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South Africa: SAA’s original sin is state capture, not Covid says Gordhan

By Xolisa Phillip, in Johannesburg
Posted on Tuesday, 30 March 2021 16:30

SAA
The logo of South African Airways (SAA) is seen on an aircraft at O.R. Tambo International Airport in Johannesburg, South Africa, February 14, 2019. REUTERS/Mike Hutchings

Can South African Airways (SAA) see blue skies after a long and difficult turnaround operation? There are still substantial issues to overcome: SAA's debt, the opacity of its accounts, a stand-off with the pilots. But public enterprises minister Pravin Gordhan says the problems stem from corruption hangover from the Zuma era: state capture.

While many airlines in recent months have been grounded due to lack of passengers and tourism in a time of coronavirus, that is not what is ailing South African Airways (SAA).

The original sin at the troubled national carrier is state capture, not Covid-19, says public enterprises minister Pravin Gordhan.

The phenomenon hit the whole group; including subsidiaries Mango, the low-cost domestic and regional airline; SAA Technical (SAAT), the aircraft maintenance specialist and AirChefs which provides in-flight meals.

Years of unchecked state capture culminated in SAA crash-landing into state bailout on 6 December 2019 and it has been a costly endeavour.

As of December 2020, R200m ($13m) in fees has been paid — and counting. The government has so far coughed up R7.8bn ($522m), with another R2.7bn ($180m) still to come, for restructuring and recapitalising SAA’s subsidiaries.

The R7.8bn ($522m) comes from R10.5bn ($703m) that the government committed for SAA’s bailout. It was released in three tranches:

  • R1.5bn ($100m) on 30 November 2020;
  • R1.3bn ($86m) on 20 January 2021;
  • R5bn ($334m) on 12 February 2021.

The R2.7bn ($180m) for the subsidiaries is part of the R10.5bn ($703m).

Last ditch effort by government

The bailout represented a last-ditch effort by the government, through the department of public enterprises — which is the shareholder ministry — to redirect the flagship carrier’s fortunes.

Although Mango, SAAT and AirChefs are not part of the bailout, the R2.7bn ($180m) hinges on the successful conclusion of the process because SAA is the parent company.

Saddled by “overemployment”, laden with debt and riddled with corruption, SAA was backed into a corner in 2019, when bailout was put forward as the only viable way out.

The government ran out of fiscal space to drip-feed the airline bailouts and to back its debt with state guarantees. Commercial lenders, facing considerable exposure to the airline and the heightened risk of not recouping their money, closed the credit taps.

Enter joint business rescue practitioners (BRPs) Siviwe Dongwana of Adamantem and Les Matuson of Matuson and Associates: they were appointed to steer SAA’s business rescue and are now preparing to finish their work “in the next couple of weeks.”

Fanfare gave way to scepticism

SAA’s interim board is overseeing the subsidiaries. The BRPs consult and update the interim board and the department about the carrier, but are ultimately responsible for SAA until the business rescue is legally deemed to have been concluded.

When the bailout commenced in 2019, it was accompanied by much fanfare and bore the promise of a better-run entity emerging on the other side. However, that has since given way to scepticism even as the BRPs cross off administrative and regulatory milestones, and near a handover of the streamlined airline to SAA’s interim board.

“There is history before business rescue,” says Gordhan, adding, “[this] history is directly connected to the state capture process and the corruption … [which] took place during that time, from which SAA, the group – not the airline – had not recovered.”

All the subsidiaries have been affected.

“By malfeasance. By overemployment of people. By stealing of parts from SAAT. That was partly rectified, but mostly not rectified,” says Gordhan. “The original sin was not Covid-19. The original sin was state capture.”

Despite SAA’s ‘sins’, discussions are ongoing with prospective strategic equity partners. There are also buyers sniffing around SAAT, which has been “the target of several expressions of interest by potential partners or people who want to acquire it,” the minister says.

Details will be released when the process is completed. “At this stage, regrettably, I can’t give any further information. It might compromise our ability to finally settle on this matter,” Gordhan says.

“From a shareholder point of view, we would like the business rescue to conclude sooner rather than later,” Gordhan says.

Solving for overemployment, as SAAPA deadlock drags

Dongwana said: “We have a level of comfort … [and] believe the process should be coming to an end in the next few weeks.”

