a professional board in place that understands the running of the company, you can still retain control, you don’t have to sell any of it that way. There are a variety of things that you can do.”

There are concerns about how SAA spends money. While the airline is facing financial difficulties, Groenewald highlights that it is still sponsoring the national soccer team, Bafana Bafana. While he has nothing against sponsorships, Groenewald notes that airline must at least make a profit before agreeing to sponsor the national team. “This is further proof of the recklessness and the real attitude that they have no respect for the taxpayers’ money.”

SAA continues to ask for an extension to the publication of its financial results for the previous financial year. The airline states that it needs a going concern government guarantee in order to finalise its AFS.

With regards to this, Groenewald says: “They also get rated by credit institutions, and I think that is part of the problem that the financial statements will also show that they are technically bankrupt. They don’t have liquidity and I think that is part of the reason they don’t want to release [the financial results]. We know it is about this R5 billion [Finance Minister Pravin Gordhan] doesn’t want to approve. They need this to show their financial statements that they can still survive, and if they don’t get it then everyone will be able to see that they are actually bankrupt.”

Operating SAA

Gilmour points out that SAA’s geographical isolation at the tip of Africa makes it difficult for the airline to be a major player and compete against larger airlines. One point that everyone interviewed agrees on is that a new board is needed to take the airline in a new direction to make it more lucrative and competitive.

According to Groenewald, the re-election of Myeni to the chairperson of the SAA board is not a good move by government. “Part of the problem with SAA is you have political appointments and you don’t have people there who are experts. The aviation industry is such a sophisticated one that if you don’t have experts you are not going to survive.”

Gilmour notes that the perceived lack of relevant experience by the board members of SAA is a concern. “What I don’t see here are people striking me right between the eyes as having A) experience in the aviation industry and B) in the tourism industry. And I think it is vital that you have both of those in profusion if that is going to work and SAA is going to work its way out of this hole (financial problems).”

In addition the continued calls by SAA on the government for guarantees and monetary assistance is another problem. Groenewald points out that in a private company you have to ensure that your business will survive, i.e. you need to be profitable. However, with SAA Groenewald says there is an attitude where people think they don’t have to give the professional service expected because there will always be money.

“A private company will ensure that you have excellent service, you will ensure that you make a profit, and the moment you don’t make a profit you will become worried because you know your company is going down. The problem is because it is a state entity, the attitude is, it doesn’t matter whether we make a profit or not, we can always go to Treasury and get more money,” says Groenewald.

The airline’s continued need for government guarantees to help fund it is frowned upon. Gilmour states: “If I look at it from a very hardnose business perspective, this is a situation that cannot continue. If you look at some of the memos that were leaked last year from the legal side and from the accounting side, it is clear that without these guarantees, the airline actually isn’t a going concern.”

The important question is whether or not a private company would be willing to purchase the airline. Groenewald believes that there are still enough assets, including aircraft and lucrative routes, to help the airline out of its current financial difficulty. “It’s pure business. Other countries at one stage had to make a decision and some of them closed down. It’s not a national thing, but I think that if you look at SAA as a business it still has the potential to become a profitable organisation. But you need the experts to get in there and fix the problems.”

 Handy tip: Are you planning on travelling? Make sure you are covered before setting off, you can apply for medical cover and life insurance on Justmoney.