What can we expect from South African Airways?
One year after stopping operations, South African Airways (SAA) will finally take to the skies again on 23 September. Having completed a business rescue exercise and secured investment from a consortium as well as a government bailout, the airline has been cleared to resume operations with a limited schedule. It could introduce much missed competition to the sector. However, concerns about the sustainability of the projected dubbed “South African 2.0” have not been entirely resolved.
Significance – Government ‘U’ Turn to boost funding
Pre-pandemic, SAA was facing a significant crisis. The company had not made a profit in over a decade and lost approx. ZAR 16 billion (USD1.1 billion) in the three years before 2020. The recent sequence of events includes:
Labour. In November 2019, it faced labour disputes including a strike over pay and planned job cuts in that caused all flights to be cancelled for one week. Shortly afterwards, on 5 December 2019, the airline was placed under business rescue led by Les Matuson and Siviwe Dongwana.
Administration. In March 2020, the carrier was all but grounded due to the pandemic with South Africa emerging as an early hotspot on the continent. By May, the government had announced that the airline would not be receiving any further government funding and in the same month, they announced the cessation of operations for SAA[1]. Rand Merchant Bank was appointed to help find investors and, with this process delaying, the airline was placed under ‘care and maintenance’ by the business rescue team with all flights indefinitely grounded.
Rescue. The government stepped in with a near ZAR 10.5 billion (USD700 million) bailout in October 2020 in order to help improve the position of the airline and further entice potential investors. By June 2021, it was announced that the Takatso Consortium had been chosen – constituted of Harith General Partners[2] and Global Aviation. Takatso will hold 51% of SAA with government taking the remaining 49, in return for which Takatso will invest ZAR 3.5 billion (USD 246 million) over the next three years.
Still the repair of SAA remains a work in progress. The share purchase agreement has yet to be finalised and is waiting on the conclusion of due diligence checks on all partners before facing final scrutiny from parliament’s Portfolio Committee on Public Enterprises and an ultimate approval from the Department of Public Enterprises (DPE).
Further, the resumed service will be mere fractions of former operations with only 6 destinations being served initially by only eight aircraft. The business plan speaks of a plan for 26 aircraft in total but not when and how the route network will be developed – this is going to be based on prevailing demand according to a presentation given by the consortium.
Outlook – Turbulence ahead
The confidence of SAA resuming operations will be a boost to the entire continental industry, it has been in operation since 1934 and is one of the most instantly recognisable African aviation brands. It will also benefit consumers by bringing in increased price competition after private operators such as Airlink took advantage of the absence of SAA to raise prices on lucrative domestic and regional routes. If a price war were to break out, competition authorities may look closely at the CEO of the consortium, Gidon Novick who was formerly CEO of Comair and is a co-founder of Lift, a budget airline that launched in December 2020 – both of these will be direct competitors of SAA.
However, significant risks to SAA’s survival still exist. Despite a pay dispute with South African Airways Pilots Association (SAAPA) finally being resolved, unions have raised concerns that they were not involved in the restructuring process[3] and are remaining vigilant about the re-hiring process and conditions of service going forward. A representative from South African Cabin Crew Association (SACCA) said in an August interview: “even us as key stakeholders do not know the nitty-gritties, which is a huge concern for us. You need all stakeholders working together, but here the unions are on the outside looking in.”
As mentioned above, the agreement with the consortium has yet to be finalised and, whilst this is unlikely to impact on the planned commenced on 23 September, a full board cannot be installed until it has been. This could leave the airline in limbo for some time. Rumours that Global Aviation was seeking to withdraw from the deal were quickly rebuffed but provisional deadlines given by the DPE have been missed[4] with no further updates given.
It is also likely that the ZAR 3.5 billion (USD 246 million) that the consortium is offering as working capital (in addition to the ZAR 10.5 billion (USD 700 million) from government) may be enough to fund up to 3 years of operations and no more. After that, it is likely that government will again have to provide funding which risks the re-emergence of the intersection between political and business considerations.
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[1] That cessation never took effect due to lingering legal action by employee unions.
[2] In which the state has a 30% interest
[3] Notwithstanding participation from the highly powerful and politicised National Union of Metalworkers South Africa (NUMSA) rerpresenting some of the employees.
[4] On August 19th they said they expected everything to be concluded within a week.
*Photo credit: Joe Ravi, CC BY-SA 3.0
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