SAA is likely to have a tough time finding an equity partner as no investor will plough money into the airline without the opportunity to exercise some control, according to analysts.
SAA is struggling with escalating costs and has been racking up losses, pushing the government to pony up money and guarantees to keep the airline afloat.
Public Enterprises Minister Lynne Brown said last week that SAA would consider an equity partnership in an attempt to implement a turnaround strategy for the embattled state-owned airline.
But analysts said that the government would have to make some policy and operational changes, including dropping money-losing international routes, as well as look into the Air Service License Act which limited the control of foreign airline owners.
Aviation analyst Linden Birns said the Air Service License Act was limiting to foreign entities by allowing them only 25 percent of voting rights of any airline operated in South Africa. South African citizens could have as much as 75 percent of voting rights, according to the act.
Aviation commentator and editor of SA Flyer magazine Guy Leitch ruled out a possibility of an interested private investor, “unless SAA dropped some of its long-haul flights which are making a loss”.
Finding an equity partner would not be new for SAA. The state-owned airline entered into a private partnership with Swiss Air holding company known as the SR Group about 14 years ago. The partnership unwound when SR Group ran into financial difficulties.
“The issue for any investor is going to be what sort of control they are going to exercise over their investment,” said Leitch.
The regulation also stipulates that the asset and management of the company has to be in the hands of South Africans. These were going to be real considerations for anyone who was interested in this airline, Leitch added.
He said that Brown was not being precise about the kind of partnership SAA would need. He said she might be referring to an equity partnership in the aircraft fleet and not the airline operations.
“This would make sense as the government plans to spend R50 billion on a fleet renewal programme,” he said, adding that this would be better than selling off a chunk of the airline. “But I can’t see it happening. As long as the airline operates non-economic routes, the private sector would not be interested in getting involved.”
He said opportunities were on investments in the fleet as lenders were lining up to lend on the aircraft because they had state guarantees.
“The airline is fundamentally bankrupt so there is no equity and no capital for an equity partner,” Leitch said.
Birns said that airlines were generally capital intensive with profit margins, on a good year, in a range of 2 percent and 3 percent.
“As much as everyone is focusing on the governing issue of SAA there are real factors characterised by the trading environment which are a real challenge to SAA and will not go away despite who the owners were,” he said.
One of the biggest operational costs was the fuel, accounting for about 35 percent of the airline’s overall cost base. And as an international operator, SAA was incurring currency exchange rate costs which were mainly in US dollars and euros.
Another hurdle for SAA might be the fact that it leases a majority of its aircraft, making it difficult for private shareholders to invest in assets.
Birns said the key to SAA’s future was making sure that it was adequately capitalised and could live off its balance sheet.
Should the airline be privatised, it could lose its ideological purpose as an economic enabler and its role in underpinning strategic foreign relationships especially with the Brics bloc – which comprises of Brazil, Russia, India, China and South Africa.
“SAA is the only airline that services Brazil, China and to some extent Russia and there were no private airline in the South Africa to start long-haul routes,” said Birns.