Why SAA won’t fly: not just state capture, the government is also to blame
Public enterprises minister Pravin Gordhan this week bemoaned the corruption that has brought a growing number of state-owned enterprises (SOEs) almost to their knees. He heaped much blame on state capture. The malfeasance has contributed directly to the sorry state of some SOEs, as evidence presented to the Zondo commission has revealed.
Corruption is not the only reason many SOEs are in a terrible state. With South African Airways, other factors led to the airline existing in name only, pending its promised emergence from business rescue.
Evidence from a doctoral study I conducted showed that the government was one of the main reasons for SAA’s failure — and Gordhan is not without blame.
The airline industry is intensely competitive and has been only marginally profitable over the years. Aviation expert Rigas Doganis said “super profits” were possible only between 2010 and 2018 when the price of aviation fuel had a huge drop in mid2014. Even then, SAA was shackled by government requirements that made it impossible to compete in an environment that requires agility in decisionmaking.
SAA was poorly capitalised when it was hived off from Transnet and set up as a separate company. This was worsened by an R8bn fuel hedging loss when Andre Viljoen was CEO. Unlike its state-owned counterparts, Ethiopian Airlines and Kenya Airways, SAA was burdened with a dual mandate that required it to be both commercially viable and carry out an ill-defined developmental mandate, requiring it to fly loss-making routes favoured by the political mandarins.
As if deliberately setting the airline up for failure, the government subjected it to the Public Finance Management Act (PFMA), which emasculated the SAA board and the CEOs and led to critical decisions being made by the shareholder minister, who often took months to make decisions, if they were made at all.
During the study, interview participants described the PFMA as “one of the biggest stumbling blocks that considerably slowed down decision-making”.
While the PFMA gave the ministers up to three months to revert to the board with decisions, those ministers sometimes took twice as long or simply refrained from taking any decision.
Once, a candidate recommended by the board to be CFO of Air Chefs turned the airline down and joined a competitor because a minister took too long to get back to the board with a response.
Vuyani Jarana, when SAA CEO, said ministers refrained from making decisions if those decisions stood to “undermine or affect their political careers”. The Ethiopian and Kenya airlines could make decisions swiftly in response to challenges without any government restrictions.
SAA’s challenges were far too numerous to catalogue individually here. These included lack of coherent government aviation policy, frequent changes of ministers and their different approaches to the airline, reluctance by ministers to make decisions and their tardiness in honouring important financial undertakings, unhealthy board dynamics, directors’ fears of reckless trading, leadership instability, lack of management skills and expertise, too many executives in acting positions, and contradictory government voices.
Unlike Ethiopian Airlines, which had only two CEOs between 2010 and 2021, and Kenya Airways, which had only three, SAA had 11 CEOs (most of them acting) and eight ministers in the same period. Between 2014 and 2020, the airline had four shareholder ministers: finance ministers Nhlanhla Nene, Des van Rooyen (admittedly, only for the weekend), Gordhan, Malusi Gigaba and Nene again. SAA was moved back to Gordhan at public enterprises in August 2018.
This is how a concerned SAA manager with three decades of experience in a critical part of the business described the situation: “You just get a CEO coming in at airline 101 level, when they need to be at airline 301 for the airline to be profitable. Just as you start getting them educated, you have a change of guard. That is really one of the biggest challenges you have in the business.”
SAA boards have been characterised by divisions, with some nonexecutive directors pursuing different agendas and, with the exceptions of Khaya Ngqula, Sizakele Mzimela and Jarana, who claimed to have had adequate delegated authority, the CEOs had no authority and were undermined. Various board members told of how CEOs and their top management teams were routinely undermined. One director said he “pitied SAA executives”.
The situation at SAA is a contradiction of what is needed to successfully implement a turnaround.
Turnaround scholars are unanimous that a successful implementation requires leadership stability, with Donald Bibeault, an expert in the field, saying the CEO should be “the architect of the turnaround strategy” and its implementer.
Adherence to good corporate governance is paramount, with a supportive shareholder that leaves a capable, empowered management team to run a company under a similarly supportive board. Among other requirements are adequate capitalisation (Bibeault argues that “money is ... analogous to a blood transfusion” during a turnaround) and a viable core of the business.
Scholars are also near unanimous that a turnaround cannot be implemented without cutting costs (including employment costs) and selling non-core assets.
However, like other SOEs such as SABC and Eskom, the SAA board was not allowed to retrench employees or even to put the airline in business rescue until late in the day, when President Cyril Ramaphosa agreed.
No business that cannot make critical and timely interventions can be turned around. The analogy often used by SAA interview participants was that of a boxer thrown into a world title fight with both hands tied behind his back.
To stand a chance of success, a turnaround must directly address a company’s causes of decline. In SAA’s case, it has to address head-on the mentioned challenges. But the political leaders will not allow this.
There is little chance of a relaunched SAA succeeding in a competitive market, even with an equity partner. Legislation restricts foreign shareholding of the national carrier to 20%, although South Africans can own up to 49%. That means a foreign suitor with the required capital would not have a sufficient say in the airline’s future and would be reluctant to get aboard.
Arkebe Oqubay, deputy chair of Ethiopian Airlines, told me that although the airline was keen on a partnership with SAA, including the possible purchase of a stake in the carrier, it changed its mind when it realised the extent of SAA’s challenges.
He mentioned the discord between Gordhan and finance minister Tito Mboweni: “South African policymakers are not guided by one policy. Mboweni wants to privatise the airline and Gordhan wants to have SAA state-owned. The government should have one position, but there is no coherent policy. There is conflict.”