South African Airways has started negotiating with lenders to extend its R9.2 billion in loans that mature on March 31.
The airline hopes the progress it has made with its long-term plan to turn the struggling company around will be enough to convince lenders to extend the loans by four to five years, chief financial officer Deon Fredericks told Moneyweb on Monday at a media roundtable.
This is ‘old debt’ that lenders earlier converted to short-term debt due to concerns about the continued existence of the airline, he said.
SAA CEO Vuyani Jarana, speaking at the same roundtable, said funders have started talking to SAA again and the airline succeeded in securing R3.5 billion in funding last week.
SAA previously told government that it needs R21.7 billion in funding to keep the airline afloat and to manage it back to break-even by 2020/21. It anticipates being profitable thereafter.
SAA was allocated R5 billion in the medium-term budget policy statement in October and currently has enough cash to operate until around June. However, it needs a further R4 billion for working capital to survive 2019/20, Fredericks said.
Finance minister Tito Mboweni is expected to give clarity on further allocations to SAA in his budget speech on Wednesday.
SAA’s finance cost of R1.3 billion per annum could be reduced drastically should government proceed with the recapitalisation, he said.
Results held back
Jarana said in terms of the FY2019/23 Corporate Plan, which sets out the turnaround strategy, the airline will show a R5.2 billion loss in 2018/19 and reduce this to R1.9 billion in 2019/20. He acknowledged that the financial results for 2017/18 are being held back by going-concern issues, saying the report should be finalised after March.
Jarana pointed out that the turnaround strategy is based on certain assumptions, such as oil price and exchange rate expectations, adding that it is for SAA’s management team to navigate variances in this regard while executing the plan.
He said by September 2018 SAA revenues were 5% above projections while costs incurred were 2% below budget. The net loss improved by 35% compared to the budget, and the group had a tight grip on cash flow.
The airline has done a lot of work to optimise its routes, improving its network profitability by 42% compared to the same time last year.
SAA began work on its new organisational design late last year and hopes to finalise it by the end of March, whereafter it will start populating the new structure. The airline will consist of three business units – international, regional and domestic – each with its own executive, Jarana said.
Functions such as finance, human resources and supply chain will follow a shared-services approach.
Subsidiaries Air Chefs and SAA Technical are also under scrutiny.
New majority stakeholder for Air Chefs?
Jarana indicated that the sale of a majority stake in Air Chefs might be on the cards, with an international partner in mind to extend the food business beyond the borders of South Africa.
He said the maintenance schedule of SAA Technical (SAAT) was disrupted by the earlier-than-anticipated withdrawal of five of SAA’s aircraft.
When aircraft leases come to an end, the lessee must ensure that the aircraft complies with the stipulated return specifications, which could for example include certain seat configurations and painting the aircraft. SAAT had to accommodate this work in its maintenance schedule, which led to some disruption and delays in returning aircraft after maintenance. This also impacted on the airline’s international performance.
Jarana says SAAT has now been stabilised, but that SAA is still determining its exact positioning in the market.
Transport economist Dr Joachim Vermooten, who also attended the roundtable, said that while SAA’s general approach and many small actions should contribute to better financial results, the absence of any big-ticket items that could wipe out the multi-billion rand gap between revenue and costs is concerning.
He added that government should give clarity about the extent and pace at which it plans to recapitalise SAA. If government is not prepared to give the necessary support, SAA should go back to the drawing board, he says.