The big question that must be confronted

There is legitimate anger and exasperation among the public about the financial woes of South African Airways (SAA) because of the stratospheric amounts of subsidies dished out to the airline by all the administrations to date without confronting and finding a solution to the most important and fundamental questions about its existence.

Should the national airline fulfil a commercial or developmental purpose?

The answer to the first option is easy and has obligatory consequences consistent with market practice in relation to management capability and conduct; board capability and fiduciary attitude; funding structure; profit motive; an accountability framework and operating processes.

The answer to the second depends on the ideological preferences of the shareholder and mandate given to the board; funding structure to meet mandate obligations; a high risk for noncommercial behaviour by management; and an appetite to expose citizens to potentially unlimited funding support. The profit motive is not paramount.

These questions have troubled many governments, especially in the late 1980s and early ’90s, as they dealt with the unfolding disruptive transformation of the airline industry triggered by open-skies policies, the new world order, advances in airline technology and growing tourism traffic.

SA’s democratic government could not escape these global challenges. The corporatisation of SAA was at the time part of the redesign of Transnet’s corporate structure (for which I was responsible as chief of strategy) as a financial holding company with stand-alone business entities. However, the two options that could have been followed were never rationally and comprehensively pursued to their natural conclusion.

The challenge of determining and accepting the value of SAA as an exclusively state-owned entity is a seductively powerful and emotionally testing one in the context of the apartheid legacy and SA’s high unemployment.

But the pragmatic question that must be confronted is whether in the current competitive context — and given the reality of a stagnant economy and a population growth rate that exceeds GDP growth and increasing demands on the social and welfare budgets — SA can afford to own an entity such as SAA.

The answer to this critical question must factor in the consideration that a large majority of SAA customers are in the middle to higher income demographic; the majority of tourists are carried by their host airlines; the quantum of high-value exports from SA is minuscule compared to imports carried by competitor airlines; and SAA has lost natural African endowment routes to more competitive and efficient operators such as Ethiopian Airlines.

In addition, its fleet composition is unsuitable to its chosen routes and SAA’s balance sheet renders it technically bankrupt.

Context is a fundamental and an existential issue for any business. SAA’s glory days were underpinned by dominance in the domestic and limited African and international routes in the late ’80s and early ’90s. The open-skies policy and massive entry by established and large international airlines constituted an existential threat to SAA unless a fundamental and comprehensive restructuring was put in place and vigorously executed.

The government failed spectacularly to undertake the required restructuring. Under the current leadership, there is no hope that the business decline can be stemmed or turned around.

The protocols governing the current lenders to SAA will make further lending impossible. What then must be done to restructure and reposition SAA for sustainable growth? The two options facing the airline must be answered unequivocally.

Without a doubt, the state must give up a sizeable portion of its equity in the airline and capitalise it adequately. The new investors must have a controlling mandate to populate the board with competent professionals of their choice. They must also have a total mandate to restructure the airline suitably and bring on board competent management.

This will not be easy, but if SAA means to stay competitive, these drastic steps, no matter how painful, are unavoidable. Bringing Vuyani Jarana on board as CEO at this stage may have been premature.

THIS WILL NOT BE EASY, BUT IF SAA MEANS TO STAY COMPETITIVE, DRASTIC STEPS, NO MATTER HOW PAINFUL, ARE UNAVOIDABLE

Motsohi is organisational strategist at Lenomo Advisory