SAA: A brief improvement, but back in intensive care

Last week finance minister Pravin Gordhan confirmed earlier reports based on leaked documents, that South African Airways (SAA) recorded a R4.7 billion loss in the 2014/15 financial year.

While this amount seems massive, it is difficult to analyse in isolation. When Moneyweb requested the financial statements that were submitted to Parliament’s finance committee at least a year late on Thursday, SAA spokesperson Tlali Tlali referred us to National Treasury, who referred us to Parliament. We are still searching….

Gordhan also said the projected loss for 2015/16 (financials not yet finalised) is R1.8 billion. Does that mean things are improving?

These numbers – read against the background of other publicly-available information and a glimpse from behind the SAA scene – unfortunately tell the sad story of a very sick airline that lifted its head momentarily, but was let down by those who were supposed to take care of it and, as a result, suffered a serious relapse.

To understand the causes of the huge loss in 2014/15 one should go back in time.

Late in 2013 SAA appointed Monwabisi Kalawe as its new CEO. Kalawe was the man to implement the Long-Term Turnaround Strategy (LTTS) for SAA and put it back on its feet.

Kalawe however arrived against the background of epic boardroom battles at the national carrier. In January 2014, six board members wrote to then-public enterprises minister Malusi Gigaba to complain about the leadership of board chairperson Dudu Myeni and request a forensic audit. The board failed to meet regularly during 2014 and few decisions were taken.

The relationship between Kalawe and Myeni soured and, in October 2014, things went further south when Kalawe was suspended and six board members seen to be sympathetic to him were removed, while four others resigned. Kalawe laterresigned.

Time and effort was spent on everything but the LTTS.

All of this happened against the background of an ebola outbreak in West Africa, that saw passengers disappear from all Africa routes from around July 2014, four months into the financial year. Commodity prices started to drop, which negatively impacted business travel for South Africa from several source markets. SAA also incurred massive impairments relating to four Airbus A320 aircraft it had to take receipt of.

Mango CEO Nico Bezuidenhout was appointed acting CEO in November 2014, two thirds of the way through the financial year. Within less than a month Bezuidenhout – together with SAA head of commercial Sylvain Bosc, FD Wolf Meyer, chief strategy officer Barry Parsons and head of HR Thuli Mpshe, and in consultation with National Treasury – embarked on a 90-day action plan as an urgent intervention while revising the LTTS.

In terms of the 90-day action plan that ended a few days before year-end, the costly direct flights to Beijing and Mumbai were scrapped, saving the airline about R600 million per year. Together with contract re-negotiations and other inventions, about R1.5 billion in cost was taken out of the business.

The Airbus deal was being renegotiated to exclude further large impairments and a partnership with Emirates Airlines was set to inject a large amount of cash, reportedly about R2 billion, into the struggling airline.

It seemed as if the airline was lifting its head and could begin to face the future. Gordhan’s statement that the projected SAA loss for the next financial year (2015/16) – when the effect of these interventions would begin to reflect – was reduced to R1.8 billion, also seems to prove the success of the 90-day action plan.

In June 2015, a mere three months after the 90-day action plan came to an end and the new financial year (2015/16) started, things started going horribly wrong again. The Emirates partnership collapsed, allegedly after interference by Myeni and the Airbus deal was about to follow suit.

It was only after a protracted battle between Treasury and Myeni that the Airbus deal was eventually signed in December, freeing SAA from the costly transaction.

These are just the high-, or rather lowlights. Since June last year SAA has seen strong turbulence. Bezuidenhout was sent packing back to Mango, Bosc was suspended together with several other top managers, while others resigned. Serious questionswere raised about procurement and financing – the latest scandal being the appointment of little-known BnP Capital to restructure SAA’s R15 billion debt for an exorbitant R256 million success fee. The contract was cancelled as BnP’s licence to operate was suspended by the Financial Services Board. Finally SAA landed itself an investigation by the Competition Commission as a result of an irresponsible statement about assistance to lowcost subsidiary Mango. The statement was aimed at embarrassing Bezuidenhout.

Last month Moneyweb reported that a leaked internal SAA document stated a loss in the first quarter of 2016/17 of R1.388 billion. If these losses continue at the same pace it could see SAA report an annualised loss of R5.5 billion for 2016/17.

That is more than the additional guarantee of R5 billion SAA received from government. It is also equal to about 21 Nkandlas!

SAA has a new board, but Myeni is still chairing the board. It has to appoint a new CEO and top management, but has suffered serious reputational damage which might discourage suitable candidates.

The national carrier saw a brief improvement, but it is back in intensive care.