That comfort derives from the fact the BRPs have mostly resolved SAA’s “overemployment” problem through a mix of measures. These have resulted in SAA cutting down its workforce from 4,700 to 1,000.

The BRPs have also settled on an agreement with staff about outstanding salaries, which had not been paid for eight months.

  • Although eight months’ worth of salaries were owed, the BRPs have settled for three months in full. A total of 3,888 employees have taken up the offer.
  • The BRPs have paid R1.55bn ($103m) in voluntary severance packages to 3,140 employees.

“There was general consensus SAA has a high number of staff relative to airlines of its size,” explains Dongwana.

But talks with the SAA Pilots’ Association (SAAPA) deadlocked and collapsed and in response, the BRPs instituted a pilots’ lockout, which remains in force.

At the centre of the impasse is a regulating agreement between the airline and SAAPA, which gives the association substantial say on operational matters. The agreement dates back to the 1990s.

“That lockout comes on the back of a lengthy period of negotiations, primarily around the setting aside of the Regulating Agreement. In our view, and in the view of the company, [the agreement] has become the proverbial millstone around the company,” said Dongwana.

Other payments effected include R400m ($26m) to post-commencement creditors. These are the suppliers of goods and services to the airline. Another R700m ($46m) has been paid for unflown tickets in the form of vouchers, which are valid until February 2023.

“We continue to incur costs for the maintenance and care of the airline,” says Dongwana.

Road out of business rescue

Furthermore, the BRPs want to leave adequate working capital for the new operation “when the airline is ready with that process.”

That is a key requirement for the business rescue to terminate. Litmus tests for the success of the business rescue will be SAA’s solvency and liquidity positions. All involved concede the airline was in a messy and chaotic position.

Another pillar of a positive business rescue outcome is how SAA’s debt will be dealt with.

Dongwana explains that the debt will be taken into a different entity called a receivership and then any remaining debt under SAA will be written off to ensure the airline’s solvency.

Two receivers will oversee the receivership structure. One of them is Dongwana. But Gordhan has questioned the wisdom of this, given Dongwana’s proximity to SAA’s business rescue.

“I want to register this now before the receivership starts, that I hope we don’t get into the same kind of expensive exercise in terms of fees this business rescue process has cost the state. We will be looking at that very, very carefully,” said Gordhan.

The receivers’ role will be to deal with lenders, concurrent creditors and aircraft lessors.

The bailout will come to an end when the BRPs sign a notice of substantial implementation and file that notice to the Companies and Intellectual Property Commission.

Despite the messy finances and sticky labour relations, the BRPs have maintained SAA’s membership to the International Air Transport Association and the Star Alliance. They have also preserved the airline’s infrastructure.

On corruption, the BRPs have handed over information to the Special Investigating Unit. Additionally, SAA is one of the state-owned entities that will be repaid its consulting fees by McKinsey.

Show us the money trail, parliament demands

However, all this work is being done in the absence of an audit of SAA’s financial statements and the publication of its annual report. This predates the bailout, but is continuing under the BRPs.

“Parliament has not had the benefit of receiving financial statements from SAA for three years to enable us to make an informed assessment. The lack of compliance. The failure to submit, for whatever reason, became a snowball effect and when Covid-19 [came] things exploded,” says Inkatha Freedom Party MP Mkhuleko Hlengwa, chairperson of the standing committee on public accounts.

Hlengwa says: “Every time the audit cycle begins and SAA is unable to be audited, critical things fall through the cracks, hindering investigations, consequence management and the fundamental lessons as to what one should not do to collapse an airline. Money does not fix everything; we need a global picture of what happened at SAA.”

“It’s not our fault that the … financial accounts have not been done. As SAA gets out of business rescue, I will consult with the auditor-general and see how those financials can be made available,” said Gordhan.

Gordhan’s parting shot to SAAPA

Gordhan accused SAAPA members of “sabotaging SAA.” Speaking about the pilots’ association and leadership, the minister said what they are “doing at the moment is highly detrimental to what we want to achieve as government, which is get a successful airline off the ground.”

He said: “… [On] the one hand, they want an airline that will continue to employ them. On the other hand, they are doing everything possible, as I said earlier, to sabotage this airline from ever taking off. I don’t know how they reconcile those two positions.”

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