Bloated flag carrier spiralling out of control

With the end of apartheid, SAA was able to branch out around the world. In 1990 it became a division of Transnet, under the condition that it would be run on a commercial basis. However, when new entrants came onto the market, instead of improving its service and cutting costs, SAA behaved like the playground bully, trying to force out fledgling airlines by cutting fares. Wholly-owned by the SA government, SAA was in 2014 transferred from the Department of Public Enterprises to fall under National Treasury.

Having an overprotective parent, this cosseted child was never disciplined, nor punished. It was given sweets whenever it made demands. Today we have a debt-ridden, loss-making, flailing, money-sucking, incompetent enterprise – and now there are rumours that the airline may battle to pay the salaries of the very loyal SAA employees.

One cannot give credence to any non-audited figures made available to the public. It is thus necessary to take a step back and refer to the last annual report published, for the year 2015/16. Even then, the heads of the board of directors were firmly embedded in the sand, not taking any responsibility for inept management, and stating in the 2016 annual report that “cash flow will remain a critical issue until such time as the airline receives an equity injection to reduce its expensive reliance on debt funding”. Thereby the board reached out their open hands, requesting that “a more permanent appropriate capital structure is required for the airline”. And on the basis of this, the directors stated that they “have every reason to believe that the group and the company have adequate resources in place to continue in operation for the foreseeable future…”. The government duly granted a perpetual guarantee of R4.7 billion to ensure that the airline would qualify as a going concern.

Of concern, is that the only excuses given for bloated operating costs were the weaker rand and market pressures. The high interest costs were blamed on the reliance of debt funding. No mention was made of irregular expenditure. Nor was there any proposed plan to cut unnecessary expenditure, root out corruption, increase efficiencies, nor cull unprofitable routes. Now, no shareholder, not even the government, should continue to pour money down an ever deepening hole.

The audit report was fairly benign, referring to irregular and wasteful expenditure of R12.3 million (2015 – R121.2 million). To cut to the chase, the damning figure in the balance sheet is the R26 billion accumulated loss. Add to this the expected loss of R4.5 billion as at March 2017, and we have R30.5 billion. Total debt amounts to R14 billion. The SA government has already sunk R12.8 billion share capital into this venture.

Recapitalising this airline would require a further injection of at least R44.5 billion to wipe out the accumulated loss and the debt. This would not cover any increases in debt as at 2016/17, nor would it cover the losses made in the year 2017/18. Add to this would be the amount of capital that would be needed to improve the fleet.

In May, Treasury advised the National Assembly that it was considering various options to recapitalise SAA, including using the Public Investment Corporation (PIC) as a possible equity partner. The PIC has some R1.857 trillion under its control, of which 88.2% represents the Government Employees Pension Fund (GEPF). The GEPF members must be getting twitchy, as the GEPF issued a press release stating that the GEPF would not be funding the SAA, and that their retirement benefits are safeguarded through “proper administration and prudent investment”.

However, it appears that Treasury has just given SAA a lifesaver “injection“ of R2.2 billion so that it can meet the deadline imposed by Standard Chartered Bank. This amount was apparently transferred from the National Revenue Fund. In my view this is in contravention of Section 185(2) of the Constitution, which states that no money shall be withdrawn from the National Revenue Fund, except under appropriation made by an Act of Parliament in accordance with the Constitution.

Treasury has some explaining to do; not only how they got around the above clause, but also what their plan is to fund the further R9 billion that is due at the end of June. Further, SAA should release its 2017/18 audited annual report. Hopefully, this report will not be disclosing any further irregular nor wasteful expenditure, and will include a concise plan of how the Board intends to turn this loss-making airline around. The GEPF members should remain nervous though, if the government is to bail out SAA, they will ultimately be coughing up the money.

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