Markus Korhonen ANALYSIS: For all the billions, SA Airways bailout money not enough to buy Emirates

For frustrated South African taxpayers, the country’s struggling and poorly managed national airline seems a bottomless pit. Markus Korhonen calculated the hypothetical price tag of a more profitable airline.

No doubt employing hyperbole, the head of Business Leadership South Africa emphasised the billions South Africa’s government has spent propping up the national airline with a striking comparison.

“We have spent R50 billion on South African Airways since 1999. If we had not done that‚ we would have bought Emirates Airlines,” Bonang Mohale was reported as saying.

R50 billion is certainly a big amount, but how does it compare to the price tag of one of the world’s biggest airlines?

To put the sum in question into context, it is worth considering just how much R50 billion really is. Were you to earn one rand every second of the day, you would receive a very generous salary of R86,400 per day or just over R2.5 million per month. Even at this rate, it would take you 31.7 years to earn your first billion rand. To get to R50 billion would take you almost 1,600 years.

To put it another way, to have R50 billion now, you would have had to start earning this salary around the time of the very first Iron Age settlements at Great Zimbabwe. It is, in short, a lot of money.

R29.1 billion, not R50 billion

Alas, it seems that Mohale’s claim of money spent does not quite stand up to scrutiny.

Both the South African Airways (SAA) 2015/2016 annual report and the South African treasury 2016/2017 annual report identify a total of R19.1 billion of “government guarantees” made available the airline to date.

A government guarantee is basically a loan, which the government commits to paying back should the recipient of the loan default. Government guarantees, or bailouts, for SAA have been steadily increasing in both size and frequency.

Up to 2012, the largest guarantee allocated to SAA was R1.6 billion, with further payments of R5 billion, R6.5 billion and R4.7 billion made between 2013 and 2016. An extra R10 billion has been allocated to the airline this year, which will take the total commitment to R29.1 billion.

This, of course, is still a significant sum: earning your rand-a-second salary, you would still have to hang around for 920 years to accumulate this amount.

Wholly owned by government of Dubai

But would R29 billion (or even R50 billion) be enough to buy Emirates?

The airline was established in 1985 and currently has a fleet of 259 planes. It is wholly owned by the government of Dubai through the state’s holding company, Investment Corporation of Dubai.

Consequently, there is no readily available market value (number of shares outstanding multiplied by the value of the share). Thus, determining the value of a privately-owned company has to involve some guesswork.

What a hypothetical buyer would be willing to pay for a company would be determined by a number of factors, such as the physical assets the company owns, the debt liabilities it has, its profitability and future earning potential and the value of the brand. Less easily quantifiable qualities, such as existing and potential challenges in the industry, or the value of employees’ skillsets may also be considered.

Fortunately, Emirates is very transparent in reporting on its financial performance. The company publishes detailed results of its finances in its annual reports, with copies dating back to the 1993/1994 financial year freely available online.

From these, we can begin to piece together the amounts we would be dealing with should Emirates be put up for sale.

29 consecutive years of profit

Emirates’ 2016/2017 annual report very quickly shows that Mohale’s R50 billion, as enormous a sum as it is, would not go very far.

It would not come close to covering the value of the assets the airline holds (R454 billion). It would not even cover last year’s fuel bill (R78.5 billion). The Emirates brand alone is calculated to be worth around R105 billion.

R50b would just about cover last year’s employee costs at Emirates (R48 billion), so South Africa could have bought the airline’s staff. For one year.

But as noted, we now know that Mohale’s R50 billion estimate was out by quite some way. The more accurate figure of R29.1 billion would cover fewer than a tenth of Emirates Airlines’ total operating costs for 2016/2017.

In January 2015, the founding CEO of the airline, Sir Maurice Flanagan, estimated that Emirates could be worth about R556 billion if it went public. Since that estimate, Emirates has had a further two profitable years, which could well imply that a new valuation would have the price tag even higher. (Note: Emirates has had 29 consecutive years of profit to date.)

