Registered users can save articles to their personal articles list. Login here or sign up here

SAA: Don’t bother with business rescue

Switch off the lights and start afresh.

South African Airways needs R5 billion. NOW.

That is what the national carrier’s newish CEO Vuyani Jarana told Parliament’s Standing Committee on Public Accounts (Scopa) on April 24.

The R5 billion is in addition to the R10 billion it got from the fiscus in the previous financial year to restore its status as a going concern.

And that is nowhere near the end of it. Not even close.

According to deputy finance minister Mondli Gungubele SAA needs at least R20 billion in order to break even by 2021. That is R9.2 billion to repay debt that matures in March next year and another R12 billion to address its “negative equity position”.

To give a sense of scale, it cost about R27 billion to construct the Gautrain system. And Comair’s market capitalisation is R3 billion. R21 billion is equal to the allocation in the 2018/19 Mpumalanga provincial budget for education and amounts to 43% of the total provincial budget.

At an operational level SAA loses money on each and every domestic and most international routes. In the first nine months of 2017/18 its loss was 71% above budget at R3.7 billion. Operating costs increased. Revenue and passenger numbers declined.

Expenses exceed income by R370 million per month.

To be profitable and compete with its peers, it needs new aircraft. It cannot buy new aircraft, because nobody would lend it money on the basis of its weak balance sheet. Jarana in fact called it a “catch 22”.

Against this background trade union Solidarity is planning to apply to the High Court to place SAA in business rescue. Head of Solidarity Research Institute Connie Mulder told Moneyweb the trade union will file its papers on May 15 and has decided on this course of action in an effort to prevent SAA from being liquidated.

Solidarity believes SAA can still be saved and with it, the jobs of a few hundred of its members.

Free Market Foundation executive director Leon Louw differs sharply. He says the only viable options are liquidation or privatisation. It is too late to “rescue” SAA, Louw says. “Bailing out SAA is financially reckless and irresponsible. The scale of the amount of money required is so gargantuan that it can never be fixed and it will certainly never be a going concern able to compete in the world of modern aviation,” Louw says.

SAA’s troubles are nothing new. In 2015 its own acting CEO Thuli Mpshe and legal counsel Ursula Fikelepi advised the SAA board that the group is financially distressed, trading under insolvent circumstances and therefore trading recklessly. The board should apply for business rescue or liquidation, they stated.

Moneyweb has seen a board resolution dating back even further, to September 19 2014 and signed by seven of the eleven board members, that SAA would proceed with business rescue proceedings unless government committed to providing a going concern guarantee within a week.

Transport economist Dr Joachim Vermooten points out that the court would only grant Solidarity’s application if it can show that there is a reasonable prospect of rescuing the group.

It is very late in the day for SAA, Vermooten says. Whether the court can be convinced, remains to be seen.

The Auditor-General has stated that it is not a going concern. Vermooten further points out that over and above the required amounts provided to parliament, no number has yet been put to the turnaround plan.

A proper restructuring would require additional funds for SAA to buy out onerous agreements and employment contracts.

So far, the plans are totally unrealistic, he says. And even if the plan were realistic, it would have to be funded.

Vermooten says it will be much more efficient to wind down SAA in its current form and start a new, focused airline, free of all the legacy contracts, over-staffing, inefficiencies and culture of reliance on the shareholder.

This has been done before, he says.

When state-owned Swiss Air landed itself in trouble through over-expansion the Swiss government refrained from bailing it out and allowed it to be liquidated. It subsequently bought Cross Air and successfully converted it into Swiss International, an airline with a limited mandate that was later acquired by Lufthansa.

In a similar example the Belgian government decided against bailing out struggling Sabena Air. The provincial government in Brussels instructed Brussels Airline to service selected sustainable routes. This new airline traded profitably and was also later bought by Lufthansa.

Vermooten says rather than scaling down existing SAA operations, government should start a new airline that does not necessarily need to be government-owned in the long run.

Such an airline, if it reflects the values of the South African nation, could still serve as a national carrier, Vermooten says.

