Inside the SAA crisis: airline needs more than R2bn to stay afloat

By Xolisa Phillip, in Johannesburg

Posted on January 24, 2020 12:43

SAA Burning through R70m a day, unsure what assets to sell off, and with job cuts increasingly likely, the board of South African Airlines board appears powerless

It is estimated SAA burns through R70m to R75m a day.

Its high running costs and lack of funds are what pushed the airline this week to cut down the number of its domestic and international flights.

  • The routes affected include Johannesburg to Cape Town, Munich to Johannesburg, and Johannesburg to Frankfurt.

The flight cancellations are a cost-containment exercise. The flagship carrier might be forced to slash more flights if it does not receive the R2bn urgently, according to those with knowledge of how dire the situation is at SAA.

In December 2019, SAA entered into voluntary business rescue in an attempt to salvage the good parts of the business. Les Matuson, of Matuson Associates, is overseeing the business rescue. The process is evenly poised because the South African government is struggling to come up with the R2bn.

The trouble with SAA

Since October 2019, the airline has faced headwinds that have plunged it deeper into trouble.

In late October, the aviation regulator grounded 25 SAA aircraft. Soon thereafter, unions went on an eight-day strike in November 2019.

When it entered into business rescue, the carrier was in line to receive a R4bn capital injection:

  • R2bn from lenders guaranteed by the government; and
  • R2bn from the government in a “fiscally neutral manner”, understood to mean through the sale of non-core assets.

SAA received the first R2bn, which it has spent on December staff salaries and old operating costs including fuel.

Now, the carrier is in a fix because the other R2bn has not been forthcoming. The airline is operating in the context of an increasingly skittish market, worsening its prospects.

This is pronounced in its forward bookings, which have been adversely affected by the uncertainty surrounding SAA.

Nowhere to hide

Lenders are reluctant to open their books to SAA any further because the business is technically insolvent. That means banks face the risk of trading recklessly if they increase their exposure to the airline. In addition, banks have shareholder considerations to factor.

Initially, the government indicated it would source the R2bn from the sale of state property. But the sale of state property “is not an overnight process”, according to those with knowledge.

The state is understood to be struggling to identify which non-core assets to sell because it has so few on hand. Furthermore, the non-core assets in SAA’s possession would not generate enough funds for the airline.

Finance minister Tito Mboweni’s hesitation is an open secret. Mboweni has previously said he does not think a state-owned airline is a necessity.

In the October medium-term budget policy statement, Mboweni banned members of the executive from travelling business class domestically. The minister also said members of the executive were not obliged to fly SAA and were welcome to “shop around for better deals”.

However, he said last week National Treasury was in the process of sourcing more funds for SAA. Public enterprises minister Pravin Gordhan’s ministry exercises oversight on the airline and its board accounts to him.

Business rescue to the rescue?

In order to function optimally, an airline needs to be properly capitalised. This is so because carriers operate in a competitive space characterised by low margins and high volumes.

Even with the best strategies in place and quality executive management teams, most airlines struggle. In many cases, operating losses are funded by shareholders. In this instance, the South African government is the sole shareholder.

  • The Africa Report understands the board previously called for a proper recapitalisation of the business to avoid SAA defaulting to the same position it is in. A recapitalisation would give the national carrier breathing room to address its operational challenges.

Although the board approved the business rescue, there are downsides. The business rescue process is understood to have created a complex catch 22 for the organisation.

The board remains tasked with overall oversight, but the business rescue practitioners are responsible for SAA’s operations and key decisions. Effectively, this means the board is disempowered to make critical calls about the business.

Parliament is set to invite the business rescue practitioners to gain a better understanding of the situation at SAA.

What is certain, though, is that job losses remain a reality at the airline, according to those The Africa Report spoke to on condition of anonymity because they are not authorised to speak about the issues to the media.

They agree the R2bn is not enough and that SAA needs more money.




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