South Africa Must Free Itself From The Burden Of Owning A National Airline

South Africa needs to accept the reality that the time when national airlines flew as carriers of national pride is a thing of the past. Some national carriers – South African Airways (SAA) as a prime example – have become major liabilities. They must be cut loose to protect the pride of the nation.

Across the globe the feature of national airlines as a natural property of nation states has been in decline. Entrepreneurs have invaded the market and the success of a few national carriers, like Ethiopian Airlines, Emirates and Singapore Airlines is a function of some special features.

With a few exceptions, the situation in developing countries is particularly bad. They can’t afford the huge financial burden that comes with failing national carriers. South Africa, which is facing economic difficulties, is such a case. In raising the alarm over the country’s credit rating, the international agency Standard and Poor warned that the government faced risks from public enterprises with weak balance sheets. It included SAA on its list. The country narrowly missed being downgraded to junk status.

SAA is currently kept in the air on the basis of financial guarantees from the government amounting to R14 billion. This is coming out of over-stretched government coffers. And it must be stressed that it is taxpayers who have provided SAA with these costly guarantees.

This is not the first time the airline has been in trouble. It has a long history as a failed state owned enterprise. Yet it manages to stay afloat by asking for government bailouts and by using every available means to shut down competitors.

Dubious Uncompetitive Behaviour

The airline has once again been in the news for all the wrong reasons. This time it is making news headlines because of its role in the demise of Nationwide Airlines, one of the few competitors it faced on domestic routes.

The state-owned airline has driven Nationwide out of the market and put another one (Comair) under pressure. This has ensured that there is limited competition in the domestic airline market. This, in turn, has prejudiced customers in a big way.

On August 9 2016 the South Gauteng High Court ruled that SAA must pay liquidated Nationwide Airlines a fine of some R104 million.

Nationwide was liquidated as it could not compete with SAA. The court found that SAA’s abuse of market dominance from 2001 to 2006 contributed to the liquidation.

If interest is added to the damages awarded to Nationwide, the amount can double to some R200 million. SAA seemingly does not have the money to pay this claim. This is obvious from the fact that even before the court case it had asked the government (read: South African taxpayer) for a further guarantee of R5 billion.

There can be little doubt that SAA will attempt to take the court ruling on appeal. After all, when taxpayers “underwrite” failed business ventures such as SAA, appeal is always an easy option. It is expensive, but somebody else carries the cost.

But more is to come. Comair has brought a court application similar to the one brought by Nationwide. In this case the claimed damages amount to R875 million. If interest is added in this instance, the claim amounts to some R1,5 billion. Again this is money that SAA does not have.

Badly Managed

That South Africa’s national airline is in a parlous state is no longer in dispute.

It has delayed releasing its financial statements four times over the past 10 months. No convincing reasons have been provided for the delays.

The failure to issue financial statements on time is partly a reflection of the incompetent leadership that has led the airline astray in recent years. To be sure, the airline has been rocked by boardroom shenanigans for some time. It has over the past 10 years or so experienced unprecedented leadership volatility with frequent changes to the board and the CEO post.

The tenure of the current board chairperson, Dudu Myeni, has taken things to a new level of scandalous corporate governance. It is clear that Myeni is unqualified for the post of chairing the SAA board and has only survived due to her close relationship with President Jacob Zuma.

The unceremonious and expensive firing of former finance minister, Nhlanhla Nene, came after he crossed swords with Myeni. And she appears to remain untouchable for the returning finance minister Pravin Gordhan. He has correctly called for the revamp of the airline’s board before advancing new bailout funds. His call has gone unheeded.

Ordinary Citizens Are The Losers

Customers are indeed the losers in all of this. Many are also taxpayers, and it is their hard-earned tax contributions that provide guarantees to SAA, thus giving it the power to squeeze competitors. This action increases the cost of airfares to the detriment of the very same group of people that funds SAA by means of guarantees.

This is clearly an untenable position. There is only one solution. The South African government must simply give SAA away. This is, if anybody is interested in taking it.

SAA clearly has no value. It is not necessary to do any expensive due diligences to ascertain this. The mere fact that it is kept in the air on the back of a guarantee of R14 billion and has asked for another R5 billion confirms the matter.

The South African government can no longer afford to keep its national airline afloat. Neither should South African taxpayers be expected to.

The Conversation

Jannie Rossouw, Head of School of Economic & Business Sciences, University of the Witwatersrand

This article was originally published on The Conversation. Read the original article.