/ 6 March 2020

SAA rescue costs us social reforms

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SAA is about to be closed, which will pave the way for a new airline. (Delwyn Verasamy/M&G)


The rise and fall of SAA is best captured in the story of two legal processes — one completed and one aborted. In November 1986, at the height of the sanctions movement against the apartheid regime, the United States Congress passed a motion to ban air traffic between the US and South Africa. Desperate to maintain its presence on the lucrative route, SAA approached no lesser an authority than the chief justice of the US Supreme Court — William Rehnquist — to seek a veto on the US Congress decision. It was soundly rejected.

Thirty-three years later, in the chambers of the deputy judge president of the high court in Johannesburg, parties representing the airline, its workers and its shareholder took the unprecedented decision to place it under business rescue. Both episodes — separated by three decades of political change and market evolutions — represented an intersection between business, politics and pragmatism. As the national carrier for a country subjected to sanctions as a result of the international outrage against the apartheid regime, SAA played the role of connecting South Africa with the world in a time when few other airlines accommodated the South African market. For the politicians of the day, it represented a statement that they needed to project to the world — the efficiency of a regime whose legitimacy was in question.

Its business value to South Africa and beyond was indisputable. The island nation of Cape Verde for example, served as a refuelling port for SAA flights. Immediately before the imposition of sanctions, 36 SAA flights would refuel in Cape Verde on a weekly basis. The economic value of that arrangement — $10-million annually, immediately plummeted to just $3-million when SAA was banned from flying to the US. The dilemma of the day — whether the actions of sanctions could be justified in the face of the economic cost — would emerge again three decades later in a different form.

The end of the apartheid regime and the opening of the skies had profound implications for SAA. As sanctions were lifted, SAA could once again fly the national flag across the world. At the same time, however, all other airlines could then get access to the South African market unburdened by the moral dilemmas of the past.

In this evolution, the exogenous factors — the globalisation of international airspace, the rise of the ME3 (Emirates, Etihad Airways, and Qatar Airways), and the emergence of low-cost carriers — meant that SAA’s transition had to appreciate the significance of market forces and the waning influence of political considerations. An inability to manage the transition has led us here.

The existence of the state as a shareholder is on its own a non-issue. What keeps an airline viable is a question of how well it’s managed rather than the ideology about its ownership. But the effect of being state-owned in South Africa is that the decision-making processes, the accountability and governance model mirrors the state’s approach rather than the open market approach. The bureaucratic paralysis created by this significantly dents an airline’s competitive position.

In December, SAA was placed in business rescue. This was in response to the resolution by Solidarity trade union to approach the courts to impose a business rescue process. Since then, the airline has drafted an initial version of the business rescue plan — Project Iconic. Its main objective is to determine whether SAA can be saved in any form. Almost 10000 direct jobs are on the line in the case of the one option — an outright liquidation. In light of the unemployment crisis, this represents the worst outcome for the nation.

The state of the finances is a calamity. SAA has lost more than R23-billion since 2012. In the draft plan, the possible rescue scenarios involve the option of restructuring SAA by simply identifying the routes that have a prospect of profitability and simply canning the rest. The scaled-down SAA would result in job losses.

A key feature of the airline business is the confidence prospective passengers have in the airline’s ability to fly them in the future. The various missteps at SAA — from Finance Minister Tito Mboweni’s announcements about his wish to shut it down to the cancellation of travel insurance products — have eroded all illusions of confidence in the airline.

This has been compounded by the fact that, since February, SAA has announced blanket cancellations of all domestic lines except one. The problem is that even if the final rescue plan changes that decision, the prospects of passenger uptake on the restored routes will be low for a while until a track record of reliability is re-established.

The alterative scenario — abandoning SAA and simply keeping Mango afloat, preserves a better performing asset in the SAA stable. Its headcount, however, at less than 850 means that the net job losses under this scenario are as bad as it is in the liquidation scenario. The fundamental challenge for the business rescue team, consolidating the direct costs and the indirect social and economic costs of whichever decision they take, is proving to be more complicated than expected.

The Companies Act envisages a speedy process in relation to business rescue proceedings. This caters for the reality that by the time the process starts, cash is already a scarce resource. This is even more so at SAA. The difficulty then is why the business rescue team would seek another postponement to the process. Having been in a position to publish a draft plan in January 2020, very little in the way of good news would have hit their radar. Rather, the opposite has happened. The decision to cancel routes was an endogenous dent to the process. The impending slowdown in the global aviation industry emanating from the coronavirus, all indicate a revision towards bleaker prospects for the airline.

Political noise around the process has done little to address the main problems. Adherents of the survival at all costs option — who admittedly haven’t seen the financial statements — refer to the prevalence of evergreen contracts with predominantly white businesses as the key issue. Missing from that narrative is the fact that the business rescuers are within their rights to interrogate and restructure such contracts if need be.

The same applies to the pilot contracts and similar commitments. The national conundrum that prevails across the system is the ideological objection towards a downward revision of wages and the tensions created when those far removed from decision-making are made to feel the brunt of adjustments and cuts initiated by senior management and politicians. In an age of high unemployment and low prospects of transitioning to other airlines, SAA employees may be the first large-scale workforce to feel the guillotine of mismanagement. A tragic element of this scenario is that the usual political approach — simply putting more money into the problem, has finally run its course. The immediate consequences — the huge loss of jobs — now have to be contrasted against the question of what happens if the politicians prefer another bailout strategy. That solves the immediate issue but does nothing to address the simple question of whether those billions would be better spent elsewhere.

What works best for politicians is the strong bargaining power of the incumbents. Simply put, the fact that we know exactly who gets affected in the restructuring and liquidation scenarios means the link between action and consequence is more linear when employees are on the line. What isn’t so linear is the question of what the long-term social costs of bailing out entities, rather than investing in social services, is. Until we find a model that objectively compares the two, the incumbents — employees and unions — are always in a better position to bargain for their cause. The politicians of today — just like their peers of 1986 — will have to learn that political pragmatism will eventually be superseded by economic realities.

Khaya Sithole is a political analyst