SAA: Cyril's pie in the sky

RW Johnson questions whether any serious player will invest in our national airline

President Ramaphosa recently told the FT conference in London that South African Airways was holding talks with several possible partners who might take an equity stake in the airline. It is difficult to know how seriously to take this. In the late 1990s I had a conversation with Robin (Lord) Renwick about this. Robin, then on the board of British Airways, had come out to South Africa with a mandate to make an offer for SAA.

He told me that the government of the day had been keen and had said they would sell up to 49% of the airline. Robin had laughed and said the bare minimum that BA would consider was 51% because they wouldn’t consider such a deal unless they had complete management control of what they were paying for. The government had recoiled from this, whereupon Robin had made an alternative deal with Comair. This has been very successful – Comair have profitably used the BA name (“British Airways operated by Comair”), have made a profit every year and expanded their service – and in 2001 also launched, Africa’s first low-cost airline.

This is worth bearing in mind. BA could have incorporated SAA into a huge international network, guaranteed consistently high standards of aircraft maintenance and provided capital for SAA’s expansion into Africa. It was a major opportunity which would have relieved the government and the taxpayers of more than twenty years of SAA losses. The fact that this was turned down was merely a reflection of how completely jejune is the ANC’s understanding of the business world. One should remember that at much the same time the Mbeki government sought to involve independent power producers (IPPs) into complementing Eskom.

The idea was good but the result was farcical. The government laid down all manner of onerous conditions which such producers would have to comply with and also specified that they would not have control over the price of the electricity they generated – this would be decided by Eskom and its shareholder, the government. The potential producers took one look at this extraordinary proposition that they should invest large lumps of capital but hand responsibility for pricing and thus their own profitability over to the government – and just walked away. Not a single IPP tendered for a contract.

In effect the government had hugely over-estimated the value of what they had to offer – just as they did in the case of BA. This was a very poor reflection on Mbeki’s economic savvy. And this parochial inflation of one’s self worth is now at work again with the Ramaphosa government’s talk of minority equity stakes in SOEs. In their own eyes the government clearly feels that they are offering private investors a jewel of great price by allowing them part ownership in these pieces of the national patrimony.

Gwede Mantashe has drawn some ribald comment for his famous speech to Australian investors boasting about our reserves of the (non-existent) precious mineral, hazenile. It was indeed a clownish performance though, to be fair, any number of ANC ministers might have been similarly foolish. But more striking than Mantashe’s ignorance was the ease with which he made the happy assumption of our limitless national resources.

This is indeed quite common in ANC circles and yet it is hugely at odds with South Africa’s hard-scrabble history. If you read about the immense struggles of the early farmers trying to coax a living out of South Africa’s variable soils, scarce water resources and difficult climate you realise that until the discovery of diamonds and gold this was a country which relied on exporting wool, feathers and animal skins.

But of course, few if any ANC leaders know any South African history and instead they rely on the perspective of many Africans under apartheid who would contrast their own poverty with the gleaming office blocks of Jo’burg or the sometimes palatial white homes they walked past, concluding that this was a country of immense wealth. Yet in 2017 our GDP per capita was just $6,161. Compare that with the figures for Australia – another dry country dependent on tough farming and minerals – and you see that their 2017 figure was $53,800. Without, of course, counting their hazenile deposits.

Something of this wishful attitude must surely have inspired Ramaphosa’s London speech but it is doubtful that any potential investors were fooled for a moment. The government’s only hope of finding such investors for SAA lies in the possibility of BEE partners who are as jejune as themselves and who think it would be prestigious to own a chunk of the national airline. But even if the government were to find such partners, the resulting deal would collapse very quickly, providing no real solution for SAA.

It is worth pointing out the international context. Although some 5,500 airlines have ICAO (International Civil Aviation Organization) codes, most of these have long been defunct. Indeed, there are under 400 commercial airlines in the world and almost 100 of those have ceased to operate.

A considerable majority of the remainder are privately owned but even so the international civil aviation market is desperately overcrowded and competitive conditions are very difficult. This is true despite the fact that the falling real cost of air travel has revolutionized the way we live. And that has been the key motor. When Britain and France began to build the Concorde, Boeing looked at it and decided instead to put their money into the 747 jumbo.

They knew what they were doing – the Concorde was a technical marvel but it carried few passengers and always lost money while the 747 became the workhorse of the airborne masses and was hugely profitable. In more recent times this logic has been taken a long step further by the low cost airlines. Their very simple idea was that despite the wonderful new generation of aircraft and falling real fares, it was still possible to cut a lot of costs out of airline operation – and make large profits all the same.

The emergence of the low cost carriers has merely increased the crisis of the old “legacy” (and usually publicly owned) airlines and these are now under tremendous pressure all round the world. This can be seen at a glance from the fact that in the huge and still continuing boom in international tourism, many countries make a large profit from tourism, as do many hotels and restaurants and holiday destinations (theme parks, game reserves, Disneyland etc) and, indeed, as do the plane-makers, Boeing, Airbus, Embraer and Bombardier. But few airlines – the Cinderellas of the tourist boom - make decent profits and quite a few are running at a loss. The reason is that there are simply far too many of them and the aviation market is distorted by the willingness of some (though a declining number of) governments to finance loss-making state airlines.

