Answer to Question #154389 in Macroeconomics for Karabo Maluleke

Question

Mal administration of funds is one of the current issues confronting SAA. Identify and elaborate on three areas (e.g. employment) of the South African economy severely affected by the poor operational performance of SAA. ​​​(5×3=15)

Answer 1

- Due to political interference, SAA has a history of appointing inefficient managers hence the airline has been unable to reach operational efficiency and profitability (Ssamula, 2014). In 1998, SAA appointed an American, Coleman Andrews, as Chief Executive Officer (CEO) and charged him with putting the airline back on the road to profitability (Vermeulen & Williams, 2001). Andrews bought 737-800s to renew the

domestic fleet, sold off 20% of the airline to Swissair, and did some clever internal restructuring (Birns, 2009). In 2000 many thought he had turned SAA around after the airline reported profits of R350 million, but an investigation of the financial statements revealed that this figure was swelled by the once-off sale of obsolete aircraft (Flottau, 2013). If the aircraft sales were stripped from the financial statements, SAA showed a loss (Vermeulen & Wiliams, 2001).

- Furthermore, during Andrews’ time, SAA had a fleet of its own aircraft and those aircraft were sold and leased back to SAA (CAJ News, 2015). Cordeur (2015) argues that by selling its aircraft SAA depleted its own asset-base on the balance sheet and started losing money. Maqutu (2015) claims that a particularly spectacular bungle during Andrews’ tenure had to do with the acquisition of new aircraft. Andrews ordered 21 new Boeings, but incorrect specifications on avionics and cabin interiors were transmitted to the suppliers (Vermeulen & Williams, 2001). The result was a dramatic cost increase and a lengthy delay while the aircraft was refitted (Kemp, 2008). These decisions are still impacting SAAs’ profitability in 2017.

- Under the leadership of Andrews SAA paid out more than R1 billion without making sustainable profits (Vermeulen & Williams, 2001). Andrews’ salary was more than US$1 million (about R8 million at the time) a year, excluding perks such as a yearly bonus of 125 percent of his salary and options on 18 million SAA shares at one cent each (Birns, 2009). In total, Andrews earned more than R220 million during his 20

month stay at SAA (Oosthuizen, 2013). Consequently, he was accused of manipulating an excessive profit on his salary (Vermeulen & Williams, 2001), failing to deliver on his promise of returning SAA to a profitable position.

• After the departure of Andrews, Andre Viljoen took charge as the CEO in 2001 (Maqutu, 2015). Viljoen canceled Andrews’ order for the Boeings albeit some had already been delivered and placed a new order with Airbus in Europe (Oosthuizen, 2013). The Airbuses were reportedly cheaper than the Boeings, but considering the initial bungle on the interiors, the cancellation fees to Boeing, and the pilot and service retraining costs (almost all of SAA’s fleet were currently Boeings) the cost of this series of misadventures was considerably greater than if the airline had stuck with Boeing (Cordeur, 2015). Viljoen also signed an agreement to bring South Africa Airways into the Star Alliance group. However, when Swissair failed the Government had to buy back the stake in that airline (Kemp, 2008).

- Maqutu (2015) claims that as a result of pressure from the SAA Board (SAA board members were political appointees), Viljoen had to pursue a black political agenda, promoting “Affirmative Action” policies where SAA systematically replaced whites with black employees (Maqutu, 2015). This included lowering the compulsory retirement age for pilots to 50 years, down from the industry standard of 60 (Ismael, 2015). This policy was an attempt to move whites out of the command chain as quickly as possible. SAA also deliberately established a policy of not hiring white trainee-pilots if there were

A weak balance sheet and negative equity;

Liquidity challenges;

Negative publicity about SAA;

Previous board dynamics which are not helpful;

Suppliers have lost confidence in SAA;

Forensic reports pointing to rampant corruption;

Banks closing credit lines to the national carrier.