South African President Cyril Ramaphosa has taken the decision to put South African Airways, the cash-strapped national flag carrier, into voluntary business rescue. Caroline Southey from the Conversation Africa asked Professor Marius Pretorius to explain how the process works.

What is a business rescue?

It’s what is known in the European Union as a pre-insolvency procedure – that means a process that’s designed to save a company from being shut down. All countries have their own version of the procedures that need to be applied when a business is in distress. One of the best known ones is the US’s Chapter 11.

South Africa’s process is set out in Chapter 6 of the Companies Act, which came into effect in 2011. It indicates what needs to be applied when a business is in distress.

What’s the aim?

The aim is to address distress in a business, when it’s not performing. Distress is normally identified when a company is no longer profitable, when it’s not a going concern anymore, when it has major problems. Like a sick person. You have to see a doctor when you’re sick.

The aim is to institute a turnaround – to try to prevent the company from having to go into liquidation, or, in other words, shut down.

In South Africa, a company applies for business rescue under Chapter 6 of the Companies Act. It’s basically a last-ditch attempt to save a business. That’s why it’s called a pre-insolvency process.

It’s understandable that the government is trying to avoid liquidation: if SAA went the route of liquidation rather than rescue, the government would be forced to repay creditors. But in a rescue situation, a moratorium is put on relief payments. Creditors don’t have to be paid immediately. It gives a company a bit of a lifeline while the rescue practitioner works out a plan for the business.

SAA has accumulated unsustainable levels of debt.

When should business rescue be sought?

The act makes a provision for when a business is in financial distress. It’s then obliged to file for business rescue. This would arise, for example, if a company was unable to meet financial commitments due over the next six months. Under these circumstances, the company is obliged to file for voluntary business rescue. Research shows that company directors take the voluntary route 90% of the time. The reason for this is that if they don’t, they could face being delinquent directors, making them liable for the company’s debt.

How is a company placed in business rescue?

The directors file through a procedure under the Companies and Intellectual Properties Commission, which then confirms the appointment of a rescue practitioner and licences him or her. There is a full process of accreditation and set of requirements set by various professional bodies for practitioners. They are usually lawyers, accountants or business people. And there are conditions specifying how much experience they must have had, depending on whether they are senior or junior.

The process of appointing the rescue practitioner can take up to five days. Once appointed, the person takes full charge of the company. That means they have the power to make all decisions, including running the company’s finances.

The main aim is for the rescue practitioner to investigate the affairs of the company and ultimately prepare a rescue plan. They have 25 days in which to do this. But normally the rescue practitioner would call a creditors meeting to inform them that he or she is applying for an extension to that time. The creditors must agree to this.

The rescue practitioner must also meet with the employees.

When the rescue practitioner has drawn up a plan for the business, it needs to be presented to the creditors for approval. They must vote on it. It can only go through if 75% are in favour of implementation. Alternatively, they can ask for revisions which the rescue practitioner is obliged to follow up.

If there’s no agreement, the business must go into liquidation, and be shut down.

But if the plan is agreed, the next task is implementation. There’s no particular timeline for this – it can take anything from, say, six months to four years.

Once the plan has been implemented, the company must apply to the Companies and Intellectual Properties Commission to have its status reversed to being a going concern.

What happens to the directors during the process?

Most of the time it’s the directors that got the business into trouble in the first place by making bad decisions.

They are obliged to support the rescue practitioner in whatever he or she requires. Their co-operation is very important. For example, they must supply him or her with information. But they no longer have any powers to make decisions. They will still be paid – though, depending on the plan, this is where cuts are usually made immediately. But this will depend on the rescue practitioner and the plan.

And the employees?

Employees are unfortunately very vulnerable during the process. Quite often you’ll find that the good employees leave because they can find other jobs. Nevertheless, they are also protected. If the company does go into liquidation they get preference and are the first of the unsecured creditors to be paid from the available money.

The airline is a state-owned enterprise. Has one of these ever been put through this process before?

Not that I know of. I believe that this is why there was so much hesitancy to do it.

In late November the trade union Solidarity, which represents mainly white, Afrikaans-speaking employees, asked the Johannesburg High Court to place the airline under business rescue. The union argued that this was the only way to save the airline.

I think it’s doubtful that the airline can be saved. The question you have to ask is this: is there a business?

