Struggling state-owned airline South African Airways (SAA) was able to report a profit for its past financial year, but a closer look at the balance sheet shows that, but for a change in accounting policy and a government bail-out, the airline would have made a loss.
There has been a renewed focus on its finances since the launch of its low-cost subsidiary Mango. SAA referred all enquiries on the subject to its annual report.
SAA reported a R65-million net profit for the year ending March 2006, but R600-million flows into the income statement from a change in accounting rules. Total airline income for the year was posted at R19-billion, with R3,6-billion coming from “other airline income”, up from R1,7-billion for the previous year.
This category, something of a catch-all, includes income from leased assets, insurance recoveries and fuel levies, as well as expired air tickets. The revenue release from expired tickets jumped to just more than R1-billion, from R401-million the year before. This is in part because SAA used to count expired tickets as revenue after a three-year rolling period, but now uses an 18-month period.
Tickets paid for but not used are recorded as a liability on an airline’s balance sheet, for at least 12 months. International air-ticket rules stipulate that an air ticket is valid for 12 months from the date of purchase and if it is not used during this period, it expires. However, it can take longer than a year for settlements and rejections to be processed, SAA explained.
There is always a certain percentage of tickets that expire without being used. According to SAA, industry norms show the non-use rate to be between 0% and 3%. Based on past experience and industry trends, the airline estimates that about 2% of its passenger tickets will not be used before they expire.
It said management had revised the period over which unused air tickets and air waybills are released to income to 18 months. Because of a new sales-based revenue accounting system, it was possible to determine the exact amount that could be released to revenue each financial year.
SAA’s domestic competitor, Comair, said it used a 12-month period, after which unused tickets were released to income. “If SAA were waiting 36 months, then reducing to 12 months would produce a once-off write back of 24 months of unflown tickets, but will produce no ongoing benefit,” explained Erik Venter, Comair’s joint CEO.
Having repaid R1,6-billion of a R4-billion loan from parent company Transnet, the airline reported the remaining amount of R2,4-billion as equity. Head of communications Jacqui O’Sullivan said the loan was a holding company compulsory convertible subordinated loan, “which, by its very nature, suggests that this was a loan that would be converted to equity”. The equity conversion process was under way, she said.
Since Transnet already owns 100% of SAA, the remainder of the loan is effectively a gift. Because this loan, and another R6-billion loan, are from the holding company, they are reported as shareholder’s deficit, rather than as liabilities. This means R8,4-billion of SAA’s equity is in the form of loans.