SAA business rescue plan ‘puzzling’ and out of date

In a month of aviation turbulence, it seems more headwinds may be on the horizon.

In a puzzling admission by SAA’s business rescue practitioners (BRP), they told The Citizen that projected figures in its plan had not been updated since before lockdown a year ago.

In addition, wholly-owned subsidiaries Mango, Airchefs and SAA Technical do not seem to have been factored into the plan at all, except for a funding line item.

As the practitioners prepare to leave behind an extraordinary long and severely compromised process, they also leave behind a failing Mango, a pilot retrenchment dispute, unpaid staff at SAA Technical and an apparently flawed recovery plan.

Furthermore, the strategic equity partner recapitalisation escape route has been in the hands of the Department of Public Enterprises (DPE) for years. It remains unclear whether it is government policy and if there are any truly “strategic” equity partners seriously interested in SAA.

In a global and local economy that has fundamentally shifted along with a decimated aviation sector value chain, are the indecisive shareholder and SAA 2.0 management left without a viable route out of business rescue?

Leslie Matuson was appointed the business rescue practitioner in December 2019 and approaching 18 months – a long time by any acceptable measure. By comparison, Comair went into business rescue in May 2020 and was airborne again in December.

“The fact that Mango, Airchefs and SAA Technical were essentially excluded from the business rescue, while legal, is puzzling,” says aviation investment and advisory expert Barry Parsons.

He co-authored SAA’s long-term turnaround strategy in 2013-14, developed the strategic equity partner strategy and first presented it to DPE in 2012 and spent half a decade as chief strategy officer of SAA. He speaks out for the first time.

The business rescue does make allocation for some funding for SAA’s subsidiaries, but that seems the beginning and the end of it. “SAA cannot just walk away from their wholly-owned subsidiaries. Had a holding company been formed in 2013-14, as per the original long-term turnaround strategy, there could be greater clarity with the subsidiaries and they would not be stranded under SAA,” says Parsons.

Business rescue practitioner spokesperson Louise Brugman says “the subsidiaries are not in business rescue, only SAA is. Hence no focus on subsidiaries in the business rescue plan.”

And of subsidiaries SAA Technical, Airchefs and Mango, Brugman says due to the pandemic, “obviously, the aviation industry is in a worse position now and the subsidiaries are not exempt from that”.

Yet, despite its statement, the 10 -month old business rescue plan clings to pre-Covid figures as it continues with its legally prescribed accountability to try to rescue SAA. When asked whether any adjustments were made, Brugman said: “No these numbers have not been updated.”

Mango effectively ceases operation on 1 May or until funding is procured.

The DA’s Alf Lees says: “Airchefs should have been shut down, SAA Technical sold to a potential suitor last year and Mango should have been put into business rescue a long time ago and privatised. Of course, the DPE did not show any interest in the sale of SAA Technical.”

Should a potential strategic equity (or even a simple funding) partner be found, ageing numbers presented in any data room for a due diligence exercise will have little value as the aviation market has fundamentally changed.

“No credible investor would consider investing when a due diligence process is supported by a 10-month-old plan, particularly with South Africa’s risk profile and the government’s history of interfering in and corrupting SOCs,” says Parsons.

There is a difference between a strategic equity partner and an equity partner or investor.

“As originally envisioned and presented to DPE in 2012, a strategic equity partner brings more than funding to the table,” says Parsons.

“Perhaps fleet, a complementary route network, skills and pooled procurement are all on the table. The emphasis is on making a strategic contribution to the business and not just a cash injection.”

He adds that even up till 2018 there could have been several strategic suitors for SAA. However these discussions were essentially off limits with the shareholder and the pandemic landscape is much thinner.

“The entire global aviation value chain has been decimated and the damage is far deeper than first anticipated.”

Global aviation body IATA has been saying as much in several media statements over the past few months.

According to Lees the assumptions made by the business rescue plan pre-Covid were already pie in the sky. “They projected a passenger recovery that simply could not have been achieved even before the pandemic, given the state of the economy and the scaling down of the SAA 2.0 operation.”

Undeterred by the shareholder, in 2014 Parsons authored a detailed paper submitted to the SAA board outlining alternative funding options for the carrier, including a strategic equity partner option. The Citizen has read this.

The document highlights a fundamental flaw, as he saw it, in the long-term turnaround strategy – the exclusion of any consideration (or mention) of a strategic equity partner. This was by express instruction by SAA’s shareholder, led by Malusi Gigaba at the time.

After years of red tape, the airline never implemented the long-term turnaround strategy nor did the alternative funding paper gain traction with the Dudu Myeni-led board or with the government at the time. In fact, three years after the submission of the paper, in 2017, Gigaba said in an interview that “SAA’s financial challenges are of a short to medium term nature” and an “aggressive turnaround” will be led by incoming boss at the time, Vuyani Garana.

He was also emphatic about not privatising SAA in any shape or form. Garana’s tenure lasted less than two years and SAA went into business rescue in 2019.

The investment climate in South Africa plods along on the strings of junk status. At the time of South Africa losing investor-grade status, the ANC Women’s League lashed out at ratings agencies S&P and Moody’s, saying that South Africa “will not be held to ransom by ratings agencies that are serving a political agenda.”

But in an interview in Daily Maverick, Dr Iraj Abedian, CEO of Pan-African Investment and Research Services, said the downgrade was a consequence of a government “misbehaving” and that “investment grade pension or provident funds, among others, are not allowed to invest in a jurisdiction with a junk rating, according to their fiduciary duties”.

On the bright side, Parsons says there is a lot of cash floating about the world now, but it may not be from a strategic equity partner as originally envisioned.

He questions who “would want to invest in an airline with the South African government as a partner, bundled with its history of interference. It would have to be a very brave investor indeed.”

Acquiring a minority or larger interest in SAA with the current investment climate in South Africa tightens the noose of risk even further.

“The pronouncements of the imminence of a strategic equity partner are simply fiction which is a clear deflection of the fact that SAA 2.0 will simply remain a burden on the taxpayer,” says Lees.

Pickings may be slim, if at all. And with the business rescue practitioner’s admission that it has not adjusted its figures for the pandemic, the process may push the shareholder into a corner in its search for cash.

In 2020 it was already mooted that pension funds, via the Public Investment Corporation (PIC) be used to bail out Eskom. In 2017 Gigaba hinted at a similar outcome for SAA. noting that a minority equity partner may not necessarily be sourced from the private sector.

The DPE’s Richard Mantu noted that the “process to appoint a strategic equity partner is at an advanced stage and once that process is finalised, the government will make an announcement”.

Don’t hold your breath.