South African Airways (SAA) has shrugged off suggestions that its latest government guarantee courtesy of the National Treasury could have contravened an airline industry agreement.
After the Treasury approved a R6.5 billion government guarantee for the cash-strapped carrier in January in order to hold its annual general meeting, commentators raised concerns that the guarantee may have flouted the Domestic Air Transport Policy (DATP).
The DATP – an agreement between private sector carriers governed by the Department of Transport – outlines rules which the airline industry complies with for fair competition and equal treatment of operators.
SAA acting chief executive Nico Bezuidenhout (pictured) says the domestic policy has no relevance to the national carrier’s government guarantees, as it has made intercontinental operation losses of R1.6 billion for the 2013/14 financial year.
An airline which has taken umbrage with SAA’s financial aid is JSE-listed Comair Limited. The company is part of a pending High Court application to compel the government to consult the airline industry before approving any further aid.
Bezuidenhout says Comair has the same recourse when it seeks capital from its shareholders, which is no different to what SAA does.
“On this specific case we have not turned to our shareholders. We have not received capital injection from our shareholders; we have gone to the debt market and raised finance. Finance we serviced the principal amount on and serviced the interest on.
“So this is not even a case where we turned to the shareholder who had deep pockets, we haven’t received cash from the shareholders since 2008,” he says.
However commentators disagree, arguing that SAA seems to get financial reassurance from the government while its competitors are facing industry headwinds without support.
Aviation economist Joachim Vermooten says the equal treatment principle is applicable in a situation where a government enterprise is competing with others in the same market.
“The need for equal treatment is often referred to as the need to ‘level the playing field’ and is generally considered to be of extreme importance,” says Vermooten.
SAA’s turnaround strategy
After delays in publishing its financial statements for the 12 months ending March 2014, due to technical insolvency, SAA reported a 12% increase in revenue and decline in operating losses to R374 million.
The latest government guarantee was approved by the Treasury on the back of a sound 90-day action plan that ends on March 24. The plan is part of SAA’s long-term turnaround strategy to bring financial stability to the beleaguered airline.
SAA has completed 60 days of the plan. SAA announced on Monday that it expects its operating performance to improve by R1.25 billion through the plan.
The reconfigurations of airline networks, which include the cancelation of the Beijing loss-making route by April, will help the carrier recoup R600 million a year. SAA will further announce consolidations of airline networks, but it does not see “short- to medium-term cancelation of international routes.”
In March, SAA will launch its first direct flight between Johannesburg and the Middle East. In the African continent, SAA has grown its network with frequency flight additions between Johannesburg and Maputo, Harare and Mauritius.
SAA has negotiated fleet lease re-extensions of three of its A340 aircraft, which already showed a saving of R112 million a year. Another five aircraft-lease extensions and re-negotiations were expected to yield additional savings in excess of R150 million.