He says government should carefully consider what it is it needs from the national carrier and only focus on that.

Sell low-cost SAA subsidiary Mango, split SAA Technical into a separate business and consider listing it and sell Air Chefs, he says.

When Scopa met the SAA leadership last week, Scopa chairman Themba Godi listened to all the plans to address the multiple problems at SAA. New policies, new staff, new inventory management systems, new IT systems….

Godi remarked that it sounds as if the theme is building a whole new airline.

Perhaps that is exactly what they should be doing.

AUTHOR PROFILE

COMMENTS   42

To comment, you must be registered and logged in.

LOGIN HERE

Don't have an account?
Sign up for FREE

SAA is a proxy for the whole South African economy under ANC rule. The criminal policies of Luthuli House served to institutionalize corruption, incompetence and negligence. Most SOE’s and all ANC municipalities are already bankrupt. The threat of downgrade prohibits another round of bailouts. Like all socialist/communist regimes before it, the ANC has also now reached the end of the line. “They ran out of other people’s money”.

Their only solution is to beg their enemies, the capitalists, to bail them out. The only alternative to privatization is to capture the Treasury in order to keep bailing out failures with inflated currency.

The implosion of the economy, the destruction at SOE’s and bankruptcy of municipalities are the logical and expected results of ANC policy. ANC voters are basically stealing from themselves to fund BEE projects, cadre deployment and other criminal activities.

Mothball it. Retrench the staff.
Taxpayers will save a fortune in the long run.

We should remember that the ANC today is no political party … it’s a business. A business with one, crystal clear objective, to acquire wealth … and that it has done very well indeed at the detriment of a nation.

You can keep pouring capital into this sieve but until you plug the holes it will still leak.

Drastic times drastic measures. Get the big knife out and cut where it makes the most difference, staff, it is way over staffed. Posts created for friends, for stealers and loafers.

Business rescue can be the quickest solution. We as tax payers will not be exempt as any credit provider of note will have the SA Govt wrapped up in a guarantee. It will off course be subject to the appointment of a competent Business Rescue Practitioner(BRP. There are BRP’s out there that have converted these appointments into a lucrative business deal.

The BRP can then, as part of his rescue plan propose the privatisation / sale of SAA. (Not that there is anything to sell?) With the Govt as the biggest creditor and the biggest say, it is anybody’s guess if the plan will succeed and then liquidation will be the only outcome.

Another solution can also simply be to close shop. All the other private airlines will take up the business in minutes and we as tax payers will have something to smile about.

Nt sure about rescue. In all probability it will conclude that insolvency is the best solution. Resort to insolvency right away i.m.o.

There are some parts of a business practice, the loss makers, including some difficult customers, that any company would want to hand over to its competitors. SAA, mindlessly, is trying to keep these to itself.

Solidarity believes that SAA can still be saved? What rubbish!

Solidarity also wants government to bail out SAA with the R5 billion,just to save the jobs of a few hundred people? What abt the thousands of taxpayer’s money going into an endless pit? Clearly Solidarity is only interested in the monthly premiums that they will loose if these few hundred people are retrenched.

We don’t need a government owned airline. Locally, privately owned airlines could satisfy local needs and there is an abundance of international carriers available to cater for long haul business. SAA has always been a drain on the public purse and that cost in the current economic mess, just cannot be afforded and undoubtedly takes focus away from solving the other more serious and intractable problems we face. These are the issues which need concerted concentration, free from the distractions of the pretensions of maintaining a dubious flag carrier as well that contributes very little to our economic sustainability.

Perhaps the question should be posed to the students in our beloved country. Should Treasury allocate R20bn to bail out SAA, or R20bn to fund “free” education? Then the students might be motivated to trash and burn all SAA’s planes rather than libraries, municipal buildings, private motor vehicles etc.? The way to solve this conundrum is obviously to declare insolvency, sell what can be sold, honour govt. commiments for the last time and walk away. What is the social demographic of people who use SAA? Anyone know?

The headline of this article is applicable to the whole country….not only SAA. The whole ” body ” is pervaded with cancer.

