Business rescue is unlikely to cure SAA of its real maladies
The same operational and corporate governance issues that grounded the airline in the first place could still stand in the way
Finance minister Tito Mboweni indicated in his second budget speech last month that SAA would be a radically restructured airline after the business rescue process. But what a radically restructured airline looks like remains a mystery to most of us.
SAA has been in a financially distressed position and unable to pay its debts for some time. Its business model has yielded no positive operating results compared with its industry peers over the years, and the Competition Commission has fined the company at least twice since December 2006 for price-fixing and abusing its dominant position.
Over a 10-year period from 2008 to 2017, SAA’s revenue has increased on average by a mere 4%, compared with Comair’s 11% average over the same period. SAA underwent a much-publicised structuring process in 2008, which yielded no discernible results.
The signs have always been there; perhaps we were just oblivious to the horrific reality. SAA’s survival has over the years been guaranteed by the government through its debt-guarantee programme and this has given management and the board less incentive to perform. Our government kept extending guarantees to the airline even though it was generating negative returns.
Unfortunately for SAA, the status of being a leading airline came with being a leader in operating costs and operating losses. SAA’s operating costs as a percentage of revenue averaged 101% for the 10-year period from 2008 to 2017, while its biggest competitor, Comair, reported 90% for the same period.
The shield from the government that SAA has enjoyed has given it safe cover and protection and strengthened its market position. This explains the frustration of its private sector competitors, which have unequivocally and repeatedly expressed their desire over the years to see SAA as a stand-alone entity and privately owned, instead of competing with taxpayers’ money.
Corporate restructurings are by nature associated with improvements in the financial performance of the companies involved, including an increase in the companies’ market value. However, this has never been the case at SAA, even though the playing field has been in its favour.
To illustrate how inefficient SAA’s operating business models have been, the airline’s debt has grown steadily on its balance sheet as borrowings were used to fund operations because its operating costs were growing faster than revenue. The average revenue growth realised from 2008 to 2017 was 4%, compared with the average growth in operating costs of 5% in the same period.
It is clear that SAA lacked the management discipline to free the company from its operational hurdles. Over this period we also witnessed a gross inability to reduce the cost of doing business, a lack of improved business focus and inefficient capital allocation.
Evidently SAA’s capital investment trajectory from 2008 to 2017 shows a decline of 7%, while Comair’s capital expenditure over the same period increased by 22%. Generally, capital investment helps generate revenue, increase market share and operational efficiencies. SAA has long been a hospital case kept alive by the fiscus, funding operational inefficiencies where there has been clear evidence that the company does not generate enough cash flow to fund its debt commitments, let alone fund its operations. In addition, there has been no equity injection from its shareholders, so it has been operating at the mercy of debt-holders.
The lack of a vigilant shareholder, instability at the top and ineffective governance structures at SAA have led to a destruction of shareholder value and rendered the business susceptible to bankruptcy. Given the impact of the operational decisions taken by management on the overall operational performance of SAA, the quality of such decisions needed to be thoroughly assessed by an effective board structure.
The company has had five CEOs, two acting CEOs and four board chairs between 2008 and 2017. The excessive protection of SAA by its shareholder, coupled with its gross mismanagement, have brought the company to its knees.
Judging from this year’s state of the nation address and the budget speech, SA does not seem to have a plan for how to fix its ailing state-owned companies. The destruction of shareholder value at SAA happened in full view of the whole country. In trying to salvage the situation, the shareholder threw money at the problem as if money is the panacea for badly run businesses and poor operating performance.
Before we dub SAA a radically restructured airline after the business rescue process, let’s ponder what brought the airline to its knees. There is no empirical evidence that points to operational efficiency, profitability and increased shareholder value after any business rescue process.
• Wonci is CEO of Kogae Rainbow Investment Holdings and a senior partner at Kogae Advisory Partners.
Would you like to comment on this article or view other readers' comments?
Register (it’s quick and free) or sign in now.
Please read our Comment Policy before commenting.