- The business rescue plan we have waited for is just another turnaround plan, says Guy Leitch.
- It’s worse than the previous turnaround plans, he adds.
- It is highly unlikely that an airline will be profitable with 61% loads.
It is now apparent that the business rescue plan we have waited seven months for is nothing more than yet another turnaround plan – arguably Version 11. And the sad reality is that V.11 is an even worse plan than the others that have gone before.
This one was written to buy-off the creditors for the vague promise of a miserable 7.5c in the Rand – not to actually produce a better airline. The only real difference between the latest plan and earlier attempts to turn the airline around is that this plan finally takes a chainsaw to the dead wood in the organisation by cutting away 75% of the staff.
There are many worrying aspects and huge gaps in the latest business rescue plan (BRP). The most obvious to any aviation observer is that it is absurdly unrealistic. The plan expects the airline to be profitable with 61% loads.
In the post-Covid-19 world it is safe to say that it will be impossible for an airline to be profitable with loads of less than 75%. And the BRP base assumptions do not stand up to scrutiny. When the first pass at a plan was rejected with an offering to concurrent creditors of 5 cents in the Rand the Business Rescue Practitioners magically conjured up more revenue and reduced costs.
The fuel cost assumptions are particularly optimistic, and the revenue and yield assumptions would be ambitious even in a pre-Covid-19 environment.
Many rands make flight work
The key question remains unanswered, and that is whether government is actually prepared to fund it, and if so, for how much? In SAA’s case many Rands make flight work, yet Minister Tito Mboweni has been steadfastly resistant to further funding.
The problem is government’s indecision as to whether to preserve jobs – or the fiscus. Public Enterprises Minister Pravin Gordhan says he wants to protect jobs and use the airline for a “transformation agenda”.
Yet Mboweni says there’s no more money. Whether this is just a good cop, bad cop role play, or a deep schism in government, remains to be seen, but given the evident factions within the ruling party, I suspect it’s the latter. In the SAA business rescue process so far, labour has been calling the shots, and it would appear that Mboweni has been pushed into a corner and so has reluctantly signed a vague undertaking that he has very little intention of honouring.
Wanted: strategic partner
The only way the latest turnaround plan has any hope of success is if government really does find and then allows a strategic equity partner to run the airline. But no matter what government may claim about potential suitors waiting, as it were, in the wings, I find it impossible to believe that any foreign carrier would be prepared to buy into an airline burdened by the transformation load that SAA bears, with government interference a certainty, and a massive geographical disadvantage in terms of routes.
International airlines are struggling to survive the Covid crisis and cannot be in any mood to consider high risk and high hassle expansion. And they are currently limited to just 25% ownership of South African airlines.
The fundamental problem lies in the statement by the Department of Public Enterprises that the airline must fulfil a “transformation agenda”, and yet still be a viable sustainable business. You just cannot have both. Even under the best of operating conditions airlines have to survive on paper-thin margins to cover their hugely capital-intensive operations.
It is impossible to burden an airline that is expected to be a sustainable, let alone profitable, with a transformation agenda. By making this comment, government is deluding itself that it will be able to attract a “strategic equity partner”. Further, it is evident that government is not about to learn the lessons of the Ethiopian government and stay out of the operations of its own airline.
The South African government likes to point to the success of Ethiopian Airlines as evidence that Africa can have a successful state-owned airline.
However, SAA is not Ethiopian Airlines, and for that we can be grateful. It is said that even birds need to ask for permission to fly in Ethiopian skies. The Ethiopian flag carrier benefits from enormous government protection which suppresses competition, both internationally and particularly domestically. The lack of competition makes air connectivity in Ethiopia expensive, and this constrains both business and tourism. In stark contrast, thanks to a policy of liberalisation or “open skies”, the South African airline industry is intensely competitive. As evidenced by the high failure rate of airlines, only the fittest survive. But it has been great for tourism.
Yet, despite the fiercely competitive environment, our government, which has shown itself unable to run a bath, is determined to continue deluding itself that it can run an airline. State ownership is not being seriously questioned and the business rescue plan gives us no assurance that the Department of Public Enterprises is not going to interfere by making its airline fly unprofitable routes. From that it is just a small step or two further into the tar pit that killed the current SAA.
There will be no checks and balances against management becoming bloated and once again filled with crony appointments who play politics to guard their backs, rather than getting on with the demands of actually running an airline. From there it is but a short step to procurement being corrupted under the excuse of the preferential procurement policy. No airline can survive any part of that.
The inescapable conclusion is that the new BRP will be just another failed turnaround strategy. We are doomed to keep repeating the same old mistakes – and government continues to delude itself – and us, the willing gullible, by believing it knows how to run an airline.
The DPE’s Acting Deputy Director General responsible for aviation may have charmed former minister Malusi Gigaba, but she has no aviation qualifications beyond attendance certificates for less than 100 hours of minor IATA courses.
The airline was destroyed by corruption and incompetent management and given the final kick into touch by the Covid-19 crisis. Yet, instead of taking the opportunity to create a new airline that is not just sustainable, but is profitable and pays taxes, the same old shit is going to happen once again. Deja poo.
– Guy Leitch is the editor of SA Flyer Magazine. Views expressed are the author’s own.
