South African Airways: Smothered By Politics?

SAA

VENTURES AFRICA – South African Airways (SAA), Africa’s oldest airline and formerly its most successful, experienced further disruption last week as its entire board of directors resigned in protest against interference from the South African government, which remains the company’s biggest shareholder.

The resignations came just weeks ahead of the airline’s annual general meeting, which led South Africa’s Minister of Public Enterprises, Malusi Gigaba, to call the timing “bizarre.” Gigaba immediately appointed seven new board members, and promoted as Chairman the airline’s former Head of Strategy.

In truth, the government’s embarrassment is self-inflicted. While other African countries have slowly liberated their national airlines from government control, SAA’s strategic direction remains constrained by political interference. The South African government retains veto power over the airline’s purely commercial decisions, including its route network, fleet acquisition and, most significantly, payroll cuts.

As a consequence, SAA has seen its dominant control of the southern African market eroded by nimbler, privately-held start-ups like 1Time, whose acquisition and deployment of aircraft is dictated by sound commercial analysis rather than political vanity. Despite being wholly-owned by the Ethiopian government, Ethiopian Airlines has been almost entirely freed from political interference in its commercial decision-making and has seen its profits grow every year for a decade, while Kenya Airways (in which the Kenyan government has a 30 percent stake) is managed by a completely independent board and has seen similar, if slightly less spectacular, success.

SAA’s poor commercial decision-making has led directly to higher fares: too-large planes on thin routes, with too many employees, means ticket prices have been forced up. Cutting fares in responsive to competitive pressure has only led to deepening financial losses and route termination, creating a vicious spiral of decline. In August, SAA experienced the ultimate indignity of axing its flagship Cape Town-to-London route following sustained price pressure from European airlines including British Airways and Virgin Atlantic. More route closures are likely.

In response, SAA’s recently-departed board members tried to rebalance the airline’s route network in favour of more destinations on the African continent. In recent months, new routes have been launched to Ndola (Zambia), Bujumbura (Burundi), Kigali (Rwanda) and Pointe Noire (DR Congo). But here, too, price pressure is severe as new low-cost carriers like Fastjet emerge and Ethiopian and Kenya consolidate their regional dominance.

Compounding these troubles is SAA’s location at what aviation analysts call “the end of the line”: Johannesburg sits in an awkward geographical location that makes it a poor hub. Unlike Accra or Addis Ababa – let alone Dubai or Doha – Johannesburg lacks a broad menu of onward destinations for international travellers, who have to double back on themselves if flying in from Europe or Asia and then onward to other parts of southern Africa.

These concerns have created organisational chaos within SAA, as South African politicians – few of whom have any airline experience – execute knee-jerk responses designed more to demonstrate their political virility and to minimise job losses than to rescue an airline which, without the financial backing of the state, would by now be teetering on the brink of collapse.

In light of the industrial unrest currently afflicting South Africa as a whole, it seems unlikely that the new board – appointed by the government – will be given the freedom to take the difficult decisions that the airline needs if it is to stand on its own two feet. For instance, a cut in SAA’s bloated payroll is probably outside the new management’s policy constraints. Therefore, costs will likely continue to rise and fresh bailouts may be necessary, leading to further dramatic, politically-inspired management changes.

Despite the obvious, the government has agreed bail out package for the airline for a fifth time in 13 years, providing a peppercorn $600 million loan. However, if present trends continue, it has little chance of recovering

Overall, the SAA’s experience serves as a warning to other African governments who still habitually interfere in the operation of their respective national airlines. Aviation is a truly delicate business, buffeted by numerous input factors outside airlines’ control, and unnecessarily adding to those unpredictable variables is a recipe for disaster. This is a lesson to be heeded by, among others, the Nigerian government, which this week announced its intention to create a new national airline in which it will have a controlling stake, albeit in partnership with an as-yet-unnamed European partner.