As soon as this process starts, the business takes a body blow. Nobody trusts it anymore. Nobody wants to take the risk and book tickets because there’s a high risk they will lose their money.The Conversation

 

Marius Pretorius, Associate professor in strategy, leadership and turnaround, University of Pretoria

This article is republished from The Conversation under a Creative Commons license. Read the original article.

South African Airways (SAA) said on Friday it has applied to enter ‘business rescue’, a form of bankruptcy protection it hopes will save the cash-strapped state carrier from collapse.

SAA, which has been making losses since 2011, is deeply in debt and has received more than 20 billion rand ($1.36 billion) in government bailouts over the past three years — all of which has achieved little more than keeping it barely afloat.

A government memo on Wednesday said President Cyril Ramaphosa had ordered SAA to seek the business rescue — in which a specialist takes control of a company with the aim of rehabilitating it, or at least securing a better return for creditors than liquidation would bring.

After years of government dithering, the distressed state entity’s crisis was increasingly seen as a test of Ramaphosa’s resolve to carry out badly-needed economic reforms.

Years of corruption and mismanagement have put several state owned enterprises in dire straits, including power utility Eskom, whose financial problems have left it struggling to keep the lights on.

South Africa’s credit rating is teetering on the brink of junk largely because of these problems. All agencies but Moody’s have cut its rating to below investment grade, risking billions of dollars of investment outflows if Moody’s does follow suit.

How Ramaphosa handles SAA’s restructuring, in the face of fierce opposition from unions, could be taken as a signal his resoluteness in a much bigger, immanent battle with Eskom.

A strike last month left the airline without enough money to pay salaries, then two major travel insurers stopped covering its tickets against the risk of insolvency. It has been granted a 4 billion rand ($272 million) lifeline from the government and banks to launch the rescue plan.

On Thursday Les Matuson from Matuson Associates was appointed to restructure the company. He is already reviewing payments to creditors and is scheduled to come up with a plan for how to handle them within 25 days.

His appointment spurred an outcry from two of the largest trade unions at SAA, the National Union of Metalworkers of South Africa (NUMSA) and South African Cabin Crew Association (SACCA), who argued that he should have been independently chosen.

“We don’t trust a process where a shareholder and the board get to hand pick a business rescue practitioner,” SACCA President Zazi Nsibanyoni-Mugambi told Reuters on Friday.

“We can’t leave it to the same people that we’ve been complaining about for many years,” she said.

The opposition Democratic Alliance (DA)’s shadow minister for public enterprises, Ghaleb Cachalia, approved the plan, saying: “we hope that ANC government will take a stand ... in the best interest of South Africa and the economy.”

SAA flights appeared to be operating normally according to the existing schedule, ahead of the publication of a new provisional flight schedule soon.

 

- Reuters

Forty of the 46 airplanes grounded this week owing to faults at the maintenance unit of state-owned South African Airways (SAA) have been returned to service, South African Civil Aviation Authority (SACAA) Chief Executive Poppy Khoza said on Thursday.

Khoza said SACAA had made five findings during its audit at SAA Technical, two of which were serious. The two serious findings were that unqualified personnel had signed off on maintenance work and that maintenance checks on flight data recorders and cockpit voice recorders had not been done correctly.

 

(Reuters)

Fly Modern Ark and Cerberus Capital Management – a consortium of local and international investors – have made an unsolicited loan offer to SAA to the tune of R21 billion in return for a 51% stake in the bankrupt airline.
 
In September, media reported that SAA would need R21 billion between then and 2021, when the airline is expected to return to profitability.
 
In his mid-term budget speech in October, Finance Minister Tito Mboweni had announced a R5 billion bailout for SAA.
 
Last month, SAA’s acting chief financial officer (CFO), Deon Fredericks, told Parliament that the airline would need a further R3.5 billion between then and end-March 2019.
 
On Saturday SAA spokesperson Tlali Tlali said lenders had agreed to advance a facility that would see the national carrier through to March next year.
 
In an email sent last week by Fly Modern Ark’s co-founder, Theunis Crous, to various stakeholders – including SAA chief executive Vuyani Jarana and Public Enterprises Minister Pravin Gordhan – Crous confirms that talks regarding the funding were held between his team and airline officials.
 
