EXPLAINER: How SAA landed in such a mess
- SAA is in a death spiral as government struggles to get R2 billion from banks to keep its operations going.
- The airline is bleeding money, and made massive losses over recent years, with taxpayers having to fork out more than R25 billion in bailouts and guaranteed loans.
- Its predicament was caused by a number of problems: including political interference, the weak rand and leadership turmoil.
- For more, go to Business Insider's home page.
SAA is on its knees – it doesn’t have enough cash to pay staff or keep its planes in the air for much longer, and government is currently scrambling to borrow R2 billion to keep it going.
Its spectacular implosion has wreaked a lot of damage, particularly on South African taxpayers.
More than R16.5 billion in taxpayer money was spent on bailouts to SAA over the past decade. On top of that, last year government committed to settle more than R9 billion in debts that SAA can’t afford to pay back.
This amounts to more than R5,000 per registered individual taxpayer in South Africa – or roughly equal to a percentage point increase in VAT.
And still the losses continue: according to some reports, SAA may have suffered a R9 billion loss in the past year alone – meaning it loses R930 for every passenger it (and is subsidiary Mango) transported.
However, the real extent of SAA’s losses and its debts isn’t clear. The airline hasn’t been reporting its results since 2017.
How did it end up in this mess?
As recently as 2011, SAA made a profit. But its problems have been coming for some time.
Competitors ate its lunch
In 1991, government deregulated the domestic airline industry, allowing any company to fly any route. SAA – which up to that point controlled 95% of the local market – starting losing its dominant position to new competitors.
Many of these new companies failed – including 1time, Sun Air, Phoenix Airways, Nationwide and Flitestar. They blamed unfair competition: SAA continued to be bolstered by the deep pockets of government.
But eventually two competitors started hurting SAA locally: Comair (which operates kulula and British Airways in SA) and FlySafair, which is now SA’s largest domestic airline.
SAA was also hit on its international routes.
For many years, it dominated all traffic between Africa and the rest of the world. It had few competitors on these routes and much of the air traffic from elsewhere in the world to African destinations was connected via Johannesburg, with SAA having specific rights on African routes.
But over the years, new competitors – including Ethiopian Airlines - started to erode its position.
These days, almost all of SAA’s international routes are making big losses.
The one lucrative SAA route had was between Mumbai and Johannesburg - but in 2015, the Gupta family influenced SAA into relinquishing this route to Indian airline Jet Airways.
This was just one of the disastrous decisions made during the five-year SAA chairmanship of Dudu Myeni, a close friend of former president Jacob Zuma. She currently chairs his charitable foundation.
Myeni repeatedly clashed with former finance minister Nhlanhla Nene, and his eventual successor Pravin Gordhan over a controversial deal that would allow SAA buy a number of Airbus planes, then sell them to a local company, and then lease the planes back from the company.
The finance ministers refused to allow SAA to buy the planes.
Nene was fired by Zuma, in part for his refusal to comply. Gordhan testified that Zuma called him in an effort to convince him to follow Myeni’s plan. Gordhan refused, demanded that SAA’s board to be replaced, and was eventually also axed.
Myeni has also been fingered in a suspect tender to secure debt funding for SAA.
The wrong planes
Since 1991 SAA has spent billions on a range of Airbus A340 planes, which proved a key pitfall, according to the airline news platform Anna Aero.
“These aren’t well-suited for the challenges of long-range operations from its hot-and-high hub, Johannesburg (5,500ft). In addition, as fuel prices rose from 2007, the four-engine type was less capable than rival twins or higher-capacity quads used by Emirates, among others.”
The weak rand
Fuel represents more than a third of SAA’s expenses, and as South Africa imports most of its fuel, the sharp drop in the rand in recent years has massively added to its fuel bill.
With debts of at least R17 billion, the burden of massive repayments meant that it didn’t have enough cash to compete on price, or improve its service.
