Buckle up, 2015 is going to be a turbulent year

The latest South African Airways (SAA) financial statements disclose that this state-owned entity recorded yet another loss in the 2014 financial year, an eye-popping R2.556bn as opposed to the R1.17bn in the previous year. Not at all surprising. Over the course of the last decade it has consumed more than R20bn. SAA’s acting CEO, Nico Bezuidenhout, coolly states, “The only other carrier to have had a higher debt to equity ratio than SAA was the American Airline Group, which went bankrupt in 2011”.

Using taxpayers’ money, the National Treasury has yet again resolved to stand as surety to this perennial loss-maker by granting it a further R6.5bn guarantee. Add this new guarantee to an already existing one of R7.9bn, brings the total to R14.5bn. How many South Africans comprehend that while it might forever be beyond their wildest dreams to fly aboard “our proud national carrier”, their hard-earned cash is a source of funds that keeps it in the air and by doing so, subsidises the travels of South Africa’s elite and foreigners who choose to fly SAA?

No private-sector operation, over such a sustained period, could ever survive losses like SAA’s. Yet Finance Minister Nhlanhla Nene has said that it would not be a good idea to sell the only “national carrier we have” when it’s not doing well. Given the airline’s disastrous track record, when will it ever do well? It has no economic incentive to improve when it can simply go and ask the Treasury for another bail out. And what is this obsession about having a “national carrier”? Poor people who are being forced to fund it, don’t care whether SAA flies or not. The “must fly at all costs” mentality can only be ideologically motivated – it makes no economic sense whatsoever.

To make matters worse, government’s flawed ideological thinking has crowded out nine private airlines – the much needed competition that would have harnessed prices. Also, the Competition Commission has caught SAA cheating, repeatedly. But, when SAA is found guilty of cheating, in a sad and twisted way, taxpayers again have to foot the bill.

The decision to keep SAA as a “going concern” is indefensible. Government needs to prioritise its spending. Subsidising flights for the rich whilst the majority of South Africans sit in the dark is not an appropriate or justifiable use of taxpayer funds.

SAA, its subsidiaries (Mango, SAA Technical etc), and sister outfit, SA Express, should all be unbundled into separate entities and auctioned off. Government will not only receive funds from the sale of assets, but also from the resultant creation of a new source of tax revenue, privately owned, profitable, airlines. Taxpayers will save billions of rand.

Critics of unbundling SAA, typically people with vested interests in the airline business, will argue that strategic routes will be underserved. But many of the routes that SAA flies are already serviced by a low cost carrier and, for the remainder, if the route is viable, private companies will surely compete to satisfy demand.

The opportunity cost of the resources consumed by our “national carrier” is simply staggering. Considering the cost of a low-cost house (R85,000), this money (R20bn) could instead have been used to build over 200,000 houses and put a roof over the heads of more than 900,000 people (assuming an average of four people per household).

With lacklustre growth, falling revenues and mounting debts, the government is facing a fiscal crisis. It needs to concentrate on its core competencies and reduce its spending. Yet, instead of remedying the root cause of the current predicament, government is seeking to do more of the same and, in order to do that, casting around to find new sources of tax revenue.

History has demonstrated that private sector managers, when free to innovate and use their initiative, manage businesses much more effectively than public sector officials who are prone to graft and to mismanage funds because losses can simply be recouped from taxpayers. Government’s continued support for SAA is a clear-cut scandalous case of the state misusing taxpayer’s money in the name of propping up a “strategic asset”. The government would do well to recognise that frequent flyer miles do not feed, or house, or protect, or educate, or heal poor people. The money could be much better spent.

Author: Jasson Urbach is an Economist and director of the Free Market Foundation. This article may be republished without prior consent but with acknowledgement to the author. The views expressed in the article are the author’s and are not necessarily shared by the members of the FMF.

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