ZA Gov Intends Merging Ailing State Carriers

South Africa’s Zuma government has announced plans to consolidate the financially plagued national carrier South African Airways and budget airline SA Express. The idea behind the endeavor is that the unified airline would have a better chance for financial success through the merger.

ZA’s Finance Minister Pravin Gordhan strongly supports the merger of SAA and SA Express
ZA’s Finance Minister Pravin Gordhan strongly supports the merger of SAA and SA Express

Will two nearly bankrupt airlines be commercially successful by becoming one? That’s the million dollar - African - question nobody can realistically answer at this point of time. Jacob Zuma’s government is convinced of its success or else they wouldn’t have proposed their unification process. 

Unexpected announcement
The project was made public last week by South Africa’s Finance Minister Pravin Gordhan during his Budget speech in parliament. Acknowledging the important role state-owned enterprises play in fostering his nation’s growth and development, Gordhan warned that supporting both ailing carriers can become a heavy burden for the country’s finances if they continue losing money year after year, as expected by market observers and analysts. This applies in particular to SAA, which is constantly burning cash, with no end in sight. It is of little comfort that they are not alone; SAA’s ally SA Express’s finances are going south as well despite all efforts to turn things around.


Does a merger really solve the pressing problems?
Obviously, the Pretoria government is fed up with the situation, constantly injecting money into two bottomless pits to keep both airlines aloft. This was confirmed by Minister Gordhan during his Budget address, stating that the government sees no further need to channel taxpayer’s money into the coffers of ailing airlines. He announced that Public Enterprises Minister Lynne Brown has agreed to explore the possible merger of SAA and SA Express under a strengthened board, “with a view to engaging with a potential minority equity partner, and to create a bigger and more operationally efficient airline.”
A real slap in the face for the current execs running SAA and SA Express!
Both carriers have persistent financial difficulties, Gordhan criticized. “Therefore, we must take decisive steps to ensure that they are effectively governed and that they contribute appropriately to the attainment of the National Development Plan.”
Put simply: a merged carrier must start earning money and stop being a permanent budgetary burden!


SAA is technically insolvent
He went on to explain that the move to merge the carriers follows the Presidential Review Commission report on state-owned enterprises (SOEs), which according to the politician is “a very welcome guide to the path ahead.”
In fiscal 2014/15, SAA is expected to report a major net loss as a result of high operating expenditures, increased competition on all routes, asset impairments and higher finance costs. “The carrier is technically insolvent and has been achieving a going-concern status on the basis of guarantees issued by the government,” Gordhan said, citing the Treasury Department.

Dubious role of Pretoria’s politicians
Local aviation experts blame the government for having contributed to the woes the national carrier is facing for some time. “Influential political groups have constantly torpedoed urgent commercial decisions, making it extremely difficult for management to steer a new course,” noted a Johannesburg-based cargo manager. 
Air freight traditionally plays a major role at SAA, transporting roughly 150,000 tons on domestic and international routes annually. The lion’s share of volume is carried in the lower decks of the carrier’s long-haul passenger fleet. Three Boeing 737-300 freighters complement the service offered to the market. SAA Cargo is a division of South African Airways, whose losses or earnings are integrated in the fiscal results presented by the airline each year.    
The Johannesburg-based budget airline, SA Express is a strategic ally of SAA, but operationally independent. SAA Cargo markets the capacity of their Bombardier fleet entirely, this way adding thinner regional routes served by SA Express to the national carrier’s global network.

Heiner Siegmund  /  Michael Taweel

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