The SAA meltdown: a hard lesson on the costs of indecision


POSTED ON: January 27, 2020 IN by Admin

SAA, through the actions of our political players, is now effectively a privatised, inefficient enterprise, a situation caused by a legacy of bad direction by its shareholder.


By Busisiwe Mavuso, CEO of BLSA

When alarms are raised that South Africa is just one wrong turn away from reaching out for an international bailout package, those raising the alarm do so in the hope that the greater fear of a loss of sovereignty will spur government into action. But because that loss of sovereignty is not yet a clear and present danger, they are quickly dismissed for being alarmist.

But in the tale of SAA, whose future is delicately poised as it cuts back on domestic and international flights, the state is perhaps receiving a hard lesson on the costs of its continuous indecision. In placing the airline’s future in the hands of joint business rescue practitioners Les Matuson and Siviwe Dongwana late last year, the state in essence gave up sovereignty over one of its key assets.

Is this a harbinger for things to come, as market forces continue to paint the state into a corner? This, we hope, is the question that the ANC’s national executive committee was asking itself when it met last weekend.

As much as we stew over the “wasted nine years” and what the era of state capture did to our state-owned enterprises (SOEs), there have long been question marks over the future of the airline that turns 86 next week.

Tales of corruption at SAA are age-old and date as far back as 1998 when Coleman Andrews was appointed chief executive officer. He was brought in to turn around what was already at that stage a struggling airline. It would prove the first in a long line of expensive hires with the US consultant being paid out as much as R200m during a two-and-a-half-year tenure.

Over the past 20 years, the state has backed a great many turnaround plans at a cost of billions to the fiscus that have yielded no fruit. Over the past decade alone, National Treasury calculates that almost R30bn has been invested in various attempts at SAA’s resuscitation – with these cash injections taking place in an environment where the economy has, for much of this period, struggled to breach the 2% growth mark.

Finally, market realities have finally caught up with SAA after years of mismanagement, corruption and collapsing governance standards in what is one of the most difficult industries in the world to turn a profit due to razor-thin margins. The state has had to cede all control of the asset. It is now in the hands of market forces that will take advantage of all its inefficiencies now that it no longer has the backing of South Africa’s balance sheet.

Today, the cash crunch at the airline is so severe that it seems wage and leasing payments will not be able to be made in full. And that’s the best-case scenario. While an inability to pay wages on time doesn’t necessarily derail the airline, failing to pay leasing companies is a much riskier prospect. It could literally result in the immediate grounding of a large part of the fleet and force the airline into liquidation as bookings dry up.

That’s where we are now with the SAA story, a state-owned asset with more than 10,000 jobs at risk in an economy battling with unemployment at about 29%.

Unions that have formidable influence in most SOEs have blamed the uncertainty on National Treasury for not injecting R2bn as a part of the business rescue package but, with our without that, SAA would still be facing this existential crisis. The funding would do nothing more than plaster over a festering wound.

The SAA situation is one that could have been avoided were it not for our penchant of kicking the can down the road. If you consider that the World Economic Forum has highlighted the country’s more pressing needs such as education and health care as impediments to social mobility, the question needs to be asked: should the state should have stayed as overly invested in the airline industry as it has?

Arguments could be made about the strategic importance of ownership of Airports Company of SA because of security concerns. But as an investment case for South Africa Inc, just how necessary was it to operate an airline in a country following an “open skies” policy?

When Transnet unbundled SAA in 2006 because of the risk it posed to its balance sheet after reporting a R6bn hedging loss, in essence all it served to do was to transfer the risk to the sovereign.

While the state’s financial support for the airline over the past two decades has weighed on the sovereign, SAA is not in as parlous a state as Eskom, whose debt burden is close to half a trillion rand and rising. But, worryingly, there are many similarities in the way the state has handled both SOEs.

The restructuring that Eskom’s new chief executive officer, Andre De Ruyter, is following includes plans that were first penned as far as back as the late 1990s. More than two decades later he will no doubt still face many of the same obstacles in trying to stabilise the company.

South Africa has about 700 SOEs.  A thorough audit of each of these institutions is urgently required and a pragmatic approach must be taken as to whether each one’s future lies in public hands or in partial of full disinvestment. The lesson from SAA should be that the state should never be forced into deciding that issue: the outcomes are never pretty.

SAA, through the actions of our political players, is now effectively a privatised, inefficient enterprise, a situation caused by a legacy of bad direction by its shareholder.

We find it encouraging that President Cyril Ramaphosa says a major focus of government’s work will be on restoring the health of state-owned enterprises by appointing experienced, qualified boards and managers and by clarifying their mandates.

This column was first published in Sunday Times on 26 January 2020


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