Antoinette Slabbert
3 minute read
31 Jan 2015
11:38 am

SOCs must stand on own legs – Nene

Antoinette Slabbert

Finance minister Nhlanhla Nene made it very clear on Friday that state-owned companies (SOCs) have to stand on their own legs financially and government won’t use taxes or loans to bail them out.

FILE PICTURE: Former Finance Minister Nhlanhla Nene. Picture: GCIS

Nene was addressing the media after South African Airways (SAA’s) annual general meeting where its financial statements for the year ended March 31 2014 were approved. This approval was earlier delayed as the airline was technically insolvent. Government intervened in December and extended SAA’s guarantees by R6.5 billion, which restored its balance sheet.

This assistance to SAA was given on the grounds of a sound 90-day action plan that ends on March 24. Nene said the plan will produce quick-wins, but it will take longer to restore SAA’s commercial sustainability. SAA management is currently revising the carrier’s long-term turnaround strategy and this will be revalidated by the board and National Treasury as the new shareholder department.

Nene said given fiscal constraints over the next two years, recapitalisation of SOCs will only be funded in a manner that will not increase the budget deficit. It may entail the sale of non-strategic assets, including property, direct and indirect government shareholding in listed companies, non-strategic government shareholding in SOCs and surplus cash balances in state entities.

He could not put a value to such assets as government is still busy assessing it and he said speculation in the media in this regard is the result of “people’s imaginations”.

SAA reported a 12% increase in revenue and decline in operating losses to R374 million (FY2013:R425 million).

Acting SAA CEO Nico Bezuidenhout said where the long-term turn-around strategy was implemented, it did bear fruit. Domestic and regional operations for example grew by 10% and 17% respectively.

Bezuidenhout said the strategy was not implemented on intercontinental operations and, as a result, the loss increased with R235 million to a staggering R1.6 billion.

He said the route between Johannesburg and Beijing in China will be discontinued in the first week of April. Air China will start flights on the same rout in May, which means passengers will still be served but not at a cost to the South African tax payer.

SAA is currently making a loss of R30 million per month on the route. The total loss over three years amounts to R1 billion, he said.

SAA subsidiary Mango, headed by Bezuidenhout, reported a record profit.

SAA’s results were negatively impacted by impairment charges. A charge of almost R1 billion was recorded in the value of the airline’s seven wide-bodied aircraft and the inventory of spares for these aircraft. Bezuidenhout said the replacement of these aircraft with more fuel-efficient twin-engine aircraft is a critical element of the turn-around strategy and in terms of accounting standards the remainder of its useful life had to be taken into account in the valuation.

A further impairment of R369 million relates to the difference between the price at delivery and the market value of the four new A320 aircraft that SAA received during the reporting period. The price at delivery is higher as a result of annual escalations. He said similar impairments can be expected on future deliveries in terms of the same legacy contract.

Bezuidenhout said the need for the further government guarantee was the result of delays in implementing the turn-around strategy. The implementation of the revalidated strategy will resume on March 25 after the completion of the 90-day action plan, albeit 16 months behind schedule, he said.

Substantial progress has been made with the 90-day action plan. This includes the introduction of flights between Johannesburg and Abu Dhabi which provides access to the Asia-Pacific region through the SAA-coded network and an increase in frequency of regional flights to several destinations, including Mauritius, Zambia, Zimbabwe and Mozambique, Bezuidenhout said.

While SAA achieved cost savings of R450 million in the reporting period, Nene set it a target of R1.3 billion in annual savings. Bezuidenhout also said SAA staff have not increased productivity to the level it needs to be.

Board chairperson Dudu Myeni would not comment on the suspension of SAA CEO Monwabise Kalawe, safe to say the investigation has been completed and a legal process is underway.

This article originally appeared on www.moneyweb.co.za