Thursday, 28 February 2013

Should SAA be laid to rest or sold?


SAA: Ready for shedding off?
REPORTS IN THE South African press have it that a local private airline will sue the government over the continued bailout of South Africa Airways. 

The Airline, Comair, argues that the bail outs do not comply with; either the domestic aviation transport policy or the law, says the Business Report.

Comair wants a level playing field in the domestic aviation market to ensure that all airlines face the same risks and the same requirements to operate on sound commercial principles.

In the past 20 years, SAA has sunk 22 billion Rand, (US$2.5 billion) with nothing to show for it. And the government last October guaranteed US$576 million in loans over the next two years. The support was granted the airline to recapitalize after being pushed into insolvency by bad financial decisions.

SAA can emulate KQ
In 2004, the airline almost closed down after losing US$1.03 billion in hedge loss after a fuel edge went haywire. The airline had hedged its fuels at a rand’s exchanged rate of 10 to the US dollar. However, the rand strengthened rising even to R6 to the USD. This meant massive losses for the airline. That loss left the airline insolvent.

In addition, it has made operational losses amounting to R3 billion (US$356 Million). Since 2004, the government has recapitalized the airline twice for a total of R10 billion ($1.15 billion). And  last year,it was guaranteed to borrow R5 billion($576 million). 
The private airline argues that the airline makes losses because it does not operate on commercial lines.  It has, “excess capacity, that is under priced,” resulting in losses. Its practices are a double tragedy for South Africa.Apart from being a drain on public  coffers, it has also become the exterminator of the aviation industry. In the last 20 years or so, SAA's unbusinesslike practices have consigned 10 domestic airlines to the graveyard.

 Although it is not clear how the suit will help Comair,it is wake up call to the South African government to face the ugly truth: the airline needs clinical surgery. Either it is allowed to collapse, or it is privatized while the going is still good.

The Chickens are coming home to roost for South African Airways, Africa’s oldest airline. It is the sick man of the aviation industry in Africa kept afloat by artificial life support. The airline has become a sinkhole for the South Africa taxpayer’s money.

 SAA has the highest turnover of Chief executives-having changed six or so boards and chief executives over the past decade. This is a reflection of an unstable business.
The choices facing the South African government are stark: On the one hand, the airline is a strategic asset. But on the other hand it is a drain on government’s coffers. Which do they choose?
Generally, governments are initially reluctant to dispose off loss making state owned enterprises due to policy fears. However, the grim reality is an SOE that lives off government handout has no incentive to operate profitably.  Many have thus to be shed off and left either die or learn to operate profitably. That is the dilemma facing South Africa.
However, in this South Africa is in good company.  Many other governments in Africa and Europe faced a similar dilemma.  And the choices were equally stark. But the right decision had to be made anyway. Some, such as the Nigerian government chose to let the airline die. Others privatised the airlines.

Among these are such large European airlines as Swiss Air, Alitalia and Air France. These airlines were first grounded when they ran into turbulent winds, and later sold to the private sector -and they survived.

 Closer home, Kenya Airways presents the best example of a correct decision taken at the opportune time.is a case in point. In the 1980s and early 90s, it was tagged a strategic asset that could not be privatized. But the grim reality caught with government at the beginning of the second half of the 90s. It was shed off by 1996 and now it is a profitable airline, flying Kenyan colours. The offload began with a marriage with KLM which took a 26 per cent stake in the airline; the public bought another 25 per cent leaving the government a minority shareholder.

It was weaned off government coffers and has learnt to run its affairs including paying dividends to the government. Today, should Kenya Airways need money to recapitalize, it goes to the capital market without seeking government guarantees. SAA can do the same.

The government should thus consider seriously saving the airline from itself by privatizing it while the going is good. That way it shall safe the tax payer money and keep the airline afloat. It should not take the Tanzania route, which resisting the truth until it can be hidden no more.

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