SA’s state airline is in the news once more, plagued by strike action. Despite many solutions being offered, the government persists with this millstone, confusing the nation and irking the taxpayer.
Former Comair CEO Erik Venter, speaking at the Free Market Foundation, observes that in the new millennium there has been profound change in the business of global aviation. Many country airlines have moved from an insular approach to dramatically increasing their home bases, and many state-owned airlines have been privatised.
Turkish Airlines for example was historically an insignificant player. Now it is the world’s most international airlines, serving 121 countries from its home base of Istanbul, the world’s busiest airport, having recently eclipsed Atlanta-Hartsfield in Florida, US. Similarly, Europe and most countries in the Far East (except China) have opened their skies.
But some countries have remained highly protective of their local industries, including the US and some in Africa. While the US internal market has enough competition to keep prices low, that is not the case closer to home.
“As long as protectionism is there, prices can be pushed up,” Venter said. “If the African market was opened up, prices would fall.” However, many African countries are regressing, looking to revive their defunct state-owned airlines.
In Africa, aviation is mainly a middle-class phenomenon, and a substantial middle-class is essential to make it viable. On the rest of the continent, the size of this segment of the population is far too small. This means aircraft are small, economies of scale cannot be achieved, and so prices are high. African countries also don’t co-operate with each other, hindering open-skies policies, resulting in a high consumer cost of flying.
The SA domestic market is tiny in global terms. Its total 13-million passengers is smaller than the number of passengers who fly through the relatively insignificant Stansted Airport near London. This market size, combined with the number of players who have tried over the years, means our local private aviation industry does not boast a good survival rate, with an 80% failure record, according to Venter.
SA collapses are not surprising, considering that cost inflation, being mainly fuel combined with a weak currency, in the local aircraft industry has averaged 9.5% annually this millennium.
The only way to combat this phenomenon is to become increasingly efficient, diversify beyond just carrying passengers, and invest in technological efficiency.
Some airlines, such as Ryanair, have expanded into the management of airports and lounges. While Comair’s fleet has been steady at 25 aircraft for many years, the number of passengers it carries has doubled, achieved through larger aircraft and far more daily flights.
Exact amount
SAA is not the only airline failing on modern technology, and many struggle with legacy IT systems, particularly those written in Cobol. British Airways (BA) is a case in point, suffering three major IT crashes in two years due to its creaking computer systems.
SAA, now laden with R30bn in losses, has not risen to any of these challenges. Who really knows the exact amount of debt and accumulated deficit — financial reporting is so opaque and infrequent.
Venter offers a solution to the SAA crisis, predicated on the premise that it cannot be salvaged in its current form. Start by closing it down at operational level, he recommends, then leveraging its “intellectual property”, and franchising the valuable strategic SAA and SA Express domestic and regional routes to the private domestic airlines.
Privatise Mango, which is much smaller and may perhaps be a going concern, he suggests, though this is difficult as financials are uncertain. Otherwise shut it down and lease out its route rights.
Form a joint venture with a big global brand to use the international SAA route rights, with SAA-branded aircraft, Venter says.
These are radical solutions but probably appropriate for the albatross that refuses to fly.
• Gilmour is an investment analyst.
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