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Privatisation and SAA

Oct 09 2012 07:39 James-Brent Styan

SAA plane

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THE resignation of South African Airways (SAA) CEO Siza Mzimela has once more seen a call going up for the state-owned carrier to be privatised.

There’s one very real reason why this shouldn't happen.

It’s called the oil price.

For every $1 that the price of Brent crude rises, airlines' global fuel bill rises by $100m.

That’s about R800m (pretty soon R920m if the rand drops any further).

Since the 1990s the price of oil has shot up for a variety of reasons, and this is something airlines have no control over. SAA’s outgoing chairperson Cheryl Carolus herself said this month that the oil price has added R2.2bn to SAA’s costs in 2012, leading to the reported  R1.2bn loss.

In 2001 fuel costs comprised 13% of an airline’s total cost base; today, they make up more than 30%.

And none of this is under the control of the airline.

The impact on airlines globally has been massive. Just this year we’ve seen the end of carriers like Malev, Spanair and Air Australia. The giant American Airlines is under Chapter 11 bankruptcy protection (similar to local carrier 1Time).

Other airlines like Air India have been bailed out by their governments, in Air India’s case to the tune of $6bn over the next eight years.

The International Air Transport Association (Iata) estimates airlines in Europe this year will report a total loss of $1.2bn. African airlines are expected to break even.

Airlines have a profit margin of 0.6%. That makes it nearly impossible to build up the cash reserves needed to strengthen a balance sheet like the one of SAA.

Back to the privatisation issue. Simply put, governments put in money in areas where corporate money won’t go because there’s no money to be made. That’s called subsidisation.

If SAA were privatised and oil were to hit $200 a barrel, it is highly probable that very few if any carriers wouldl consider flying to South Africa under the current status quo (high taxes, passenger numbers, etc).

Our country is at the bottom of Africa, far removed from the rest of the world and airlines have to fly very far, burning a lot of fuel to get here. It’s simply not affordable.

If oil prices keeps rocketing skywards and if SAA were privately owned, its owners may also eventually give up the profit dream and kill the airline off. (The picture in the domestic market is different, and a solid argument can be made that the domestic market section of SAA should be privatised.)

Given the economic benefits of aviation to the country’s economy - and there is proof available that can attest to this - it is non-negotiable that we do need to be connected to the rest of the world.

If we kill off SAA, we run the risk of cutting ourselves off from the rest of the world.

 - Fin24

Follow James-Brent Styan on Twitter by @jamesstyan.


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