Towards a New South African Airways

A Proposal to the Department of Public Enterprises

Drafted and Presented by SATAWU

Problem Statement

South African Airways (SAA) has for over a decade been retarded by failure to transition from a traditional state-owned enterprise (SOE) to one that is agile and adheres to optimum operating costs in a viciously competitive environment. Numerous attempts to change this operating mindset have failed to yield acceptable results. This submission proposes a strategy for a creation of a new SAA in the post Covid-19 era that focuses on a comprehensive approach that involves participation from all stakeholders.

It is also anchored on a clear understanding that the operating environment has now been dramatically disrupted by the Covid-19 pandemic and that the envisaged new SAA will be smaller and may result in significant job losses. In the immediate we recommend that Government to bailout SAA with current COVID – 19 Funds furthermore:

1. Appreciate that the private sector is collapsing
2. Private sector is desperately in need of bailouts
3. SAA is state-owned entity and should be prioritised more than the private sector
4. Government must create enabling environment/markets for the airline as part of the NDP vision.

Background Statement

This submission was triggered by the BRP paper titled SAA Crisis: Resolution Overview (13 April 2020).

A critical point of departure is a proper articulation of the problems that have beset SAA over time in order to be able to frame a proper context for a responsive solution. It is important to underscore that there are two distinct markets at play.

1. The continental and intercontinental market. This a typical long-haul space for the new SAA
2. The domestic market. This s atypical low-cost space in which Mango is strategically situated
3. There is a need to create a new vision for the airline while borrowing among others from the following countries:
   1. Morocco
   2. Emeritus
   3. Egypt
   4. Ethiopia
   5. Kenya: Wants to borrow a similar operating model
   6. It will also be important to look into international cases of State-Owned Airlines
4. The new vision of the new SAA National Carrier must also consider the following:
   1. Address issues of networks
   2. Consider partnering with other airlines and share profits in low generating routes
   3. Nationalisation of the Airline with the following in mind:
      1. Cut out outsourcing contracts in the Aviation sector and insource such employees into SAA airline full-time employees
      2. Conduct everything in – house including Cleaning, Security, wherein such employees shall be absorbed within the operations of the new airline and be provided with in – house necessary skills required for the business
      3. Restructure procurement model and cut off middlemen
      4. Expansion on the aviation academy and utilise funds from the SETAs for the capacitation of the employees
   4. Partnering of workers through new worker cooperatives which will enable them to have shareholding in the new airline and representation in the Board of the New Airline
   5. SAA Express and Mango as part of the new SAA National Airline dedicated to deliver domestic – regional routes and SAA focusing on intentional activities
5. Termination of the BRP (Business Rescue Practitioner) contract
   1. The mandate of the BRP has been overtaken by COVID – 19 and therefore, SATAWU propose that DPE (Department of Public Enterprise) terminate the contract of BRPs. The challenge of aviation are global in nature and can no longer focus on SAA alone
   2. This is a requirement if the processes of restructuring of SAA are to be achieve and delivered
6. Leadership Compact/Working Group
   1. The working group/leadership compact must be established through equal representation of Labour and DPE and/or Government’s Inter-Ministerial representatives. There must be direct representation of Organised Labour in the working group/leadership compact
   2. Develop clear terms of reference and timeframes
   3. This working group shall develop and review the challenges of the airline in-depth amongst others
   4. To explore wide-ranging opportunities to revive the airline
   5. Put moratorium on retrenchment including the current retrenchment processes facilitated by CCMA
7. Political management of SAA at government level
   1. SATAWU believe SAA must be run both by DPE & DoT (Department of Transport) until such time that the business has returned to its normality, whereafter can review the same
   2. Recognition that SAA forms part of an integrated public transport strategy
   3. SAA must enjoy government subsidy like Bus and Rail industries
   4. Resuscitation of SAA shall assist on strengthening SA’s transport corridors especially between rail and Aviation with a central goal of shifting from road freight to rail and air freight carriages
   5. The new SAA must work with Transnet and PRASA in enhancing the manufacturing of aircrafts components
   6. Exploit S.A’s position in trade routes and locate Aviation in the trade development

The documents provided indicate that the recognition of these separate and different markets (domestic and international) has long been recognized. However, the boards of SAA and management have inexplicably not sought to review its repositioning and operating mandate in relation to these issues. This opportunity was best presented when Mango was created in 2006. Such a decision and clarity was significant as it could have set a basis for determining the vision and business models applicable to both entities and all other associated questions including;

1. Corporate Governance
2. Fleet and Network
3. Labour and Contracts
4. Capital Structure

These issues demanded the keen attention of the shareholder as represented by the board and management.

Under Causes of the Crisis this critical and foundational determination has been overlooked or ignored. By stating the destructive role of the incompetent management and some corrupt Board members that were appointed with the approval of the shareholder is not minimised.

It is important to underscore that Labour was not consulted in debating the key operational issues. But it is labour now that faces the harshest outcome of the current crisis.

The Way Forward – Post Covid-19 Era

We find nothing in the BRP document that articulates a clear strategy on the recreation of the new entity and a template for testing the viability of such a strategy. In our view, such a template would provide a basis for discussing how long it would require to test the viability and what other actions will be urgently needed to mitigate the economic and social and stem the cash burn in the interim. The current BRP approach has mainly been financially driven without addressing what it would take to establish/recreate the new SAA.

We believe it has failed to produce a basis for determining the viability of a new SAA and the impact of the pandemic has created a new and different reality. It must be scrapped. We highlight below some of the critical ones we have identified.

