A RELAUNCHED SAA WILL NOT SUCCEED IF NOTHING ELSE CHANGES
In an opinion piece in an online publication last Tuesday (23 February), Public Enterprises Minister Pravin Gordhan bemoaned – for the umpteenth time – the different forms of corruption which have badly affected some of the country’s State-owned enterprises (SOEs) over the past few years, almost bringing a growing number of them to their knees. Typically, he heaped much of the blame on State capture.
That grand-scale malfeasance has contributed directly to the sorry state in which some of our SOEs find themselves is beyond doubt, as voluminous evidence routinely led before the Zondo commission of enquiry into State capture has revealed. However, corruption is not the sole reason many of our SOEs are in the terrible state they find themselves in. Certainly, as far as SAA is concerned, numerous other factors saw that airline currently existing in name only, pending its promised emergence from the business rescue process into which it was placed in December 2019.
In fact, evidence from an intensive doctoral study that I have conducted showed overwhelmingly that the Government was itself one of the main reasons for SAA’s failure – and Gordhan himself is not without blame.
Notwithstanding the fact that the airline industry is intensely competitive and has been marginally profitable over the years, and recorded what aviation expert Rigas Doganis describes as “super profits” only during the period between 2010 and 2018 as a result of a huge drop in the price of aviation fuel in mid-2014, SAA found itself shackled by various Government requirements which made it impossible for it to compete in an environment which requires agility in decision making.
To start with, SAA was poorly capitalised from the time it was hived off from Transnet and set up as a separate company. The situation was only worsened by a huge, R8 billion fuel hedging loss suffered during the Andre Viljoen era. To compound matters, unlike its State-owned counterparts like Ethiopian Airlines (EAL) and Kenya Airways (KQ), in which the Kenyan government has always been a significant shareholder, among others, SAA was lumbered with a nonsensical dual mandate which required it to be both commercially viable and, at the same time, carry out an ill-defined, so-called developmental mandate which required it to fly loss-making routes favoured by the political mandarins.
As if deliberately setting the airline up for failure, the Government further subjected it to the Public Finance Management Act (PFMA), which emasculated the SAA Board and the Chief Executive Officers and saw critical decisions made by the relevant Shareholder Minister – who often took months to make decisions, if he made them at all. During the study, interview participants described the PFMA as “one the biggest stumbling blocks that considerably slowed down decision making” and as “a big hurdle and a setback”.
While Section 54 of the PFMA gave Shareholder Ministers up to three months to revert to the SAA Board with decisions, sometimes they took twice as long or simply refrained from taking a decision. Once a candidate who was recommended by the SAA Board for appointment as Chief Financial Officer of Air Chefs eventually turned the airline down and joined an SAA competitor because Gordhan took too long to get back to the Board with a response, and on another occasion he vetoed the Board’s choice of a CEO for SAA Technical.
Then SAA CEO Vuyani Jarana said Shareholder Ministers refrained from making decisions on SAA if those decisions stood to “undermine or affect their political careers”. On the contrary, EAL and KQ were able to make major strategic and other commercial decisions swiftly, in response to whatever challenges they encountered, without any government restrictions.
SAA’s challenges were simply far too numerous to catalogue individually in the space available here. These included lack of coherent Government aviation policy, frequent changes of Shareholder Ministers and their different approaches to the airline, reluctance by Shareholder Ministers to make decisions and their tardiness in honouring important financial undertakings, unhealthy Board dynamics, Directors’ fears of reckless trading, leadership instability, lack of management skills and expertise, too many executives in acting positions, as well as publicly contradictory Government voices.
Unlike EAL, which had only two CEOs between 2010 and 2021, and KQ which had only three CEOs, SAA had 11 CEOs (most of them acting) and eight Shareholder Ministers during the same period. Between 2014 and 2020, the airline had four Shareholder Ministers: Finance Ministers Nhlanhla Nene, Des van Rooyen (admittedly, over just a weekend), Gordhan, Malusi Gigaba and Nene again, and was moved back to Gordhan at the Ministry of Public Enterprises in August 2018.
This is how a concerned SAA Manager with three decades of experience in a critical part of the business described the situation: “You just get a CEO coming in at Airline 101 level, when they need to be at Airline 301 for the airline to be profitable. Just as you start getting them educated, you have a change of guard. That is really one of the biggest challenges you have in the business.”
SAA Boards have been characterised by divisions, with some Non-Executive Directors (NEDs) persuing different agendas and, with the exceptions of Khaya Ngqula, Sizakele Mzimela and Jarana, who claimed to have had adequate delegated authority, the CEOs had no authority and were seriously undermined. Various Board members told of a situation where SAA CEOs and their top management teams were routinely undermined, so much that one Board member said he “pitied SAA executives”.
The situation which obtained at SAA is in direct contradiction to that which is recommended to improve the chances of successfully implementing a turnaround strategy. Turnaround scholars are unanimous in their view that successful implementation of a turnaround strategy requires leadership stability, with Donald Bibeault saying the CEO should be “the architect of the turnaround strategy” and its implementer. Adherence to good corporate governance is paramount, with a supportive shareholder that leaves a capable, empowered management team to run a company under the direction of a similarly supportive Board of Directors. Among other prerequisites are adequate capitalisation (Bibeault argues that “money is … analogous to a blood transfusion” during a turnaround) and the existence of a viable core of the business.
Scholars are also near-unanimous in their views that a turnaround strategy cannot be implemented successfully without reducing costs (including employment costs) and selling off non-core assets, which is something they call cost and asset retrenchment. However, like other SOEs such as the cash-strapped SABC and Eskom, the SAA Board was not allowed to retrench employees or even to place the airline in business rescue – until very late in the day when President Cyril Ramaphosa eventually agreed reluctantly to do so.
No business which cannot make such critical – and timely – interventions can ever be turned around successfully. The analogy often used by SAA interview participants was that of a boxer thrown into a ring for a world championship fight – but with his hands tied behind his back! Only one outcome is a certainty in such a situation: he is on a hiding to zero.
Finally, to stand a chance of success, a turnaround strategy must directly address a company’s causes of decline, and not be generic. In SAA’s case, it had to address head on the abovementioned challenges, but the political leaders would not allow it to do so.
Therefore, there is very little chance of a relaunched SAA succeeding in this intensely-competitive market, even with a strategic equity partner. As things currently stand, legislation restricts foreign ownership of the national carrier to a paltry 20%, although South Africans can own up to 49% of it. That means that a foreign suitor with the required capital would not be able to have a sufficient say on the airline’s future, hence they would be reluctant to get on board.
Indeed, Arkebe Oqubay, Deputy Chairman of the EAL Board of Directors and an adviser to that country’s Prime Minister, told me last year that although EAL was keen on a strategic partnership with SAA, including the possible purchase of a stake in the South African carrier, it subsequently changed its mind when it realised the extent of SAA’s challenges. Among those challenges, he mentioned the discord between Gordhan and Finance Minister Tito Mboweni: “South African policy makers are not guided by one policy. [Finance Minister Tito] Mboweni wants to privatise the airline and [Public Enterprises Minister Pravin] Gordhan wants to have SAA State owned. The Government should have one position, but there is no coherent policy. There is conflict.”
Kaizer Nyatsumba is the author of