Liquidate or privatize SAA, asap!

Upon its placement on business rescue in December 2019, it became clear that SAA’s
management was unable to efficiently run the organisation. It could have been that, the
expectation of assured subsidies from government, led the executive to be wasteful,
lack the desire to innovate and also accommodate poor management systems.

For instance, the business rescue practitioners managed to save the company, R500
million each month, by ensuring that procurement contracts and leases of planes were
fairly priced, whilst cash resources were managed diligently. That implies that, several
procurement contracts were significantly priced above market rates and the cash
resources were being wasted.

The ratio of employees to the number of aircraft was also
bloated, with 4 708 workers for a total of only 44 planes. An analysis of the routes by
the rescue practitioners, also revealed that only 8 routes where profitable, whilst the rest
(24) were loss-making. The practitioners eventually optimized the company’s itinerary,
by reducing some of the unprofitable ones. The business rescue team, went on to
streamline workers by reducing much of the labour force, cutting it from around 4 708 to
about, only 1 000.

An arrangement was made for SAA’s bank debt of over R15 billion, to
be taken over by the government. However, the company’s trade creditors were dealt a
very unjust hand, as they managed to recover only 7.5 cents, for every Rand owed to
them, as of 5 December 2019. They lost over 90% of their value, as only R600 million
was repaid to them, out of the overall trading debt, which stood at around R8 billion.

As it stands, after the rescue, SAA is still unprofitable. For instance, in the three
quarters of the financial year ending, 31 March, 2024, it has already registered a R750
million loss. Although, in mid-March (2024), Minister Gordhan (Department of Public
Enterprises) articulated that the company could continue as a self-reliant entity for the
next 18 months, a number of issues need to be brought to the fore, so that the
government does not find itself bailing it out again, at the expense of tax payers and
future trade creditors, who stand to lose their value in another business rescue or
liquidation.

Firstly, in order for the entity to find a shareholder who is capable of injecting the much
needed cash, parliament will need to revisit the SAA Act and other crucial matters which
will need, a minimum of 18 months, to be resolved. Since Minister Gordhan had
announced the company’s ability to self-sustain for the next 18 months, cabinet and

law-makers need to view the following 1 and half years (18 months) as a deadline by
which the SAA Act has to be revisited. Delaying on that would complicate and curtail
possibilities for future partnerships with private players.

Secondly, even when SAA begins to break-even or to make modest profits, it will still
need to compete with some dominant industry players, such as Qatar Airways,
Emirates, Etihad and Turkish Airways, for instance. The major challenge for SAA would
be that the aforementioned companies are more centrally located (internationally),
whilst their respective governments provide them with subsidized fuel, because they
produce oil, or they are situated very close to oil producing countries. In other words, it
will be cheaper for the Arabian-gulf-based airliners, than it would be for SAA to transport
passengers, internationally.

Thirdly, it would be quite a task even for SAA to concentrate on domestic flights only,
since even the business rescue plan, which commenced in 2019, revealed that
domestic routes were making some of the heaviest losses, of all the company’s routes,
at that time.

Fourthly, the government has assigned more than R50.7 billion to SAA, between 2007
to 2022. If it does not become profitable soon enough, clearly the Department of
National Treasury will be assuming its future debts, once more, in the near future. Also,
even if it were to make a profit, airliner profits are very modest, averaging just over 2%,
globally. So, there is not much of a financial gain (profit) to make even after all the
restructuring, and other efforts.

Furthermore, the aborted Takatso deal, went on to raise more questions again, about
whether the country is ready to professionally manage public entities. Had it not been
cancelled, the Takatso Consortium would have bought a R6.5 billion company (SAA) for
only R51, in order to obtain 51% shareholding. The R3 billion which the team had
offered SAA would have been received as a repayable shareholder loan, instead of a
direct equity injection (payment for shareholding). Fortunately, Minister Godongwana
had insisted earlier, that the valuation was scandalous, whilst the SIU is still determined
to find out how the company’s actual value was understated.

Recommendations

SAA needs to be privatized or liquidated, as soon as possible. To make up for the
removal of the airliner, the government will need to make arrangements for making the
country’s skies open to any IATA-compliant (competent) airliner which books a slot to
land or take off, from any of the airports. The move should attract more world-class and
also low-cost airliners to the country, some of which will introduce new routes which
were beyond SAA. This will improve South Africa’s connectivity, internally, and with the
rest of the world. Additionally, the competition to be created through open skies, will
likely lead to lower ticket prices, which is for the benefit of consumers.

Freeing up funds which were supposed to support SAA’s yearly losses, can also provide
room for advancement of the country’s air force, which can be gainfully used in crime
prevention, maintenance of law and order, civil protection (disaster response and relief
efforts), and defence against foreign threats. It is worthy to emphasize that, although
developed economies have ceded government control of civil aviation, they have
increased their commitment to their respective air force, thereby advancing their aerial
military capabilities.

In the end, it is clear that SAA has proven incapable of being competently run, in the
past few years. This therefore means that, the government needs to seriously consider
funding retrenchment costs for the remaining employees, as it goes on to liquidate it.
For alternative, independent and authoritative comments, the government may also
request the opinion of other credible experts, including the World Bank’s aviation
consultancy division.