South African Airways is Not a ‘Strategic Asset’

In this article I am going to give a point-by-point rebuttal to the economic illiteracy expressed in this video. Firstly,  I would like to thank Benji Shulman for posting it on the Renegade Report discussion group and for bringing it to my attention.

Below are summaries of the four main points presented in the video:

1. There is a demand for South African tourism that tourist operators are unable to meet unless the government provides a “public good”, which in this case is the South African Airways (SAA).
2. SAA pays more in taxes than what the government spends on bailing it out, so the government does not make any actual losses by giving these bailouts.
3. The benefits from point 2 above only work if the government owns SAA since it is only the government that can profit from tax revenue.
4. SAA brings in tourists who cumulatively spend more money in the country than the cost of bringing the tourists to the country.This point is related to the first point but more on that later.

My rebuttals to the above are as follows:

1. This is a classic case of the seen versus the unseen. There is undoubtedly a demand for South African tourism, but why is it not valuable for operators in the tourism industry to collaborate with the aim of bringing in tourists by investing the capital themselves? Even if their cumulative resources are not sufficient to do this, if there is such a strong business case, surely the banks would be salivating at the chance of funding such a no-brainer?

The answer is simply that it is more valuable for tourist operators to invest their money elsewhere. They will take the tourists if we are stupid enough to impose costs on ourselves to bring them here, which brings me to the second point on this.

Government is subsidising the tourism industry (the seen) by taking money that would have been invested elsewhere by us (the unseen). The worst of it is that most of this money would have been invested in the future because, without raising taxes, government has to borrow to fund SAA bailouts.

2. This is just stupid. He is essentially saying government should prop up every company (not just SOEs) that is on the brink of failure as long as the taxes it has received and will receive from this company outweigh the cost of the bailout itself. Following this logic would mean that SAA would still be eligible for a bailout depsite being a private sector entity. Government could just continue to subsidise SAA on the basis that it pays taxes.

What he fails to realise is that money spent propping up an inefficient company is money lost in a productive part of the economy, as I have said in the second part of (1) above.

This is a recipe for a stagnant economy, with higher prices and disincentives for investment and innovation.

3. This third point simply does not hold. As I have said in (2) above, they could just as easily direct money into private companies as long as the overall amount of the subsidy is less than the total taxes paid by the company.

This argument is really an argument for lowering taxes. Why should the state waste time taking away money only to subsidise you later in order to get taxes. For simplifiction’s sake, just lower taxes for everyone and then there will be no need for a subsidy at all. This is far better for the economy because intelligent investment decisions can be made by the market, and not by central planners.

4. I have addressed this in (1). If the cost of bringing in a tourist is outweighed by the money they spend, people who benefit from this could just as well bear this cost themselves. This would clearly be more efficient because everyone who does not benefit from tourism gets to keep their money and invest it where it will work for them.

There is also a reason why the international airline industry is dominated by governments. Governments have over time raised the costs of running these companies to the point where they have to be run at a loss and only governments can do that, which in turn has made international travel more expensive than it would otherwise be.

A major contributing factor to the problem is the political pressure governments have come to feel due the irrationality of human psychology.

Just to take two examples: terrorism and plane crashes. No matter how rare fatal incidents are or how low the average number of lives lost is relative to other modes of transport, because the airline industry relies on scale to operate profitably, each deadly incident has more psychological impact on the voting public than say a thousand deadly incidents related to private automobiles over the same timespan.

So we clamour for the government to impose itself on the airline industry so that we don’t have to endure the horror of hearing that hundreds of people died simultaneously even though a greater number of people die on the road over the same period. A better way to ensure airline safety is simply not to fly on airlines with bad track records. Government does not have the omniscience to predict all possible incidents anyway, so it is in no way a reliable regulator of the industry.

There is a huge difference between money that is handed over voluntarily and money that is taken by force from people.We also need to learn that the market is always better at solving problems than any government ever will be.We must rely on the mechanisms of competition to put forth the solutions.

Lastly, here’s more about why giving SAA our money is such a bad idea.