In the era of deregulation and open skies, SAA needs a new governance framework to succeed

Article first published in News 24 on 17 September 2018 

Why the SAA is not structured to compete effectively in the 21st century

There is a lot of legitimate anger and exasperation by the public about the unending financial woes of the SAA. This is so because of the stratospheric amounts of subsidies eagerly dished out without scrutiny to the airline by all the administrations to-date without confronting and finding solution to the most important and fundamental questions about its existence.

Should the SAA fulfil a commercial or developmental purpose?

The answer to the commercial purpose question is easy because it requires strict adherence to best market practice and includes; appointment of experienced professional management team; Board membership with appropriate competences and experience; implementation of sound management and accounting processes; a funding structure that enables proper implementation of the operating business model and independence from political interference.

The answer to the developmental part of the question depends on the political dictates of the government of the day. Under this scenario political interference is common particularly in the appointment of the Board and the top management team. The reluctance to insist on appointment of experienced and professional management, as it has happened in the case of the SAA over many years now, leads to risky and adventurous behaviour by management which may expose citizens to potentially unlimited  funding support intervention in times of crisis.

The above underlying question is not knew and has troubled many governments especially in the late eighties and early nineties as they dealt with the unfolding disruptive transformation of the airline industry that was triggered by the new world order following the collapse of the Soviet Union; open skies policies and deregulation;  advances in airline technology and growing tourism traffic. Our new democratic government could not escape these global challenges. The corporatization of the SAA was at the time part of the effort to redesign Transnet corporate structure (for which I was responsible as Chief of Strategy) as a Financial Holding Company with diversified stand-alone business entities. However, the question raised above was never rationally and comprehensively pursued to its natural conclusion.

The challenge of determining and accepting the value of the SAA as an exclusively state owned entity is a seductively powerful and emotionally testing one in the context of the apartheid legacy and the exceptionally high unemployment that we have.

 But the pragmatic question we must all confront is; whether in the current competitive context, and given the reality of a stagnant economy and a population growth rate that exceeds our GDP growth (and will likely continue to do so for years to come); and increasing demands on our social and welfare budgets; whether we can afford to own an entity such as the SAA.

The answer to this critical question must factor in the following considerations:

  • a very large majority of the SAA customers are in the middle to higher income demographic; 
  • the majority of the visiting tourists are carried by their host airlines;
  • the quantum of high value exports from South Africa is minuscule compared to imports carried by competitor airlines;
  • SAA has lost its natural African endowment routes to more competitive and efficient operators like the Ethiopian Airlines notwithstanding the fact that it fought vigorously to protect these routes even to the desperate extent of behaving in an uncompetitive manner to the likes of Sun Air and Khulula. In addition, its fleet composition is unsuitable for the chosen routes and the SAA balance sheet renders it technically bankrupt! 

Context is a fundamental and an existential issue for any business. A business that does not maintain resonance with the dynamics of the market always faces a definite existential threat.

SAA’s glory days were underpinned by dominance in the domestic and limited African and international routes in the latter eighties and early nineties. The open skies policy/deregulation and the subsequent massive entry by established and large international airlines at the beginning of the democratic transition constituted an existential threat to the SAA unless a fundamental and comprehensive restructuring was put in place and vigorously executed. We failed spectacularly in this requirement. Under the current leadership at the level of the political economy there is no hope that the business decline can be stemmed and turned around. I am also convinced that protocols governing the current lenders to the SAA will make further lending impossible.

 What then must be done to restructure and reposition the SAA for sustainable growth?

The underlying question I’ve laid out at the outset must be answered unequivocally. Without doubt the state must give up a sizeable portion of its equity in the airline and capitalize it adequately in order to attract investors. The willing investors must have controlling mandate to populate the Board with competent personalities of their choice. They must also have total mandate to restructure the airline suitably and bring on board competent management.

By all means this will not be easy but if we mean to stay as competitive as the Ethiopian Airlines, these drastic steps, no matter how painful, are unavoidable. 

However, it is important to understand that Ethiopian Airline is governed by a political decision and protocol that requires that the airline must be managed by experienced and highly professional executives and a competent Board. The government has stayed faithful to this principle since the time of my management attachment with it in the mid-1970’s..

This operational independence sets it apart from many African airlines and underpins their success. It relies completely on its balance sheet to attract funding for aircraft acquisition and operations.

Clearly there are serious policy issues and challenges that we have to solve in our situation before a realistic restructuring of the SAA can produce tangible results. These decisions however require a level of strategic political vision that frankly does not exist currently. To this end, bringing Vuyani Jarana on board at this stage may have been premature.  His time will be consumed by battles in the Board room rather than focus on improving operational efficiencies and productivity.