The Covid-19 disease outbreak will soon claim its first local corporate scalp in ailing state carrier South African Express (SA Express), after its business-rescue practitioners informed labour unions over the weekend that they intended to petition the courts to place the airline into liquidation.
Should this be done, it will perhaps serve as a sign of things to come, at a time when many state-owned enterprises in different sectors are already on financial life support.
Internal correspondence to employees, dated March 21 and seen by the Mail & Guardian, show that the practitioners, who were appointed by the courts last month, have been unable to raise the post-commencement funding (PCF) required to stabilise the airline’s balance sheet while restructuring the business.
It has also revealed that SA Express, which is so broke that it had just over R1-million in its bank account last week and cancelled flights because it could not afford insurance, has not contributed to workers’ pension funds, the Unemployment Insurance Fund (UIF), or income protection for the month of February.
The business-rescue practitioners, Phahlani Mkhombo of Genesis Corporate Solutions and Daniel Terblanche of DT Consult RSA, have been caught in a stalemate with SA Express’s government shareholder, the department of public enterprises.
The department, which has previously said it has no confidence in the two and has started its own process to develop a rescue plan, unsuccessfully tried to convince SA Express’s creditors to remove Mkhombo and Terblanche as practitioners, claiming they weren’t independent because they were appointed as a result of a court application by one of SA Express’s creditors, Ziegler South Africa.
The practitioners argue that they are independent and have never had an engagement with Ziegler outside the prescribed business rescue processes.
In their letter to staff, dated March 21 2020, they list a series of meetings and interactions with the airline’s government shareholder representatives — including last week when the airline announced a decision to down all flights — to try to secure funding, but none of these bore any fruit.
The extent of the cash-flow problems has meant that SA Express cannot guarantee salaries, and has not yet paid statutory contributions towards employees’ provident fund, pension, income protection, UIF, and pay as you earn, the business rescue practitioners said.
The Covid-19 effect
“In addition to all these challenges, the situation is now exacerbated by the recent worldwide spread of Covid-19 virus, which has already had a significant impact on the aviation industry globally. Most major airlines in Europe, the US and locally, including South African Airways, have made drastic, unprecedented schedule cuts, bringing operations to a near halt as restrictions set in and the demand dries up,” the rescue practitioners said in their letter.
“This is the biggest crisis the aviation industry has faced in decades. Without funding or PCF, which, unfortunately, cannot be quantified with certainty at this stage due to the recent outbreak of the Covid-19, the business rescue will not succeed.”
They continued by noting that the Companies Act, under which they were appointed by the high court, required that when practitioners determine that there is no reasonable expectation for a company to be rescued, they must inform the courts by filing an application to discontinue rescue proceedings and place the company into liquidation.
“In light of the above and based on our own objective assessment of the plethora of challenges faced by the company, we have come to the conclusion that a reasonable prospect to rescue the company no longer exists and, consequently, we will begin a process to convert the current business rescue proceedings of the company into liquidations as envisaged in terms of section 14(1) and (2) of the Companies Act with immediate effect. This will be done by way of application to court.
“Should [the] government be able to secure funding or PCF before the conversion application is heard in court, the application will then be withdrawn,” the letter concluded.
SA Express has been caught in inescapable turbulence and living on borrowed time since it was grounded, because of safety concerns created by severe financial constraints, by the Civil Aviation Authority in May 2018.
The grounding, which lasted for more than two months, was followed by another grounding by Airports Company South Africa last September after SA Express failed to pay R71-million in taxes, as well as a liquidation application by another creditor towards the end of the year.
Ring-fenced cash injection
It is set to receive a R164-million cash injection from the government at the beginning of April, but this is ring-fenced to cover government-guaranteed debt. Treasury on Monday said although it has been meeting with SA Express, the department of public enterprises, and the business rescue practitioners, it has not received any formal requests for funding.
The Covid-19 outbreak and the subsequent international bans issued by many states worldwide have dealt a serious blow to the aviation sector with a number of airlines — including Gulf carrier Emirates, which has dropped routes from 159 destinations to just 13 — indicating plans to temporarily scale back operations until the pandemic is under control.
Last week South Africa’s other embattled state airline, SAA, first announced that in light of the government’s decision to impose a travel ban in an attempt to halt the transmission of Covid-19, it would immediately suspend all international flights until May 31. That announcement was followed by another statement extending the ban to regional flights, as the number of bookings had been affected by the suspension of international flights.
SAA, which is also under business rescue and is in the process of restructuring that will shed about 4 000 jobs, will now operate only its domestic route between Johannesburg and Cape Town. Earlier this year it announced that it would pull out of unprofitable routes, including East London, Port Elizabeth and Durban.
Mkhombo and Terblanche could be reached for comment, but questions were left on their cellphones and with colleagues. The department of public enterprises had not responded to questions at the time of publication.