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.”
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
South African Airways has identified Vodacom Group Ltd. executive Vuyani Jarana as the leading candidate to become the struggling state-owned carrier’s first permanent chief executive officer since November 2015, according to three people familiar with the matter.
The debt-laden airline hasn’t made a profit since 2011 and is in talks with banks about repaying or refinancing 8.9 billion rand ($685 million) of loans due at the end of the week. The carrier needs an experienced executive from the private sector to turn it around, said one of the people, who asked not to be named because the information isn’t public.
Jarana, 46, has been head of Vodacom’s enterprise division since 2012 and was previously chief operating officer of the Johannesburg-based wireless carrier. He is the preferred choice of a number of board members appointed to SAA by the National Treasury last year, one of the people said. Chairwoman Dudu Myeni, who also heads President Jacob Zuma’s charitable foundation, has a different candidate in mind, the person said.
Jarana declined to comment.
The identity of SAA’s new CEO “is currently under consideration by the shareholder,” spokesman Tlali Tlali said by email, referring to the National Treasury. “The shareholder department may decide to table the name of the recommended candidate to cabinet for final approval. We have to wait until all these processes have been finalized before we could know and announce the CEO designate.”
Jarana hasn’t been offered a job by SAA and is focused on delivering Vodacom’s business strategy, a spokesman for Vodacom said in an emailed response to questions. Treasury spokeswoman Yolisa Tyantsi couldn’t immediately comment when contacted by phone.
After the board identifies a candidate the name will to be presented to Finance Minister Malusi Gigaba, who will seek cabinet approval for the appointment, the second person said. Only then can an offer be made to the candidate, adding that the process could take until the end of July. The Sunday Times reported last week that Myeni attempted to halt an SAA board meeting aimed at approving Jarana’s nomination, as she doesn’t approve of the candidate.
SAA has been run on an acting basis by Chief Technical Officer Musa Zwane since 2015. He is the seventh permanent or temporary CEO of the airline since 2010. The leadership vacuum is one of many challenges to have beset the airline, which said June 20 it has made “significant headway” toward a five-year plan aimed at returning the company to profit.
On Tuesday, SAA and the National Treasury said they are in talks with lenders about settling 2.3 billion rand of 8.9 billion rand in loans due at the end of this week after one of the banks refused to ease the debt’s terms. The airline has been relying on government debt guarantees in order to remain solvent.
Vodacom, 65 percent owned by Vodafone Group Plc, is the market leader in South Africa with 37 million subscribers in the country. It also has customers in Tanzania, Mozambique and the Democratic Republic of Congo.