Within reach: Turkish Airlines

While Emirates is clearly off the shopping list, the money spent on SAA bailouts would have been enough to buy some other airlines.

According to market values provided by Forbes, R50 billion ($3.52 billion) would have sufficed to buy Aeroflot-Russian Airlines (valued at $3.2 billion). Even the more modest sum of R29.1 billion ($2.04 billion) would have allowed South Africa to purchase Turkish Airlines, currently going for $2 billion.

Indeed, it might have been wise to do so as, unlike SAA, both airlines have been predominantly profitable over the past five years.

But it might be just as well that South Africa cannot buy Emirates. At no cost to the South African taxpayer, the Emirates Group was estimated, through “direct, indirect, and induced economic value-add”, to have contributed R4.5 billion to South Africa’s GDP in 2014/2015 and to have supported almost 13,000 jobs.

While SAA similarly boasted of supporting 34,000 jobs locally and contributing R9.2 billion to the economy in 2013, these figures are somewhat muted by the not insignificant contributions made by the taxpayer to keeping SAA afloat.

Markus Korhonen is a lecturer in political studies specialising in Global Political Economy. He is currently teaching at Stellenbosch University and has also lectured at the University of Cape Town and at the Accra campus of Webster University.


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Comment on this report

Comments 5
  1. By Mike Schussler

    Hi In the early 2000’s SAA had a hedging loss of R6 billion which saw an R3,5 billion loan guarantee given to SAA. Most of this was converted later to equity.

    Moreover, there was another long-term guarantee in about 2009/10 which was converted to equity and again an near immediate further Guarantee was given.
    A cash injection was also given to SAA on a few further occasions. So the Guarantees and cash injections or equity or forgiveness of some debt over time would not fall under the Guarantees that were in place at the time.

    So the Figure of R50 billion is likely to be the cash injections as well as guarantees.
    This is public information but you can look for example at the time when the hedging loss happened and how much money was then Guaranteed. How much of that money a few years later was converted into equity. Sometimes the government also paid SAA to ditch aircraft like a Boing 747 (I believe about R1,4 billion)

    You would have to go back into government budget documents. You would also need to understand that Financial statements are about immediate history and not long-term history. These are free on treasury website and one can sometimes search them for Airways or SAA – but not always. for example, check page 16 here on equity and bailout.

    Furthermore before 1999. Transnet Pension fund financed some Aircraft at very good rates for SAA. This also led to Transnet pensioners now being very poor and not being able to survive. (there is a coming court case were I believe a lot will be revealed)
    In the 1990’s the low-interest loans were about 8% while prime was about double that!

    Then there is also SA express (SAX is there code in some budget documents) Here too some billions were guaranteed and or injected into the airline.

    Add the time value of Money and one could have well over R50 billion in help from the government.

    It could even be that if one says uses the start date as the incorporation of the company (SAA LTD) in 1991 (before it was on its own but under the department of transport) that the total bailout in todays terms would equal well over R70 billion.

    Add SAX and the total could be north of R80 billion.

    So point is bailouts and guarantees and equity injections ALL need to be put into the “help” as well as some low interest loans from it own pension fund which help pensioners into poverty.

    If checking just make sure what you are checking and what financial statements are. (I am no expert here but I can tell you AFS are always for a certain time and not on history from far back.)

    Kind regards

    Reply Report comment
    • By Markus Korhonen

      You may be right that the sum is a bit higher as a result of other favourable agreements (rates of finance etc). As you note, the data is not always available.
      The figure I gave in the piece (19.1 + a further 10 this year) was also arrived at by Cape Chamber of Commerce and Industry president Janine Myburgh and accounts for the government guarantees given to SAA.
      Mohale’s office also did not respond to my query about the origins of the R50 billion sum he used. Even if the sum is higher (“could be north of R80b”), it still wouldn’t get close to the value of Emirates.

      Reply Report comment
  2. By FJ

    Emirates EQUITY value on its balance sheet was AED35 billion. That is roughly R131 billion in todays terms – and an accurate proxy of value if it were to be sold today.

    Reply Report comment

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