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Last month’s allocation of R10,5bn (€569m) to bail out SAA, which saw government pulling budget from departments such as health, education and policing, caused South Africans to shake their heads in exasperation. Moreover, there are now new, post-COVID forces at play and the world in which SAA went into business rescue is a different one from where it now finds itself. The questions are: Is there still space for SAA? Has the business rescue plan taken the effects of COVID on the aviation industry into consideration? Will this be the last bailout needed?
Responding to these questions and others, SAA BRP, Siviwe Dongwana, told Tourism Update that in July, when the plan was formulated, the BRPs predicted that the airline would make another R6bn (€325m) in losses over the next three years.
“This amount was based on assumptions relevant at the time of formulating the plan in July. Those assumptions continue to change with the passage of time, taking into account the many variables attached thereto, thus requiring further revisions. In addition, future operating losses, if any, would arise first out of the strategies implemented by the company and secondly based on the scale of flying operations,” said Dongwana.
He said the R10,5bn bailout would primarily be used to settle the “sins of the past” and to streamline the organisation into an entity that would appear more attractive to a private investor, who, the government hoped, would be willing to take on the beleaguered airline.
“The plan seeks not only to address the sins of the past but also to create a clean slate for a restructured, albeit smaller, airline in the short to medium term, which may attract a strategy equity partner (SEP). It is common cause that no SEP wants to deal with legacy issues of SAA, which include the restructuring of its massive debt, the right-sizing of the bloated workforce and the negotiation of a reasonable compromise with current creditors,” said Dongwana.
He explained that R2bn (€108m) of the R10,5bn bailout would be allocated towards working capital intended to give the new management and SEP an adequate runway to settle in while the airline undertook interim flying.
“The plan is not intended to formulate the strategy of the future of the airline, as that becomes a prerogative of the new board, executive management team and possibly a new SEP,” said Dongwana.
While nay-sayers have criticised the BRPs for placing SAA in business rescue a year ago rather than liquidating it, Dongwana still argues strongly in favour of business rescue. He told Tourism Update that through the business rescue process, the BRPs had been able to clean up the airline’s balance sheet in the following ways:
An agreement was reached with employees to reduce the headcount from 4 700 to only 1 000, with the majority taking voluntary severance packages and the remainder to be retrenched.
Revised conditions of employment for the restructured airline are being finalised, which would result in a significantly lower employment cost for the airline.
A compromise was reached with creditors including aircraft lessors, which involves a plan to repay them over a three-year period.
The plan contemplates a receivership to house legacy debt and create a structure for its repayment from government allocations as well as the settlement of the debt owing to creditors and aircraft lessors, following the compromise as provided in the approved plan.
Dongwana argues that, should SAA have been immediately liquidated, aircraft lessors would have impounded its aircraft in foreign destinations; thousands of passengers would have been left stranded and the announcement would have triggered the calling in of guarantees with immediate effect, which could have potentially resulted in a sovereign crisis in South Africa. Employees, many of whom have dedicated years of service to the company, would only have been entitled to a maximum of R32 000 (€1 737), as no negotiated severance would have been in place, he added.
Dongwana did not shy away from discussing the legacy issues and the government interference that he said ultimately resulted in the airline being placed in business rescue. He specifically mentioned the following:
SAA has had at least eight ceos in the 10 years. This undermined its ability to implement its strategies.
Evidence of interference by successive boards who meddled with operational issues is now coming out at the Zondo Commission.
Government bailouts were given with no substantial changes to SAA’s massive overhead cost structure, which included an above-average number of employees relative to industry norms. These bailouts were mainly in the form of debt from commercial banks provided on the back of government guarantees. This resulted in the company’s long-term debt ballooning from around R2bn (€108m) in 2011 to around R12bn (€651m) in 2019. By then, financing costs had risen to R1,3bn (€70m) per annum just to fund the interest on SAA’s loans. Thus, significant and much-needed cash required for working capital was directed at debt repayments.
When asked why a new equity partner would come on board when Dongwana had listed ongoing government involvement in the airline as one of the airline’s legacy issues, he responded as follows:
“The DPE is on record that it welcomes a suitable SEP which will be able to enhance or contribute to the strategic and operational issues of the airline and is open to not being a majority shareholder.”
Source: tourismupdate.co.za