Presentation: News from the South Conference Paper June 2020 - PDF document

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3rd Workshop on "Aviation in Africa," 4 June 2020 Presentation: News from the South Presenter: Dr Joachim Vermooten University of Johannesburg, South Africa joachim@icon.co.za +27 83 468 2111 1

South Afr frican Domestic Air Transport Market (Number of return flights per week) • Pax traffic is concentrated on Four Routes • Golden Triangle (JNB-CPT, CPT-DUR, JNB- DUR) • JNB - PLZ • Nine high density routes are competitive (contested) • 23 low density routes are monopoly routes (most under SAA franchise & loyalty schemes) 2 Source: http://mapsontheweb.zoom-maps.com/post/90337042369/number-of-flights-per-week-on-each-domestic-air

The Pre-COVID 19 South African Aviation Sector • Overall the South African and African air transport industries were unprofitable due to the extreme extent of sustained large losses of SAA (since 2012) • This is in stark contrast with the rest of the world where record profits were made in the industry (since 2010) • SAA losses deter viable investment • SAA losses dissuade funding and credit to the industry (Banks required Government Guarantees to lend to SAA) • State financial aid distort the working of market forces (competition) and affects private sector competitors negatively • This threatens the future of a competitive air transport market • No regulations to limit State Aid • Risk of a drift into a State subsidised monopoly if State aid exclusively to SAA continues • Results in perpetuation of inefficiency and economic waste 3

SAA Predicament Debt spiral / vortex Source: http://www.google.com/imgres?imgurl=http://gcaptain.com/wp-content/uploads/2012/08/shutterstock_19351639.jpg&imgrefurl= http://www.democraticunderground.com/10025241609&h=422&w=920&tbnid=or8Xy2pCn-RB0M:&zoom=1&docid=L418JWp4FQYt1M&ei=aXbxVJvFE4a7UfLcg OAC&tbm=isch&ved=0CB8QMygAMAA www.flickr.com5. 3761064713_efa7cbe0d1.jpg 4

South African Airways (SAA) - Salient Structural developments • In 1990 South African domestic air transport market was economically deregulated • In 1993 international air services liberalised • In 1999/2000 SAA corporatized into a company as a subsidiary of Transnet Ltd, properly recapitalised. • 1999 - part privatisation, 20% of SAA sold to SwissAir holding company as Strategic Equity Partner (SEP) • 2001 - 20% of SAA re-acquired by Transnet • 2001 - 2006 SAA hedging losses funded and recapitalised by Transnet. Hedge book taken over by National Treasury • 2006 - Effective date of purchase of SAA by Government (from Transnet) • 2006 - Airlift Strategy 2006 (more capacity entitlement to foreign airlines) • 2007 – 2008 SAA restructured and recapitalised • 2009 -2011 SAA profitable • 2012 scaling up of activity levels to increase Government’s role in the economy, expansion of LCC output production (in excess of market demand), competing LCC & FSC service offerings = Dual Business Model, imposition of development mandate, removal of turnaround management, increase in employee numbers with racial quotas, B-BBEE procurement intermediaries, corruption and State Capture - Zondo Commission, CIPC Hearings, and Pretoria High Court (Court cases against former Chairperson) appointment of replacement boards and CEOs with no scheduled airline experience, increased reliance on overseas consultants, increased losses retroactive funding through State-guaranteed loans. • 2014 Administrative authority over SAA transferred to National Treasury • 2014 Administrative authority over SAA transferred back to DPE • 2015 & 2017 White Paper on National Civil Aviation Policy (NCAP) • 2012 to 2020 large losses, guaranteed debt & State funding 5

So, what happened? SAA’s purchase and restructuring • 2006 - Effective date of purchase of SAA (from Transnet) by Government (Department of Public Enterprises) • 2007 – 2008 SAA restructured and recapitalised • 2009 -2011 SAA profitable for three years 2012 onwards • Scaling up of activity levels (production of capacity) to increase Government’s role in the economy • Expansion of LCC output production ( Competing LCC & FSC service offerings = Dual Business Model) • Imposition of development mandate (in addition to commercial mandate = Dual Mandate) • Removal of turnaround management • Increase in employee numbers with racial quotas on each management level & B-BEE procurement intermediaries • Corruption and State Capture - Zondo Commission, CIPC Hearings, and Pretoria High Court (Court cases against former Chairperson) • Appointment of replacement boards and CEOs with no scheduled airline experience • Increased reliance on overseas consultants (Multitude unsuccessful turnaround programmes) • Increased losses retroactive funding through State-guaranteed loans Administrative authority over SAA • 2014 SAA transferred to National Treasury • 2017 SAA transferred from National Treasury back to DPE 2019 & 2020 6 • Business Rescue & Business Rescue Practitioners (BRPs) appointed with alternative BR Plans.

