Merge SAA and SAX to give them a chance at success

RESIGNATIONS and the rotation of the boards of directors of SA’s two state-owned airlines, South African Airways (SAA) and SA Express (SAX) have dominated the headlines since November last year, when the board of SA Express resolved to withdraw its financial statements due to two irregular items that were brought to its attention by a whistle-blower.

A forensic investigation revealed further irregularities in SAX’s accounting policies, which spiralled into a war of wills between the board of SAX and its auditors, Nkonki, (which jointly audits SAA), resulting in Public Enterprises Minister Malusi Gigaba deciding that the only way to resolve the impasse was to remove the board and Nkonki, handing over the task of determining who was correct to the auditor-general.

The events that surrounded that decision were set out in a detailed statement by the departing chairwoman of SAX, Lilian Boyle, on behalf of the rotated members of the board. The statement was circulated to the minister of finance, Gigaba, the auditorgeneral and the chairman of the parliamentary committee on public enterprises, among others. This statement received little attention from the media or the recipients.

Be that as it may, a lot of criticism has been levelled against the state about the public funds allocated to the state-owned carriers over the years, some of which is deserved, although most is not.

Critics have also argued that the state lacks a coherent policy on the role of the stateowned carriers.

However, a little-known fact is that in 2008, then public enterprises minister Alec Erwin dispatched the CEO of SAA (Khaya Ngqula) and SAX (Siza Mzimela, now CEO of SAA) and other directors, including me, to Frankfurt to hear from Lufthansa executives, including its CEO, how they run things.

At the heart of Lufthansa’s model is an integration of services among its subsidiaries operating in Europe with its own international service, while maintaining the identity and niche markets of the subsidiaries. What came across strongly was a need, if not to consolidate the two airlines then, at least, for a “shared services” model. Further discussions and strategy meetings were held under the auspices of the Department of Public Enterprises between the two carriers’ boards and their senior executives, which expanded on the “shared services” model.

One of the proposals mooted was for the establishment of an “Aviation Group” holding company, with the three carriers (SAA, SAX and Mango) operating as independent entities, with cargo, technical and another divisions (termed “aviation services”) providing common services to those airlines and perhaps to others in future.

The mandate to the carriers would be to focus on operating in their distinct market carrier, thus removing the dominating tendencies of the latter.

The three carriers have a common shareholder and many common facilities. It would be logical to extract the positive aspects of the Lufthansa model, for example shared services such as ground handling, IT, revenue accounting and treasury, call centre services, loyalty schemes and procurement of aircraft and fuel. If these were housed in a separate division headed by a responsible CEO, with revenue and profit objectives and focused on delivering services to its clients at marketrelated rates and governed by service-level agreements, truly operating independently, the competitive issues and strong-arm tactics inherent in the present arrangement would be removed to the benefit of all.

These discussions and valuable time and effort and, by implication, state funds, came to naught, with a succession of ministers

‘Poaching of senior executives and migration by the two airlines’ pilots and staff has long plagued both carriers’

segments without any one carrier wielding excessive power over another. Those market segments would be dictated by customer needs and volumes, which in turn would determine the gauge of aircraft and frequency, and thus route selection. In the Lufthansa structure, this is dictated by the mainline carrier. The regional carriers have little say.

A further issue was the continued use of the “SA” code by all three carriers (and by SA Airlink, with which a closer relationship could have been fostered by SAX as there are synergies that would be beneficial to all parties, and especially to the mainline carrier — SAA). The ownership of the code would, however, reside with the shareholder and not with SAA. Under this structure, route and network decisions would be debated with the holding company and not with the mainline being appointed to steer the state-owned companies, resulting in a loss of impetus in the process.

A further pity is that the debate wasn’t opened to the private sector. Now the Department of Pubic Enterprises has issued a tender for consultants to assist with a study into the opportunities, mechanisms and challenges of regional aviation expansion in Africa. It has called again for a better strategic plan for SAA before approving further funding to stabilise SAA, in effect starting the process from scratch and ignoring the lessons learnt from Lufthansa.

Surely the time has come for the government to integrate SAA and SAX, considering that the two airlines are already locked into a commercial agreement, under SAX depends on SAA for many core services, such as fuel purchases, reservation systems, airline codes, the frequent flyer programme and emergency response services, which are all conducted by SAA on behalf of SAX — and not always at competitive prices. Instead, a foul up in invoicing for fuel, an unutilised ticket liability and other accounting mishaps have, over the years, cost the two carriers hugely in costs and legal expenses and led to the whistle-blowing incident that saw SAX withdrawing its financial statements at the expense of the board’s credibility.

In addition, the two carriers have locked horns over route rights into Botswana that cost SAX much-needed revenue.

A misalignment on the choice of routes each airline chooses to fly has led to both carriers losing ground to competitors, only later to see one or the other opt out of that route, leaving the remaining carrier the unenviable task of trying to recover lost ground from its competitors.

Poaching of senior executives and migration by the two airlines’ pilots and staff has long plagued both carriers and is an indication that a combined entity is needed.

Further, the inability of the airlines’ CEOs to work together, despite having common board members, and the implementation of a “chairman’s forum” for all state-owned companies aimed at encouraging such co-operation, is another example of the shortsightedness of the segregated airline model and policy. Interestingly enough, Gigaba has seen fit to continue with this line, appointing the chairman of SAX, Andile Mabizela, to the hastily constituted new board of SAA.

A single state-owned airline has a greater chance of success if, and only if, a visionary combined strategy is implemented by a leaner, experienced and commercially minded board to steer the combined entity. And, as a parting shot, why not buy SA Airlink and incorporate it into the common entity?

Christodoulou, a former member of the SA Express board, is an aviation attorney.