South Africa's State-Owned Airline Edging Toward Collapse, As Government Refuses More Bailouts

South Africa's state-owned flagship airline has been beset by myriad problems, including heavy debt, incompetent management, a crippling strike, and years of incurring losses despite bailouts totaling $1 billion in the past two years.

Now, many are wondering if South African Airways is on the verge of collapse.

Early Friday, three leading travel insurance companies in South Africa stopped covering tickets issued by South African Airways against insolvency.

Even the country’s minister of finance, Tito Mboweni, wants to see the airline permanently grounded.

“It’s loss making,” Mboweni told an investment symposium in New York last year. “It seems to me you are very unlikely to sort out that situation. My view is, shut it down.”

Mboweni has recommended the airline maintain the brand name, but that the government should lease it out to a private firm to operate.

Mboweni’s Treasury has agreed to repay 9.2 billion rand ($620 million) in debts that will come due in the next three years. Beyond that, Mboweni said he will not approve further funds.

Professor Jannie Rossouw, head of the School of Economic and Business Sciences at the University of the Witwatersrand, commented there’s "no reason for the government to own an airline.”

Rossouw added if South African Airways had been shut down five years ago, it would have saved the taxpayers 20 billion-rand ($1.35 billion).

“South African Airways competes in a cut-throat industry with razor-thin margins. There are 50 airlines serving South Africa,” said Martin Kingston, board member of South African Airways.

After the end of apartheid in the early 1990s, South African Airways sought to establish dominance over Africa by arranging flights all over the continent. However, the airline suffered half-empty flights and endured heavy fuel burn on long trips. South African Airways also made costly mistakes in hedging the price of jet fuel. As a result, it hasn’t had a profitable year since 2010-11 and has since survived on state bailouts.

In addition, profitable state-owned carriers from Kenya and Ethiopia cut into South African Airways’ routes and profits.

South African Airways now has debts of some 100 billion rand ($6.77 billion), meaning finding a buyer will be difficult.

A planned equity stake in South African Airways by Emirates Airlines in 2015 was canceled by president Jacob Zuma. Reportedly, the reason for the withdrawal was that then-South African Airways Chairman Dudu Myeni, a friend of Zuma, did not want an outside shareholder watching over the airline’s operations.

It appears the public fund spigot is now shut off.

Public enterprises minister Pravin Gordhan said the government would not inject anymore cash into South African Airways.

"In addition to growing revenue, efficiencies must be improved and costs need to be reduced across the board,” Gordhan said in a statement.

Mboweni has placed greater emphasis on bailing out Eskom, the state-owned power utility which carries even larger debts -- $440 billion rand ($30 billion).

“The minister of finance is in an extremely difficult situation. He is highly fiscally constrained and one has to ask whether he can continually, in his words, bail out [state-owned enterprises],” Kingston added.

South African Airways employees went on strike in mid-November to protest planned job cuts – reportedly the airline was going to lay off about 1,000 of its 5,000-strong workforce.

The strike canceled thousands of flights at a cost of 50 million rand ($3.4 million) each day.

The strike lasted eight days with South African Airways offering a moratorium on layoffs and a 5.9% salary hike. Phakamile Hlubi-Majola, spokesperson for the National Union of Metalworkers, which represents most South African Airways employees, said: “We are dealing with an entity on the verge of collapse due to rampant looting and corruption. The problem has always been we’ve had a management board that refuses to address procurement issues up to now.”

In the event South African Airways collapses, Indigo Ellis, head of Africa research at Verisk Maplecroft in London said it would be tantamount to “a shock to both the economy and the population, as well as the perception of state-owned enterprises in general.”

Fabian de Beer, director of investments at Mergence Investment Managers in Cape Town, said losing South African Airways would be “a blow to national pride and have ramifications for industries and service providers tied and/or closely associated with it.”

Mike Schussler, an economist in Johannesburg, asserted the airline is doomed. “South African Airways as we know it will not be around in a few years time,” he said. “There can be parts that survive but overall they are gone.”

However, some faint signs of hope have emerged.

Ethiopian Airlines CEO Tewolde Gebre Mariam said his company might be willing to buy a stake in South African Airways. Richard Branson said his Virgin Atlantic would “definitely” consider investing in South African Airways if the Pretoria government approached him with an offer.