The above statement is based on the reality that:

1. The Covid-19 global pandemic has paralysed air transport, collapsed markets, and terminated many of airlines globally.
2. How long these markets will take to resuscitate is central to the viability of many airlines in their operating contexts but in different and reconfigured formats.
3. The reality is that the rationale for the BRP process has evaporated with the advent of the Covid-19 pandemic. It has become moot.
4. Our view is that we should agree to this reality and that the DPE urgently implement an unwinding legal process.
5. The correct and pressing challenge confronting us now is how and whether it is viable to recreate SAA International?
6. In our view the ideal course of action in response to the above question is to immediately establish a working group, of equal representation from Organised Labour and other people seconded by consent of the parties with experienced airline experts and other professionals, to frame a strategy and working template to respond to the following:
   1. What must be done to mitigate the impact of the collapse of SAA International in terms of jobs and the impact on the economy?
   2. Develop urgent and costed scenarios for market resurgence and associated plans for revival/recreation of SAA
   3. A need to review the cost structure of the airline, governance model as well as creating a new operating model/philosophy
   4. Conduct a skills audit to achieve a skills fit for the new airline
   5. Sale of non-core assets that would have been identified and agreed upon by the parties as to raise funds
   6. Urgently define the role of the shareholders in the new model
   7. How to implement an agreed employee retrenchment process and how it must be funded.
   8. Consider upgrade technology, organisational and management capabilities
   9. Vision 2025 of Ethiopian Airlines focused on technological capacity development, skills formation, aggressive new market development and commitment to Pan – Africanism
   10. The context for the operation of the new SAA must be to serve:

Regional market using narrow-body aircraft

Long haul continental and intercontinental market using wide-body aircraft

The work on recreation scenarios will include, but not be limited to the   following:

1. New Fleet and Network
   1. Develop a viable near-term and long-term plan
   2. Engage with aircraft providers (OEMs and lessors) to evaluate re-fleeting options – widebody and narrow aircraft. An aggressive Boeing / Airbus competition could yield material advantage to the new SAA.
2. Labour and Supply Contracts
   1. In the current circumstances all contracts should be liable for review and re-negotiation

We have identified the major reasons for the lack of profitability in the international market as lack of scale as well as geographic positioning of South Africa being at the end of the Hemisphere. Geographic positioning together with network effect of global airline schedules meant that SAA got limited flight hours out of its international fleet, making it impossible to recover the costs of leasing and operating the international fleet even on good load-factor and average price conditions. These were systemic constraints in SAA international business leading to poor return on investment.

Given the systemic challenges in the international markets, we need to look to collaboration as an instrument to address SAA’s woes in the international market segment. The best option is to focus on commercial joint ventures in the international business to share the profits and losses with partners who share the same values and aspirations in the African Aviation Market.

Preliminary discussions had already been held with Ethiopian Airways who were keen to participate in order to achieve the long-standing hope of creating an African Intercontinental airline with both SAA and ET as anchors. The current situation presents an ideal opportunity to pursue this vision

Rationale for Recreating SAA

First, it will cost too much to close it down, and we can’t afford it. SAA is about R40-billion in debt to the state and to banks and it has about R80-billion worth of aircraft leases, which will cost plenty to wriggle out of. Without flight operations to service that debt it just becomes a deadweight that the state (we the taxpayer) will still have to pay for. Other Airlines are in operational downflow with some to be working on downsizing their employees, failed to pay their employees with such scenarios providing business opportunities to the new SAA National Airline

Second, the airline employs 5,000 people – and 10,000 in the SAA Group. If SAA and SAE were to close, about 80% of those jobs would be lost. The pilots would accept jobs at overseas carriers and may be able to continue. But without SAA as their primary customer, SAA Technical and Air Chefs would collapse. And this is only the loss of direct jobs. Thousands more high-value jobs in support industries would also be lost. The cost, both in terms of human suffering and to the national economy would be huge.

Third, the airline performs an essential enabling function to the South African economy – and the rest of Africa as well – in that it provides essential air transport connectivity. The facile response to this claim is that private sector airlines which are now collapsing are waiting on the wings of SAA to wait to collapse and move into the gap left by SAA. Covid-19 has redefined the operating context in a very dramatic way. The regional and continental absence of SAA will negate the stated efforts of the President as Head of the OAU to realize a rapid recovery for the continent, whilst SAA through SAE & Mango would be able to fit well in the domestic – regional activities with SAA focusing in the International activities.

Fourth, in 2017, Oxford Economics updated its seminal study on the value of aviation to South Africa, and the results are startling.

Headline numbers show that the aviation sector supports 490,000 jobs and adds R160-billion to South Africa’s GDP. In addition, by buying goods and services from local suppliers the sector supported another 130,000 jobs.

Funding Options

It is our view that the current status of SAA qualifies it perfectly for funding under the Covid-19 R500 bn budget.

The immediate challenge is to fund:

1. The activities of the Working Group/Leadership Compact for plotting an implementable strategy for recreating SAA
2. Funding any possible the retrenchment packages that will emerge from this exercise
3. Provide working capital

The exact budgets will emerge from the work of the Working Group but our estimate is R15 bn.

 Submitted by:

Jack Mazibuko

SATAWU General Secretary

Jack@satawu.org.za

Mobile: 082 660 4793/082 951 1181

Date: 24/04/2020

Further details from Anele Kiet, Deputy General (071 021 1903) and Nelson Lamityi, Sector Coordinator (076 402 0308)