“As indicated, our company – in partnership with local and international financiers – has engaged with Vuyani Jarana, [former interim CFO] Robert Head and [SAA treasury boss] Lucky Ncobela with regard to funding SAA in the short, medium and long term, which included the potential equity transaction related thereto.”
 
The department of public enterprises has said that SAA needs an equity partner, but has not revealed the size of the stake that it is willing to sell.
 
Crous’ email reads further: “The above discussions culminated in a teleconference with ourselves, our international partners ... These discussions were constructive and fruitful, and we were to engage after the minister of finance’s mid-term budget vote in October 2018.”
 
However, the email shows that following Head’s departure from SAA, the meeting did not happen.
 
Added Crous: “We are firmly of the view that we, as a consortium, would add intrinsic value to the turnaround strategy of SAA over and above the funding requirements.”
 
Gordhan acknowledged Crous’ correspondence via an email written by a person named Selatswa Masenya: “On behalf of Mr Pravin Gordhan ... I hereby acknowledge receipt of your correspondence ... the contents thereof have been noted and will be brought to the minister’s attention at the earliest opportunity.”
 
Crous told Press last week that SAA needed an equity partner.
 
“We are offering them R21 billion as a loan and we are prepared to take 51% and then plough in more money to recapitalise the business. SAA initially expressed an interest in the idea but later went quiet. Cerberus knows how to turn around companies.”
 
Tlali confirmed that a meeting with Fly Modern Ark had taken place in May at the airline’s head office in Kempton Park.
 
“Fly Modern Ark wanted an opportunity to present their capability, which they suggested could be beneficial to SAA’s turnaround strategy, including addressing our liquidity challenges. The discussion with Fly Modern Ark did not include any discussion regarding a strategic equity partner.”
 
He said the troubled airline was not involved in any bid to to find an equity party, adding that if that process did happen, it would be led by the government.
 
Tlali stressed that the discussions with Fly Modern Ark centred on funding, not the acquisition of a stake by the company. He denied that a teleconference took place.
 
Adrian Lackay, spokesperson for the public enterprises ministry, said government was currently not involved in talks to acquire potential partners.
 
“Acquiring an equity partner for SAA would require a significant capital injection from government upfront. For a commitment of this nature to take effect, it is essential that the company is first stabilised operationally in order for government as the shareholder to realise optimal value from a strategic equity partnership.”
 
The ministry, Lackay said, had received various unsolicited bids from companies wanting to acquire a stake in the airline.
 
“In terms of the Public Finance Management Act and the Constitution, such bids cannot arbitrarily be considered, entered into or accepted. It would have to follow due process.”
 
Lackay said that SAA, with government’s support, was working to raise sufficient funding to meet its immediate and medium-term liquidity requirements
 
 
Source: City Express
South African Airways could sell shares to the public as the state-owned carrier seeks ways to end years of losses and reduce the need for bailouts, according to people familiar with the matter.
 
The move would enable the government to cut its stake in much the same way as it did with former phone monopoly Telkom SA, almost two decades ago, said the people, who asked not to be named as the information is not public. However, the carrier would first need to make progress with a turnaround plan designed to reach break-even in three years, they said.
 
While the sale of a stake to an equity partner has been aired repeatedly over the years, this is the first time it’s been suggested that SAA should list on a stock-exchange. Pretoria-based Telkom’s initial public offering in 2003 raised almost $500m and the government’s shareholding is now just under 40%.
 
SAA declined to comment
 
The airline’s Chief Executive Officer Vuyani Jarana is facing renewed pressure from his bosses in government, which last month put aside R5bn to help SAA repay debt.
 
Last week, Finance Minster Tito Mboweni said it was his preference to shut down the carrier rather than continue to stretch state finances, while his counterpart at the department of public enterprises, Pravin Gordhan, warned on Monday that “radical things need to be done” for the airline to survive.
 
Nigeria flights
 
More immediate plans than the share sale include holding discussions with potential commercial joint-venture partners including Air Mauritius, one of the people said. That could lead to cost savings on routes to the Asian-Pacific market as the airlines would share operating costs.
 
SAA will also consider a resumption of flights to Abuja, the Nigerian capital, which it abandoned in 2017, the person said. The carrier would apply for a local license - or find a partner - to help Nigerians travel to the U.S.
 
