A leaked SAA internal quarterly report – that discloses a R1.388 billion loss in the three months ended June 30 and a 51% increase in finance cost – has left experts surprised at how resigned the board appears regarding the bad results, lack of diagnostic analysis and proposed corrective measures.
The loss is incurred despite a 7% increase in revenue and is 169% higher than SAA’s budgeted loss of R497 million. At a net level the cash outflow was R247 million – which was better than the budgeted outflow of R971 million. The report interprets this as a positive swing of R1.218 million even though the real number is R724 million. Bridging finance is stated to be the major component of this “positive variance”.
Ratings Afrika corporate governance expert Charl Kocks, who did an analysis of the report for Moneyweb, says: “Even though it describes a business outcome that is extremely serious and quite calamitous, it does not convey a sense of crisis or of strong concern.” He says it seems as if the author has become resigned to bad results.
“The reader is left with a bizarre picture of hopelessness combined with an unspoken expectation that the matters are not serious, since somehow there will be support forthcoming – although this is not made clear in any way,” Kocks says.
An aviation expert who also studied the report and asked not to be named, says: “SAA’s load factor was 69% versus a target of 72%, for which no reason is identified”, and “SAA does not propose any action which would bring it back to budgeted losses or how to reverse its losses.”
He says if current losses continue at the same pace, SAA could see an annualised loss of R5.352 billion for F2017.
SAA’s financial statements for 2014/15 and 2015/16 have not been finalised due to going concern issues and this leaked report gives the first glimpse of the real state of affairs at the national carrier.
The airline has submitted an application to National Treasury for an additional going concern guarantee, but finance minister Pravin Gordhan has made it clear that no further guarantee will be granted until the current board under controversial chairperson Dudu Myeni has been replaced.
This stalemate has been dragging on since Gordhan’s appointment in December last year.
The extent to which SAA has been relying on government guarantees is clear from the following table included in the report:
Kocks says the table “paints a dismal picture of guarantees that have increased steadily since March 2007 and show no sign of reduction in future….” Of the R14.394 billion available, only R99 million is currently not being utilised. He says in 2013 the minister of finance agreed that R7.9 billion would become “perpetual guarantees”. “Only then could the auditors conclude that SAA had a going concern status, apparently.”
The report does not give one confidence that SAA could be a sustainable business, Kocks says. The revenue per available seat kilometre (RASK), which is an important performance indicator at SAA, fell short of the expected R1.18 for the three-month period, with actual figures of R1.11, R1.06 and R1.05 cumulatively in each of the three months. “The second, third and fourth quarters were expected to return R1.22, R1.23 and R1.21 each, which seems unlikely.”
Kocks says route profitability was significantly below the planned 85% level for the year at 83%, 78% and 66% for each of the three months. Only three of the nine international (non-African) routes were profitable and in total only 23 out of the 35 routes show a profit when measured at a route profit level plus network contribution.
Both experts question the assumptions relied on in SAA’s planning. Kocks points out that SAA has budgeted for an oil price of $35 per barrel, “an assumption that seems highly inappropriate in its precarious situation, and is clearly unravelling already.”
The aviation experts point at SAA’s load factors that are lower than budget and the comparative numbers for the previous financial year. “Such deviations so shortly after the start of its financial year is indicative of unrealistic assumptions and financial planning”, he says.
He further warns against SAA’s special focus on cutting maintenance costs. “This is an area of operational risk, in the cases where maintenance is done under circumstances of financial distress, which may involve skimping on safety-related matters.” He says it would seem more appropriate that the excess production of seat capacity, expansion and new routes and other superfluous costs should be cut rather than those that required maintenance.
*Moneyweb and its experts had sight of 24 pages of the 43-page report. The portion available included the executive summary, financial position and performance, guarantees and borrowings, hedging, capital investments and long-term turnaround strategy implementation process.
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