SAA needs new planes. Why? Comair runs profitably with some old Boeing 737-400 models in BA livery (ZS OTF, for example) that have been flying since 1999. Granted, they are busy with fleet renewal, but they are a listed company open to public scrutiny and have thrived despite anti-competitive behaviour by SAA. Why can SAA not run as a going concern? When you are at ORTIA next, look around and see how many people in SAA ground staff uniforms are seemingly wandering around aimlessly. They may be on breaks or on legitimate business, but I cannot help wondering about efficiency and management competence …

Saw this recently, IF accurate or even semi accurate, it shows where the real problem is.

1. Quantas: 32,500 staff, 252 aircraft = 129 staff per aircraft.
2. American Airlines: 87,897 staff, 618 aircraft = 142 per aircraft
3. Delta Airlines: 106,216 staff, 722 aircraft = 147 per aircraft
4. BA: 36,832 staff, 238 aircraft = 155 staff per aircraft
5. United Airlines: 115,149 staff, 710 aircraft = 162 staff per aircraft
6. SAA: 55,500 employees, 58 aircraft = 957 staff per aircraft

But on the bright side, it can safely be said that SAA is truly transformed, just like, Escom, Denel etc etc.

Been my point all along staff staff staff. Cut cut cut.

… and today Quantas reports record profits … and orders 6 more Dreamliners … the result of good management you think … ?

“With a larger fleet of Dreamliners, we’ll be looking at destinations in the Americas, Asia, South Africa and Europe,” he adds.

SEE: PICS: 17-Hour long-haul Qantas flight first direct Australia-Europe passenger service

The announcement was made as Qantas revealed in a trading update it was on track to post a record full-year underlying profit before tax of Aus$1.55-1.60 billion (US$1.16-1.19 billion).

The result, slated to be officially released in August, comes on the back of an aggressive efficiency drive that has included hefty redundancies and a shift away from loss-making routes, despite rising fuel costs.

“We’re seeing solid results from each of our business units, which is a reflection of broadly positive trading conditions and the work we’ve done to strengthen the group,” says Joyce.

It would be interesting to see figures for the following, which fly the same/similar routes as SAA:
Emirates, (which seems to charge only half as much, yet flights are two-thirds full (from my experience))
Lufthansa (also fly the European routes)
Swissair (which I think is owned by Lufthansa)
Ethiopian (also an African airline, which seems to be getting much passenger traffic away from SAA, and also is getting awards).

With regards to Emirates and the other Gulf airlines in fairness one need to consider that fuel iks heavily subsidised for them

I find it strange that whenever I use SAA, nationally and internationally, the flights are always full. If these are fare-paying passengers, how can SAA possibly make a loss when all competitors make significant profits on these same routes, even when not full?

It implies that the indirect costs, or overheads, are way too high. From what I experience, I guess this is mostly staff costs.

Yip staff staff staff jobs for pals, posts created for pals. 36 million for protection.

So very true Realist.
Now if you take an average of the first 5 airlines then SSA has 5 people doing the job of 1 person on the first 5 airlines. Where are they not at booking a flight; check in counters; on the flight or flying the planes. so where are they in the office earning big salaries. cut the staff.
Service on most airlines is far better than on SAA. PLUS more comfortable. If i have to spend extra to get comfort and service i will do so. SAA i will never fly with you.

You do realize that those stats are complete nonsense right? SAA has at most 10500 employees (go read their annual report).

Regarding the 10,500 employees – would it include employees of the subcontracted BEE entities?

Sadly nobody posting here knows the first thing about aviation (I have 23 years in the industry). The proposed solution for SAA is the right one – the airline just has far too much legacy baggage to ever be viable as a trading entity. And some of it flows from the previous government (the onerous agreements the airline has with its pilots are a legacy of that time for instance) as well as the current (complacency in the face of stronger competition, lack of government coordination in dealing with issues to support the airline).

Hello LPillay…I would like to believe everything you say.

How much is required to provide you with the necessary facilities from where you can spread the TRUTH on an ongoing basis?

