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SAA may have recorded a loss of more than R9bn in the past year

A look at what its figures for the year to end-March might look like, bearing in mind that its 2018 annual report remains unpublished nearly 17 months after the end of that financial year.
The rules and realities of business do not apply to SAA, and the country’s taxpayers continue to supply the loss-making airline with capital. Picture: Shutterstock

Many of South Africa’s listed companies will publish their interim or annual results for the period to end June during the next few weeks. Several have already done so.

The Johannesburg Stock Exchange’s (JSE) rules require that companies publish results within three months of the end of a reporting period, and shareholders and other suppliers of financing expect it. The JSE is quick to warn when a company fails to publish its results and shareholders are quick to exit the share, while banks and other creditors will immediately start to ask hard questions.

The outcome of this rigid requirement is that companies’ operating and financial health are reported regularly and corrected when things start to go wrong. The alternative is a non-performing company that will go bankrupt when it runs out of capital. The benefit of a company structure – that of limited liability – is that shareholders are not obliged to keep on throwing money into a bottomless pit.

Unfortunately, these rules and realities do not apply to South African Airways (SAA).

SAA lost all its capital more than a decade ago, when its liabilities exceeded its assets and equity by R368 million. Government funding and hard work saw some recovery in 2010 and 2011, but since then everything has gone wrong.

SAA has been in decline since 2012, with taxpayers cast in the role as capital providers and unwilling shareholders, effectively with unlimited liability. During the next six years, from 2012 to 2017, SAA suffered total losses of nearly R18 billion and by the end of the 2017 financial year, the airline reported that its liabilities exceeded its assets and equity by R17.8 billion.

The annual report for the year to end-March 2017 was the last that SAA published. It took management 11 months before it published the 2017 report. Nobody knows when the 2018 report will be done, nearly 17 months after the end of the financial year. Any other company in the private sector would have published its 2019 audited figures by now.

Ignorance is bliss?

SAA is in a difficult position. If it does not publish its reports, the ministers of public enterprises and finance, the banks and taxpayers will become even more impatient. But the publication of the figures will probably show that things are worse than expected.

Reading through the last 10 annual reports shows that operating costs increased faster than revenue in most years since 2012, and that SAA suffered an operating loss every year, with the notable exception of 2016 when the price of jet fuel dropped sharply. But by then SAA’s interest-bearing debt had increased to R14 billion and interest payments of R1 billion wiped out the operating profit of R522 million.

Summary of revenue, cost and profit

R million 2012  2013 2014 2015 2016 2017
Revenue 23 861 27 098 30 266 30 492 30 716 30 742
Operating cost 25 176 27 523 30 640 33 407 30 194 33 502
Operating income -1 315 -425 -374 -2 915 522 -2 760
Depreciation and impairments 63 -1 416 -1 933 -2 607 -896 -1 000
Interest -105 -189 -231 -608 -1 004 -1 590
Profit -843 -2 554 -1 170 -6 142 -1 478 -5 569

Source: Compiled from SAA annual reports

It is unlikely that things improved during the last two years. In the 2017 annual report, then CEO Vuyani Jarana noted that revenue showed no growth over the last few years due to low economic growth and strong competition from low-cost airlines in SA and international airlines globally.

Economic growth has slowed even more since then and competition has increased. The airline lost its status as the best airline in Africa to Ethiopia Air in 2017, according to the Skytrax World Airline Awards ranking.

SAA has been falling in the international rankings in comparison to other airlines year after year.

Jarana flaunted a long-term turnaround plan in 2017, but his resignation letter at the beginning of June 2019 indicated that it was impossible to achieve much. It seems reasonable to assume that costs have continued to increase.

Read: SAA gets state funds after CEO, chairman quit

Costly operation

The old annual report (2017) disclosed that around 55% of SAA’s operating expenditure is dominated in foreign currency. Just the weakening of the rand, from R12.90 per dollar in June 2017 to R13.42 in June 2018, would have added 4% to costs.

In addition, the price of jet fuel increased by around a third between 2017 and 2018, according to data from the International Air Transport Association (Iata). Jet fuel increased from around $60 per barrel to around $80 by the end of 2018. This increase, together with the weaker rand, is likely to impact heavily on fuel costs, which remained close to unchanged at R7.3 billion in the 2016 and 2017 financial years.

Wages are likely to have continued to increase, as have indirect employee costs.

The cost of accommodation and refreshments has increased by 40% since 2015, to R1.4 billion in 2017.