If you look at the world car market it is instantly noticeable that production is overwhelmingly dominated by just fourteen large groups – Daimler, Volkswagen, BMW, Peugeot-Citroen, Renault, Fiat-Chrysler, Ford, General Motors, Tata, Seely, Hyundai/Kia, Toyota, Honda and Nissan. There are a few smaller manufacturers like Subaru, Tesla, Mazda etc but these are niche producers and have no mass market presence. Moreover, there is considerable spare capacity in the world car industry despite the closure of many smaller manufacturers and even many of the fourteen are under pressure to merge, as Nissan and Renault have come close to doing (and Nissan has taken over Mitsubishi). And even this market has long been distorted by governmental wishes to support their “national champions” so one could well see this number fall to a dozen or less over time.

Exactly the same market forces are at work on the world’s airlines and although many airlines have gone bust or been bought out, including such giants as TWA, PanAm, KLM (bought by Air France), Swissair, Austrian (bought by Lufthansa) and Iberian (bought by BA). But quite clearly a further radical contraction in the number of airlines is under way – and if market forces prevail there could one day be only a dozen world airlines.

One can easily see a number of large airlines on the hospital list. Alitalia, for example, went bankrupt in 2008 and Berlusconi then allowed some of his cronies to buy the healthy bits of the airline, allowing the rest to fail at a huge cost to the taxpayer. But even the new slimmed down Alitalia filed for bankruptcy again in 2017. The airline now puts out publicity promising that flight schedules will be honoured “despite the current situation”.

If one looks at the list of publicly-owned airlines one is struck by the large preponderance of tiny (and loss-making) African airlines. Almost all of these are vanity projects but a high proportion of their seats are actually complimentary, for they provide free air travel for the political elite and the President’s friends.

The same is true of SAA, of course – all MPs get 84 free flights a year while ministers, SOE managers and senior civil servants get unlimited free travel. That is to say, many of these airlines are not really airlines at all but just part of the elite’s perks of office. Naturally, this makes members of these elites great defenders of their national airlines, insisting that they are a crucial part of the national heritage, that they play a developmental role and so forth. All this is nonsense.

Once you have waded through those scores of African psuedo-airlines one is left with only a few major state airlines. Qatar, Emirates and Etihad all benefit from wealthy regimes which have used them to promote their countries around the world. They are all run on a tightly commercial basis but it is not clear how far they have benefited from subsidies and how profitable they really are. Something rather similar applies to Singapore Airlines which has frequently won awards and advertises Singaporean efficiency and high standards to the world. Scandinavian Airlines is lucky enough to be sponsored by not one but three rich governments.

After that come the basket cases like Egyptair, which has made losses every year since 2011 and doesn’t help itself by refusing to serve alcohol. Air India is another. In 2013 the Minister for Civil Aviation, Ajit Singh, announced that “the privatization of Air India is the key to its survival” but, as in South Africa, political pressure groups prevented this from happening. In 2017 the government again announced the loss-making airline’s privatization but again it has not happened.

Pakistan International Airways is in an even rockier state – in 2009 the EU banned most of its fleet from flying to Europe because of safety concerns and there too the government has made repeated though unsuccessful attempts to privatize. Aeroflot is now only 51% state-owned and almost exclusively buys from Boeing and Airbus. According to its official accounts it just about balances the books, this despite its vast internal air travel market and such unexpected awards as being made the official carrier for Manchester United.

The great exception is Ethiopian Airlines, now by far the biggest in Africa (it has 117 planes and in terms of countries served is now the world’s fourth biggest airline). Although state-owned it has always been run on an extremely commercial basis, including tough job cuts when necessary. It has also quietly been buying up airlines in Malawi, Zambia, Guinea, Mozambique and elsewhere, thus transforming itself more and more into an all-Africa airline.

In 2018 the Ethiopian government announced that the airline would be partly privatized. It is highly profitable and, probably more than any other airline, it has been eating SAA’s lunch. One can see that in Europe we are rapidly coming down to just three airlines – Lufthansa, Air France and BA. If Africa comes down to just one airline, it will be Ethiopian.

This last sentence is a sad epitaph for SAA which used to be unquestionably Africa’s leading airline. Had it been run better it might now be where Ethiopian Airlines is. Twenty years ago SAA was a takeover target for BA but it is doubtful now whether it could excite interest from such a major world airline, for there has been a huge destruction of value in the intervening years. Probably its best hope would be to get taken over by Ethiopian.

But if Ramaphosa thinks that even Ethiopian would be satisfied with a minority share-holding, he had better think again. In the real world those days have long passed. Swissair once bought 20% of SAA on the promise that the airline would be completely privatized. When the government welshed on that promise, Swissair sold out. But that was another era: Swissair itself went bust some years ago.

RW Johnson