Privatising SAA will require the wisdom of Solomon

State-owned airline SAA carried 6.9 million passengers in the year ending March 2016.
State-owned airline SAA carried 6.9 million passengers in the year ending March 2016.

If there’s a single national carrier that has much in common with SAA, then it’s Air India.

For years, it has done precisely what SAA has been guilty of – wasting billions and continually sucking at the teat of the cow that is treasury. 

In other words, the money to keep it afloat comes from the taxpayer’s pocket in the midst of questionable management and valuable benefits passed on to politicians and others with the correct political connections; even well-paid positions in the airline.

Just as at SAA, its turnaround attempts came to nothing amidst many discussions about privatising to get it off the taxpayer’s back.

In March, a breakthrough was reached when the government of the Indian prime minister, Narendra Modi, announced that Air India, which was established in 1932 and functioned as a monopoly for many years, would be privatised.

Since then, there has been one setback after the other. Private entities have hardly shown any interest in getting involved in this inefficient and debt-ridden airline. 

Not a single bid has thus far been received.

The deadline for making an offer is 31 May.

Pundits in the aviation industry mention the following factors when a subsidised airline wants to privatise:

- Nobody is keen to manage a mountain of debt. The government will be obliged to offer attractive conditions, not only to remove this burden from the airline’s shoulders, but also to assist with the initial losses that are expected.

The loss in Air India’s financial year to March 2017 stood at about $865m, while the group’s total debts are about $8bn. Government wants to reduce this debt by about $5.1bn.

- There is also a generous pension scheme that government wants to palm off on a potential buyer.

- The above-mentioned goes hand in hand with staff members who are not cost conscious. It’s a culture that’s difficult to change, while serious job losses will have to be addressed.

As is the case with SAA, Eskom and other state-owned enterprises in SA, there are too many staff members, many of whom have been appointed into senior positions with fat salaries through their political connections.

Owing to the change to the private sector, the heads of some of these politically influential people will have to roll.

Not only will it lead to great financial costs, but government would like it to take place with as little pain as possible.

- Government wants to have an interest of 24% in the privatised Air India, which will ensure that it can play an influential role in the airline.

Will its representatives put up with the painful savings that will have to be introduced, or will one of their main functions be to try and negotiate benefits for politicians and senior civil servants?

Then the state’s interest will mean that a buyer will not be able to merge Air India with its own airline.

- India’s top airline is IndiGo, which indicated that it was not interested in acquiring the whole airline, after studying the government’s bid documents.

Some of the other potential buyers have a similar view.

IndiGo is, however, interested if it could take over Air India’s international routes. It does not want the local, unprofitable routes.

This last point is where political pressure could be expected. 

- A buyer will not only be saddled with restructuring Air India, but will also have to develop a strategy to deal with the smaller, efficient low-cost airlines.

These airlines have in any case been busy reducing Air India’s market share for some time.

Back home, SAA has approached Treasury for yet another bailout, this time for nearly R5bn.

The current request follows on the R55bn that Treasury has granted SAA over the past 23 years, and there is little hope of it ever ending.

Up until now, the SA government has not been in favour of following the steps taken by the Indian government by getting rid of the burden.

In the financial year to March 2018, SAA has made a loss of R5.67bn.

According to the airline, it will need a further R21.7bn over the next three years as part of its “turnaround plan”.

According to its (umpteenth) new chief executive, Vuyani Jarana, all the local routes and some of the international routes are unprofitable.

Who is going to be interested in buying it?

It will require the wisdom of Solomon to privatise SAA successfully.

This article originally appeared in the 24 May edition of finweek. Buy and download the magazine here, or sign up for our weekly newsletter here.

Brent Crude
All Share
Top 40
Financial 15
Industrial 25
Resource 10
All JSE data delayed by at least 15 minutes morningstar logo
Company Snapshot
Voting Booth
Please select an option Oops! Something went wrong, please try again later.
I'm not really directly affected
18% - 1912 votes
I am taking a hit, but should be able to recover in the next year
23% - 2519 votes
My finances have been devastated
35% - 3746 votes
It's still too early to know what the full effect will be
25% - 2680 votes