Three Things to Learn From Exit of South African Airways's CEO

(Bloomberg) -- South African Airways’s prospects of surviving in its current form took a hit over the weekend when news broke that Chief Executive Officer Vuyani Jarana quit over a lack of government support.

Three Things to Learn From Exit of South African Airways's CEO

The National Treasury isn’t committing to an agreement to put 21.7 billion rand ($1.5 billion) toward the state-owned carrier’s 2021 break-even plan, Jarana said in a four-page resignation letter. The lack of clarity has made it impossible for SAA to attract outside funding, and a 3.5 billion rand bridge facility runs out this month, he said.

With the Treasury referring all queries to the department of public enterprises, the ministry officially responsible for SAA, the airline’s future is shrouded in doubt. Ratings companies will be watching for the government’s next move, which may also influence the rand.

Below are some key findings from Jarana’s decision to walk away.

SAA Isn’t a State Priority

Three Things to Learn From Exit of South African Airways's CEO

South Africa’s budget is under strain, and the state carrier is far from the only government-owned company under duress. Of greater concern for President Cyril Ramaphosa is power utility Eskom Holdings SOC Ltd., which supplies almost all the country’s electricity and is groaning under 440 billion rand of debt. While Finance Minister Tito Mboweni announced a bailout plan for Eskom in his last budget, he ignored SAA.

“There are other more important state-owned enterprises that we have to focus on now, such as Eskom,” Mike Schussler, a chief economist at Johannesburg-based economists.co.za. “The economy cannot survive without Eskom, the economy can survive without SAA.”

SAA’s Future May Be in Parts

While there’s been little indication so far the South African government has plans to break up SAA, that may be a way to raise cash for the airline -- either through unit sales or the reduction of operations and services. Mango Airlines, SAA’s domestic low-cost unit, is profitable, while other parts of the business may also be of interest to buyers.

“It’s very clear that the government cannot support the current levels of losses plus the restructuring plan, so there needs to be a reduction in the scale of operations,” said Joachim Vermooten, an independent aviation analyst. That will also mean cutting jobs, he added, and SAA employs about 10,000 people in a country with an unemployment rate of almost 28%.

SAA Has a Leadership Problem

Jarana’s arrival in November 2017 was seen as a fresh start following a series of leadership changes and corruption scandals under ex-Chairman Dudu Myeni, a close ally of then President Jacob Zuma. Jarana came from Johannesburg-based wireless carrier Vodacom Group Ltd., where he was a senior executive, and his private-sector experience was touted loudly at the time as major asset.

However, one reason he gave for quitting SAA was the high level of bureaucracy, lack of accountability and sluggish decision making at government departments. Eskom’s CEO also quit recently, citing the “unimaginable demands” of the job.

The South African Airways Pilots Association said that while Jarana “did his best to turn SAA around under incredibly difficult circumstances,” his successor should come from the aviation industry.

©2019 Bloomberg L.P.

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