COVID-19 shut down almost all industries in South Africa when the country was under the level five lockdown. Now, under level three lockdown, approaching the last quarter of the year, uncertainty and speculation rules the day in most industries, with aviation being no exception.
A spotlight was shone on the local aviation industry on 14 July, when PSG, a leading independent financial services group, held a webinar under its “Think Big Series” about the future of the aviation industry in South Africa. The webinar was hosted by award-winning financial journalist Bruce Whitfield who spoke to the editor for SA Flyer magazine, Guy Leitch.
The aviation industry in South Africa, as Whitfield stated, is a “disaster zone”, with South African Airways (SAA) being bankrupt for years and constantly being bailed out by the government. Comair, holding company of Kulula.com and British Airways, which has not once reported a loss in its 74-year history, will report its first full year loss for 2020 and has entered into voluntary business rescue.
“No one has any idea whatsoever and any attempt to plan is absolutely delusional,” was Leitch’s opening remarks on the SA aviation industry, adding that all one can do is guess the trajectory of the industry in line with what medical experts are saying.
At the centre of uncertainty in South Africa’s aviation industry is the future of the government-owned SAA. “Why do they [government] think they should be owning an airline? They have been called vanity projects, flag carriers but they absolutely are financial disasters,” said Leitch. There are more examples of failed state airlines in Africa than successful ones. However, Ethiopian Airlines is an example of a successful airline and Whitfield points out that key to its success may be its geographical location which makes it a hub for air travel. South Africa on the other hand is on the southernmost point of Africa that, “not that many people in the world want to or do travel to,” added Whitfield. On this point, Leitch mentioned that there are exceptions to this but he believes that due to COVID-19 and wanting to prevent its spread, people will not be wanting to travel via hubs and instead opt for point to point travel.
Another comparison that Leitch made between Ethiopia’s and South Africa’s state-owned airlines is that Ethiopian Airlines gets conservative treatment while SA embraced an ‘open skies’ policy with the liberalising of the airline industry. “What this means is that it is a really cutthroat business. It means that the margins are absolutely paper thin,” said Leitch, who went on to say that foreign airlines have taken SAA’s profits as seen when 20 years ago, SAA accounted for two thirds of SA domestic travel and now only accounts for 12%. The ‘open skies’ policy has come with its own benefits as Whitfield pointed out, being healthy competition, cheaper flying for the consumer and overall better economic growth.
SAA business rescue practitioners Siviwe Dongwana and Les Matuson, announced on 28 July that most of the conditions of the carrier’s business rescue plan have been met. 2 600 SAA workers are to be retrenched, international routes will be cut to five, regional routes will be cut to 19 and SAA’s aircraft fleet will be cut to 26.
“The plan as we have seen it from the business rescue practitioners is quite frankly a joke in terms of actually turning around the airline. It was not written to turn the airline around. It was written as a sop to two competing forces,” said Leitch. The two competing forces Leitch mentioned are the creditors, who want the money that is owed to them, and government, which wants to keep the airline running. Leitch added, “Let me point out the business rescue plan as we have seen it, which is incredibly thin on any hard information, plans to go back to almost all international routes, almost all of which were loss making.” There has not been any attempt by the business rescue practitioners to address the legacy issues such as bad procurement, cronyism, bad management appointments and running obsolete routes for, “whatever vanity reason”.
Above all the criticism, Leitch maintains that it is a good idea to have a national airline, stating that if SAA had to dissolve, other airlines would move in with no hurry considering most are struggling to get back on their feet. This would leave South Africa with a huge gap in air services and airlift capacity, affecting not only people but cargo as well. Another issue for Leitch is that the money from airlines transporting South Africans would be leaving the country via international airline companies. “I will be hated for saying [this], but one can justify a small subsidy for SAA and not even that small,” added Leitch, based on the idea that the air line could run profitably.
Leitch noted that there are reasons SAA is not being run profitably, the first, being corrupt procurement. “You could knock R4 billion back into the bottom line by just cleaning up procurement. Even things as basic as fuel were going through middle-men.” Leitch stated the government’s Preferential Procurement Policy Framework Act (PPPFA) allowed for intermediaries and gave the example that SAA was paying R17.50 for a bottle of water when the actual value should have been around R2.20. Leitch said that routes also need to be addressed: “We were flying to Beijing for vanity reasons and losing a million rand on every flight to Beijing. We should have course been going to Guangzhou or the economic zones of China and that route would have probably broken even.” However, as Whitfield pointed out, “We can theorise but as history tells us, we can’t trust government to actually leave well alone.”
In theorising on how to remedy the troubled state-owned airline, Leitch proposed that the government would need to give the airline R14.4 billion, take a hands-off approach and bring in a private company to run and own the airline. There would still be a need for other airlines such as low-cost carriers. Leitch pointed out that there is definitely still a market for them in South Africa. “The low-cost carrier model creates the need, creates the demand, to get people off buses and fly when they otherwise might not have,” said Leitch.
In concluding the interview, Whitfield asked when Leitch would be comfortable to catch a flight. “The statistics and the results that are coming out from the surveys conducted by IATA [International Air Transport Association] as to the actual rate of infection are unbelievably low…They are saying the rate of infection is in the order of one or two percent,” replied Leitch.
The annual general meeting (AGM) for IATA is planned to take place on 23-24 November in Amsterdam, Netherlands and they want people to be physically present for their AGM. Leitch closed in saying that although he is 50/50 on whether it will happen and COVID-19 levels permitting, he would travel for the event.