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