Businesses pivoted toward the global market operate against a moving target in light of Covid-19. Not only are the expected losses in the aviation industry great, but the expectation of government support is greater.
Should airlines, and business in general be prepared for the worst? Not this much. The International Air Transport Association (IATA) expects about half of the traffic activity for the 2020 year, that's half the industry's revenues locked down. This is a 25 million-jobs-at-risk and a $314 billion-dip-in-revenue-losses scenario, which is part of a spiral of cumulative effects along value chains. A global economic contraction that is somewhere around -3% according to the IMF, with an assumed rapid "recovery" to 2021 is expected.
However, the recovery is limited by how quickly markets would revive. Internationally, the argument is that airlines should under the circumstances have access to capital; tax reliefs and other measures depending on the country. In the case of South African Airways (SAA) and Mango, British Airways and Kulula, FlySAfair and the like, this requires all domestic and international airlines to brace for a 51% loss in revenues in line with the IATA estimate for Africa.
What Joseph Stiglitz penned as "globalisation and its discontents" is by and large a wave of opportunity. An opportunity to embrace and account for externalities, and accepting that when "free-falling" no organisation is "too big to fall". Against this backdrop, the principles and assumptions of global travel markets may require renewed structures that insulate airlines and travel markets from exogenous risks, and create the appropriate policy infrastructure for our globalised network economies. This is a collective effort. While IATA's position is largely focused on the financial position of airlines, SAA's situation is not unique in that that there are political and organisational factors at play. We do however need to look beyond a single state-owned airline.
Unique expressions for each political economy
Countries with government support for airlines, like China are predictably secure and aviation will be part of their economic revival. Here the importance of stable and consistent transportation systems and government policy relations is highlighted.
In the US, the scenarios vary, but the political environment may be conducive for supporting some airlines, with lobbying power and influence, to be supported. Particularly the influence of Airlines for America which requested funding early in the pandemic-recession. An airline "bail-out" is plausible as a net for the bigger part of the industry.
In Europe, some airlines may receive financial support from government, but it is unclear the extent to which this will happen. The practice for major carriers is that they will have to salvage and survive, the market is too heterogenous there to even think of what could happen.
No single government can reinvigorate their airline industry; it requires cooperation at the scale of the Chicago Convention, which is the backbone of the aviation industry today. However, this may be difficult to do because the global supply chains and the airline industry are intertwined in their role in globalising an epidemic. Some countries may initiate a more protectionist position toward global trade and travel; while others will acknowledge that in a network economy good and bad things spread fast. In Africa, there is a platform for consolidated effort, but the role of South Africa needs to go beyond SAA.
Beyond South African Airways
South Africa is in a different scenario. It entered the pandemic-recession environment with two State-Owned Airlines down near liquidation; a contracting economy; and a decade long political recession in terms of the performance of State Owned Enterprises (SOEs). When Maria Ramos restructured Transnet Ltd, she orientated the business toward improved financial performance through customer orientation and efficient corporate governance, among other things.
In the process, SAA was a black sheep: Transnet Ltd ran its ports; railway tracks and terminals; and provided freight transport services, maintenance etc. Its operations are integrated with its infrastructure. Already then, Ramos knew that SAA was a non-core division which made R 3.8bn in operating losses in 2004 (more like R8.9bn if all factors are included). SAA had to stand alone, separate from the Airports Company South Africa, while other network industries remained integrated with their ports. This was important for a deregulated aviation market, that would welcome new entrants in addition to Comair which has been around since the 90s.
New entrants since 2004 like Kulula.com were launched with green-lit humour, and set to expound the low cost carrier market for SA. The same year saw 1Time penetrate the lucrative low cost market, only to shut down in 2012 while others purport that it could have been saved. Mango Airlines of SAA followed the growth in low-cost markets in 2006, and continues to perform fairly well.
A deregulated aviation economy was crucial for the economic returns for air travel to be maximised, this can be subdued by the lasting focus on SAA largely due its relationship with the state. FlySafair is an interesting recent entrant because it is part of a much larger and older aviation firm that was pivoted toward the leasing business. As cities and towns grow, industries develop, and incomes rise, regional air travel for goods and people will follow if growth is distributed in a structurally efficient manner. However, under the circumstances all airlines are grounded and exposed.
