ANALYSIS | SA airline industry in danger of collapse, no sign of state aid

South African airlines have a vital role to play in enabling the economy to try and rise out of the coronavirus induced recession.

Yet, the country's airline industry itself is in danger of collapse due to flight bans since the start of the lockdown on 27 March, leading to zero revenues.

Although government has already announced various Covid-19 aid programmes, there has, so far, not been any indication of assistance specifically to enable the airline industry to survive.

Restricted air travel will only commence at lockdown Level 3, full domestic air travel at Level 2 and regional and international air travel at Level 1. Some airlines, like Comair and FlySafair, have already indicated that they will likely only be allowed to fly again by September, October or even November.

"We recognise that the primary objective is to prevent the virus from spreading, but the longer the airline industry is unable to fly, the more severe the risk becomes of loss of jobs and loss of airlines," warns Chris Zweigenthal, CEO of the Airlines Association of Southern Africa (AASA).

For him it is incorrect to blame the airline industry as spreading the virus as passengers had contracted the virus prior to travel and unfortunately travelled whilst carrying the virus.

"We believe the airline industry can provide very safe and reliable transport to get the economy going around the country and when borders open, we can get regional and international travel back on track."

AASA will continue to work with all stakeholders in order to make this possible.

He argues that, whilst airlines currently will fight to survive the pandemic, international airlines cannot simply step in to fill the void should local airlines not survive. While they are able to fly international flights to SA, foreign-owned companies are legally prohibited from flying domestic routes.

Before the start of the pandemic, the air transport and tourism industries in SA supported a total of about 472 000 jobs and contributed about R180 billion to GDP each year.

The International Air Transport Association (IATA) now estimates that in SA 252 000 jobs are at risk and the contribution to the SA economy could be reduced to R97 billion.

Iata CEO Alexandre de Juniac has been quite emphatic that governments should support all airlines, regardless of whether they are owned by a state, private-sector shareholders or any combination of the two.

Zweigenthal similarly believes that any Covid-19 airline aid – if any - should be given to all SA airlines, whether they are state-owned or not.

Aviation economist Joachim Vermooten also agrees, and adds that such government aid should be distributed pro rata according to an airline's market share, otherwise it will create a distortion to competition.

Not just airlines

Airports Company SA (ACSA) and the SA Civil Aviation Authority (SACAA) and the Air Traffic and Navigation Services (ATNS) would also most likely need Covid-19 assistance, he says.

Vermooten notes that airlines are very expensive to run. Even before the coronavirus pandemic and lockdown led to the grounding of airlines, it is estimated that South African Airways (SAA) incurred losses of about R6 billion a year.

"Without a few competitive airline networks, it is impossible to have a functional economy. Clear provision has to be made for competing airline networks to start post the coronavirus pandemic," says Vermooten.

SAA has been in business rescue since December last year. After a request for R10 billion was rejected by government on 10 April, the business rescue practitioners (BRPs) indicated that they do not have the funds to continue running the company beyond the end of April and might end up having no other option but to apply for liquidation.

A deadline for unions to accept a proposed employment termination agreement which would enable a structured winding down was set for 17:00 on Friday 1 May. Over the past 13 years SAA has incurred over R28bn in cumulative losses.

On Thursday, unions Numsa and SACAA filed an urgent application with the Labour Court in a bid to stop the BRPs' retrenchments at SAA. On Friday the Department of Public Enterprises issued a statement in which it describes a Leadership Compact between the department and unions with the vision of trying to restructure SAA into a "new airline". No mention has as yet been made of where the funding for such a process would be coming from.

Minister of Tourism Mmamoloko Kubayi-Ngubane said on Wednesday that government had reached no final decision yet on the fate of SAA, but she is hopeful that a decision may have been made by the end of June.

Low-cost airline Mango is a subsidiary of SAA. What its future holds, is as yet unclear. Whether it in itself is profitable or not is questionable, according to some industry experts.

State-owned regional airline SA Express, which was forced into business rescue by one of its creditors earlier this year, was placed in provisional liquidation on Tuesday when its BRPs threw in the towel after it could not provide a rescue plan which satisfied government and their request for further funds was also rejected.

JSE-listed Comair, the owner of kulula.com and the local operator for British Airways informed its shareholders on Thursday that it is lobbying the state for "special aid" through industry initiatives.

When SAA went into business rescue, it still owed Comair about R790 million from a R1.1 billion settlement in a competition case. It is unclear how much of that it will be able to recoup.

Comair started a restructuring process in March, which would include job losses.

Fin24 reported in March that regional airline SA Airlink plummeted to a loss of R365 million in November 2019 – compared to a profit of R84 million in September and R50 million in October – as a result of SAA withholding revenue from ticket sales when it went into business rescue.

Elmar Conradie, CEO of low-cost airline FlySafair, said during a recent webinar that the biggest impact is the uncertainty about when they will be able to fly again.

"We don't know what the demand will be once we start again. We would have to start small with a few flights a day, but would also have to be flexible to match demand if it suddenly picks up," said Conradie.

He would like to see some sort of leniency from government, like zero VAT and reduced aviation charges for a while. This would be to make it feasible to run flights on low load factors expected once flight bans are lifted.

The post-pandemic recovery is likely to happen relatively quickly for domestic flights and, potentially, even for continental routes. However, the international recovery could take a fair amount longer as it will be largely dependent on global destinations reopening their borders, and, crucially, a desire and willingness by tourists to enter specific countries, says James Geldenhuys, head of aircraft finance at Nedbank CIB.

"The diversity and estimated flexibility of an airline's fleet will also be a significant determinant of its ability to recover, and the rate at which such recovery occurs. Ultimately, like most questions relating to life and business after Covid-19, the future of airlines is largely unknown and almost impossible to predict."