Jarana, 48, a former executive at South African mobile-phone market leader Vodacom, was hired a year ago, in part for his experience in the private sector. He also has no connection with previous management, which has been embroiled in the corruption scandals that plagued state-owned companies during ex-President Jacob Zuma’s almost nine years in charge.
 
SAA has had an equity partner before. The government sold 20% of the carrier in 1999 to Swissair, which pioneered the concept of an alliance anchored via minority stakes, only to buy the shares back in 2002 when the European carrier went bankrupt.
 
 
Source: Blomberg News

South Africa’s new Finance Minister Tito Mboweni said on Thursday that struggling state-run South African Airways (SAA) should be closed down, adding that decisions over the future of the state carrier were not under his remit.

SAA, which has not generated a profit since 2011, survives on state guarantees and is regularly cited by credit ratings agencies as a drain on the government purse.

“It’s loss-making, we are unlikely to sort out the situation, so my view would be close it down,” Mboweni told an investor conference in New York televised live on South African public broadcaster SABC.

“Why I say close it down is because it’s unlikely that you are going to find any private sector equity partner who will come join this asset,” Mboweni added.

In August, President Cyril Ramaphosa transferred oversight of SAA to the public enterprises ministry which is led by Pravin Gordhan from the finance ministry. Ramaphosa has pledged to revive struggling state firms, including SAA.

SAA CEO Vuyani Jarana has said he is mapping out a punishing austerity plan to turn the flag carrier around. He has said layoffs and other cuts were unavoidable.

In a dramatic fall from grace over the past decade, SAA has lost its place as Africa’s biggest airline and a symbol of patriotic pride to become a source of frustration for taxpayers who have forked out more than 30 billion rand ($2 billion) since 2012 to keep it in the air.

 

- Reuters

SAA is considering selling off assets after banks have refused to lend it any more money – and its debt ballooned to R15bn more than its assets at the end of July.
 
A senior SAA executive told City Press this week that the airline’s finances are in tatters and the Auditor-General has raised serious concerns about its viability.
 
SAA, which is technically bankrupt, will therefore not present its 2017/18 financials to Parliament by the end of this month, as required by law.
 
Senior SAA staff and a confidential report, presented at the company’s board strategy session 10 days ago, reveal that the airline’s management is now looking at a number of aggressive cost-cutting measures, including selling off its catering arm, Air Chefs, and outsourcing or selling SAA Cargo.
 
A top official at the national carrier told City Press that in the meantime, the company would look to government for more bailouts because banks have “hardened their attitudes” and are “continuing to refuse” to lend it more money, despite Treasury guarantees.
 
SAA has about R19.1bn worth of government guarantees.
 
In September last year, Treasury gave SAA a R3bn cash bailout to avoid defaulting on a Citibank loan.
 
The report, a turnaround strategy document which SAA chief executive Vuyani Jarana presented to the board last week, reveals that:
 
- On March 31, the last day of the 2017/18 financial year, SAA had R13bn in assets and R26bn worth of debt. But by July 31, the company’s assets remained at R13bn while its liabilities burgeoned to R28bn;
 
- The airline will record a R6bn loss by the end of the current financial year;
 
- SAA Technical (Saat), which has suffered significant losses to “fraud and theft”, is bleeding money, losing up to R560m a year in penalties from poor turnaround times for aircraft repairs and maintenance;
 
- SAA’s monthly costs, ranging between R350m and R450m, are significantly higher than its revenue and are not coming down fast enough; and
 
- SAA needs to reduce costs by 5.2% and increase revenue by the same amount to record a R1bn improvement by the end of the current financial year.
 
Although the report did not mention anyone by name, it slated the previous board, led by former chairperson Dudu Myeni, for leaving SAA with rampant corruption, low pilot productivity, a significantly weak balance sheet, liquidity problems, loss of confidence from suppliers, a lack of critical skills and fragmented IT systems.
 
“Unfortunately, SAA has had acting people in most senior positions. The board was also fractured and there was a lot of instability. The problem here is not even the market, but within, with people stealing and committing fraud,” another executive said.
 
“But SAA is absolutely fixable and Jarana is moving things in the right direction.”
 
Selling assets
 
Although no decision has been made to sell some of SAA’s business units, the report shows that the matter was discussed at the board meeting. Jarana, who has led SAA for almost a year, asked board members whether the SAA Group needed all the businesses “given the relative sizes and impact on financials”.
 
