SAA loss exceeds target by almost 80%

Struggling South African Airways (SAA) has recorded a R1.46 billion loss in the first quarter of the current financial year, exceeding its target by 79%. It is about R70 million worse than the previous financial year’s loss.

This comes as debt of R6.7 billion matures at the end of September. The airline currently has R19.1 billion of government guarantees, R2.7 billion of which is not being utilised.

Documentation provided to parliament shows that SAA’s income has dropped by 8% in the first quarter compared to the same period in the previous year and is 10% below target.

National Treasury on Thursday afternoon announced the appointment of Vuyani Jarana as new CEO of the airline. Jarana has been at the head of Vodacom Business since 2012.

Finance minister Malusi Gigaba praised Jarana for the way he “transformed and positioned Vodacom Business as a growth engine of Vodacom, growing its contribution to group service revenues from under 10% to 25% over three years and turned around and transformed Vodacom subsidiary Stortech”. He said he believed Jarana would be key in turning around SAA.

It is however not clear when he will take the rudder. Gigaba merely said: “He will commence his duties after his current employer has officially released him.”

Ahead of SAA’s appearance before parliament on Friday, DA shadow deputy finance minister Alf Lees said it was not clear how the SAA losses would be stopped and how the loans that mature at the end of September would be repaid.

Treasury had to step in a month ago with a R2.2 billion bailout when Standard Chartered Bank refused to extend a loan to SAA when it matured.

Lees said the new board that was appointed ten months ago has not stemmed losses. Instead it increased, he said.

The documentation provided to parliament shows that SAA’s finance cost has increased by 37% in the first quarter compared to the same period in the previous financial year. SAA explains this as “a result of greater reliance on debt finance to fund the group’s operating activities”.

The cash flow analysis with projections until December shows a cash deficit after facilities from R568 million in July, peaking at R936 million this month. It is expected to drop to R134 million in October and increase again to R679 million in December.

Lees said the cash flow analysis reveals that SAA has run out of cash and will not recover unless it receives a cash bailout. “In any normal business the creditors would undoubtedly be filing for liquidation.”

SAA has underspent on aircraft maintenance. Its expenditure in the first quarter amounted to R845 million, compared to a target of R1 billion and actual expenditure in the corresponding period a year ago of R1.1 billion.

The airline states that it needs a capital injection of R13 billion over the next three years. It plans to generate R13.6 billion additional income in the next five years through various initiatives, including network and schedule changes and hopes to save costs to the tune of R10 billion over the same period.

Parliament has also been provided with one volume of a 2 000-page forensic report prepared by consultants EY after an investigation into SAA’s procurement practices.

The report is marked as draft and dated December 2015. It flags almost a third of the 38 contracts investigated as posing a risk of financial loss or legal liability unless urgent intervention follows. It is not clear whether such interventions occurred.

The report identifies worrying trends, including a failure to test the market for the best price, paying more than the contracted price due to a lack of contract monitoring, delays in tender processes which led to costly month-to-month procurement and a failure to keep documents.

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