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“Not within a thousand years will man ever fly”: SAA’s new business plan threatened by pandemic and uncertainty

18 July 2020 Gareth Stokes

The Wright brothers, long credited with the first sustained, controlled, powered, and ‘heavier than air’ manned flight, were not always certain of their success. A mere two years before their contraption took to the skies at Kill Devil Hills, North Carolina, Wilbur Wright was quoted: “Not within a thousand years will man ever fly”. Wilbur’s estimate was a trifle pessimistic as by 1903 he and his brother, Orville, had set in motion a race to the skies. This race may have reached its zenith in 2019 with more than 38,9 million flights recorded globally in that year, as published by Statista 2020. Then pandemic happened. 

Pandemic sends airlines plummeting

The airlines industry, much like South Africa Inc, was not firing on all cylinders as it entered 2020. They had expanded their operations in response to growing consumer demand for business and leisure travel, both domestically and internationally; but had done so in a reckless fashion. We say reckless because their focus was on market share rather than profitability. International carriers were cutting fares on the most popular routes, while budget airlines were practically giving away seats to continue flying full or near-full aircraft. There were some shining stars; but for the most part airlines were struggling to break even pre-pandemic, despite record passenger numbers. 

South African Airways (SAA) suffered the double whammy of being an airline in deep distress at a time when governments worldwide were issuing lockdown decrees that brought the passenger airline market to a screeching halt. Guy Leitch, publisher and editor of SA Flyer and Flightcom and prolific commentator on South Africa’s airline industry, weighed in on the airline’s woes during a webinar hosted by PSG Wealth, 14 July 2020. He observed that any attempts to conjure up an airline business plan in the current economic environment were couched in “delusion”. This might explain why the business rescue plan offered for the state-owned airline is so light on detail. “All you can do is guess at the economic trajectory over the next 18 months, [with the economy] entirely dependent on medical experts’ trajectories for COVID-19,” he said. 

Bruce Whitfield, who hosted the on-point discussion, reflected on Warren Buffett’s decision to exit his airline investments in May 2020. The investment guru, still near the top of the world’s wealthiest tables, has declared that airlines are simply “un-investible”. Whitfield also commented on the fact that Zoom, an online meeting platform, boasted a market capitalisation higher than the world’s seven largest listed airlines combined. We will leave the debate about the valuation of bricks and mortar assets (albeit heavily leveraged) versus intangibles such as goodwill and intellectual property for another day. 

Job-shedding at monumental scale

The extent of the damage to global airlines is already evident in the almost daily announcements of delays in resuming normal flight schedules and lay-offs. We will not bore you with individual headlines, they are accessible via a quick Google search; but a recent article on CNN.com suggests more than 100 000 employees at America’s four largest airlines had been furloughed or had salaries cut. In the same article an airline analyst at financial service firm Cowen observed that the US would see 95 000 to 105 000 permanent job losses. 

“We are not going to get back to anything reasonable in the next three or four years,” estimated Leitch. “Most carriers [are reporting] demand at less than 3% of the old normal demand; even if they consolidate 10 flights into one, they will be lucky to fly at 30% capacity”. He added that there was no faster way for an airline to lose money than by flying an empty airplane. And lose money they will. The International Air Transport Association expects airlines to lose US$84,3 billion through 2020. Losing billions is nothing new for South Africa’s flagship carrier and it is anyone’s guess how much more the rescue plan will deprive taxpayers of. Leitch suggested the plan required another R14,4 billion for starters. 

Opening the taxpayers’ money tap

It is common knowledge that government owned airlines are money traps, with only a handful of notable exceptions. “Even the best entrepreneurs, who make fortunes in other industries, are struggling to make money in airlines,” said Leitch. There is one pandemic-related development that could play into the hands of a well-run SAA, being that airlines might rethink their business models. “We could see a move away from flying from central hubs to point-to-point flying again,” he said. Another important consideration in the ‘state airline or not’ debate is the economic multiplier benefit of a functioning airline business. The argument goes that every dollar spent on air travel converts into approximately 10 dollars in GDP. State-sponsorship of an efficiently run SAA could thus be tolerated. The Gautrain project is massively subsidised by taxpayers too, with few complaints. 

SAA does not have a track record of efficient operation and there have been no fundamental shifts that suggest this will change. “The rescue plan is thin on hard information; there are plans to go back to all loss making routes; and there is no attempt to address legacy issues such as bad procurement and cronyism in management appointments,” lamented Leitch, who at one time estimated that R4 billion per annum was ‘lost’ through the application of the airline’s preferential procurement policy. Fuel was being purchased through middlemen and, in one glaring example, water was bought at R17,50 per bottle when it was available at under R5,00. Beijing was held up as an example of a loss-making route, with each flight to that destination costing SAA around R1 million. 

Making millionaires out of billionaires

It appears, therefore, that South African taxpayers can expect business as usual from their flagship airline until such time as a private partner is granted a controlling stake, free from political interference on areas such as labour and procurement. “Nobody knows when the global aviation industry will return to a new normal, nor what shape or form that new normal will take,” concluded Leitch. And nobody knows what form the new SAA will take either; but it seems certain taxpayers will continue to bleed. 

We conclude today’s article with some witticisms offered by global investors in airlines over the years. Juan Tripp, it is alleged, once joked that he knew there was money in the airline industry, because he had put it there. And Richard Branson, founder of Virgin Atlantic among other businesses, is on record saying: “If you want to be a millionaire, start with a billion dollars and launch a new airline”.

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