A senior SAA official said: “We continue to review our portfolio and we continue to engage with the shareholder. There is no holy cow and everything is under consideration. There is no pressure to sell anything, but does SAA really need Air Chefs?
 
“We are not in the business of selling food and it is not our core business. We just need ready-made food at the cheapest cost available, without having to worry about management and staffing issues.”
 
Regarding SAA Cargo, the document said while the division generated more than R2.1bn last year and made a R387m profit, it had major problems – including antiquated warehousing facilities, rigid pricing models and extensive dependency on aircraft that ferry passengers and cargo at the same time.
 
Jarana asked the board to consider a full cargo division or to outsource the business completely.
 
The document shows that Jarana is inclined towards outsourcing the cargo division to a private third party.
 
Banks won't finance SAA
 
A senior SAA executive said government will have to continue funding the airline until 2021, when its balance sheet becomes self-sustainable.
 
“Banks have walked away from us despite our guarantees from Treasury. It is true that they don’t want to fund us. They will only fund us once they see a path to debt reduction,” he said.
 
“If you are a shareholder of a company and you are unable to source funds from banks, what do you do? You have to step in and rescue the situation, to the extent that you believe the turnaround strategy is worth the paper it is written on.”
 
The report shows that the airline will need R21.7bn between now and 2021, when it is expected to return to profitability. The R21.7bn is made up of government bailouts amounting to R12.5bn, and loans of R9.2bn.
 
In addition, it shows that in the current financial year, Jarana’s executive management is projecting a 5.2% loss which, according to projections, will be reduced to 1.9% in the 2019/20 fiscal year before returning to profitability, with a projected 1% profit, in 2021.
 
In September last year, City Press reported that Nedbank told a meeting – attended by Treasury’s director-general, Dondo Mogajane, and SAA’s former chief financial officer, Phumeza Nhantsi – that the bank would not lend money to SAA as long as Myeni was still on the board.
 
Nedbank was not the first bank to withdraw support for SAA. In July last year, Standard Chartered revoked its R2.207bn loan, and a month later, Citibank pulled the plug on a R1.8bn loan.
 
However, another SAA executive said Treasury and the department of public enterprises were in discussion with the banks to try to convince them to change their minds not only regarding the funding of SAA, but of other state-owned entities as well.
 
“But when it comes to SAA, a funding plan must be created. You cannot just rely on debt for such a big company. The problem with SAA is that it doesn’t sell as a brand. A brand must sell.”
 
The document shows that Jarana’s corporate plan was beginning to bear fruit. The plan, approved early this year, has as its focus revenue stimulation, flight schedule reorientation, organisational design, supply chain transformation and the overhauling of Saat’s logistics and operations. The report shows that during the first quarter of this year, SAA’s revenue improved.
 
Jarana refused to comment about the plan. However, another official said this had been brought about by the realisation of a “dramatic shift to low-cost airlines, and the executive management decided to shift four aircraft from SAA to Mango”.
 
In April, SAA also reduced the number of flights to London’s Heathrow from two each day to one. SAA also introduced new aircraft on this route which caused SAA to post a profit on the route for the first time in more than a decade.
 
A revamp of the airline’s flight schedule will involve rescheduling flights to Germany, Hong Kong, Perth and Buenos Aires to improve connectivity for passengers, capture more traffic and extract more flying hours on each aircraft, the document shows.
 
SAA, another executive said, was also looking at establishing new routes from West Africa to the US and London, and from Johannesburg to the Asia-Pacific region.
 
“We need to grow and we want to use the same aircraft to fly more,” he said. We are focusing on route profitability. The plan is to grow and become a commercially viable airline. The corporate plan has identified a number of risks and mitigation strategies.”
 
He blamed government for SAA’s woes, saying: “Airlines need stability. Most of the chief executives of most of the big airlines have been there for more than a decade. The mind of the shareholder is reflected on the board.”
 
SAA spokesperson Tlali Tlali said the airline was unable to comment because it had not seen 
the strategy document. “We will soon address the media on the progress we have made, milestones, and the path that lies ahead in transforming SAA ... We are confident that the airline is moving in the right trajectory and we are making steady progress.”
 
