Will SAA’s restructuring process pull through?

It has been just under eight months since South African Airways (SAA) was put into business rescue.

The process to turn around the airline has been tumultuous to say the least and, with the business rescue plan almost at the point of implementation, the question is what will it take for it to fly?

In June the director-general and chief executive officer of the International Air Transport Association (Iata), Alexandre de Juniac, said that “financially, 2020 will go down as the worst year in the history of aviation”.

Airlines across the world have felt the impact of Covid-19, which has caused a collapse in air traffic due to countries across the world instituting lockdowns and closing international borders to stem the spread of the virus.

De Juniac announced in June that the aviation industry would make losses of $84.3 billion in 2020. He added that airline finances would be “fragile” in 2021, with losses of just under $41 billion expected.

It is under this shadow that SAA hopes to restructure its operations and build a commercially viable national carrier, using a R27 billion plan that involves settling SAA’s old debts and restarting operations.

‘Water under the bridge’

The R27 billion includes the R16.4 billion commitment the government appropriated in the February budget to settle guaranteed debt and interest.

The amount covers monies owed to lenders before the airline was placed under business rescue, as well as the R5.5 billion SAA received from a coalition of commercial banks and the Development Bank of Southern Africa for post-commencement funding (PCF).

Reflecting on the past eight months, Department of Public Enterprises (DPE) acting director-general Kgathatso Tlhakudi says: “The work could have been done a lot faster and unfortunately the result of it is that funding that would have been used for the restructure basically got exhausted dealing with operational expenses.”

This is not a new sentiment. In Parliament earlier this year, when the rescue practitioners were working towards a “structured wind-down” instead of a rescue of the airline, Public Enterprises Minister Pravin Gordhan criticised them for not being prudent with the PCF given to them.

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At the time Les Matuson and Siviwe Dongwana had been in charge of SAA’s business rescue for five months, the airline’s flights were mostly grounded due to the lockdown, and government had vetoed extending an additional R10 billion to the pair because they had not presented a “proper and fully-fledged” rescue plan.

“That’s water under the bridge,” says Tlhakudi, adding that they are now looking at new sources of funding to ensure the restructuring of the airline.

Funding 

The question of who will fund the restructure has come under great scrutiny following the woolly letter of commitment from government.

Government, represented by Gordhan and Finance Minister Tito Mboweni, has presented Matuson and Dongwana with a letter in which it commits to “mobilise funding for the short-, medium- and long-term requirements, to create a viable and sustainable new South African national airline”.

The airline will need R10.5 billion according to the figures in the rescue plan. This will be put towards working capital, paying off creditors and covering retrenchment packages.

As a precondition to the rescue plan’s implementation, it states that government must provide confirmation that it will “support and commit to providing the requisite funding” for the various items in the rescue plan.

The ‘unfortunate narrative’

Tlhakudi would not be drawn on how the government aims to “mobilise” the funding, but says the “unfortunate narrative” that has taken hold is that the money would be a “burden on the state”.

“That’s not the narrative we have encouraged ourselves,” says Tlhakudi. “We have always said that we are looking at multiple sources for recapitalising and restructuring SAA and that there has been interest from the private company space.”

The DPE has said that SAA has attracted “a mix” of local and international investors who are interested in providing the airline with financial, technical and operational expertise.

ALSO READ: Restructured SAA no vanity project, but a better business – DPE

Asked by Moneyweb if the letter given by the government provided enough clarity for that condition to be met, Matuson and Dongwana did not respond.

Mboweni also recently tweeted that a bailout for SAA “does not exist”. He was responding to a court application in which the Democratic Alliance (DA) seeks to interdict him from invoking his “emergency” powers under the Public Finance Management Act to release funding for SAA.

“It only exists in your mind,” said Mboweni to the DA’s Geordin Hill-Lewis, who is also listed as an applicant. “Where is the evidence of the allegation? I do not know about this.”

How will it work

Aviation economist Joachim Vermooten isn’t convinced that the current business plan will attract private investors.

“The problem with the business plan as-is is that it does not present a viable investment proposal, where normally you want to see a reasonable return on investment to the extent that there is a risk,” he said.

Of the full R26.9 billion, 93% will go towards existing creditors and losses incurred which have to be settled. The actual costs of the new airline only account for the R2 billion in working capital, the cost of recapitalising subsidiaries and trading losses.

The restructured airline is expected to make losses of R6.4 billion in the first three years – based on “optimistic assumptions” – and to make a profit only from 2024.

There is, for example, no build up in the load factor, which is expected to be 61%. Vermooten says this is not enough for an airline to operate in today’s environment. In 2019, prior to Covid-19, Iata carriers achieved a record high average load factor of 82%.

In addition, SAA’s unsecured creditors, who will be getting R600 million over three years – or 7.5 cents for every rand they are owed – will be expected to provide services for the new airline.

Vermooten says it’s unlikely they would give SAA the same credit terms as before.

“Once you get hurt by only getting 7.5 cents for your fuel or services provided to SAA, you would do it on cash on delivery and even on a deposit basis and that will increase the upfront payment to actually launch,” he says.

Source: SAA Business Rescue Plan

“Ultimately if you look at the profile that comes out, it’s three years of losses and very small profits thereafter – in a market in which airline investors can put their money into other airlines,” he says, adding that it will be difficult to get independent or institutional investors on board.

When it comes to investment from other airline companies, Vermooten says timing is against the government in a Covid-19 environment, where all airlines are battling for their own survival.

Competition

Vermooten says an added challenge is the broad focus of SAA’s services. While it aims to start on a small base, it eventually plans to be active in all markets – domestic, regional and international.

“If you really want a successful business it needs to be a focused airline,” he says. “If you look at other government-owned airlines, those that are successful only provide intercontinental services.”

He adds that domestic services mean that SAA will also be competing against its subsidiary Mango.

Tlhakudi disagrees. He says the two businesses compete in two different market segments, with SAA being a full-service carrier in direct competition with British Airways while Mango, as a low-cost carrier, is in competition with FlySafair and Kulula.com.

Vermooten points out that what would be really beneficial to consumers is for the country to emerge with a competitive airline industry.

Outside of SAA, other airlines have also experienced hardships due to Covid-19 grounding restrictions, with SA Express facing liquidation while two divisions of Comair, which operates Kulula and British Airways, are under business rescue.

“We really need a system in which the entire industry is supported rather than one specific airline,” he says.

This article first appeared on Moneyweb and was republished with permission.

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