How government responds to the aviation sector should be informed by the more than 70 000 direct and 411 000 indirect jobs; if not the more than $2bn in direct Gross Value Added in 2019. While informed by socio-economic factors, the expected growth in aviation traffic for SA is set to double in 20 years and undertaking a "harmonised and strategic approach to aviation policy making" requires serious institutional reforms that prevent market dominance and government failure. An aviation economy should promote industrialisation, economic activity and knowledge creation and exchange.
The plague of market dominance and insidious failure
The market dominance of SAA was overwhelming between 2001-2007, but the Competition Tribunal made significant efforts to correct the incentive structure which appeared to induce travel agents to divert traffic toward SAA, among other things. By 2007 when the South African Airways Act was promulgated, the dynamics of the airline were clouded by the need for a liberalised aviation market.
When former Finance Minister Trevor Manuel said that the allocation to SAA would not be a recurring one in the late 2000s, given the airline's track record in Transnet Ltd it was an optimistic anticipation. The spiral continued for nearly a decade with organisational and regulatory failures overshadowing the airline’s award winning service performance. Comair came to the fight with an argument that the cumulative government bail outs were distorting the market.
Privatisation was at the edge of much of the conversation in this period. This turned into potential opportunities for equity partnerships. With enough media coverage on what happened, I'd say by outstepping labour union Solidarity's submission, SAA entered into voluntary business rescue, and a plan has been en-route since. With SA Express, the private sector prompted government to react quickly to symptoms of severe financial leakages in the procurement practices of the company. SA Express was pivoted toward serving the regional airports which are currently not financially viable, thus its role was largely developmental.
As recent headlines flare with the tailwind of SAA not receiving a cash injection in the middle of a global pandemic there's a lot that could happen. The policy discourse seems flooded by liquidation; privatisation; and possibly leaner government involvement in SOEs. What seems missing are the conversations around public-private-partnerships; aviation industry development incentives; and programmes to encourage new entrants with a much smaller and more rationalised, professionally run SAA. We might need to zoom out and observe the broader dynamics of the aviation value chain and the opportunities within it.
SA’s role in the African aviation value chain
The IMF estimates a contraction of nearly 5.8% for 2020 and a recovery of 4% in 2021— but this still places us nearly where we were when entering this recession: we are heading for a deeper recession when we use our first quarter 2020 GDP as a basis. The April 2020 Monetary Policy Review makes this quite clear too, we entered the crisis with growth limitations at a structural level.
However, the implementation of the Yammouskro Declaration and Decision through the Single African Air Transport Market form part of what InterVISTAS reported as a source of rapid growth in the aviation economy for Africa. It is not that the signatures of African leaders will make the plan work, but it is how each country aligns its aviation policy with the need to shift from primary and service sectors to industrial, agricultural and sustainable technology sectors. According the Harvard Atlas of Economic Complexity, South Africa needs to diversify its productivity toward industrial sectors that involve both manufacturing and the underlying service sectors which make industrialisation work.
The Logistics Performance Index also reveals that unlocking South Africa’s potential logistics efficiencies requires investment in infrastructure (hard and soft) and skills (people). In other words, investing in improving industries near transport hubs, terminals and networks is viable with the Special Economic Zoning for airport, truck and rail terminals in cities and towns—but this cannot fly without investing in education and skills training. With a myriad of airlines, training academies, experience and education institutions, South Africa does not need to compete to be the geographic hub of air travel in Africa.
Instead, with little investment it may move toward being the innovation and development platform for Africa's aviation value chain. This could set the tone for a different kind of recovery. A recovery in action not lost in planning, cash injections or bail-outs. Creating incentive mechanisms for aviation value chain development here in SA, is one way of redirecting the SAA and SA Express saga toward a fairly distributed industry-wide opportunity: more people, places and gross value. While this direction is not a panacea, it is clearly within the public sector's mandate to look at the aviation industry as a whole and point toward signatures that will lead to its development.
Ofentse Mokwena is a transport economist. Views expressed are his own.