 
Source: City Express
In President Cyril Ramaphosa's statement on the Economic Stimulus and Recovery Plan for South Africa, he highlighted the visa changes approved by the cabinet on Wednesday.
 
One of the key economic reforms mentioned in the president's speech was the country's visa regime, focusing on the amendments that will be made to regulations on travel of minors to South Africa, the list of countries requiring visas to enter South Africa, an e-visas pilot that will be implemented, and visa requirements for highly skilled foreigners that will also be revised.
 
"These measures have the potential to boost tourism and make business travel a lot more conducive. Tourism continues to be a great job creator and through these measures we are confident that many more tourists will visit South Africa," says Ramaphosa.
 
The full details of the visa reforms and waivers have yet to be made available but will be officially gazetted in October - ahead of the busy December holiday period.
 
Expected visa changes:
Cabinet received a joint report from the Ministers of Home Affairs and Tourism - Malusi Gigaba and Derek Hanekom - which reiterate the visa-related reforms that will make it easier for tourists, business people and academia to visit South Africa.
 
The biggest issue is the hoops foreign tourists have to jump through when travelling with minors and obtaining unabridged birth certificates, and changes to this regulation will also be included in the reforms, the state has confirmed. 
 
There are also negotiations on visa waivers and relaxation of visa requirements from certain countries which are being finalised, and further details will be announced later this week.
 
This is expected to include China and India, as part of high-level agreements between the countries and South Africa that was announced in July during the BRICS summit. 
 
While the details of the Chinese visa agreement is not confirmed, Hanekom did mention that one of the options being considered was a “multiple entry Visa” that would be valid for five years and offer tourists up to 90 days in the country. 
 
South Africa is also rolling out e-visas soon, set to be a gradual roll-out starting with "Phase 1, Release 1, for applications for temporary residence visas, adjudication of temporary residence visas, applications for waivers, notifications to the applicant via email and biometrics captured at the Mission."
 
The ePermit will be piloted at one Mission or local office in the last quarter of the next financial year by 31 March 2019. This is to ensure system stability. Once stable, more offices locally and abroad can then be gradually brought online, says the DHA
 
This is sure to make travel to South Africa much simpler and less complicated once it is up and running.
 
 
News24

South Africa has promised another 5 billion rand ($400 million) capital injection to help its struggling state airline meet urgent financial obligations, the CEO of South African Airways (SAA) said.

SAA has not generated a profit since 2011 and has already received state guarantees totalling nearly 20 billion rand. It needs the money to help pay debts and prop up the business as it implements a turnaround plan.

The promise of more government cash comes after SAA Chief Executive Vuyani Jarana told parliament in April that the firm needed the capital injection “now”.

“Government has committed to inject another 5 billion rand into SAA. Part of that 5 billion rand we will repay some of the creditors, suppliers, then the balance will support us for working capital until around October/November,” Jarana told Reuters in an interview.

The Treasury said it would follow its normal budgetary process, which entails seeking cabinet approval.

“The outcome of this process is expected to be finalised in time for the 2018 MTBPS (Medium Term Budget Policy Statement),” the Treasury said.

The MTBPS is usually presented to parliament in October.

Jarana said that while waiting for the funds, the company would negotiate for some breathing space with lenders. 

“If Treasury needs a certain period of time to do this, lets say up to September, between now and then, we are negotiating with lenders to give us a bridging facility on the back of that commitment,” he said.

SAA is regularly cited by ratings agencies as a drain on the government purse, but the Treasury is hopeful that new executive leadership led by Jarana, a former executive at telecoms company Vodacom, would return the airline to profitability. The government has said that SAA needs an equity partner to pump money into the company to address its liquidity crisis and to help with the implementation of a turnaround plan.

The airline was looking at several measures to cut costs and Jurana said reducing the current workforce of about 10,000 people was “inevitable”.

“Whether it’s pilots, cabin crew, administration, we are going to rationalise the workforce. It’s an unavoidable thing. We have been talking to trade unions about how we work together,” Jarana said.

“The first priority for me is job preservation, how do you find alternative jobs for people as a starting point before you go into the hard issues of retrenchments.”

Jarana said the company hopes to break even in three years time and “there onwards, everything else equal, it will be able to start paying for its own operations in terms of positive cash flows.”

 

(Reuters)

South African Airways needs R5 billion. NOW.

