Losing battle to clip the wings of SAA albatross
| Comair CEO says his state-backed rival’s tactics hurt tourism and it won’t be changing any time soon
SOUTH Africa’s best-performing airline executive, Erik Venter, CEO of Comair, suspects that its biggest competitor, SAA, will continue to bleed the economy dry for the foreseeable future.
He says he doesn’t believe that government guarantees or bailouts for SAA will end, no matter what Finance Minister Pravin Gordhan may have hinted at in his budget speech.
Under intense pressure to show rating agencies that the government is serious about cutting expenditure, Gordhan hinted darkly that bailouts for underperforming state-owned enterprises would soon be a thing of the past.
“We’ve heard that many times before,” says Venter, 46, who, throughout his 10 years as CEO, has been fighting governmentfunded attempts by SAA to destroy Comair.
Instead, as its latest results showed again last week, Comair, which also operates low-cost airline kulula.com, is buoyant, while SAA is technically bankrupt.
“Every minister to date has said that. Maybe in his term Gordhan might be able to constrain it, but how long is his term going to be?”
Without government bailouts and guarantees, SAA won’t survive, he says. And the government has decided that it must have a national carrier for reasons of status, if nothing else.
“SAA is on a very steep slope, and the kind of actions they’re taking or claiming they will take to address their situation are too mediocre.
“There are some enormous issues they’ll have to get around in terms of their cost of labour, fleet composition, funding structures, the efficiency of their contracting of third parties.”
Many of these are the result of ruinous contracts to which SAA is legally bound, he says. “How do you get out of them?” Gordhan suggested that the government might make the need for further bailouts go away by selling a minority equity stake to a private sector partner. But Venter doesn’t believe anything will come of this, either.
“If government insists on a controlling share, nobody’s going to want to touch it, just because of the history of government intervention.”
An insurmountable problem he sees is the government’s lack of credibility.
“Even if the present minister puts any promises in place, you just don’t know what’s going to happen when the next minister takes over. It would be a huge risk for any private sector or foreign carrier to get involved in SAA with promises of government not intervening.”
The only other option would be selling the whole thing. But SAA has become such a disaster that nobody would want it, he says.
“I can’t imagine anyone want- ing it if it were put on the market. There’s massive debt, obviously. They don’t own any aircraft, they’re all leased. There’s really no asset in SAA at all. Maybe you’re buying the brand, but is that worth anything?”
Although the government continues to bail it out, the level of government “protectionism” for SAA, which has made life so difficult for local competitors, has fallen, says Venter, as disenchantment with SAA grows.
“There has been a turning in many government departments against SAA and the fact that there is so much money being put into SAA that could be going into other departments. So we’re not seeing the same level of protectionism of SAA across all government departments that we used to see.”
Various government departments have even begun flying with Comair or kulula.com.
There was a recent sighting of Gordhan in economy class on an SAA flight, but Venter says the minister “flies with us regularly”.
“Treasury is trying hard to bring down the total cost of government travel, which brings Comair and kulula into the picture.”
He says the “expectation” is for the government to cut 23% off its budget for domestic flights by buying tickets more competitively.
The National Treasury is driving this, but other departments are also cutting their travel budgets, he says. This will favour Comair. “We are seeing quite a lot of use of Comair services now by other government departments.”
In spite of this, Comair’s “chief risk” remains that “our main competitors are state-owned” and can “simply ignore” economic realities such as fuel prices and exchange rates to punish Comair. They did this when Comair tried to fly to Dar es Salaam a few years ago and was blocked by SAA, supported by the South African taxpayer.
“They trashed the ticket prices to the point where it wasn’t feasible for anyone to operate on the route,” says Venter.
He went to court to argue that government bailouts and guarantees for SAA were anticompetitive and unconstitutional, but the case was dismissed with costs last year. Venter is clearly still fuming.
“They simply ignore cost increases, they don’t put up airfares, they lose a fortune and we have to contend with these lower airfares.”
This has stopped for the time being “because they’re in such a desperate situation they just can’t afford to do it”.
He says Comair is well positioned to withstand whatever the economy is likely to throw at it, including negligible growth, high interest rates, inflation, a volatile exchange rate and the likelihood of rising fuel costs at some point. This is because of the fleet upgrade strategy it embarked on in 2009 aimed at giving it the most modern and efficient fleet in Southern Africa.
This week, it launched its latest, new-generation ultra-fuelefficient Boeing 737-800, the seventh it now has in a fleet of 26 planes. The aim is to upgrade the entire fleet by 2012 and cut the cost per seat.
This is the plane it will use on its once-a-week flight from Johannesburg to the Atlantic island of St Helena, which it announced this week.
There is “no commercial argument” for the flight, he admits, but the British government is subsidising it, so the risks to Comair are minimal.
Although it seems counterintuitive, Venter says an inefficient SAA is bad for Comair.
“Their cost per seat is very high, particularly on international flights, so they have to charge high airfares for people coming into South Africa. Consequently, their competitors, other international carriers, are also able to charge high airfares.”
This reduces the number of incoming tourists who use Comair and kulula on local routes.
“A more efficient SAA would lead to more competition, which would lower the cost of air travel in and out, which would benefit us.”
Not to mention the local economy.
Flying African routes is not on the cards, he says.
“Aviation is driven by the middle-class market, and the African middle class is growing at a very, very slow rate. So the market is not there.”
Even with more and more South African companies moving into Africa, the volumes of local business people wanting to fly there are still insignificant.
Comair has just announced a partnership with Qatar Airways that will allow international passengers to book a flight on a Qatar ticket to destinations in South Africa operated by Comair. “Small volumes, but all these little bits add up,” he says.
He recently lectured at the Gordon Institute of Business Science on the business of running an airline. He says he didn’t notice anyone from SAA in the audience.
barronc@sundaytimes.co.za
A more efficient SAA would lead to more competition, which would lower the cost of air travel It would be a huge risk for any private sector or foreign carrier to get involved in SAA