SAA’s Financial Results Amounts in R Millions Revenue Reliance on External Consultants Consultants Losses (Profits) Profits Source: SAA Business Rescue Practitioners (BRPs). Presentation to the Standing Committee on Public Accounts (SCOPA) on South African Airways SOC Limited Business 7 Rescue. Slide 3. 19 February 2020

SAA’s Financial Results SAA purchased Increased role by Government for Government = Growth Plan Level revenue Turnaround Loss of demand Implemented 2007 / 2009 Consultants Profitable Operations 2009, 10, 11 Production of Increased employment & procurement costs & capacity ahead Introduction of intermediaries, result in losses Source: Adapted from SAA BRPs. Presentation to the Standing Committee on of demand = 8 Public Accounts (SCOPA) on South African Airways SOC Limited Business Rescue. cause losses Slide 3. 19 February 2020

SAA Unit it Revenue & C Cost Co Comparis isons Operating Gross Profit (Loss) Margins (RASK – CASK) Air Ethiopia SAA Mauritiu Kenya n Air New (Mainline) Comair s Airways Fastjet Airways Zealand RASK 7,7 8,3 7,4 6,5 3,9 6 5,9 CASK 8,5 7,3 7,2 6,7 6,1 5,4 4,9 Gross Profit (loss) (RASK - CASK) -0,8 1 0,2 -0,2 -2,2 0,6 1 % GP Margin -10% 12% 3% -3% -56% 10% 17% Source: SAA. Presentation to the Standing Committee on Finance. Slide 9, 10. 17 May 2017 9

SAA’s Annual Losses (under Government Ownership) SAA Annual Losses (2007 -2019) 2 000 0 -1 000 -2 000 750 -3 000 1 000 417 370 -4 000 -5 000 -6 000 - -7 000 -8 000 - 259 -9 000 -1 000 -10 000 - 843 - 883 -1 085 -11 000 -1 204 -12 000 -1 478 -2 000 -13 000 -14 000 -15 000 -3 000 -16 000 -17 000 -18 000 -4 000 -19 000 -20 000 -21 000 -5 000 -22 000 -23 000 -24 000 Losses since 2007: -5 569 -5 478 -5 478 -6 000 -25 000 -26 000 • R26.9 billion -6 142 -27 000 -7 000 -28 000 • $1.5 billion at 17.43 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Annual Net Profit/ Loss Cumulative Net Profit/ Loss 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Annual Net Profit/ Loss - 883 - 1 085 370 417 750 - 843 - 1 204 - 259 - 6 142 - 1 478 - 5 569 - 5 478 - 5 478 Cumulative Net Profit/ Loss - 1 968 - 1 598 - 1 181 - 431 - 1 274 - 2 478 - 2 737 - 8 879 - 10 357 - 15 926 - 21 404 - 26 882 Data Sources: National Treasury. Presentation to Select and Standing Committees on Appropriations: South African Airways Special Appropriation Bill. Slide 4; 15 May 2020. 10 SAA Draft Annual Financial Statements 2018; SAA Draft Annual Financial Statements 2018.

Financing of SAA’s Losses Cumulative Financial Assistance to SAA (Under Control of Transnet and Government) Financial Assistance to SAA since 2007 70 000 US$ 3.9 billion. (in Millions) 60 000 34 204 50 000 SA Rands US Dollars Funding under Under Government Ownership 53 318 3 059 Government 40 000 - Cash transfers 34 204 1 962 Ownership - Guarantees 19 114 1 097 30 000 Under Transnet Ownership 14 634 840 19 114 Total Finacial Assistance 67 952 3 899 20 000 Funding under 10 000 Rand : US Dollar Exchange Rate 17,43 14 634 Transnet Ownership - 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Total Under Transnet Control Cumulative - Government Guarantees Cumulative - By Government Cash Injections Data Sources: Transnet Annual Reports 2006 & 2007; SAA Annual Financial Statements 2000 to 2019; DPE. Recapitalisation and guarantees to SAA since 2003 04 2020 03 5; National Treasury Annual Report 2017/18 and National Treasury Annual Report 2018/19 11