SAA is not structured to compete

2017-09-17 06:06
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The state must give up a sizeable portion of its equity in the airline and capitalise it adequately to attract investors, writes Thabang Motsohi.

There has been much legitimate anger and exasperation expressed about the unending financial woes at SAA.

This is so because of the stratospheric amounts of subsidies eagerly dished out to the airline without scrutiny, and without confronting and finding solutions to fundamental questions about its existence.

Should SAA fulfil a commercial or developmental purpose?

The answer to the first part of the question is easy, and must take into account management capability and conduct, board capability and fiduciary attitude, funding structure, profit motive, and accountability framework and operating processes.

The answer to the second part of the question depends on government’s political mandate. This would determine the board’s mandate and the funding structure to meet this mandate. It usually leads to high-risk behaviour by management and exposes citizens to potentially unlimited funding support in times of crisis.

The above questions are not new and have troubled many governments, especially in the late 1980s and 1990s as they dealt with the disruptive transformation of the airline industry. This was triggered by the new world order following the collapse of the Soviet Union, the open skies policies and deregulation, advances in airline technology and growing tourism traffic.

Our new democratic government could not escape these global challenges. The corporatisation of SAA was, at the time, part of an effort to redesign Transnet’s structure (for which I was responsible as chief of strategy) as a financial holding company with diversified stand-alone business entities. However, the question raised above was not rationally and comprehensively pursued to its natural conclusion.

The challenge of determining and accepting the value of SAA as an exclusively state-owned entity is a seductively powerful and emotionally testing one in the context of the apartheid legacy and the country’s exceptionally high unemployment levels.

The pragmatic question we must confront is whether, in the current competitive context, and given the reality of a stagnant economy and a population growth rate that exceeds our gross domestic product growth (and will most likely continue to do so for years to come), as well as increasing demands on our social and welfare budgets, government can afford to own an entity such as SAA.

The answer to this critical question must factor in the following considerations:

  • The majority of SAA’s customers are in the middle- to higher-income demographic;
  • The majority of the country’s visiting tourists are carried by their host airlines;
  • The quantum of high-value exports from South Africa is minuscule compared with imports carried by competitor airlines;
  • SAA has lost natural African endowment routes to more competitive and efficient operators such as Ethiopian Airlines, despite fighting vigorously to protect these routes and even resorting to uncompetitive behaviour against the likes of SunAir and kulula.com.

In addition, SAA’s fleet composition is unsuitable for the chosen routes, while, according to its balance sheet, it is technically bankrupt.

Context is a fundamental issue for any business. A business that does not maintain resonance with the dynamics of the market always faces a definite existential threat.

SAA’s glory days were underpinned by dominance in the domestic routes, as well as in limited African and international routes in the late 1980s and early 1990s.

The open skies policy, deregulation and the subsequent entry by established and large international airlines at the beginning of the democratic transition constituted an existential threat to SAA – which would have been avoided if a comprehensive restructuring plan was put in place and executed. We failed spectacularly in this.

Under the current leadership, there is no hope the business decline can be stemmed and turned around. I am convinced that protocols governing the current lending to SAA will make further loans impossible.

What must be done now to restructure and reposition SAA for sustainable growth?

The question I laid out at the outset must be answered unequivocally. Without doubt, the state must give up a sizeable portion of its equity in the airline and capitalise it adequately to attract investors.

The willing investors must have a controlling mandate to populate the board with competent personalities of their choice, and to restructure the airline suitably and hire competent management.

This will not be easy, but if we mean to stay as competitive as Ethiopian Airlines, these steps are unavoidable.

However, it is important to understand that Ethiopian Airlines is governed by a protocol that requires the airline be managed by experienced and professional executives, and a competent board. The state has stayed faithful to this creed since the time of my management attachment with it in the mid-1970s.

This operational independence sets it apart from many African airlines and underpins its success.

Clearly, there are serious policy issues and challenges that must be solved before a realistic restructuring of SAA can produce tangible results. To this end, bringing new chief executive officer Vuyani Jarana on board may have been premature.

Motsohi is an organisational strategist at Lenomo Strategic Advisory

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