The mess named South African Airways

We have shared the view before that, as a general rule, governments are better off staying out of the airlines business.  There are exceptions, but they are few and these few airlines are run, largely, on a commercial basis.  The poster children for state airline mess-ups include Olympic, Alitalia, and Air India and SAA joins that sad club. Take a look at the airline’s PR about its relaunch.

Take a look here for a view from the front row seats in South Africa, from a well-known local observer. The “new” South Africa saw the government as a way to provide “jobs for pals/voters”. (The previous government did too, to be fair)  Now that the government has started to essentially run out of money and foreign investment and loans become scarcer, new means of getting their hands on capital have to become ever more creative. State-owned enterprises (SOE) are problems in the making. These structures allow governments to manufacture jobs as priority #1. And you can be sure these jobs are for loyalists, rather than the most competent people.

But back to SAA. Pravin Gordhan, South Africa’s Minister for Public Enterprises had spoken of several bids for SAA.  No names and details were shared. Emirates was a public name that popped up some time ago, but they quickly put paid to that rumor. Ethiopian was also mentioned. As RW Johnson notes: “… the government has not mentioned any other bidders for SAA and the process by which Takatso was chosen was completely non-transparent.”

Reaction to Johnson’s article was swift. Takatso did not appreciate his views. Readers should focus on the last two paragraphs of the Takatso rejoinder:

Takatso Consortium – we are comfortable with DPE’s assertions that a thorough and rigorous process was followed which led to the appointment of Takatso Consortium as the preferred Strategic Equity Partner (SEP) to take ownership of 51% stake in the new airline following a due diligence process into Takatso and SAA. Only once this process is finalised, and if successful, will the deal be finalised. Takatso represents a South African solution to the rebirth of a key local brand.

The R3bn funding figure announced is what the Consortium estimates will be required to fund the first 12 to 36 months of working capital requirements of the newly launched SAA. Future capital and planning of SAA will be determined post completion of the due diligence exercise. It is normal corporate action practice to announce a transaction before a DD process – and Harith has over the past 15 years concluded multibillion rand deals and raised over US$1billioin (sic) invested across various assets in Africa – the SAA transaction will go through a similar process.

There are some items that are not addressed, and if they are made transparently, might cause even more government unease.

1. Harith has the state, via Public Investment Corporation (PIC), as an investor with a 30% stake. Who are the other investors? What are the connections between the state and Harith? What made Harith the best option for SAA?  Why aren’t other bids made public, if there are any?
2. South Africa’s PIC is an entity whose clients include the Government Employees Pension Fund and the Unemployment Insurance Fund. It is managing state employee pensions. This suggests that as a 30% stakeholder in Harith, the PIC is using state employee pensions as part of its risk capital in SAA.
3. Given the financial history of SAA, how do state employees feel about their pensions being put at such risk?  To be clear, that risk is huge. Currently, South Africa’s operating airlines are privately owned, and despite having to face off against a state-funded competitor, they saw it off.
   1. A return of SAA is going to see that operation bleed again. A fare war will ensue to win back traffic for SAA.  Harith admits SAA will bleed. Who funds that bleeding? Somebody else’s pensions it seems.
4. Let’s talk about the R3bn needed for the re-start at SAA.  The timing seems a bit off. The SAA PR says “After months of diligent work” while Harith says “Future capital and planning of SAA will be determined post completion of the due diligence exercise. It is normal corporate action practice to announce a transaction before a DD process“. Really? The SAA PR doesn’t even mention being recapitalized. There is a credibility gap which is not a gap only to insiders.  
5. If Harith sees a 51% stake as worth R3bn, what is the state going to invest? It would seem that R2.9bn would be appropriate. Anything on that? Nope.
   1. But Harith is confident: “Takatso Consortium as the preferred Strategic Equity Partner (SEP) to take ownership of 51% stake in the new airline following a due diligence process into Takatso and SAA. Only once this process is finalised, and if successful, will the deal be finalised.”
   2. Will the state inject more money into SAA? Probably not until it becomes a political issue.  After all state ROI is measured in votes rather than traditional investor returns.  Every player in the game is rational from their perspective.
   3. “The fiscus will not make any contribution in the future, let me emphasize that the fiscus will not be required to make contributions in the future, because the parallel process to this that is taking place is the acquisition of strategic equity partner,” according to Minister Gordhan.
6. The SAA launch news appears to be rushed and ahead of the completion of due diligence. We are informed the state has taken the former SAA’s debt off the table. It is not clear what happens with Mango (SAA’s LCC) or SATS (SAA’s MRO).
7. A rational investor might want to sit this out and watch the “new” SAA burn through whatever cash it has. But if your pension is in the hands of people who are former state officials or people with close ties to the state, what can you do?
8. No doubt the private airlines are keen for SAA to restart. Why? Because the state will have to ease restrictions like the curfew that stops flights at night. The state will do whatever it can to help SAA and this also helps private airlines. But SAA won’t attract the same level of talent because, well, SOE.  What a mess. Pity the hapless and powerless taxpayers funding this.

Credit: airinsight.com

Wole Shadare