As I write this, the big question for everybody who has an interest in SAA is whether Covid-19 is the final nail in the airline’s coffin?
In early March we finally saw the first clear signs from the business rescue practitioners of their turnaround strategy. And it was ugly, with massive route and thus crew cuts – particularly amongst the pilots.
And then the reality of Covid-19’s impact hit home, and all plans were sent back to the drawing board. International and regional routes have been suspended and domestic routes had already been more than halved by the business rescue practitioners (BRP). Without knowing how the Covid-19 pandemic is going to develop and hopefully peak and then decline, it has become impossible to plan, so the BRP have now asked for a further two-month extension – to 29 May.
Until the BRP released its job cut proposals, things seemed warm and fuzzily uncertain. We fondly hoped that the government didn’t have the political will or capital to admit defeat and close its airline down. Even SA Express was allowed to stagger on, suffering the ultimate indignity of having competitor CemAir operate its flights and losing more money than it was getting in on top line revenue. So, people accepted that SAA should be able to continue, albeit much slimmed down and hopefully small and agile enough to be eventually profitable.
But then the BRP issued a bomb shell notice of, ‘Contemplated restructuring and possible retrenchments’. The notice revealed that almost two thirds of the pilots would become redundant and distressingly it made it clear that due to an ‘Employment Equity Override’, the first to leave would be white males, “to ensure equitable representation of black, female and disabled employees”.
Suddenly, if you will pardon the expression, ‘the shit got real’. Most of the white male pilots knew they would get the chop. Not even the Training Captains would be spared, which meant that our Designated Flight Examiner and SAA Training Captain columnist Mike Gough was going to be a casualty, plus almost every other SAA pilot friend of this publication. And the prospects for international employment are bleak.
The pilots who have the most to lose are the Senior First Officers. Due to the inability of the airline to grow over the past twenty years their careers stalled at first officer level. When a captain retired another captain filled the place due to the airline steadily shrinking. The result is that many pilots who are still first officers have invested the best twenty years of their lives into SAA and now had their long-term commitment rendered all but valueless by the airline’s collapse. These Senior First Officers will now find themselves cast out into the cold winds of the international airline market having to compete against thirty-year olds with more than a thousand hours of command time. At the low-cost carriers such as EasyJet and Ryan Air, pilots as young as 26 are getting command. And now Covid-19 will do irreparable damage to airlines, further reducing their demand for pilots from the many airlines that will inevitably fail. The blossoming pilot shortage has been cut off at the stem.
And of course, it’s not only the first officers. Captains whose lives are in South Africa will be forced to look for work in strange places with funny food. And as one pilot dryly commented when contemplating flying far from home, “Ja, the pay may be okay, but who am I going to drink beer with?”
The other group that will be hurt the worst by the cutting of SAA operations – or its total closure – are the cabin crew. SAA cabin crew are well paid, particularly those that get international travel and meal allowances, and can earn up to R18,000 per month. They have worked hard to acquire marketable skills. If – and it’s a big if – they manage to get into another airline it would probably be at less than half their salary. The local low-cost carriers reportedly pay their young cabin crew less than 10,000 per month – and so they live at home with their parents. But SAA cabin crew have nice apartments with bonds and levies and flashy living expenses.
Even so, it’s hard to feel much sympathy for them as a group as it was their gullibility in the hands of their union leaders that forced SAA onto its knees late in 2019 due to their strike. They did not have the insight or common sense to see how vulnerable the airline was, and how forcing it to cancel flights would lead to a mass loss of forward bookings. Damn fools – they allowed themselves to become casualties in a war between those who would pull down the walls of the temple for their own selfish political agendas.
The big question remains – can SAA be saved from this double blow? Can the shareholder, i.e. government – and that is you and me, the taxpayer – continue to fund SAA through not just the business rescue process, but also the Covid-19 pandemic?
It depends on several factors. Does the government have the political will to continue to bear the burden of SAA? And does it have enough money? – especially in light of competing demands from other services such as healthcare’s need for massive cash injections to deal with the pandemic.
How much will it cost to rescue SAA from this double blow? It’s hard to say because it depends on whether or not the airline flies during the pandemic. At time of writing it has cancelled all international and regional flights, at least until the end of May and this goes some way to reducing the airline’s direct costs. But overheads will continue, and these will be in the region of at least R1 billion per month. And then there is the interest burden from its massive debt. So, the cost of keeping the airline on the ground for three months may be R3 – R5 billion.
Is it worth it? In February I wrote a piece for the general media on whether SAA was worth saving. What follows is an edited and updated version of my earlier article. In it I said, “Let’s for a moment look past our feelings of anger and helpless frustration at the once proud airline that has been holding out the begging bowl for the past twenty years, and ask the simple question – is SAA worth trying to save – yet again?”
I would argue that the answer is unequivocally yes.There are couple of quick and easy reasons why it would be a hugely costly mistake to close it down – or to choke off its funds and let it die:
First – it will cost too much to close it down, and we can’t afford it. SAA is about R40 billion in debt to the state and to banks and it has about R80 billion worth of aircraft leases, which will cost plenty to wriggle out of. Without flight operations to service that debt it just becomes a deadweight that the state (we the taxpayer) will still have to pay for.