SAA owns SAA Technical, which maintains its planes, as well as those of other companies like Comair. Last year, the airlines were forced to ground some of their aircraft for compliance checks after irregularities were discovered during an inspection at SAAT.
This came after reports that SAAT used “fake parts” when servicing aircraft, and that a crime syndicate had infiltrated the airline's technical team. SAAT denied this, but finance minister Tito Mboweni later confirmed widespread theft at SAAT, including that “a whole engine” was stolen.
FlySafair, which owns its own maintenance arm, has capitalised on SAAT’s problems - and continued to fly as other planes were grounded.
SAA currently doesn’t have a CEO after a tumultuous decade of leadership crises.
In 2009, CEO Khaya Ngqula was sacked after accusations that he authorised massive bonuses without approval, as well as signing an ATP tennis sponsorship deal worth R120 million without board agreement.
His successor Siza Mzimela resigned in 2012 after a dispute with government.
Vuyisele Kona, SAA chairperson, was appointed as acting CEO, but the following year then-minister of public enterprises Malusi Gigaba suspended him following unspecified allegations. The Sunday Times later reported that Kona refused R500,000 from the Gupta family.
Vuyani Jarani – a former Vodacom executive – was then appointed as permanent CEO, but quit last year, citing a lack of government support.
Fines for uncompetitive behaviour
SAA has been forced to pay large fines after running an incentive scheme for travel agents, who received commissions from SAA in contravention of the Competition Act.
In 2016, SAA was ordered to pay Nationwide, a competitor that went bankrupt, almost R105 million in damage.
Comair – which operates kulula and British Airways in SA - also received an award of R1.1bn. (SAA has not yet paid the full amount.)
Some of the other problems that hurt SAA was government’s decision to demand unabridged birth certificates for the minor children of inbound tourists, which had a marked impact on travel volumes to South Africa.
Of late, industrial action has also hit SAA. A strike at the airline last year cost the company more than R50 million a day.
What will happen next?
SAA is currently in business rescue.
This means it doesn’t have to repay its loans for the moment, and it is being run by business rescue practitioners. They have until the end of February to decide whether the airline can be rescued, or whether it should be liquidated.
Liquidation isn’t really an option: if SAA goes under, government would immediately have to repay billions in loans that will be triggered if it is liquidated.
Last weekend, the ANC’s national executive committee decided to keep the airline alive, but said that “substantial restructuring” will be needed. SAA has already started selling its planes, and has scrapped 38 loss-making flights to save money.
But it has an immediate problem of getting through the next few weeks.
It urgently needs R2 billion to keep its planes flying. Government already pledged the money to the business rescue practitioners, but it still hasn’t paid it.
That’s because the money hasn’t been budgeted for, and Treasury is trying to secure the funding without adding to ballooning government debt.
The national debt now tops R3 trillion - 61% of GDP. Mboweni has warned that South Africa's government debt could hit more than 70% soon.
Moody’s, the only credit rating agency which hasn’t downgraded South Africa to junk, is closely monitoring government’s commitment to rein in spending, which is keeping Treasury on its toes.
According to economists, Treasury may be trying to secure loans for SAA without providing government guarantees. Unsurprisingly, though, banks are reluctant to bite.
So it’s expected that SAA will try to cut more flights, and spending, to remain operational – at least until the business practitioners announce how the airline could be restructured at the end of February.
Receive a daily update on your cellphone with all our latest news: click here.
Also from Business Insider South Africa:
- Here are the over-the-counter medicines you may need a prescription for in future - including Adcodol and Nurofen Plus
- What you need to know about the state of SA’s minibus taxi industry – including how much profit owners make each month
- These SA towns will get better roads and internet connections under a draft spatial development plan
- SA’s future cities can have rooftop poetry nights and people being nice to one another, says a new draft government plan
- The US plans to force passengers to change routes, and potentially redirect entire flights, to make sure they get screened for the Wuhan virus
- A black man in the US received a settlement in a race discrimination lawsuit. When he tried to cash the cheque, the bank called the cops, prompting a second racial discrimination case.