Abu Dhabi, UAESaturday 14 December 2019

South Africa's flagship airline set for crash landing

State-owned airline hasn't made a profit for eight years and had bailout funding worth $1bn in past 24 months

Around 11,000 passengers were left scrambling for alternative flights when a strike hit heavily-indebted South African Airlines last week. Reuters
Around 11,000 passengers were left scrambling for alternative flights when a strike hit heavily-indebted South African Airlines last week. Reuters

Cape Town// Peter Farrel’s hope of catching his flight back home to Sydney, Australia, were fading fast. “We’ve been told there’s no departures tonight,” he said, standing among a group of equally frustrated passengers. “My visa expires so from tomorrow I’m here illegally. It’s unbelievable.”

Mr Farrel and fellow passengers gathered anxiously around the South African Airways kiosk at Cape Town International Airport on Wednesday, November 20 were lucky; harassed staff managed to find alternative flights, and he was soon headed to Johannesburg where SAA partner Etihad would ferry him home.

SAA staff went on strike in mid-November, in protest against looming retrenchments as the loss-making state-owned airline spirals into a death dive. Around 11,000 passengers flying to destinations worldwide, were left scrambling to find alternative carriers to destinations such as New York, Hong Kong and Accra.

SAA is one of the world’s oldest airlines, launching in 1934 with a German-built Junkers 54 plane. In time, it grew to be Africa’s premier airline. Today, however, it struggles to survive. SAA has sucked in $1 billion (Dh3.67bn) in bailouts over the past two years alone, and the flow of red ink shows no signs of abating.

Most analysts want it shut down and even the reform-minded minister of finance, Tito Mboweni, would like to see it gone.

“It’s loss making,” Mr Mboweni told an investment symposium in New York a year ago. “It seems to me you are very unlikely to sort out that situation. My view is, shut it down.”

Instead, he proposes that the brand name is retained by the state and leased out to a private company. A similar model was used to revive Swissair after it went bankrupt in the early 2000s.

How it got to this sorry state is a combination of a political strategy to put it at the centre of African air travel, followed by a decade of increasingly corrupt management.

When apartheid ended in 1994, South Africa was again invited into the international community. For the first time in three decades, SAA flights were welcomed across Africa to destinations such as Sudan and Egypt. As economic sanctions against South Africa were lifted, flights to long haul destinations such as New York and Australia resumed.

By the 2000s, SAA was the centrepiece of a plan for ‘quiet diplomacy’ being pushed by then-president Thabo Mbeki. He wanted SAA to form links between poorly-served African cities, raising South Africa’s diplomatic standing across the continent.

“It’s ironic because these state-owned entities were created by apartheid,” says aviation analyst Desmond Latham. SAA, for instance, was used to smuggle military contraband into the country, and promote diplomacy abroad. Now, a new government, albeit a democratic one, was making the same ‘anachronistic’ decisions to use the airline for political purposes rather than for business reasons.

“They come off a nationalistic ethos that doesn’t work in the 21st century,” Mr Latham says.

Routes to destinations such as Brazzaville in the Congo, Libreville in Gabon, Kigali in Rwanda, and Lilongwe and Blantyre in Malawi were opened. SAA embarked an extensive fleet renewal programme and appointed Airbus as its supplier.

It ordered 41 new aircraft, mostly of the A340 family, with a price tag of $3.5 billion, then Africa's biggest jetliner acquisition. This was on top of a $680m order for 21 Boeing 737-800s bought two years before. The airline now has 54 aircraft in its fleet.

The challenge of serving destinations to which aircraft often flew half empty, however, soon became apparent. It suffered heavy fuel burn on long-range flights, and made costly hedging mistakes trying to bet against the fuel price, both of which ate into its revenue.

SAA made its last profit in the 2010-2011 financial year, when South Africa hosted the Fifa World Cup. Ever since, SAA has bled cash and only survives on government handouts.

Moreover, rising competition from Kenya and Ethiopia — both of which support profitable national carriers — was making it harder for SAA. Based so far south, away from the busy routes further north, SAA was slowly becoming irrelevant.

“They get traffic we cannot get, from east to west,” Mr Latham adds, referring to Kenya Airways and Air Ethiopia. “They are like Dubai; they are in an area where planes pass through.”

Meanwhile, every year the government keeps paying to keep the airline flying.

“SAA is not mission-critical for South Africa’s future,” says Professor Jannie Rossouw, head of the School of Economic and Business Sciences at the University of the Witwatersrand. “There’s no reason for the government to own an airline.”

While other state entities such as electricity utility Eskom remain vital to the country’s economic health, SAA has little to offer. “Had SAA been closed five years ago, it would have saved the taxpayer 20 billion-rands (Dh5bn),” Prof Rossouw says.

As is, the government’s trickle of funds has done little to bring down SAA’s overall 100 billion rand debt. This will make the airline a tough sell for anyone interested in picking it up.

Among airlines mentioned as possibly being interested are Ethiopian Airlines, Emirates and Virgin. Indeed, Emirates was poised to buy an equity stake that would have provided SAA with $100m a year, in 2015. But the deal was cancelled after then-president Jacob Zuma reportedly pulled it at the last minute.

The reason for the balking at the contract was not provided, but it is likely that then-SAA chairman Dudu Myeni, a close associate of Mr Zuma, did not want the oversight and governance an outside shareholder would bring.

Unlike SAA, Emirates has shown it can profitably operate in Africa. The UAE-based airline’s Johannesburg-Dubai route was declared the most profitable on the continent this year by research firm OAG.

As for the strike at SAA, it was called off after eight days, with unions hailing it a victory. SAA imposed a moratorium on immediate retrenchments and offered a 5.9 per cent salary increase. Phakamile Hlubi-Majola, spokesperson for the National Union of Metalworkers, which represents most SAA employees, says the strike was never just about wages.

“We are dealing with an entity on the verge of collapse due to rampant looting and corruption,” she said. The union had also pushed for a task team that would review procurement spending, audit all contractors and end graft. “The problem has always been we’ve had a management board that refuses to address procurement issues up to now.”

Whether SAA survives long enough to take these measures is uncertain. Analysts believes it is just days away from running out of money, unless the government steps in. Public enterprises minister Pravin Gordhan last week said bailouts were a “moral hazard” and no more money would be spent on the airline. Instead, SAA would have to find the money itself.

"In addition to growing revenue, efficiencies must be improved and costs need to be reduced across the board,” Mr Gordhan said in a statement. “Savings in excess of 500m rand have been realised through renegotiating procurement contracts, many of which were concluded at inflated prices during the era of state capture,” he said in reference to the recent era of corruption under former president Zuma.

Still, it will be touch and go if these savings will be applied in time to rescue SAA, says Mr Latham. “They’re headed towards the Niagara Falls in a barrel, with no way of escape.”

Updated: November 25, 2019 07:53 PM

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