SAA's day of reckoning: Is Gordhan eyeing consolidation to save the airline?

Minister Pravin Gordhan
Minister Pravin Gordhan

The grounding of airlines at the end of March due to the coronavirus pandemic was bound to become an existential crisis for an industry not known for its resilience, no matter the geography.

For a state battling to keep two of its carriers afloat for the best part of the last decade in South African Airways and SA Express, the pandemic has proved a day of reckoning for its continued investment in the sector.

With SAA in business rescue since December and in desperate need of funding assurances that haven't been forthcoming from Treasury, and with Minister Tito Mboweni loath to bail out another state-owned enterprise, the writing seemed on the wall for the close to 5 000 staff at the airline, which was founded in 1934.

But it seems the struggles of the entire industry, including its biggest commercial rival and owner of Kulula.com, Comair, has sparked ideas of consolidation in Pravin Gordhan, the minister of the department of public enterprises.

Last week, Comair, which has the licence to fly under the British Airways brand in SA, joined the national airliner in moving into business rescue.

While briefing parliament on the state of affairs at SAA, Gordhan spoke of the creation of a new SAA. One of his slides highlighted the words "consolidation" and "Comair", though he himself did not mention the JSE-listed company by name.

Asked for further detail on the slide, the department would only say it does industry analysis from "time to time".

Comair wouldn’t speculate on the slide.

Speculation

The slide has led to speculation that the minister wants to consolidate SA's airline industry, with some analysts suggesting that he might be waiting for private airlines as a whole to collapse, leaving the market to SAA.

Restricted air travel will only commence in SA at lockdown Level 3, full domestic air travel at Level 2 and regional and international air travel at Level 1. It is estimated that domestic flights might only start again in October this year.

In response to whether he plans to consolidate the country's airline industry, Gordhan says his priority was to ensure that the rescue process [of SAA] results in a viable, competitive airline and in addition, the saving of as many jobs as possible.

"The aviation sector has been substantially harmed across the world by Covid-19. This includes SAA, which was already in business rescue, and the aviation sector generally."

Gordan, who has championed a "Leadership Compact" with unions to save the airline and jobs, said no-one can predict what the post-covid travel situation will look like.

The minister's plans differ from SAA's business rescue practitioners', who have indicated their preference for a structured winding down, and indicated that if this is not possible, liquidation might be their only option due to a lack of funding from the state.

Partnering with SAA

An anonymous source (whose identity is known to Fin24) and who has direct knowledge of SAA's financial and operational situation, says all the industry data is available to draw up a plan for a sustainable airline.

"The state's capacity to support any form of bailout - even with funding from the private sector - is zero at the moment," he says.

For him it is not too far-fetched to think there might be consolidation in the airline industry.

"But then, those already running successful airlines, should be allowed to be at the helm of a commercially driven operation, as they are better placed to raise capital needed," he said.

Rodger Foster, CEO of privately-run regional airline Airlink, said he would be open to getting involved in a public-private partnership with a "new" or restructured airline that replaces SAA - provided it can run on commercial principles and proper governance, and without political interference.

Kirby Gordon, head of sales and distribution at privately-owned low-cost airline FlySafair, says it is key to make a distinction between domestic and international flight routes. Even before the pandemic led to the grounding of flights, SAA accounted for only about 30% of international "seats" into the country.

On the domestic front, Airlink and SAA's subsidiary Mango were a big players pre-lockdown, along with Flysafair.

He does not think the current situation will lead to consolidations among the local airlines, but rather a process of rationalisation as airlines right-size themselves for the lower demand expected once flights can resume.

Aviation economist Joachim Vermooten emphasises that, to avoid the creation of a monopoly as existed between 1934 and 1990, it would be essential that any state financial assistance to sustain the airline industry is made available to all participants under the equal treatment principle and not only to state-owned airlines.

As for SAA, Vermooten says that, without the money needed for its restructure, "you can build projections and ideas, but at the end of the day all firms require a firm capital base. Alternatively, you make do with the capital you have available".

Healthy competition

Linden Birns, managing director of Plane Talking, says airline competition will be critical going forward, as it would be best for the cost of business in the country not to have a monopoly airline.

He points out that it is not so much the ownership of an airline - public or private - which determines its success, but the control and management thereof.

"The key thing is how will a 'new SAA' be run? Minister Gordhan says it won't be the same as the 'old SAA' and investors would likely want to know what the real difference will be and if government will resist the temptation to interfere," says Birns.

"Circumstances are now radically different in the airline industry. There is bound to be some form of consolidation in the industry, but that does not mean that all remaining players will get together. It might just mean that some drop out of the market all together."

Gordhan and the department of public enterprises is expected to brief parliament on Friday, where there’ll be expectations of a proper airing of his plans for SAA and the airline industry as a whole.

So far, Finance Minister Tito Mboweni has refused to be drawn on plans for the national airline, apart from saying a new airline could "rise from the ashes" of SAA.

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