Assuming that the trends of the last few years persisted in the year to June 2018 – only a marginal increase in revenue, continued cost increases and higher interest charges due to growing debt – it is possible that SAA’s loss in the 2018 year increased to more than R6 billion.

Continuing the exercise, the loss for the year to March 2019 could have increased to more than R9 billion as the rand declined to worse than R14 per dollar and jet fuel prices increased to a high of $100 per barrel, before falling to between $80 and $90 for most of the past year.

Forecast of revenue, costs and profit



R million 2016 2017 2018 2019
Revenue 30 716 30 742 31 600 32 000
Operating cost 30 194 33 502 35 700 38 700
Operating income 522 -2 760 -4 100 -6 700
Depreciation and impairments -896 -1 000 -500 -1 000
Interest -1 004 -1 590 -1 600 -1 600
Loss -1 478 -5 569 -6 200 -9 300

Source: Author’s analysis

We can only hope that the forecast is wrong and that SAA is doing much better than the trend of the last few years suggests. If the forecast is fairly accurate, the balance sheet would scare the likes of junk-bond junkies like Michael Milken and Jim Casey.

At the end of the 2017 financial year, SAA had total liabilities of R33.7 billion and total assets of only R15.9 billion. The negative equity of R17.8 billion is calculated after taking account of decades of accumulated losses totalling R33.6 billion at March 2017.

If bankruptcy had different levels, SAA’s would hit a new record if the trends of previous years continued in 2018 and 2019.

The estimated losses would have increased the negative equity position to more than R30 billion, depending on whether SAA accounted for the bailouts it received from taxpayers as loans or new capital, and whether this funding was used to reduce debt or pay salaries.

SAA’s financial state and the fact that the latest formal figures are more than two years old raises the question of whether SAA is creditworthy. In reality, a bankrupt company that posts a huge losses year after year and cannot produce an income statement would not even get an appointment with an assistant branch manager in Riviersonderend.

Banks aren’t talking

It proved impossible to get confirmation from banks on their exposure to SAA. FNB nearly admitted to it when it referred Moneyweb to Rand Merchant Bank, but RMB replied that “client confidentiality precludes us from commenting on client-specific matters”.

The most interesting response was when somebody at another bank pushed the wrong button when forwarding Moneyweb’s questions to the financial director, asking him if they should reply with “the usual response of client confidentiality”, and a few minutes later we got that.

Moneyweb received the same response from other banks.

The 2017 annual report listed Standard Bank, Nedbank and Citibank as SAA’s bankers. Citibank cut its exposure to SAA in August 2017 when it refused to roll over debt of R1.8 billion when it became due after Standard Chartered Bank refused the same on a loan of R2.2 billion earlier.

Standard Bank and Nedbank, as well as other local and international banks with offices in SA, refused to admit to their exposure. The five large local banks that offer corporate loans probably all have exposure to SAA given SAA’s total debt of nearly R17 billion in March 2017 (and probably closer to R20 billion now).

Nedbank Group CFO Raisibe Morathi, in an interview with Moneyweb after the banking group published its results last week, said that Nedbank has total exposure to state-owned enterprises to the tune of R20 billion. She declined to list the entities, but said the bank’s exposure is down from R24 billion (as at the end of December), and is backed by government guarantees.

The risks brought on by SAA’s weak balance sheet and continued losses cannot be ignored. It will take just one small problem to derail the whole airline. SAA nearly lost its landing rights in Hong Kong in 2016, when the Hong Kong registrar of companies threatened to deregister SAA because it did not publish its results.

In addition, airports around the world and fuel suppliers would like proof that SAA will be able to pay its bills.

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SAA is going to get a new CEO anytime soon, and his first order of business is going to be another turnaround plan.

This will take 18 months to produce by which time SAA will be totally gutted.

Nevertheless, the plan will likely call for the replacement of the fleet with yet more fuel efficient planes at a cost of only 20 billion or so. This will also create space for BEE middlemen to get in on the deal.

But no need to worry because the plan will call for a return to profitability by 2030 or so provided economic growth in SA tops 4%, and the Rand strengthens back to around 10 to the dollar.

New routes can be added and more staff engaged.It’s going to be a great place to park you pension savings.

Your bailout will be coming from the remaining 100 taxpayers left standing in the country.

Or maybe not.

Someone has to explain why we keep this thing running.

It’s part of the corrupt government’s long term gravy train plan.

