Business, aviation sectors largely welcome private sector involvement in SAA

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The government has partially privatised SAA.
The government has partially privatised SAA.
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  • The business and aviation sectors have largely welcomed news of private sector involvement in state-owned airline SAA.
  • On Friday, the Department of Public Enterprises announced a public-private partnership involving assigning 51% of the airline to a strategic equity partner, while 49% remains state-owned. 
  • The partnership aims to decrease the need for state aid and make the grounded airline viable. 

The public-private partnership announced on Friday for South African Airways has been largely welcomed by members of SA's business and aviation sectors, due to the fact that the private sector will become involved in the running of the airline, hopefully preventing the need for further bailouts with taxpayers' money.

But most organisations are still taking a "wait, see and question" approach as the partnership is still in its early stages. 

The Department of Public Enterprises announced on Friday what it regards as a ground-breaking deal to assign 51% of the grounded airline to a strategic equity partner and 49% to the government, with the aim of creating a viable national airline.

The equity partner is the Takatso Consortium, which consists of African infrastructure investment company Harith and Global Airways - which already operates low-cost airline LIFT.

Making the announcement on Friday, Minister of Public Enterprises Pravin Gordhan said the relaunched SAA will no longer need state funding and may be listed in the future.

The aim is for SAA to start domestic and regional services later this year, and international flights after that.

Business Unity SA welcomed the deal, noting it had consistently argued that SAA could not survive or become sustainable without a private equity partner.

"Partnerships between the private sector and government in non-strategic SOEs is the appropriate way to go. This enables injection of private sector capital and expertise into their operations," it said in a statement.

Business Leadership South Africa and trade union Solidarity also welcomed the deal, praising its goal of removing the need for state bailouts. 

"After a decade of bailouts and, on top of that, a pandemic, government and SAA were dragged to the altar by Solidarity's business rescue process," said Connie Mulder, head of the Solidarity Research Institute.

The National Union of Metalworkers of South Africa, meanwhile, called for more transparency and accountability.

"As unions, we are finding out through the media about this equity partner. We have been asking since last year for DPE to be transparent about the process to appoint an equity partner for the sake of the future of SAA, but they refused to disclose," said spokesperson Phakamile Hlubi-Majola. 

Alf Lees of the Democratic Alliance says there are some fundamental questions that need answers.

"Given the relatively lightweight status of Global Airways, the loss of market share by SAA and the massive costs of getting SAA flying again, ....what trading, routes, employment, and other conditions have been imposed on the new shareholder? Will the new shareholder be free from any government political influence and interference of any sort?" asks Lees.

The links that bind  

Both Solidarity and the Organisation Undoing Tax Abuse (OUTA) are concerned about the ties consortium member Harith has with the PIC, one of its chief investors. 

In the view of OUTA, the links effectively mean that the state will retain control over the airline, owning both a direct share of 49% and having influence via the PIC's stake in Harith.

OUTA is also concerned about the impact government's oversight bodies will have on the competitiveness of the airline industry as a whole, particularly regarding route licence allocations.

For aviation economist Joachim Vermooten, the two most important aspects of the partnership are that the government has given the assurance that there will be no further taxpayer money used to rescue SAA, and that the private sector is now involved in the new airline.

"This implies that private sector principles will be applicable and with a reasonable expectation of investment returns. The final consideration is still subject to discussion and due diligence to be completed. It would have to consider that Mango, LIFT and SAA would be in one entity while competing with each other," said Vermooten.

Government made R2 billion available for SAA restructuring and a restart in the business rescue plan. The consortium will invest R3 billion, bringing the recapitalisation of the airline to R5 billion.

"It is not a sale transaction, but an investment and recapitalisation of an existing company of which the investors will receive 51% interest," explained Vermooten.

For political analyst Daniel Silke, SAA's challenge remains whether it can find a market.

"The industry is shifting under its feet. The challenge of an 'end-of-continent' airline remains, as its hub status is usurped by Addis Ababa and other regional centres," he said.  

"SAA also has to contend with the immense damage caused in recent years which can slow its core South African market from booking. It will need to be price-competitive to regain market share, and this will put pressure on margins," said Silke. 

"Ultimately, the airline needs to cherry-pick routes and fortunately, the world of travel data has matured to really identify key routes. A new SAA cannot afford 'vanity' routes."

Setting the stage

Transport economist Ofentse Mokwena said he had anticipated such a deal regarding SAA. In his view, since the 2000s, the DPE has started to create an environment where it could be possible to turn SOEs into listed companies.

"SAA's business rescue process was essential to package the airline in a way to at least make financial sense for equity investors or other roleplayers from the private sector. This type of idea for SOEs is seen all over the world," he said.

But a lot of unanswered questions remain, in the view of Intellidex analyst Peter Attard Montalto.

"We need to see what minority shareholder rights the government has and what PFMA impact there still is over SAA. But overall, the inclusion of Global and the talent they bring is a very interesting move for the DPE, which maximises its chances of some success - though only if [the consortium] are given free rein in terms of scope of the airline and what it wants to do (and not do)," says Attard Montalto.

Elmar Conradie, CEO of Safair, which operates low-cost airline Flysafair, said the company welcomed the announcement and the state's commitment that there would be no more bailouts for SAA.

"This will finally put Safair and other private airlines on a level playing field, where we don't have to compete with our own taxes. We hope that the same principles will be applied going forward to SAA's subsidiaries Mango, SAA Technical, and Airchefs," he said.

"Covid-19 has had a devastating effect on the country and especially the tourism and travel industry, and it has never been more important that the weak competitors are not artificially strengthened by capital that demands no returns," said Conradie.

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