Why nose­div­ing SAA does not merit costly emer­gency land­ing

• National car­rier no longer Africa’s go-to air­line as com­pe­ti­tion in­creases and market tight­ens

Business Day - - FRONT PAGE - NORTJE BRONWYN

If the phrase “throw­ing good money after bad” had a ge­n­e­sis, the many bail-outs of South African Air­ways (SAA) would be it. The South African tax­payer has forked out more than R50bn in bail-outs for SAA since 1999 — enough, ac­cord­ing to Busi­ness Lead­er­ship SA CEO Bo­nang Mo­hale, for the state to have bought Emi­rates out­right. Yet the pow­ers that be seem to think ap­point­ing a new “chief re­struc­tur­ing of­fi­cer” will be the sil­ver bul­let to turn it all around.

I don’t want to be a killjoy, but you don’t need a re­struc­tur­ing ex­pert to know why SAA doesn’t make money and why it is un­likely ever to make money.

The first and most crit­i­cal rea­son is that, in the air­line in­dus­try, costs have been ris­ing faster than ticket prices. This isn’t a phe­nom­e­non unique to SAA but one air­lines all over the world are strug­gling with.

Al­though it might not seem like it when you’re stand­ing out­side the lo­cal Flight Cen­tre star­ing at a 10-day all-in­clu­sive pack­age to Thai­land, ticket prices have fallen dra­mat­i­cally in real terms over the past 10 to 15 years, while costs have been steadily climb­ing.

To give you a lo­cal ex­am­ple, Co­mair ex­pe­ri­ences av­er­age cost in­fla­tion of about 9.5% a year. This equates to a cu­mu­la­tive in­crease in costs of about 225% since 2001.

What is amaz­ing is that these fig­ures al­ready in­clude any pric­ing ef­fi­cien­cies Co­mair might have been able to lever­age. Con­sid­er­ing that Co­mair is one of the few do­mes­tic air­lines that makes a profit, this means that for other do­mes­tic air­lines cost in­fla­tion is likely to have been much higher.

By com­par­i­son, the av­er­age ticket price has in­creased only 1.5% a year over the same pe­riod, and a cu­mu­la­tive 27% since 2001. These fig­ures would be scary enough if you owned an air­line, but they haven’t even been ad­justed for in­fla­tion — in real terms, ticket prices have de­creased by about 50% in the past 15 years.

The re­sult is that air­line op­er­a­tors in SA have to take out 8% per year in costs or im­prove ef­fi­cien­cies dra­mat­i­cally just to main­tain their mar­gin. Let that sink in for a mo­ment: just to main­tain your mar­gin — let alone im­prove on it — you have to some­how re­move 8% in costs from your busi­ness ev­ery year.

What this means is that the air­line busi­ness can never af­ford to take a break. There is no time to dilly-dally over ap­point­ing a new board mem­ber or ag­o­nise over the de­tails of a turn­around plan. You have to keep chip­ping away at costs and im­prov­ing ef­fi­ciency if you are going to keep your head above wa­ter.

With these fig­ures in mind, it is easy to see how a poorly man­aged paras­tatal such as SAA has man­aged to get it­self into so much trou­ble.

Apart from the air­line’s dayto-day oper­a­tional cost is­sues, to­day’s global air­line market is a world away from the old days when SAA used to have a vir­tual mo­nop­oly on flights in and out of SA and Jo­han­nes­burg was the con­ti­nen­tal hub for air travel.

The rapid growth of Mid­dle East­ern car­ri­ers such as Qatar, Emi­rates, Eti­had and even Turk­ish Air­lines means there is a lot more com­pe­ti­tion on routes in and out of SA. The large economies of scale en­joyed by these car­ri­ers means SAA can­not com­pete on costs be­cause it can’t match the price per seat of the big car­ri­ers and it is al­most al­ways beaten on price point to point.

These Mid­dle East­ern air­lines now also serve a stag­ger­ing num­ber of des­ti­na­tions in Africa — in the case of Emi­rates about 25 des­ti­na­tions and for Turk­ish Air­lines about 45. This has dev­as­tated the regional routes that used to be SAA’s cash cows. Typ­i­cally, peo­ple in Africa used to fly into Jo­han­nes­burg be­fore they could fly to the rest of the world, but the im­ple­men­ta­tion of a tran­sit visa and the growth in other car­ri­ers means most peo­ple would now rather fly through other hubs.

The big ques­tion then is whether SAA can be saved. More to the point, is there any value in per­sist­ing with an un­prof­itable national air­line? The an­swer is not re­ally.

There have been many calls to pri­va­tise the air­line, but it is doubt­ful any­one would want to buy it even if it were pri­va­tised. For a po­ten­tial buyer there are too many legacy is­sues: masses of debt, ex­pen­sive con­tracts, a fleet that isn’t suit­able and a staff com­ple­ment that has been com­pletely de­mor­alised. As for the brand it­self, it is ar­guable whether it has any value in ex­cess of the value of the brand of a new en­trant.

The fact is that if SAA were to be shut down, the pri­vate sec­tor would hap­pily take up the slack on do­mes­tic and in­ter­na­tional routes ser­viced by SAA.

This is al­ready clear from the num­ber of com­pet­ing air­lines in the lo­cal space and SAA’s loss of market share.

The best thing about the pri­vate sec­tor is that it would ser­vice these routes with­out large gov­ern­ment sub­si­dies in the form of bot­tom­less bail-outs.

I am aware that ar­gu­ments have been made for hav­ing a national car­rier for rea­sons of eco­nomic devel­op­ment and that cer­tain routes are cru­cial for the econ­omy even if they run at a loss, but this could be fixed quite eas­ily with­out the state hav­ing to ac­tu­ally own an air­line.

If cer­tain routes were re­ally deemed im­por­tant for eco­nomic devel­op­ment they could be put out to ten­der like any other gov­ern­ment con­tract.

This is en­tirely in line with nor­mal gov­ern­ment op­er­a­tions and at least the sub­sidy on these routes would be fixed, un­like the bal­loon­ing costs we are see­ing at SAA.

With all of this in mind, I wish all po­ten­tial ap­pli­cants for the role of SAA chief re­struc­tur­ing of­fi­cer the best of luck.

If I were to get the job, the first strate­gic rec­om­men­da­tion I would make would be to sell its as­sets, set­tle its debt and shut it down.

We can do with­out SAA.

THE FACT IS THAT IF SAA WERE TO BE SHUT DOWN THE PRI­VATE SEC­TOR WOULD HAP­PILY TAKE UP THE SLACK

/Gallo Im­ages

Flight club: SAA may once have been the pas­sage to Africa, but Mid­dle East­ern car­ri­ers are giv­ing it a run for its money — some­thing the air­line is woe­fully lack­ing.

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