SAA: The costs far exceed the benefits

There can be little doubt –  South Africa does benefit because South African Airlines (SAA) exists. But, the costs far exceed the benefits. The airline continually runs at a loss and repeatedly needs to tap taxpayers’ pockets.

Aviation, in general, creates thousands and thousands of jobs. It enables trade, encourages business and promotes tourism. It allows people to travel to see friends, family and new sights. But all this happens regardless of who owns the airline. 

In other words, the benefits SAA creates would still be there regardless of who the owner may be. 

The problem today is the airline destroys more wealth than it produces. Any business that is losing money, regardless of ownership, is destroying wealth. It is NOT contributing to GDP but taking away from it.

SAA faces a R4.8billion loss for 2016/17 (and a cumulative loss since 2012 of R15.8 billion). Where could that money come from? It comes from taxpayers, both consumers and producers. For consumers, the extra taxes government raises to fund SAA leaves them with less to spend on other products. 

So, people who would rather buy more mielie-meal, or perhaps a new taxi, through the extra taxes they have to pay, instead, subsidise the air travel of people generally better off than they are. In this case, the ANC redistributes wealth from those who are poorer to those who are wealthier. It sends wealth up the ladder. 

When consumers have less money to spend, it means that jobs are destroyed – buy fewer light bulbs and fewer jobs producing light bulbs exist. Similarly, jobs are destroyed when producers are taxed to fund a bankrupt state enterprise. Producers who wish to expand cannot do so; instead they are spending their money on keeping an entity afloat that is more a cesspool of corruption than a business in any real sense of the word. 

If each rand going to SAA were left in the productive sector, it would create a rand’s worth of employment. The average South African salary is R18,687 per month. If you divide the R4.8 billion loss by that amount, the subsidy to SAA is costing the economy about 256,856 jobs for one year. Of course, reality is more complex than that, but it helps to think about it in simple terms to start with.

As for the jobs SAA creates, what makes the supporters of SAA assume those jobs will disappear? If SAA disappeared overnight there would be a period of adjustment but other airlines would step in and fill the gap – they would profit in doing so. That sort of collapse, however, becomes more and more likely the greater the debt SAA incurs. The more that debt damages the financial rating of the country, the more the collapse of SAA will bring down along with that of just one airline.

If SAA were to be sold to a private competitor, it is unlikely we would see much decline at all and many of the consequences of collapse could be avoided. 

SAA has not encouraged competition. That is one reason SAA must pay out damages of R104 million to Nationwide airlines. As Jannie Roussouw from the University of the Witwatersrand states, SAA stays “afloat by asking for government bailouts and by using every available means to shut down competitors”. Roussouw says SAA practices have driven Nationwide out of the market and put another one (Comair) under pressure. This has ensured that there is limited competition in the domestic airline market.

Not only were employees of Nationwide directly unemployed by SAA practices, but the spillover benefits are also lost as this drives up costs and reduces demand. Roussouw warned:

Customers are indeed the losers in all of this. Many are also taxpayers, and it is their hard-earned tax contributions that provide guarantees to SAA, thus giving it the power to squeeze competitors. This action increases the cost of airfares to the detriment of the very same group of people that funds SAA by means of guarantees.

With SAA out of the market, we are more likely to see more robust competition and lower air fares, which would benefit passengers directly and increase trade and tourism by lowering prices.

It is a myth that government can create jobs by subsidising losing enterprises. Every rand’s worth of employment created on one side of the ledger comes with a rand’s worth of taxes and the unemployment it creates on the other side. Worse yet, the jobs governments tend to create are high paying in comparison to the jobs destroyed, resulting in an increase in gross unemployment. 

Redistributing wealth does not create new wealth, just as distributing jobs does not create more jobs.

James Peron is President of the Moorfield Storey Institute

Share Button

About southcapenet

Adding value to my domain hosting and online advertising services.
View all posts by southcapenet →