Too much turbulence to keep SAA in the air

IF THE phrase “throwing good money after bad” had a genesis, the many bailouts of South African Airways (SAA) would be it.

The South African taxpayer has forked out more than R50-billion 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 day-to-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.

Bronwyn Nortje is a Business Day columnist