EDITORIAL: SAA sell-off not so easy
Getting private sector players involved will take more than putting a stake up for sale
Selling off a stake in South African Airways (SAA), as the National Treasury has proposed, may be easier said than done, as the Indian government will be quick to tell you.
The similarities between state-owned Air India and SAA are plentiful: both have been running at losses for years, relying on government bailouts to keep flying; they are deeply in debt; and they need to cut jobs to bring staffing levels in line with global best practice. That is politically difficult in either country.
That they have been operating at losses in recent years, when oil prices — a major cost driver for airlines — have been at multi-year lows, boosting competitors’ profit margins, shows there is much room for operational improvement.
Unlike the South African government, Indian Prime Minister Narendra Modi and his government officially put out a tender to find a buyer for a 76% stake in the national airline.
More than a year later, there hasn’t been a single bidder. Potential buyers have sniffed around, but ultimately balked at some of the conditions set to the deal, such as the Indian government retaining 24% and restrictions on getting rid of unprofitable business units.
Whether or not it gets an equity partner on board, the carrier’s leaders need to focus on getting the basics right.
Getting private sector players involved in SAA will therefore take more than merely putting a stake up for sale.
As in the case of Air India, the government is unlikely to relinquish its entire stake, and any potential buyer should also expect restrictions on job cuts. SAA’s relatively new leadership team’s proposals to "hire out" pilots and cabin crew to international airlines, rather than retrench them, have already met resistance from trade unions.
The airline’s latest turnaround plan will cost R21.7bn over the next three years, with a promise from management that it will be profitable by 2022.
CEO Vuyani Jarana, a former executive at Vodacom, is so confident it will work that he has bet R100,000 of his own cash on the outcome.
Whether or not it gets an equity partner on board, the carrier’s leaders need to focus on getting the basics right. For airlines, a low-margin, high fixed-cost business, keeping your aircraft in the air as much as possible, with full-fee-paying bums on every seat, is the holy grail.
Part of SAA’s problem is that its aircraft are not flying nearly enough, with its narrow-bodied fleet, typically used for shorter distances, only flying for eight hours a day, and wide-bodied aircraft, used on international long-haul flights, in the air for only an average of 11 hours a day.
Increasing these utilisation rates will be crucial to bring SAA’s cost per available seat kilometre in line with its more successful competitors, a key performance metric for airlines.
In the 2017-18 financial year, the airline’s operating costs alone amounted to R32bn, considerably more than its total income of R29.4bn. Chief restructuring officer Peter Davies, an international expert appointed in December, has said that the cost structure will need to be cut by between 35% and 40% — R11bn to R13bn — to make SAA profitable.
That will take more than outsourcing a few pilots and cabin crew or cutting flight frequencies to London. As Davies told the Financial Mail in June: "There is room for improvement in almost everything we have looked at."
Given the number of failed turnaround plans, the revolving door of executives and the endless bailouts over the past decade, South Africans’ scepticism that SAA can achieve success on its own is understandable. Don’t assume private investors will feel any more confident about the airline’s prospects.