It is not fair that all and everybody here and elsewhere continually spread lies about S.A.A.

@LPillay

Curious. Your term “previous government”?

If you are refering to the era of President Mbeki, you be partially right. CEO, Coleman Andrews, in is first 18 months as CEO, South African Airways’ market value increased fivefold (wiki)

So this is a good turn for the airline, a fact you did OR not know of

1999, Transnet sold 20% of its shareholding in SAA to Swissair for R1,4 billion, increasing its stake to 30%

2002 the South African government repurchased the shares back. Big blunder and then in 2002, took a 49% stake in Air Tanzania, to only fold the agreement in 2006

The ROT, you failed to mention came with the great CEO Khaya Ngqula, who splashed lavish gifts and money around on friends and family. And the rot continued from then

But I think you were slipping in a racial point to the “previous government”

You would agree now that you know didle-squat on matters od SAA

Struggle hero’s know how to get the votes and ultimately the control, but have zero skill in running a business or a country’s economy.

Does anybody know what happened to the Anti-Competitive fine SAA still has to pay Nationwide – at last count it was about R1,2BN……..?

Remember that money will come from our pockets – the taxpayers that is. Liquidate and walk away from the airline industry I say (any government employees who think that is a bad idea, can resign, put in an offer with the liquidators and make their independent fortune). Government must focus on educating and up-skilling the unemployed. Money much better spent.

when I flew last year [june] fare was R12600 to hong kong one month later nearly R19000 I am a lifetime platinum member will not fly this route again
with saa now fly with cathay more modern planes also gets me there with an extra half day to conduct business as a footnote the fare was an upgradeable one the cathay in economy half the the price

Comair’s market cap as of today is R5.4bn. Over the past five years it has generated a cumulative profit of R1.2bn for its shareholders from which it paid out a cumulative R330m as dividends.

Do anybody have an idea how much have cumulatively gone down this black hole

Why not give SAA to Comair to run?

And to think just this morning I had to defend market based economic policies against the plans Jeremy Corbyn have in store for the UK…

SAA is overstaffed by a few hundred employees per aircraft. Yes – No?? All major airlines run on +- 150 staff per aircraft. SAA – close to 1,000. Yep, ONE thousand. No wonder they’re not going anywhere.

There is no such thing and it is time for this lie to stop being peddled. SAA has no more than 10500 employees and their ratio of employees per aircraft is in line with major global airlines. Educate yourself and read their annual report.

You need to consider that with around 20 aircraft recently grounded due to SAA not having funds to pay for spares, that 10,500 you refer to is rather bloated. Apparently there are entire floors in Airways Park filled with “employees” doing absolutely nothing. Get rid of the political dead weight and then we can start talking.

You are correct LPilllay. Must’ve fallen upon fake news.

Anybody spot the similarities to Tesla

Yes.

SAA has electric aircraft

Only link to electricity is the “shocking” state of affairs.

Can’t agree more, there is only one solution. Restart from scratch, let everyone reapply for their jobs, get rid of the dead wood and keep the handful of highly skilled individuals.

Problem is that the ANC can’t afford the fallout…SAA is overstaffed by approximately 3,500 employees or loosely translated to about a R1,3bn annual salary bill – most of that as a result of the ANC’s jobs for pals scheme. These guys would need to go somewhere and they probably won’t make it to Eskom or any other SOC after Cyril’s crackdown on SOC’s. So where do they go to? Local Government?

even if you close the door and pack it all up they are still liable for the debt… surely there are a few logical solutions to this never ending money pit?

Picture it – The mafia want to launder money and control international drug trade. Strategy …. Control the Police, Customs, Army, Boarder….all we now need as an airline to create the wealth and then hide it somewhere on an island.

Load All 42 Comments
End of comments.

LATEST CURRENCIES  

ZAR / USD
ZAR / GBP
ZAR / Euro

Podcasts

GO TO SHOP CART

Follow us:

Search Articles:Advanced Search
Click a Company:
server: 172.17.0.2