A struggle widely publicised recently is the bailout request of state-owned enterprise (SOE), South African Airlines (SAA), which saw the National Treasury approving R3 billion in funding at the end of September 2017 to avoid SAA defaulting on its loan to Citibank. Furthermore, in the 2017 Medium Term Budget Policy Statement (MTBPS), it was reported that SAA will receive an additional R4.8 billion by 31 March 2018 from government.
David Morobe, regional general manager at Business Partners Limited (BUSINESS/PARTNERS), says that while the SAA request has been largely criticised, a financial bailout solution is only viable provided a turnaround strategy has been developed.
“This isn’t SAA’s first bailout, and many people are beginning to question when enough is enough, and whether efforts should be continued to salvage a seemingly broken asset. However, as tourism is a large contributor to South Africa’s GDP, SAA is still a strategic asset for economic growth in South Africa, given it is the country’s only international aircraft carrier,” says Morobe.
“Considering that all economies are competing on a global stage, if SAA cannot bring people to South Africa, why should other airlines?” he questions. “As such, these airlines may easily opt not to fly the route if it is deemed unprofitable, or will likely do so at a premium, which would impact business and other sectors such as tourism. However, this reasoning isn’t necessarily strong enough to move forward with a bailout agreement,” Morobe points out.
He explains, “whether it is a SOE, large corporation, or smaller owner-managed business, the basic principles of business turnaround remain, and that is whether a business can survive, and then thrive, long after the financial bailout period. By addressing key fundamentals, an educated decision can be made whether to close up shop or seek business rescue and implement a turnaround strategy.”
In assessing the wisdom of the SAA decision and others similar to it, Morobe points to various aspects necessary for a turnaround strategy.
“The key to a successful turnaround strategy includes reviewing and critically assessing the business model; addressing management challenges to ensure that operational guidelines are being adhered to; and reassessing the market, product and competition. If these challenges have been ironed out, then the bail-out may yield the desired results.”
He says that in the case of SAA, the recent announcement of the appointment of a new CEO, together with other executives, is a step in the right direction. “When introducing a new management team , they should take a critical look at the market place, weigh up what its customers are seeking, and compare this to the current product or service offering of the business to ascertain whether their customers’ needs and wants are still being met. Through this analysis, there may be scope to further develop the product or service to meet new needs of customers.”
Morobe points to another SOE, Telkom, as an example. “Telkom wasn’t always as successful as it is today, but with its new management team, the business reassessed its product offering and made the decision to move from fixed line products to WIFI, data and fibre connectivity. Today, Telkom is one of the biggest and competitive players in the market,” he says.
Another focus area mentioned by Morobe is that of competitors. “As most businesses face competition, the business model and the quality of the service or product offering needs to be strong enough to withstand similar players operating in the same space. For example, although SAA faces stark competition from lower cost carriers, if a struggling businesses focuses on excellent service and product quality, customers will likely be willing to pay more for the offering.
“Illustrating this is the previously struggling airline, Air Mauritius, which managed to turn its $30 million loss and poor customer service ratings into a 4-star airline garnering a profit of $8 million in just two years,” he says.
“Only once the core of the problem has been identified, can solutions be found to bolster a business performance. After ironing out these aspects and challenges, a bailout and turnaround strategy can be considered if the research deems it viable. Ultimately, enough will be enough when it becomes more economical to start a new business than trying to salvage or turn a business around” concludes Morobe.