For South African Airways a USD600m bailout is last roll of the dice
The South African government is open to private sector participation in the state-owned airline, once the biggest in Africa.
On 31-Oct-2019 the government announced that it would provide a USD600 million subsidy over three years to pay down the airline's debt, in the hope that this would accelerate the process.
At the same time, LCCs are establishing a stronger foothold on the continent, with the leading models in South Africa.
The big question now is whether the new and massive intervention will establish SAA back on the road to its former glory.
Summary
- The government has announced a ZAR9.2 billion (USD600 million) debt pay-down for South African Airways.
- The airline has declined rapidly over recent years, helped by excessive government of the wrong kind.
- As the country's LCCs prosper, this bailout could give a huge lift to SAA's restructuring and, by implication, much of the country's aviation system.
Restructuring at South African Airways needs a tailwind
South African Airways is cutting its seat numbers by 3.0% in 2019 - its fifth successive year of capacity cuts. The airline has been loss-making throughout this period (and longer) and undergoing a restructuring programme.
There are tentative signs of a return to growth, with a 3.0% increase in seats planned for winter 2019/2020, but SAA has no aircraft on order and its financial challenges remain significant.
In addition to its losses and high debt levels, the airline has been criticised for poor management, a high cost structure, and the wrong fleet mix. It has been without a permanent CEO since Jun-2019.
Underlying most of these issues has been the perpetual and mostly unhelpful government intervention at many levels.
Private sector participation is being encouraged
The South African government is open to private sector participation in the state-owned airline, once the biggest in Africa, which has relied on successive public sector bailouts.
In the hope that this will be the last bailout and will accelerate the process of gaining equity partners, National Treasury chief director of liability management Tshepiso Moahloli announced on 31-Oct-2019 that the government would provide a USD600 million subsidy over three years. The purpose is to pay down the airline's debt.
Finance Minister Tito Mboweni provided the justification for this latest intervention: SAA "is unlikely to ever generate sufficient cash flow to sustain operations in its current configuration", and there are "conversations involving South African Airways and potential equity partners, which would liberate the fiscus from this SAA sword of Damocles".
He also added, "Maybe the time has come for us to consider selling or closing down South African Express".
LCC growth is outpacing FSCs in Africa, led by South Africa's own
South Africa is, however, a successful home for LCCs. Overall, African LCC seat capacity will increase by 13.3% in 2019, whereas legacy airline growth is only 2.6% in 2019. This is the seventh successive year in which LCC capacity growth has outpaced legacy growth.
LCC share of total seat capacity in Africa will increase to 17.5% in 2019, from 16.1% in 2018, and has almost doubled over the past decade.
Just over half of LCC seat numbers (54%) are accounted for by five airlines: Ryanair, Johannesburg-based Safair, the South African Airways subsidiary Mango, the Comair budget brand Kulula, and Air Arabia Maroc.
All of Ryanair's capacity, and more than 80% of Air Arabia Maroc's capacity, is based on routes between Morocco and destinations in Europe. Both are growing seats in Africa by at least a quarter in 2019.
Three of the five leading LCCs - Safair, Mango and Kulula - have operations wholly within domestic South Africa, making them the leading truly African LCCs.
Safair's capacity is up by 31.0% in 2019, whereas Mango's and Kulula's growth have slowed.
Africa: LCC seat share, 2009 to 2019
South Africa needs the latest initiative to work - continuing bailouts do no one any good
In the circumstances this appears a sensible, if last gasp, decision.
But, given the history of the past couple of decades, it is too early to assume that the good intentions expressed here will enjoy continuity of treatment once the money starts being injected.
It is to be hoped that they will. There can hardly be another reprieve for this once great airline if this one fails.