During the budget speech, Finance Minister, Pravin Gordhan, said a possible merger between SAA and SA Express would create a bigger and more operationally efficient airline.
June Craword, Barsa CEO, says a merger between the state-owned carriers makes good sense. “SAA, Mango and SAX routes should be rationalised. They should not be competing but rather complementing each other. This way all stand to win.”
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Although a good move on the part of the airlines, a merger would have limited impact on the South African aviation landscape, says Chris Zweigenthal, Aasa CEO. He explains that, as SAA and SAX currently operate on very different routes, a merger would be unlikely to disrupt the industry.
A merger would extend SAA’s reach and dominance through direct control of smaller routes in South Africa, currently operated by SAX, says Aviation analyst, Joachim Vermooten. “It would inhibit entry and expansion on smaller routes by smaller private-sector airlines. SAA and SAX could internally co-ordinate prices and supply of capacity, exclude or foreclose other private-sector airlines from interlining, resulting in a reduction of choice.”
“Unless the change resulting from the merger can be implemented quickly, such that the resultant business is agile and competent, there will be an opportunity for other operators to gain more traction in the local markets,” says Rodger Foster, CEO of Airlink.
Foster adds that merging SAX and SAA will bring about a single state-owned enterprise airline, which will lead to much-needed stability. However, he warns that bringing two financially unstable businesses together will also naturally result in bigger losses. “It is probable that the combined entity will need to shrink into sustainable viability before it can afford to stretch its wings and grow into new horizons.”
Who will invest?
Who would want to invest in cash-strapped SAA as a ‘minority partner’?
The challenge is that as long as SAA continues making losses it will remain unattractive and the order of magnitude of its debt is a deterrent to a prospective minority strategic investor, says Rodger. “SAA’s business can be fixed, but in order to do so it needs stability and a clear strategic direction.”
A minority shareholder doesn’t necessarily need to be silent and sit back, says Zweigenthal. KLM, for example, became a minority shareholder in Kenya Airways and managed to completely turn the airline around to make it a huge success. The same is true for the partnership between TAAG and Emirates. Any possible partner for SAA would likely bring the necessary knowledge and expertise to bring the airline back to profitability, he says.
Foster agrees that there are models where minority investors play a more significant role in the management of the business. As such, the Middle Eastern carriers could be potential equity holders for SAA. However, Foster points out that these carriers have already permeated the Southern African markets by having access to multiple cities directly from their hubs. “So why would they wish to invest in the local airline network system comprising financially challenged entities?”
