SAA, Alitalia on same sinking raft

From a distance, very few links exist between the Italian airline industry and ours. But recently, they have found themselves on the same side of the long-standing debate about the public financing of economically unviable state-owned assets.

The New York Times said it best when Alitalia earlier this month submitted yet another bankruptcy filing. "When [it] went bankrupt in 2008, the government swooped in with taxpayer money and Pope Benedict - a regular rider - offered the carrier a blessing.

Six years later, as Alitalia stumbled into debt yet again, the government engineered another rescue. Even a papal decree would not have been enough to save Alitalia from what threatened to be its final stand, as Europe's most troubled airline filed for bankruptcy once more, this time amid signs that the government, and the Italian people, were fed up from providing life support."

Alitalia and SAA share the status of being regarded as legacy assets in their respective countries. They were created in the pre-globalisation age with the core rationale for their existence being a political rather than a commercial one, yet we are all surprised when they live up to what they really are.

What characterises these legacy assets is that theirs is a dual mandate that primarily meets a social and political objective, now called developmental, and then only considers the economic objective. Such assets would not be economically viable in the absence of state support.

An important feature of maintaining such assets is that political support is needed to insulate them from market forces. This is facilitated through regulatory interventions which either prohibit direct competition to the state entities or make it impossible for other players to compete.

Alitalia has a monopoly on 10 of its 15 biggest domestic routes. Proof that even aggressive market protection doesn't work.

The liberalisation of international markets exemplified by the elimination of economic trade barriers and ease of trade across multiple territories has made it difficult for countries to protect their legacy assets. Due to the political links associated with such assets, the ability to adapt their operational models to respond to changes in the market place remains difficult.

In the case of Alitalia, the opening of European skies to low-cost airlines in the short-haul market and the rise of the Gulf airlines in the long-haul market was not matched by a proactive response from Alitalia. As a result, significant market share was lost and Alitalia had no capacity to respond to these external disruptions.

SAA's problems are similar to Alitalia's, and if they are left unattended, its fate will be the same. The opening of the South African skies since 1994 has created an avenue for more business-savvy airlines to enter the market with a level of operational flexibility that enables them to adapt to changing market conditions.

SAA, on the other hand, is hamstrung by its "developmental" agenda of securing connectivity and mobility for South Africa with its trade partners - which simply means operating unprofitable routes, if you insist on having your own airline with your own flag flying its own planes. On the more profitable routes, competition from low-cost airlines and international players has squeezed market share and profitability for SAA.

The result is an airline that is generating continuing losses funded by the taxpayer. In its most recent presentation to parliament, SAA indicated that it has lost more than R5-billion in its latest financial year.

Given the large number of financial demands on the state and the impact of the ratings downgrade, it is necessary to interrogate the wisdom of keeping an asset like SAA on South Africa's balance sheet through equity injections and now more expensive leverage through government-guaranteed commercial debt.

We have to look at the Alitalia case and ask ourselves the tough questions.

We owe it to ourselves to weigh the national pride upside of owning and operating our own airline against the commercial downside of having to constantly fund it, simply because it can no longer compete in its current form.

Some believe that such legacy assets need to be privatised to solve the problem. But they conveniently overlook the many cases where privatisation has not worked. Alitalia itself was privatised in the '90s and still went under.

So, for as long as we own these companies, we must make peace with the fact that we will keep bailing them out. A couple of billions at a time until we are gatvol and it's only a matter of time until we do what the Italians did.

Khumalo is chief operating officer of MSG Afrika and presents "Power Business" on Power98.7 at 6pm, Monday to Thursday