When we dealt with the economic problem of scarcity, we indicated that an important question that needs to be answered relates to the issue of how to produce goods and services. In a market system this question of how to produce is answered by firms wwo are responsible for the production of goods and services. We also argued that we require our economic system to be both technically and allocatively efficient. Technical efficiency relates to the effectiveness of firms in the economy to produce goods and services in such a way that the best productive use is made of the factors of production.
In our circular flow model it is in the goods market that households (consumers) buy their goods and services and the producers supply their goods and services. Two active participants in this market are households, as the demanders of goods and services, and firms, as the suppliers of goods and services. In the topic Demand we took a closer look at the demand for goods and services by households. In this section we take a closer look at the supply of goods and services by firms.
Read the following and reflect on the questions that follows:
In the Daily Maverick of 23 August 2017 Simon Mantell express the following opinion on the South African Airways:
The misguided propping up of SAA over the last 15 years to the tune of more than R20-billion is brought into stark relief when one considers that these funds could have built 200,000 RDP houses and that SAA management’s latest request for an additional R13-billion injection over the next three years could finance a further 130,000
The 2016 SAA AFS shows operating expenditure of R30-billion with R5.8-billion comprising employee salaries and benefits. The staff complement for the year totalled 10,700 employees and average cost to company per employee is an eye-watering R542,000 per annum.
The salary income statement line item begs two questions:
- What is international best practice in terms of employment numbers per aircraft so as to measure productivity?
- Are salaries, especially at what appears to be a dysfunctional Airways Park “head office”, way above what are market related given the general sub-optimum performance?
International best practice on comparable full service airlines in the USA, Europe and Asia report a ratio of between 120 and 140 employees per aircraft and SAA, with about 190 employees per aircraft, is approximately 46% higher than the average.
To be competitive, SAA would be required to retrench 3,000 employees resulting in at least R1.6-billion being trimmed off the annual salary bill. Market-related pay cuts for those who are the easy riders at Airways Park would see another R400-million saved annually.
Questions for reflection:
- In your view what is the opportunity cost of spending more money on the South African Airways.
- Should we be spending more money on the South African Airways?
- Can the South African Airways be regarded as technical efficient?
- How did the South African Airways get into this situation?