That is what the national carrier’s new CEO Vuyani Jarana told Parliament’s Standing Committee on Public Accounts (Scopa) on April 24.

The R5 billion is in addition to the R10 billion it got from the fiscus in the previous financial year to restore its status as a going concern.

And that is nowhere near the end of it. Not even close.

According to deputy finance minister Mondli Gungubele SAA needs at least R20 billion in order to break even by 2021. That is R9.2 billion to repay debt that matures in March next year and another R12 billion to address its “negative equity position”.

To give a sense of scale, it cost about R27 billion to construct the Gautrain system. And Comair’s market capitalisation is R3 billion. R21 billion is equal to the allocation in the 2018/19 Mpumalanga provincial budget for education and amounts to 43% of the total provincial budget. At an operational level SAA loses money on each and every domestic and most international routes. In the first nine months of 2017/18 its loss was 71% above budget at R3.7 billion. Operating costs increased. Revenue and passenger numbers declined.

Expenses exceed income by R370 million per month.

To be profitable and compete with its peers, it needs new aircraft. It cannot buy new aircraft, because nobody would lend it money on the basis of its weak balance sheet. Jarana in fact called it a “catch 22”.

Against this background trade union Solidarity is planning to apply to the High Court to place SAA in business rescue. Head of Solidarity Research Institute Connie Mulder told Moneyweb the trade union will file its papers on May 15 and has decided on this course of action in an effort to prevent SAA from being liquidated.

Solidarity believes SAA can still be saved and with it, the jobs of a few hundred of its members.

Free Market Foundation executive director Leon Louw differs sharply. He says the only viable options are liquidation or privatisation. It is too late to “rescue” SAA, Louw says. “Bailing out SAA is financially reckless and irresponsible. The scale of the amount of money required is so gargantuan that it can never be fixed and it will certainly never be a going concern able to compete in the world of modern aviation,” Louw says.

SAA’s troubles are nothing new. In 2015 its own acting CEO Thuli Mpshe and legal counsel Ursula Fikelepi advised the SAA board that the group is financially distressed, trading under insolvent circumstances and therefore trading recklessly. The board should apply for business rescue or liquidation, they stated.

Moneyweb has seen a board resolution dating back even further, to September 19 2014 and signed by seven of the eleven board members, that SAA would proceed with business rescue proceedings unless government committed to providing a going concern guarantee within a week.

Transport economist Dr Joachim Vermooten points out that the court would only grant Solidarity’s application if it can show that there is a reasonable prospect of rescuing the group.

It is very late in the day for SAA, Vermooten says. Whether the court can be convinced, remains to be seen. The Auditor-General has stated that it is not a going concern. Vermooten further points out that over and above the required amounts provided to parliament, no number has yet been put to the turnaround plan.

A proper restructuring would require additional funds for SAA to buy out onerous agreements and employment contracts.

So far, the plans are totally unrealistic, he says. And even if the plan were realistic, it would have to be funded.

Vermooten says it will be much more efficient to wind down SAA in its current form and start a new, focused airline, free of all the legacy contracts, over-staffing, inefficiencies and culture of reliance on the shareholder.

This has been done before, he says.

When state-owned Swiss Air landed itself in trouble through over-expansion the Swiss government refrained from bailing it out and allowed it to be liquidated. It subsequently bought Cross Air and successfully converted it into Swiss International, an airline with a limited mandate that was later acquired by Lufthansa.

In a similar example the Belgian government decided against bailing out struggling Sabena Air. The provincial government in Brussels instructed Brussels Airline to service selected sustainable routes. This new airline traded profitably and was also later bought by Lufthansa.

Vermooten says rather than scaling down existing SAA operations, government should start a new airline that does not necessarily need to be government-owned in the long run. Such an airline, if it reflects the values of the South African nation, could still serve as a national carrier, Vermooten says.

He says government should carefully consider what it is it needs from the national carrier and only focus on that. Sell low-cost SAA subsidiary Mango, split SAA Technical into a separate business and consider listing it and sell Air Chefs, he says. When Scopa met the SAA leadership last week, Scopa chairman Themba Godi listened to all the plans to address the multiple problems at SAA. New policies, new staff, new inventory management systems, new IT systems….

Godi remarked that it sounds as if the theme is building a whole new airline.

Perhaps that is exactly what they should be doing.

 

Source: Read more on Moneyweb

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