Privatisation has added value to airlines in the past. Why not SAA?

While presenting the National Budget in 2020, former Finance Minister – Tito Mboweni – described South African Airways (SAA) as the Government’s Sword of Damocles, which was, at the time, on the precipice of falling.

Many of us saw this as a prophetic statement, but none of us could have predicted the spectacular (or unspectacular, depending on who you ask) way the airline fell from grace.

What has transpired over the past two years (going into a third year now) is that there are many questions regarding the airline’s future that need to be answered before the business rescue can be completed. The option of a private equity partner (privatisation in a different dress) looked promising initially. However, this option has encountered challenge after challenge.

If Government wants to privatise the airline, it needs to look at historical deals and the benefits that they offered.

Large airline and aviation privatisations 2012 and 2016

Notable large airline privatisation transactions occurred between 2012 and 2015. The Japanese national Government successfully executed a very large divestment of Japan Airlines (€6.46 billion) through privatisation in 2012.

In 2015, 61% of Portugal’s national airline (TAP) was sold for a purchase price of €10 m plus the assumption of €338m of debt. In the same year, China Eastern Airlines raised €2.61 billion in a

privatisation on the Hong Kong securities exchange and a direct sale of a 3.55% stake directly to Delta Airlines for $450m to further cement the two companies’ Skyteam partnership.

Air China raised €1.749 billion in a private placement in 2015, and the Spanish Government raised €4.27bn in the IPO of a 49% stake in the airport operator Aena in February 2015. In addition, the Irish Government raised €3bn by selling off its 25% stake in Aer Lingus to International Airlines Group in 2015. Further, Greece raised €1.3 billion through lease arrangements on 14 regional airports on 13 December 2015. Further, the Greek Government raised €915 million through a 99-year lease on 14 regional airports on 06 July 2016. Finally, Oman Air raised €335 million through a marketed follow-on in 2016.

These massive numbers would be a welcome relief to State coffers when economic growth is very low.

African options

Privatisation can work in Africa. For example, on 05 June 2018, the executive committee of Ethiopian Peoples’ Revolutionary Democratic Front (EPRDF) decided to allow the sale of a minority interest to domestic and foreign investors in Ethiopian Airlines as well as Ethio-Telecom, hydropower plants and maritime transport enterprises, with the controlling interest to be retained by the Government.

Other SOEs such as the railway service, sugar plants, industrial parks, hotels, and other manufacturing enterprises would be ‘transferred to the private sector partially or fully’.

The decision was based on the chronic foreign currency shortage, lack of adequate corporate reforms, and the reduction of the role of Government in areas where the private sector can participate, as well as the debt threshold of about 59% of the current gross domestic product (GDP).

European lessons

It must be pointed out that President Cyril Ramaphosa and Mboweni are not stupid men. President Ramaphosa was an astute businessman before becoming a politician and has the business acumen needed to make value-based decisions. It is safe to say that Government is looking at every possible option to salvage some value from SAA.

The Government will cast its net far and wide to look for elements of privatisation success stories they can build upon. 

Most Western European privatisations achieved privatisation through public listing on stock exchanges (IPOs). This injected new private sector share capital listed on securities markets into the airlines. This approach was also adopted by Turkish Airlines and Aeroflot, with the governments retaining 49% and 51% shareholding in the airlines, respectively.

Two privatisation approaches were combined in Qantas’s privatisation: the sale of shares to a strategic investor (British Airways) and an IPO.

Following a capital injection into Qantas in 1993, 25% of Qantas was sold to British Airways. The remaining 75% was disposed of in a public listing in 1995. British Airways subsequently sold its 18.5% stake in Qantas in September 2004.

Consolidation of the European airline sector followed the privatisation of Europe’s biggest airlines because of better access to capital and a less nationalistic mindset within the European Union. British Airways (BA) acquired British Caledonian in 1987, and BA and Iberia merged in 2011 to form IAG, which received Vueling in 2013 and Aer Lingus in 2015. The Irish national airline was privatised through a stock market listing in 2006. International Airlines Group is 20% owned by Qatar Airways in listed stock market transactions.

Local challenges

What we have seen over the past two years is that Government has offered some funding to the business rescue signalling its interest in holding onto some interest in the airline. However, SAA needed to find a strategic equity partner to fund the rest of the rescue.

Takatso stepped up. However, the deal has faced challenges, with the company reluctant to provide capital to SAA. Is it because it wants to take a step back and be assured that the airline has resolved its leadership issues?

We need to ask if there is a need for a state-owned airline. We have seen significant evidence that there is a movement away from this business model, and airlines such as Virgin Atlantic have proven that privately run airlines are agile enough to respond to the ever-changing nature of the challenging market that airlines find themselves in. We need to make the best decision for SAA sooner rather than later.

Dr Joachim Vermooten is a Private Consultant that specialises in the transport sector