Reality check on Telkom and SAA

The government recently announced that it wants to replicate Telkom’s public-private partnership to save the insolvent South African Airways (SAA).

The Department of Public Enterprises (DPE) said it has started negotiations with private entities interested in buying into South Africa’s national carrier.

SAA needs at least R10 billion to resume operations and the DPE said it wants SAA to resume operations by the year-end.

DPE director-general Kgathatso Tlhakudi said they have received “as many as four promising proposals”.

Tlhakudi said the government is keen to replicate the privatization of former state monopoly Telkom, which was partially sold to outside investors ahead of a listing on the JSE.

“That proved to be a very good model for Telkom as it brought into the company management discipline and the important discipline of delivering a product on time to the market,” Tlhakudi said.

He added that, just like Telkom, the new SAA may eventually be listed.

Telkom versus SAA

The government’s plan to replicate Telkom’s public-private partnership model may seem like a logical solution, but the two companies are very different.

SAA has been gutted by years of corruption and mismanagement and had to be bailed out numerous times to continue operating.

The airline’s financial challenges became so untenable that it was placed into business rescue in December 2019.

Global travel bans and more efficient competitors mean there is not much demand for SAA’s services.

If it disappeared, travellers could easily be served by other airlines. There is, therefore, no real need for a national carrier.

To compare the bankrupt SAA to Telkom before it was listed is completely misguided.

When a 30% stake in Telkom was sold to SBC Communications (now AT&T) and Telekom Malaysia in 1997, the company was in good shape.

It was well-run, had great assets, and had been performing well financially for years.

In the 1996/1997 financial year, Telkom grew its revenue by 23% to R16.3 billion and its profit by 46% to R4.4 billion.

It has also shown strong revenue and profit growth for the five years preceding the deal with a big increase in dividends for shareholders.

Telkom further enjoyed a government-protected monopoly in the fixed-line telecommunications market and was a 50% shareholder in Vodacom.

It was a great company for anyone to invest in. There was tremendous demand for telecoms services, and there were few other avenues to buy into the industry.

Telkom also paid handsome dividends to its shareholders and the outlook for the telecommunications sector was excellent. In short, it was a dream for any investor.

To compare Telkom in 1997 to the SAA in 2020 is a very poor and misguided view of the two companies.

The SAA is bankrupt, it does not have many significant assets, and the outlook for the airline industry is not good.

To find a private partner who is willing to invest billions in the national carrier will be a much tougher sell than Telkom in 1997.

The table below provides an overview of Telkom in 1997 and SAA in 2020.

Telkom in 1997 vs SAA in 2020
Company	Telkom	SAA
Revenue	R16.3 billion	R27.0 billion
Profit/Loss	R4.4 billion profit	R5.0 billion loss
Legally protected monopoly	Yes	No
Strong demand for services	Yes	No
Growth in recent years	Yes	No