Finance minister Tito Mboweni recently alluded to the possibility that he has lost the SAA funding battle when he tweeted that “in politics one loses some battles if you are a team player”. This after the department of public enterprises announced that public funds had been earmarked to shore up the ailing state-owned airline, all to be revealed in the October midterm budget policy speech.
If the Treasury is going to have to see to SAA’s funding needs in an already constrained fiscal environment, we ought to explore how to ensure the airline plays the developmental and strategic asset function it has been touted for. One of the issues aviation experts have raised is the opening of direct routes to Cape Town International Airport and King Shaka International Airport, which they argue removed the network effect of having OR Tambo International Airport as the primary hub. They say this drove revenues away not only from SAA, but also sectors that benefit from the transit process, such as accommodation, restaurants and car rentals.
This error is argued to have also weakened the position of the Airports Company SA (Acsa) as the primary provider of African gateway aviation management services. Acsa is the only state-owned entity that has been profitable for 18 out of the past 20 years.
In addition, in its last reported financial statements for 2017, SAA reported cargo revenue of just 5% of the total, while its Ethiopian counterpart carried three times that cargo load in the same year and Emirates, one of the largest airlines in the world, had cargo contribute about 15% of revenue.
Where Acsa maintains a market-leading position in continental landings and take-offs, the alliance revenue-sharing mechanism could work in favour of SAA when done correctly. While many still challenge elements of it, the Vickrey-Clarke-Groves (VCG) revenue-sharing mechanism could be critical in driving up the load factor of the new airline as the government attempts to resuscitate it.
In the years up to 2009, 47 airlines left the country and 37 direct routes were cancelled, yet load capacity increased for those that remained. What was notable was that for SAA this did not happen, which meant competitors were finding fertile ground in the local market.
SA ought to explore which sectors could offer immediate value for SAA and improve the challenge of low load factors. The country has some of the best facilities and conditions in the world to shoot feature films, documentaries, series and telenovelas, because of the range of natural scenery, the favourable exchange rate and long hours of natural light in summer. While many challenges exist in the Copyright Amendment Bill and Performers’ Protection Amendment Bill, there is clearly an opportunity for SAA to be the carrier of choice for the likes of Netflix and Disney Films.
The critical thing the government must always consider is the risk associated with operating an asset if it does not have the capacity or skills. As primary shareholder, the state will have to consider operational risk transfer mechanisms that would make the airline interesting to local investors. A consortium of operators in the transport and aviation space could offer a real funding and recapitalisation opportunity for the airline if the executive oversight lines between the shareholder (the government) and the executive team at the airline were well defined and conducive to sustainable operations.
The reality is that we don’t know how deep the pit goes. Effective risk transfer is a real opportunity for the government to fiscally derisk itself from SAA and channel funds towards more productive activities that will benefit the majority of South Africans.
• Skenjana is chief economist and thought leadership executive at IQ Business.
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