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

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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