I guess it will be a commission of inquiry with a report back after 24 months and a further 6 months discussion on the commissions report to employ a new CEO 🙂

Simple: because if we let it fold, we have two choices:

a) the cross-defaults are triggered and the country defaults, requiring an immediate IMF bailout, or;
b) the SA government has to find in the order of R39bn in cold, hard cash to settle SAA’s liabilities. Unfortunately the piggy bank is empty.

Hence, the government allows SAA, SANRAL, Eskom, etc., to limp along in the hope that enough thoughts and prayers accumulate to offset the stolen Rands.

Hope it’s somehow shut down long before a new CEO – Jerana, the one that fled, achieved no positive outcomes and merely drained it further, along with people from his previous employer appointed when he started.

Patric Cairns is no doubt optimistic about the rosy future awaiting SAA…..

So let’s see if I’ve got this right
The banks are quite happy to lend billions to a company that aren’t capable of producing a balance sheet?
The above mentioned company has an accumulated loss of 33.6 billion (just guessing here folks)
As the taxpayer that will ultimately be paying for this fiasco, I find myself somewhat concerned.
Angered would be more appropriate.
Ever tried getting a loan from a bank? The hoops you have to jump through, the collateral.
Guess if you’re backed by government guarantees, it isn’t necessary to even prove competency
BTW Navigator, good luck finding those 100 standing taxpayers

Best they give SAA to Ethiopian Airways for free if one is ever to see SAA back on its feet and sustainable …

The NHI will become the Eskom of medical services, If SAA, Eskom and the other SOEs on life support are indications of the future.

NHI will make Eskom look a Sunday school picnic, pot of R 250 bn – per year to play with, and that number is probably around 10 – 20% of what we need to provide the same standard of care that medical aid patients currently get to everybody. Always funny that we see the train wreck that is going to happen, then the papers will publish some story about how it is actually not going to be so bad and “South Africans always pulls through”, then the outcome is even worse than what we feared eventually

Let’s not forget that all SOE’s including SAA has fallen directly under Cyril even during the Zuma years. He is the one that for years and years now have been saying SAA must keep flying as they will get it right.

Hope this is an example to the whole world of what he actually knows about business.

He is just a professional beneficiary nothing else. Big difference.

With the sal’s current “business plan” if something like that actually exists, they will not succeed in the next 100 years as an independent business entity – the one and only reason for keeping sal alive with taxpayer money is to pay salaries to cadre pals and no other reason.

SOEs were not under Ciryl. First under Brown, then Gordhan where they still are.

And still they do nothing……..

For the sake of my own sanity, can anyone refer me to just one concern taken over and managed by the ANC and its deployed cadres that has actually been successful?

If you had have said in 1994 that Ethiopian Airlines would have been a MUCH better business that SAA in 25 years, you would have openly been laughed at. For me, its simply a metaphor for how the new dispensation take the golden goose, kill it, then eat the rotting corpse, leaving nothing behind. The only surprise is that we are surprised

Adriaan, the banks’ exposure is a key issue; last week Business Day reported the banks are “drip-feeding” SAA, meaning despite treasury guarantees, funding is being released bit by bit, conditional to part repayment of old loans.
There were calls years ago already for SAA to go into business rescue, but the minute that happens, there’s a temporary freeze on repayments to banks. I wouldn’t be surprised if exposure to SAA is big enough to unhinge the banks, hence the secrecy.
Very interesting article by you.

What was SAA like under Apartheid ?

What’s the point you’re making? Apartheid tax was equally bad.

Also may be worth considering that the Lufthansa Technik / COMAIR maintenance facility started operating locally in May this year taking a significant bundle of maintenance income away from SAA Technical (all the Comair 737s to start with). SAA Technical was perhaps one of the few bits worth keeping (alongside catering / lounges and maybe Mango).

and they want to roll out a national healthcare plan that reads like something out of harry potter ?? is SA still a democracy with the ANC doing as it pleases ? we have disiplinaries when students sexually assualt other students. we have commissions of enquiry instead of court cases. rotten ‘cadres’ sit at home and draw huge salaries and add NO value to the economy. Cyril so far, has done nothing to benefit SA, quite the contrary, he may have accelarated SA’s downgrade to junk status.

Man Alive – can you imagine what would happen if SAA lost all it’s landing rights … all 300 odd planes stuck up there flying around and around foreva …

There’s no reason for that to happen. The issue is debt!

The destruction perpetrated by the ANC should classify them as one of the most destructive entities in the history o the world (and this comes with the intention (joke!) of improving the lives of Black people).

What happened to the so called turnaround plans we here about annually?! SAA must be privatised as soon as possible. SA can ill afford having a carrier that is not profitable. Action is required – NOW!

End of comments.





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