Second: we seem to forget that SAA is actually a good airline. It has once again won the Best Airline in Africa award, beating Ethiopian off top spot. And many travellers prefer SAA’s service to the big European carriers. It has world class pilots and wonderful cabin crew. Its on-time performance is right up there with the best (that is when it isn’t shooting itself in the foot by cancelling flights) and its safety standards are unimpeachable. What more could you want?
Third: the airline currently employs 5,000 people – and 9,000 in the SAA Group. If SAA were to close, about 80% of those jobs would be lost. Mango may be able to continue, but without SAA as their primary customer, SAA Technical and Air Chefs would collapse. And this is only the loss of direct jobs. Thousands more high value jobs in support industries would also be lost. The cost, both in terms of human suffering and to the national economy would be huge.
Fourth: the airline performs an essential enabling function to the South African economy – and the rest of Africa as well – in that it provides essential air transport connectivity. The facile response to this claim is that private sector airlines will move into the gap left by SAA. After all, capitalism abhors a vacuum. But not so fast. The world airline industry is entering a sharp downturn, having just had its worst year in 11 years. And now Covid-19 will do irreparable damage to the surviving airlines. Arline bosses will be loath to risk expanding into thin African routes that even a subsidised state-owned carrier struggled to operate successfully. And with the meltdown in oil prices there is a good chance you can’t get your money out as oil producing countries like Angola, Nigeria and others face massive balance of payment deficits and foreign currency shortages.
Fifth: If SAA collapsed and foreign operators moved into the space left by its departure, the revenue from ticket sales would have to be exported, with a strong negative effect on South Africa’s balance of payments.
Sixth: building on point 4: SAA provides essential connectivity that transports the people, goods and services necessary for economic growth. In 2017 Oxford Economics updated their seminal study on the value of aviation to South Africa, and the results are startling. Headline numbers show that the aviation sector supports 490,000 jobs and adds R160 billion to South Africa’s GDP. In addition, by buying goods and services from local suppliers the sector supported another 130,000 jobs. Foreign tourists arriving by air to South Africa, who spend their money in the local economy, are estimated to support an additional 230,000 jobs.
In 2014 the Oxford Economics study revealed that the aviation sector contributed R 50.9 billion (2.1%) to the South African GDP. This total comprises: R20.1 billion directly contributed through the output of the aviation sector (airlines, airports and ground services, aerospace); R21.0 billion indirectly contributed through the aviation sector’s supply chain; and R9.8 billion contributed through the induced effects of spending by the employees of the aviation sector and its supply chain.
A notable feature of air transport jobs is that they are high productivity and thus high value. The average air transport employee generates R721,132 in Gross Value Added (GVA) annually, which is over four times more productive than the average in South Africa. Oxford Economics calculates that an additional R5.0 billion of government revenue is raised via the aviation sector’s supply chain and R2.3 billion through taxation of the activities supported by the spending of employees of both the aviation sector and its supply chain.
This is only a small snapshot of the importance of air transport to South Africa. The airline industry’s wealth creation ability is spectacular, and the numbers mind boggling. And most importantly it provides essential connectivity. Thus, in response to Covid-19, Qantas are also suspending international flights to the end of May. However, they will continue operating some routes on an ad hoc basis, ‘for strategic and repatriation purposes’. They will also continue a very limited domestic and regional schedule of approximately 40 percent of capacity. This has been deemed an essential service by the Australian government. For example, Sydney-Melbourne will run 250 return weekly services through the end of March (down from well over 400 at present), and then 88 return weekly services through the end of May. This is clear recognition of the strategic importance of the airline’s operations.
Yes, it’s true that SAA only contributes a fraction of the total contribution of aviation to the South African economy. The airline’s once central role has shrunk dramatically. I reckon SAA’s specific share of that contribution to be between just 10 – 15% of the total South African air transport industry. Assuming a conservative 10%, then SAA is still responsible for supporting R11 billion of value to the GDP, plus a further R7.5 billion in tourism. And that’s each year.
While it’s true that much of the gap left by the closure of SAA may be replaced by private sector carriers over time – there is no incentive for private carriers to invest in uneconomic routes that are important trade links. The CEO of a privately owned airline admitted to me recently that state owned carriers do a great job opening up a non-economic route and then, when the route becomes big enough to be profitable, privately owned airlines move in and take over the market.
My plea is, let’s not lose perspective – SAA makes an enormous contribution to the South African economy – far greater than the R6 billion a year it has been getting from taxpayers or my wild guess of R5 billion due to the cost of Covid-19.
It would be foolish to close it down. Especially as there is no reason why it should not be run profitably. Other airlines located at the end of a spoke in the hub and spoke networks that have come to characterise air transport have shown that South Africa’s position of not having a natural hub like Ethiopia’s Addis Ababa is not a terminal affliction. Look at Air New Zealand, Qantas and LATAM in South America. Between them they produce R20 billion in profit. Given good management and right sizing, SAA can be equally profitable – to at least R1 billion per year.
In conclusion; despite the added vicissitudes of Covid-19, it’s worth persevering with yet another bail-out and turnaround strategy. But this time let’s make sure the turnaround team gets the political and financial support it needs. The fallback in January to the Development Bank for emergency funding was not a good sign. And if government continues to hold the purse strings there will always be interference. We can only hope that the Business Rescue people will be given enough time and resources to turn it around.