Cape Town - Recapitalising South African Airways (SAA) will only temporarily solve the airline’s low cash reserves, said Finance Minister Malusi Gigaba in a confidential memo distributed at a special Cabinet meeting on Wednesday.
In the document, which Fin24 has seen, Gigaba points out that unless SAA refines its business model to include initiatives in the turnaround plan, the airline will continue to have low cash reserves.
Government guarantees to SAA increased from R1.3bn in 2007/08 to R19.1bn by September 2016. This, Gigaba said, amounted to a 35% rise every year, which is unsustainable.
He also expressed concern that SAA lacks the appropriate commercial skills to develop and generate revenue initiatives.
SAA’s group income statement and cash flows presented to Parliament at the beginning of August show that the airline is in considerable financial distress.
At the time, it recorded a net loss of R1.459bn year to date, compared with R1.388bn in the same period last year. In July, the airline’s available cash was -R568m, dropping from R6m in June this year.
SAA chief financial officer Phumeza Nhantsi told MPs that the national carrier would continue on its loss-making path for the foreseeable future, with losses of R2.8bn expected in 2017/18.
In addition to the loss in the current financial year, the airline will take a further hit of R1.8bn in 2018/19 and could possibly only start making a profit in 2019/20.
SAA is currently utilising Seabury consulting group to re-evaluate its long-term turnaround strategy, including its recapitalisation needs, which would include a proposal on the rationalisation of routes.
The airline has not generated sufficient revenue to meet its payments on a monthly basis and as a result finds itself with low cash reserves to pay its suppliers.
"With the airline having depleted cash reserves, it is remaining ‘afloat’ by negotiating repayment plans with some of its suppliers,” Gigaba said, “which allows SAA to defer payments to a future date."
SAA has deferred payments of about R750m as at August 9, but the situation is "unsustainable".
The finance minister pointed out that in its recapitalisation programme, as with other state-owned companies, SAA will need to demonstrate that it has a sound business plan and willingness to improve governance and correct operational inefficiencies.
"It is incumbent upon the SAA management and board to aggressively implement the recommendations of the five-year turnaround plan," Gigaba said.
Fin24 reported earlier that Gigaba wants to introduce special legislation to allow for a R10bn recapitalisation of SAA by tabling a Special Appropriations Bill to appropriate additional money to the state-owned airline.
Gigaba proposed that government dispose of its 39.75% shareholding in Telkom, which is currently valued at about R14.4bn, saying the sale of non-core assets is the only viable option to support SAA that will not increase the budget deficit.
The intended Special Appropriations Bill will allow National Treasury to appropriate R10bn to SAA in the 2017/18 financial year. This amount includes the R2.2bn SAA was granted on June 30.
Of the additional R7.793bn SAA will get, R6.785bn will be used to repay loans that are maturing on September 30, while the remaining R750m will be used for working capital.
Gigaba’s spokesperson Mayihlome Tshwete however pointed out that the proposed sale of government’s Telkom shares is not a “done deal”.
"This is one of the things we are exploring. The alternative is for us to look for funding in other places, without imposing on other parts of government, as we want to make sure it does not have an adverse effect on the fiscus," he told Fin24's Matthew le Cordeur.
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