New industry forecasts and local aviation market developments challenge SAA’s future feasibility

The Medium-Term Budget (MTBPS) should not allow for further tax wastage on SAA as market forecasts indicate a 55% drop in air travel for 2021 compared to air travel stats for 2019, and new local / international partnerships will be a massive setback to SAA’s viability in this highly competitive and cutthroat industry.

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26/10/2020 13:47:33

                                                                                                                                                                                                                New industry forecasts and local aviation market developments challenge SAA’s future feasibility 


                                                                                                                                                                                                                The Organisation Undoing Tax Abuse (OUTA) says that relaunching SAA in the current economic climate would be financially hazardous and is likely to result in large losses which neither the economy nor taxpayers can afford.

                                                                                                                                                                                                                According to Julius Kleynhans, Executive Manager: Public Governance Division, the International Air Transport Association’s (IATA) latest outlook for Africa is sharply down on its previous assessments, which means that SAA’s prior approved business rescue plan (BRP), was based on a more optimistic forecast and will need urgent revision that will require more public bailout funding than proposed to Treasury in recent weeks. 

                                                                                                                                                                                                                “In our opinion, SAA’s funding request to Treasury cannot be justified and if the updated factors were taken into account, Treasury may respond differently, meaning that any commitment to fund SAA’s BRP based on outdated and flawed data may be throwing good money after bad,” says Julius Kleynhans, OUTA’s Executive Manager on Public Governance. 

                                                                                                                                                                                                                OUTA’s reaction comes on the eve of Finance Minister Tito Mbweni’s MTBPS on Wednesday which will in all likelihood indicate how SAA’s business rescue will be funded. However, these decisions will come after IATA, the global airline industry body, announced a sharp downward revision to its Africa outlook for the air transport industry, saying that it is unlikely to recover to 2019 levels any time before late 2023.  

                                                                                                                                                                                                                According to IATA, the number of air travellers carried to, from and within Africa during the current calendar year would only reach 30 percent (or only about 46.5 million passengers) of the 155 million passengers making use of airline travel during 2019. The picture for next year (2021) is slightly less grim, with 70 million passengers expected to be carried, or 45 percent of 2019 volumes. This implies the need for considerable scale reduction across Africa's airline industry, including the South African aviation industry. Within SAA’s traditional domestic and regional markets, traffic volumes will be a fraction of what it was in the 2019 calendar year. 

                                                                                                                                                                                                                IATA’s forecast includes those passengers who will be carried by foreign airlines to and from South Africa as our major long-haul source markets reopen.  “Those carriers will have much lower costs of production thanks to their economies of scale and their ability to cross-subsidise weaker-earning routes with more profitable ones across their extensive networks. They also have the benefits of strong brands and stable loyalty schemes, whereas SAA has become a questionable airline to support from a travel and tourism sector point of view,” says Dr Joachim Vermooten, transport economist, and OUTA’s advisor on aviation matters. 

                                                                                                                                                                                                                “In sharp contrast with international carriers, SAA’s image and reputation took a big hit with its service disruptions last year and during the period prior to the COVID-19 lockdowns, while its Voyager programme presented limited benefits to members outside South Africa.” Vermooten says it is crucial to remember that airlines in Europe, North America, the Gulf and Asia trade in comparatively strong currencies.  Much of SAA’s revenues were generated in steadily weakening Rands, but most of its costs were in US dollars, Euros and Pound Sterling. 

                                                                                                                                                                                                                “Many of these foreign airlines are privately owned but have received state financial assistance to help them survive the COVID crisis.  In doing so, those governments have effectively subsidised the relaunch of South Africa’s international business and leisure travel industry.”

                                                                                                                                                                                                                Adding to SAA’s woes, while SAA have procrastinated on their rescue and revival plans since December 2019,  recent announcements by Emirates and Qatar airlines have seen partnerships with local private airlines of Airlink and FlySafair respectively, which will impact negatively on SAA’s already decimated share of the market. “Both of these recent announcements will weaken SAA’s ability to achieve its prior targets proposed in the recent BRP, adding more weight to the call from OUTA for Treasury to rethink and cancel bailout plans they may have for SAA,” adds Kleynhans. 

                                                                                                                                                                                                                We find it extremely unfortunate that SAA and SA Express employees have been left in the lurch by a succession of ambitious, but perpetually underfunded, ideas. Notwithstanding its governance challenges, inefficiencies and a number of poor strategic business decisions, the reality is that over the past three decades, SAA has been under-capitalised and is caught in a debt trap. 

                                                                                                                                                                                                                OUTA points out that the much-talked about R10,5 billion that SAA seeks in the Medium Term Expenditure Framework and budget, is most likely insufficient to cover immediate costs relating to historical debt, interest, the voluntary severance packages and keeping the lights on. This bailout does not begin to cover the costs and losses associated with SAA’s current mothballing, its re-launch, re-fleeting, re-equipping and ramp-up, all of which will be incurred over the next four or five years - assuming there are no further external shocks or setbacks. “We believe it is certainly going to be a lot more than the R2 billion earmarked for the relaunch of SAA, as well as an additional R2.15 billion required by SAA subsidiaries, Mango, SAA Technical and Air Chefs, which are identified, but not provided for in the airline’s rescue plan,” Vermooten explains. 

                                                                                                                                                                                                                “We have more important matters to address than to throw tens of billions of Rands over the next few years after an airline that has proven itself to be unsuccessful as a state owned entity,” says Kleynhans. “Given the current and projected market circumstances and much more information than we were aware of just a few weeks ago, saddling South African taxpayers and the fiscus with the re-launching of SAA can no longer be justified. 

                                                                                                                                                                                                                A soundclip with comment from  OUTA Executive Manager – Public Governance Julius Kleynhans is here 

                                                                                                                                                                                                                Picture: Wikimedia Commons

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