/ 13 August 2008

SAA stomps on taxpayer

SAAs competitors say there is no incentive for the airline to function competitively. Photograph: Oupa Nkosi
It’s a history littered with lessons and crumbs of what was to become the SAA privatised. (Oupa Nkosi)

While SAA flounders on the back of its long-standing financial woes, the taxpayer has been subsidising each SAA plane ticket over the past five years to the tune of R500.

The total cost to the taxpayer in write-offs, bail-outs and guarantees is about R20-billion during this period, according to Gidon Novick, chief executive of Comair and Kulula.com.

At about eight million passengers a year, this is about R500 cost to the taxpayer per ticket.

”They also just make poor management decisions, like the launch of Mango,” he argues. ”We estimate Mango’s losses at R100-million a year.”

SAA had a 50% market share prior to the launch of Mango, says Novick, but since Mango this has fallen to an estimated 40% at present.

SAA famously incurred losses (foreign exchange) of about R13-billion in 2004.

But even if these disastrous losses of 2004 are excluded, the taxpayer has still supported SAA to the tune of about R6,5-billion over the years if all state support in the form of cash and guarantees is considered.

SAA wants just less than R3-billion of loan guarantees to be converted to equity, meaning that what it had underwritten as a loan from the state, will be written off by the shareholder (government), which already owns 100% of the equity.

SAA acknowledges receiving R653-million in direct funding from government for restructuring purposes.

Furthermore SAA, during the announcement of its annual results in July, said it would approach government for a further R3-billion to ”recapitalise” the business.

”There is no company in South Africa’s history that has performed so poorly,” says Novick.

”This is theft from the taxpayers’ pocket for an industry that does not need to be subsidised by government — SAA is putting a positive spin on a corporate disaster.”

Novick puts the problem down to the fact that the airline, with SA Express and low-cost carrier Mango, are state run.

State-owned entities ”traditionally perform poorly”, he argues, because of high levels of inefficiency and since they are government backed there is no incentive for them to function competitively.

SAA, however, denies that government has paid out anything more than R653-million to the company since 2004.

”SAA has received only R653-million in funding from government in the past five years. A government guarantee is not a cash injection and thus it does not come from taxpayers,” head of SAA corporate affairs Robyn Chalmers told the Mail & Guardian.

”One of the critical elements of SAA’s restructuring plan, which was submitted to government last year and approved, is the recapitalisation of the airline to strengthen the balance sheet and prepare the airline for future growth,” she says.

SAA argues this crucial recapitalisation justifies its request to turn its government-backed loans to pure equity.

”The financial results for 2007/08 show that the airline is on a far sounder financial footing than it was 18 months ago,” says Chalmers.

”Revenue grew 9% to R22,5-billion, cash generated from operations rose more than fourfold to R1,39-billion and operating costs were kept under control despite a R950-million unbudgeted cost flowing through as a result of the sharp rise in the oil price.”

The DA has come out strongly in Parliament against the state providing any further backing to the beleaguered airline.

Manie van Dyk, DA spokesperson on public enterprises, says that ironically, the restructuring has never taken place and has simply amounted to the retrenchment of more than 1 000 employees.

The retrenchment is despite the fact that the airline is short of more than 200 technical staff. SAA Technical, the airline’s aircraft service and maintenance arm, also provides services to Comair as well as some international airlines.

Novick says, however, that while it is a concern, SAA Technical has been ”proactive” regarding skills and ”we are confident they are managing it”.

Carte Blanche reported two weeks ago that the airline accommodated American consultants at a luxury hotel close to OR Tambo airport for a year at a daily rate of an average of R1 100.

SAA chief executive Khaya Ngqula denied the exorbitant consultancy fees, however, saying that the firm, Seabury, was paid only R100-million, rather than R300-million or more reported by Carte Blanche.

Carte Blanche also reported that senior staff, such as Ngqula are being paid massive retention bonuses each month, in a bid to prevent their flight to competitors.

Ngqula alone is reportedly being paid R68 000 a month, though he and the company deny this.

The M&G sent questions to the Department of Public Enterprises regarding SAA’s continued financial support from government, as well as its reasoning behind this ongoing support. The department had not responded by deadline.