SAA funds may need a top-up

Although SAA has received the R10.5-billion to carry out its restructuring plan, some experts in the industry said it would be naive to think the national airline will not need more money soon. Or at least until an investor is found. 

In his medium-term budget policy statement (MTBPS) in October, Finance Minister Tito Mboweni made available R10.5-billion for the rescue process. The airline received an additional R6.5-billion from the government that will go towards settling the airline’s debts and interest on the debts.

In December the airline was placed under business rescue because it was unable to meet its financial obligations. By July, creditors approved a plan that would include cutting more than 2 700 jobs, equating to R2.2-billion worth of retrenchment packages.

But Dawie van der Merwe, director of business restructuring at accounting firm BDO, said that until the state-owned entity has partly offloaded to a partner who is willing to buy equity in the airline, SAA might still be holding out the begging bowl. “That partner must also be willing to fund the operational needs of it. I think we will all be fooled if we think the R10-billion is the end of it,” he said.

In August this year, the public enterprise department said it was in talks with several private entities interested in buying into the national carrier. This week the department’s spokesperson, Richard Mantu, said the process of identifying a strategic equity partner is at an “advanced stage” and the department would announce who it is by the end of the 2020-2021 financial year. 

He also said that although the airline has received R10.5-billion it needed a total of R14-billion to implement the business plan, including the funding of subsidiaries. 

The shortfall is R3.5-billion, which will be required “over the next three years to pay concurrent creditors R2.3-billion and the next balance of unflown ticket liabilities of R1.2-billion”.

The rescue plan sets out that the money will partly be used to pay more than 3 000 voluntary severance packages and that commercial flights will resumed by January next year, but this could take a bit longer because the National Assembly passed the division of revenue amendment bill only last week. 

SAA’s rescue practitioners, Siviwe Dongwana and Les Matuson, said the money the treasury allocated for the rescue plan is enough to address and “settle the sins of the past”. 

Matuson said the rescue plan has set aside R2-billion in working capital to give the new management and strategic equity partner adequate runway to settle in.

He added that the money does not only seek to address “past sins” but to also create a clean slate for a restructured, albeit smaller airline in the short to medium term, to attract a strategic equity partner. 

“It is common cause that no SEP [strategic equity partner] wants to deal with legacy issues of SAA, nor any potential investee for that matter, which include the restructuring of the company’s massive debt, rightsizing the bloated workforce and negotiating a reasonable compromise with current creditors,” he said. 

In the plan, it’s expected that there will be R6-billion losses for the next three years. But Dongwana said that those assumptions continue to change with time when taking into account the many variables attached to it, requiring further revisions.

He added that future operating losses, if any, would arise out of the strategies implemented by the company and the scale of flying operations.

But experts in the industry say the airline will need more money until an investor is found. Aviation lawyer Chris Christodoulou noted that the rescue process had taken too long. He said business rescue plans make provisions that require speedy resolutions to see whether the business can be rescued. Typically, a business rescue process should be for six months, but with SAA it has been going on for close to 11 months. 

Christodoulou said the airline will need more money because once severance packages and immediate creditors are paid, operating capital will be required. He questioned how much of the R10.5-billion would be left for operations.

He added that the new airline needs to get its marketing right. They might need to relaunch their frequent flyer programme and doing something like this requires money. 

Christodoulou said that even if the airline operates next year, it is not going to generate enough money in the first two years of business so that more operating capital money might be needed. 

Van der Merwe explained that this is because of the political issues surrounding the airline, adding that rescuing a state-owned enterprise airline is “complex”. 

Unlike a private airline such as Comair, which was able to conclude its business rescue process in a matter of months, state-owned enterprises are different. 

“I feel for the business rescue people because they got approval from all creditors, and they got everyone to agree on the plan, but there is still some towing.”

Although the process has been long according to the experts, the rescue practitioners said they are unable to discharge SAA from rescue until “we have provided some liquidity into the business that the new management team can work with”.

Tshegofatso Mathe is an Adamela Trust business reporter at the Mail & Guardian

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Tshegofatso Mathe
Tshegofatso Mathe
Tshegofatso Mathe is a financial trainee journalist at the Mail & Guardian.

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