Privatisation of SAA, The Most Logical Solution

By Erik Venter, CEO of Comair

Following on the recent granting of a R5 billion guarantee from government to the embattled SAA and its subsidiary Mango, as well as ongoing questions over the previously reported profits of SA Express, there is now much talk of privatising the three state owned airlines. The latest bailout is the last straw. As SAA requires substantially more than R5 billion (according to its recently resigned board members), one has to ask when will be the right time to privatize SAA, or will it continue to be supported at all costs? 

Privatisation of SAA is not a new idea.  Saki Macozoma brought in co-founder of Bain Capital, Coleman Andrews, who between 1998 and 2001, pocketed R232 million from unsuspecting South African taxpayers, to prepare SAA for privatisation.   However this restructuring plan did not succeed and a few CEO’s later, then minister of Public Enterprises, Alec Erwin, was quoted in the Financial Mail of 9 March 2007, stating that the timing was not right for privatisation as it would take a few years for SAA to turn around and to stabilise its finances.  At the same time he had written to the then chairman of SAA, Jakes Gerwel that “...SAA cannot and will not be supported at all costs.”

The concept of state owned airlines has become outdated and a bit of an embarrassment to most of the remaining affected governments.  The global trend has been towards privatisation with substantial success, as governments realise there could be better ways of providing services than subsidising state carriers.  The best known examples are British Airways, Qantas, Aer Lingus, Air New Zealand and Kenya Airways, all of which have relieved their previous governments of utilising further taxpayer funding and have mostly been converted into tax generating businesses.  

The advantages of privatisation are numerous, including relieving the government of an unlimited financial burden, increasing competition in the aviation market, reducing government’s conflicting roles as operator, regulator and referee in the market, removing the bureaucracy that disables SAA from responding to changing market conditions, improving corporate governance, accountability and transparency, and very importantly creating stability in the leadership of SAA in order to deliver on long term strategies.  The list goes on.

 The argument that SAA is a strategic asset, required in case all other airlines withdraw from South Africa, is quite illogical. There would be a lot more activity from both private domestic and international airlines if they knew that they were competing on a level playing field.

Airlines are always desperate to find growth opportunities and in the past year alone SAA’s market share on capacity into South Africa has reduced from 45% to 30% as a result of the influx of foreign carriers, this despite the highest oil price in history.  Even if the oil price increases to $200 per barrel, there will still be demand for travel to South Africa, and it will make no difference whether this is provided by a state owned SAA operating on principles of sustainability, or by foreign operators, or a privatised SAA.  By comparison, while we are critically reliant on shipping to import and export goods, we do not require a state owned shipping company.

There are many approaches to privatisation, none of which provide overnight solutions, and all of which require a well designed and implemented transition.   In the interim, the first and most essential factor is to maintain a competitive airline industry.  While Treasury has demanded that there be a proper turnaround plan to accompany the R5 billion government guarantee, it is also necessary that there is a mechanism to manage this plan in accordance with the mission of the Aviation Transport Policy, namely “to maintain a competitive aviation environment…” 

One possibility would be to have SAA managed under the Companies Act provisions for business rescue, as SAA is a company registered under the Act, and as would normally be the only reprieve for privately owned companies. In fact, failing to apply business rescue might well implicate the directors of SAA and Mango in reckless trading, as highlighted by former board member, Russell Loubser, or even implicate them in “fruitless and wasteful expenditure” per the Public Finances Management Act.  Another alternative would be to mandate the Competition Commission to approve the plan and oversee its implementation, thereby relieving Treasury of such a burden.

Whatever the governance mechanism applied, there is a need to manage the short term application of the R5 billion guarantee, and a need for a long term solution, for which privatisation appears the most logical solution.  However, waiting for the perfect time to commence the privatisation process will just allow SAA to dig a deeper hole for itself.  The first loss is usually the best loss.