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South African Airways cash crunch builds pressure for change

Technically insolvent airline needs to curtail its operations and become profitable again.

South Africa is under increasing pressure to enforce changes at the country’s unprofitable state-owned airline after the carrier lost access to a short-term credit facility from Citigroup, exacerbating an already weak financial position.

The US bank canceled a R250 million ($15 million) banking facility for South African Airways on December 24, Moneyweb reported on Monday, citing an internal airline document. As a result, SAA may not have access to free cash as of January 15, the report said. SAA spokesman Tlali Tlali confirmed the withdrawal of the Citigroup facility and said the company is preparing a statement on the implications for its cash flow.

SAA has been surviving on about R14 billion of government-debt guarantees and last posted a full-year profit in 2011. The company, which has requested a further guarantee from the National Treasury, has had seven acting or permanent chief executive officers in less than four years.

“SAA is in a very, very precarious financial position — it is technically insolvent,” said Joachim Vermooten, a Pretoria-based independent transport economist who says the carrier should cut unprofitable capacity. “Fundamentally that situation can’t continue.”

South African Airways carried 9.3 million passengers to, from and within South Africa during the 12 months ended March 2014, according to its most recent annual report, published in January last year. Its fleet at the time stood at 63 aircraft, including eight operated by low-cost unit Mango Airlines.

Fund-raising options include the sale of Mango, which is profitable, and the carrier’s SAA Technical maintenance division, Vermooten said. Last year, the company closed unprofitable routes to Beijing and Mumbai and renegotiated supply contracts as part of a cost-cutting plan.

South Africa’s National Treasury is working with SAA to ensure the company has enough liquidity to continue operations, Phumza Macanda, the Pretoria-based ministry’s spokeswoman, said on Monday by phone. A process to appoint a new board is under way, she said on Tuesday.

SAA’s board reports to Finance Minister Pravin Gordhan, after responsibility for the airline was transferred from the Public Enterprises department just over a year ago. Among Gordhan’s first public moves after his appointment last month was to order SAA to conclude a plane-leasing transaction with Airbus Group, overruling an attempt by chairwoman Dudu Myeni to instead lease the aircraft from a third party.

Former Finance Minister Nhlanhla Nene ordered SAA to implement the previously approved Airbus transaction on December 3, five days before he was fired by President Jacob Zuma.

Further Risk

While SAA still had room for about R3 billion of borrowings under its going concern guarantees, the airline was struggling to raise funds because lenders were wary of assuming further risk, according to an internal November 6 memo compiled by the company’s head of legal risk and compliance, Ursula Fikelepi, and seen by Bloomberg News. The memo was first reported by Moneyweb.

The board should ask the government for an equity injection “to arrest the financial decline and resolve SAA’s going concern, financial distress and reckless trading concerns,” according to the memo. The company was also working on a plan to consolidate existing debt, it said.

SAA “needs to change direction, it needs to stop operating on a reckless basis, it needs to curtail its operations, become profitable,” Vermooten said.

©2016 Bloomberg News

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I think it will take a dreadful issue as in a jet crashing to the ground due to poor maintenance for Zuma to be forced to make a change at SAA. nothing else will change his love for Dudu it seems even her abject pathetic appalling performance on all counts seems acceptable to him.

End of comments.





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