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Shut down SAA’s international operations: Comair’s Erik Venter

Gordhan’s expected guarantee announcement ‘won’t be enough’.

The best option for South Africa as a country in dealing with the struggling South African Airways (SAA) is to close it down and increase access for international carriers, Comair CEO Erik Venter told Moneyweb on Monday.

Speaking to Moneyweb ahead of finance minister Pravin Gordhan’s budget speech on Wednesday – which is expected to contain an announcement that government will extend its guarantees to SAA by as much as R5 billion – Venter said the guarantee won’t solve all of SAA’s problems.

SAA has been given until the end of February to table before Parliament’s standing Committee on Public Accounts (Scopa) its outstanding financial statements for the year ended March 31. The financial statements have not been finalised yet as the external auditors would not sign off on the entity’s going concern status without a further guarantee.

This guarantee would be in addition to the existing R14 billion in government guarantees to SAA.

Venter said if it obtains the guarantee, SAA would be able to show on paper that it is a going concern, but it might still run out of cash. If that happens, government would have to inject actual cash into the airline, as commercial banks don’t want to lend SAA any more money.

“And they are still losing money as fast as government can print it,” Venter said.

It will be difficult to privatise SAA at this stage in its decline, Venter said. Due to regulatory restrictions on foreign shareholding in airlines, an international airline won’t be allowed to buy more than a 25% stake in SAA. That won’t be attractive to investors, as it won’t give them management control, especially in the light of SAA’s well-know governance problems, Venter said.

Government cannot put SAA in business rescue as its head of legal and risk Ursula Fikelepi advised late last year, because if the business rescue practitioner should determine that the business cannot be saved, it will be obliged to liquidate the airline, Venter said.

He said government could downscale SAA and allow its low-cost subsidiary Mango to manage all the domestic operations, since Mango has a lower cost base. Internationally it will, however, be best for the country if SAA’s services are closed down, Venter said.

He says international carriers are currently denied more access to the country in an effort to protect SAA. If SAA’s international operations are shut down, international carriers should be given increased access to the country. This will see ticket prices drop; tourist numbers increase and government would not have to bail out SAA anymore.

Venter spoke after Comair announced its interim results on February 16. The airline that operates under the British Airways and low-cost Kulula brands, reported R382 million cash earnings, down from R481 million in the comparative period.

Its profit for the period dropped from R164 million in the prior period to R84 million as a result of the revaluation of its 27 million dollar-denominated loan on one of its aircraft due to the sharp drop in the rand.

Venter told Moneyweb Comair’s six new aircraft were sitting on the balance sheet at R10-R11 against the dollar and have not been revalued. The net asset value is therefore close to R5 per share, as opposed to the current share price of R2.78, he said.

Comair’s share price dropped by 7.33% to R2.78 by late afternoon on Monday after it increased from R2.50 since February 16. It traded 21.46% higher than a week before, but was still 44.24% lower than a year before.

Amelia Morgenrood, stockbroker from PSG Wealth Faerie Glen, said the low trading volume of Comair shares might result in sharp share movements.

Comair is being managed extremely well and the fleet upgrade shows the company is fundamentally healthy, she said. She considers the share price reasonable at a PE ratio of 12.8 and its 4.25 dividend yield is good.

The one thing that would discourage her from investing in Comair at the moment is the threat of a country ratings downgrade to junk status. She said it is not clear what the effect of such a downgrade would be on the rand and on South African companies, and therefore she is sitting tight.

“The only shares I’m buying at the moment are those with dual-listings” Morgenrood said.

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Nice try Erik Venter. You are positioning yourself to be in the front of the line to grab those routes, or not????

Wait in line with the rest of the crowd. SAA should be sold, but it should be sold as an international airline with the routes it has and whoever gets control of it should have the ability to grow the company without the need to run to the corrupt choir masters with a begging bowl whenever the pot is empty.

And yes, Comair is a well run Company, but your share price is presently under R3.00, it was touching close to R6.00 one year ago, and is pretty much what its price level has been in the last 5 to 10 years too.

No-one is going to buy it as an airline, international or domestic. It’s not a going concern, it’s illiquid, bankrupt, broke, call it what you will. They could try to sell the chairperson, but I doubt there will be many offers for her.

They could pay Labola for her. The price of a KFC and coke and a free ticket to India where she can walk about the streets daily and see what poverty is like and what bankrupt and asset stripped companies will look like. Or she can run the tuck shop at Nkandla perhaps????

What does share price have to do with this?

Taking into account that Comair compete in a market where SAA can basically charge whatever they like for tickets, because of the bailout backing, I would say Comair is more than just well run.

702’s Bruce Whitfield loves this joke, it goes something like this…

Q:Whats the easiest way to lose money on the stock markets ?
***Drum-roll*****
A: Buy an airline.

Erik Venter is arguably most known for his comments and statements on SAA than he is for his own airline, which goes to show just how much of a ‘thorn in the a*s’ the whole situation is.

SAA is an empty shell, were it to be sold, R1 would suffice.
But here’s the thing, government will only sell it on terms and conditions that make no business sense i.e no retrenchments, maintain certain routes, procurement from selected providers, restrictive operational terms etc etc…
Therefore, a sale of the blooming thing is nigh impossible.

So, Erik’s utterances are a bit wishful, at least in the short-term.
Comair operates in a competitive space, where all things equal are not exactly equal, that’s the status-quo that they’ll continue to deal with for a while to come.

SAA should not serve local (in SA routes). Leave that to the privateers. A slimmed down SAA should only fly the international routes which should also satisfy governments status / flag carrier issues. Everyone would be a winner; cheaper better local flights, a healthier local industry and a slimmed own less cash hungry flag carrier.

Hi Tatanium22. I remember a different airline joke. What’s the best way to make a billion bucks with a Airline business? Start with two billion bucks.

Sadly like Nigeria, the ANC has proved that African governments can only destroy airlines. They should be ashamed at their performance. Unlike Middle Eastern airlines for example, SAA insists on employing incompetent people based on the colour of their skin!

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