Covid-19 Drastically Changes the SAA Equation - Rational Standard

Gabriel Crouse
Government decisions on South African Airways (SAA) can be considered a leading indicator of what its response will be to the double-crisis of the Covid-19 pandemic and the national debt-trap that will define much of the expected economic contraction over the coming year.

As Sikonathi Mantshantsha of Daily Maverick Business noted in November 2019, the then “strike against the restricting of [SAA] is a proxy battle to curb the government’s strength of will in its ongoing attempts to set the country’s economy back on course…Any sign of weakness on the part of the government will be milked to the last drop”.

Mantshantsha notes that adding up bailouts recorded in audited reports between 1994 and 2019 show that SAA received R57 billion rand in this way from the government. That is roughly R1 000 per South African – enough to buy a cheap ticket from Cape Town to Joburg, though the number of South Africans that have never flown anywhere remains unknown.

And yet even this understates the extent of SAA bailouts. In 2008, private competitive airline Kulula expressed “outrage at yet another bailout of SAA/Mango”. At that time, R15 billion had already been poured into “saving” SAA, with another R6.5 billion poised to be released. Bring that value up at the level of inflation from 2008 to date and R21 billion becomes R36.5 billion, though even that understates the full extent since much of the earlier bailout money came before 2008.

The total SAA group employed 10 071 people in 2017. Management has been so desultory that no annual report has been released to publicize more recent data.

Mantshantsha claimed that at the end of 2019 there was a “battle to stop the proposed retrenchments of 944 employees at the airline company” which would only be “the first skirmish and a proxy to stop the same thing from happening at Eksom, at Denel, at PetroSA, and at the SABC”.

That battle was not, however, between the unions and a reformist government. Minister of Public Enterprises Pravin Gordhan and President Cyril Ramaphosa both assured that there would be no retrenchments or even wage freezes at Eskom. Only Minister of Finance Tito Mboweni took the pragmatic line that there could be “no holy cows” amid loss-making SOEs.

The real battle before the Covid-19 pandemic was between pragmatic, value-add South Africans and those running SOEs as a patronage network in exchange for fealty and “unity”.

Workers in SOEs themselves are torn by this battle. Many face the desperate prospect of dedicating their professional lives to cleaning, serving, flying, cooking, repairing and refueling – only for poor management to twist their dedicated labour into the perverse outcome of multiple and unsustainable losses. Under better management, workers could enjoy the dignity of contributing to companies that add to the sum of usefulness rather than netting a loss.

There are three arguments for continuing to bailout SAA further, as already happened at the end of January 2020 with another R3.5 billion.

First, that SAA provides an ongoing, useful logistical function. That argument no longer applies with all international and regional flights shut down. In addition, domestic demand is reduced by “social distancing” allowing competing airlines to pick up the slack.

Second, the argument made by Ramaphosa, is that SAA is laden by debt that would become “payable immediately” upon sale of the airline. This, said Ramaphosa, “may even collapse our fiscus”.

Yet a Reuters report from 2019 indicates that SAA’s debt stood at R12.7 billion. SAA’s last financial report indicated an annual revenue of R30.7 billion.

So while Ramaphosa said, two years ago, that “if you were to sell SAA today you would not be able to get anything for it, in fact you would have to pay someone billions to take it off your hands”, this seems to take a rather dim view of the government’s own ability to negotiate competitive deals.

Yet it would be the business rescue practitioners, not the government directly, that would facilitate such a deal. The DA seems to have a more practical eye on the matter, calling for liquidation so that “billions in bailouts” can be used to address the Covid-19 pandemic fallout instead.

That is because even if SAA were, with debts and income from sold assets, given away, that would still free the state from future obligations to bailout the company, creating opportunities to spend the money better, and more directly, on South African individuals in dire straits.

The third argument for keeping SAA “alive” is that widespread retrenchments would harm the economy. Here, Covid-19 again drastically changes the equation.

South Africa can expect mass job shedding due to a super-contraction of equities (up to R2.3 trillion wiped off the JSE), a substantial fall in the Rand’s value, and a depressed global economy. That is why the IRR says now is the time to expand unemployment benefits to sustain incomes for people set to lose jobs, and to search for new ones in a fundamentally altered economic climate.

Put it another way – would you rather keep paying employees to work at companies that aren’t working and that were not working even when the going was good; or would you put cash in the hands of desperate and keenly motivated South Africans that they might seek opportunities where the hope of profit is realistic?

To me the answer seems simple. In line with the UK, South Africa should take this opportunity to expand the definition, and the extent, of unemployment benefits to be paid for by liquidating assets that have long been mismanaged. In a time of crisis the only other option will be to raid the pension pot, to which Ramaphosa has shown a “favourable” attitude, including private pensions. That would only make a bad situation worse.

In short, we do not need to save SAA, we need to save South Africans.

https://rationalstandard.com/covid-19-drastically-changes-the-saa-equation/