It's high noon for beleaguered SAA as Zuma and Gordhan face off
SAA may be staring financial collapse in the face but there is no indication that President Jacob Zuma is prepared to replace its board chairperson, Dudu Myeni, as requested by the treasury in its bid to restore good governance at the national carrier.
Observers believe that SAA is on the brink of bankruptcy and may have to be placed in business rescue, which would be a national humiliation.
The state-owned airline, which has not produced financial statements since 2014, is technically bankrupt unless it gets more working capital soon. When it last reported its results, SAA had turnover of R30-billion and was handling about a third of all South African air passenger traffic.
Earlier this year it was reported that SAA had less than R100-million left of its R6-billion guarantee extended by the government in early 2005. Business Day reported it made a net loss of R1.38-billion in the first quarter of this year.
Former SAA director Yakhe Kwinana, who was the head of the audit and risk committee, recently resigned, fearing reputational damage. She reportedly confirmed that the possibility of liquidation had come into sharp focus.
Negative headlines about SAA have dominated the news in recent weeks – legal action from competitors for damages stemming from anti-competitive practices, threats of flights to Hong Kong being grounded, and controversial deals to source working capital, which were brought to a grinding halt.
Myeni appears alone in insisting the carrier is solvent. “This company has money. It will continue to operate without government guarantees in the future. Our aircraft are always full,” Business Day reported her saying in May.
This week, SAA spokesperson Tlali Tlali said the airline was able to pay its debts. “We are currently able to pay our debts as and when they are due and payable. Presently, there is no justification to place SAA under business rescue.”
He says that, when Kwinana spoke about liquidation, she was “scenario sketching”, adding: “The South African government as the sole shareholder has not announced that it has decided to liquidate SAA.”
But it’s clear that, unless there is a break in the stand-off between the presidency and treasury, SAA is either facing liquidation or business rescue.
A business rescue expert, speaking on condition of anonymity, says only the SAA board or a high court judge can place the airline in business rescue. A judgment can be sought by an employee, a shareholder, a creditor or a trade union seeking redress. “The decision is not taken by the shareholder, so government can’t force SAA into business rescue.”
He also says the shareholder will then have no rights in terms of making decisions, and can only remove a business rescue practitioner by going through the high court.
“The current SAA board don’t look like they are going to place the business into rescue,” he says. Under business rescue, Myeni would lose all her power and the business rescue practitioner would become a “super-CEO [chief executive]”. The nonexecutive board members would also be rendered powerless. Specific functions can be delegated to directors, but the practitioner decides on this.
The business rescue expert says the appointment of a practitioner would be “hugely politically fraught” and a team of practitioners would probably be needed to turn SAA around.
He says several unprofitable routes need to be shut down, but the cutbacks would have to be gradual and not done overnight. Although the practitioners wouldn’t have to answer to the treasury, they would be “foolish” not to engage with it extensively, he says. “You need working capital to run a business like SAA.”
This week, the airline hit the headlines again after a tender for R16-billion in loan funds was published in the weekend papers.
Tlali says SAA was “courteous” in making the treasury aware of its intentions. “There is no requirement for approval by the shareholder, as this is not a new debt,” he says.
The Democratic Alliance’s deputy spokesperson on finance, Alf Lees, has written to the chair of the parliamentary standing committee of finance, Yunus Carrim, requesting an emergency meeting with SAA.
Lees wants SAA to be placed in business rescue. “The botched attempt to restructure funding through BnP Capital, with its outrageous R49.9-million [fee], seems to have been the only other attempt to find alternative funding,” Lees says.
The Organisation Undoing Tax Abuse (Outa) won a legal victory against SAA when it stopped the BnP Capital deal, which was for a transaction adviser and funder for the refinancing of SAA’s R15-billion debt.
Ivan Herselman, Outa’s legal director, says he believes the SAA directors would be found to be delinquent.
Concerning to the SAA debt, Lees says the R250-million SAA owes Standard Bank is clearly just the tip of the iceberg, as much of the balance of the loans taken against the R15-billion state guarantees are also likely to be reaching maturity and will require repayment in the normal course of business.
Two weeks ago, Hong Kong’s tax authorities threatened to ground SAA if the airline did not provide financial statements by September 6.
SAA has a daily flight to Hong Kong, which is a very profitable route as it also connects to Latin America and mainland China.
Tlali insists the matter is receiving attention and it is “extremely unlikely” that there will be a service interruption on the route.
The business rescue expert says SAA carries a lot more clout than its size warrants, because it is an international company with a global reach. So if it fails, it will have negative consequences for South Africa’s reputation and the economy. “It looks like treasury doesn’t want it to fail. They just want it run better,” he says.
He says business rescue practitioners would have to prioritise what gets paid first but airport taxes, fuel bills and maintenance crews would be first on the list – these are what keep the airline in the air and continuing to make money.
He says all major contracts would be reviewed, looking for onerous conditions. A business practitioner has the right to suspend clauses or contracts with a view to renegotiating them.
He says the rights of employees are strongly protected under business rescue and they receive “super-preference” when money is owed.
He says judgments against a company, such as the one recently awarded to liquidated airline Nationwide and the current case regarding Comair, would be at the back of the queue, as would all nonessential suppliers.
Last month, Nationwide was awarded R104.6-million in damages. Its claim stemmed from a 2010 Competition Tribunal ruling that found SAA had agreements with travel agents between 2001 and 2005 to send customers its way, and not to its competitors. These agreements were deemed anticompetitive.
This week, Nationwide joint liquidator Izak Boshoff confirmed that Nationwide’s claim against SAA has been settled and payment received.
“The only outstanding issue relates to the payment by SAA of the costs awarded. The costs are, however, still to be taxed. The liquidators will follow due process to collect the costs should payment not be forthcoming,” he says.
A damages claim by Comair is currently before the courts and, if successful, could be as much as R2-billion once the interest has been factored in. Comair’s court papers asked for R898-million in damages, related to two separate “damage periods”, plus 15.5% interest on this amount.
Erik Venter, the chief executive of Comair, says: “The case was originally pursued due to anti-competitive conduct by SAA that threatened Comair, and the damages claim arose as a consequence of the Competition Tribunal ruling.
“We can only consider our options on recovery of any award of damages once the judgment has been made.”
Tlali says these are “legacy cases”, which SAA has always been aware of.
“It would be foolhardy not to factor in their possible financial impact in our planning. These cases are in court and one has been finalised already,” he says.
Attempts to get comment from the treasury this week on the R16-billion tender, the Hong Kong flights and the possibility of SAA going into liquidation or business rescue were unsuccessful.