ANALYSIS | SAA may see a rainbow, but the DPE still needs a pot of gold

A view of SAA airplanes at Cape Town International Airport on February 18, 2020.
A view of SAA airplanes at Cape Town International Airport on February 18, 2020.
Gallo Images/Jacques Stander
  • A proposed business rescue plan for SAA was accepted by the majority of apportioned votes required of independent creditors on Tuesday. 
  • The plan requires the R10.3 billion over a three-year period, while working capital of about R2.8 billion is needed to get the airline operating again during July and August.
  • Analysts are skeptical about obtaining funding, as the aviation industry has been decimated by the coronavirus pandemic and private investors are unlikely to want to invest if government retains control of the airline. 

Just what kind of funding rabbit the Department of Public Enterprises manages to pull out of the hat for a "new" South African Airways could become clear on Wednesday.

A proposed business rescue plan for the state-owned airline was accepted on Tuesday. In terms of the voting apportionment allocated to creditors by the rescue practitioners according to the sum of their claims against the airline, there was an 86% vote in favour of accepting the rescue plan.

This has seemingly given SAA a lifeline to avoid liquidation, but with the big caveat of obtaining the necessary additional funding - about R10.3 billion.

Creditors were also informed by the rescue practitioners that the DPE has undertaken to provide a letter indicating that funding for implementing the rescue plan has been obtained. The deadline for submitting such a letter is 15 July, otherwise the rescue practitioners could declare the plan "unimplementable". Furthermore, the practitioners have requested that any such letter be co-signed by National Treasury.

The plan requires the R10.3 billion over a three-year period, while working capital of about R2.8 billion is required to get the airline operating again during July and August.

"A new, restructured, competitive airline, born out of the old, is the best option to immediately take back to the skies and preserve the brand of a national carrier," the department said in reaction to the plan having been accepted.

The big question

So, the big question remains: where will the money come from? Government has already bailed out SAA - which went into business rescue at the beginning of December 2019 - to the tune of R30-billion in taxpayers' money over the last decade. Finance Minister Tito Mboweni provided no funding for SAA in his recently announced supplementary budget.   

Cabinet has already recently expressed its support for the DPE's efforts to try and mobilise funding for the rescue plan from various sources, including potential strategic equity partners.

Yet, many industry experts remain skeptical about whether any suitable equity partner could be forthcoming from the private sector. They say this is due to, on the one hand, the coronavirus pandemic having devastated the local and global airline industry, and, on the other hand, private investors being unlikely to want to invest if government retains control of the airline.

For economist Peter Attard Montalto, head of capital markets research at Intellidex, it seems SAA's creditors decided to go with the "slim chance" of success of a new airline rather than liquidation.

"It remains to be seen exactly whether National Treasury will provide concurrence to any DPE letter to the rescue practitioners on funding. Equally, there is deep skepticism if any real strategic equity partner exists," says Montalto.

Negative signal

In Montalto's view, ultimately the funding decision will be political in nature.

"National Treasury will no doubt be very much aware of the negative signal funding SAA will send and the dangerous precedent for all state-owned company employees being backstopped by the state now," he cautions.

Aviation expert Linden Birns of Plane Talking agrees that how a restructured SAA is funded will be a matter of credibility for the country in the eyes of the international finance community - particularly in terms of the ability of President Cyril Ramaphosa's administration to show fiscal discipline.

At the same time, he notes, given the uncharted territory in which the airline industry finds itself due to the pandemic, no one has any idea yet about the plausibility of projections made in the rescue plan.

Furthermore, he asks why government should provide financial assistance only to SAA and not to the whole of the aviation industry in the country.

For Gidon Novick, founder of and former co-CEO of Comair, who has recently indicated that he plans to start a new domestic airline, it would be a tragedy for South Africa if Treasury were to approve further "wasteful billions on an unjustifiable, outdated and mythical dream of a viable government airline".

"This industry, which serves the top 5% wealthiest South Africans, has been more than adequately serviced by tax paying, privately funded airlines," commented Novick.

Expensive dud?

For Alf Lees, the DA's member of Parliament's Standing Committee on Public Accounts, by approving the rescue plan, SAA's creditors "completed the 'grand financial heist' to reap millions of rand in taxpayers' money, while saddling the fiscus with an expensive 'dud' disguised as a new airline".

In terms of the plan, concurrent creditors will get 7.5 cents in the rand. One such creditor, who wants to remain anonymous, says the acceptance of the rescue plan means the four major banks - which hold government guarantees totalling R16.4 billion and formed the largest voting bloc - have effectively voted in favour of a plan in which a "new SAA" will be funded by creditors, who happen to be the same banks' customers as well.

Unions: New era, please

For Derek Mans, Solidarity's organiser in the aviation industry, the acceptance of the plan shows that government will continue to only financially assist state-owned enterprises, and not the broader aviation industry.

"We think there is no strategic equity partner available and SAA will continue to get money from the fiscus - taxpayers. That is the sad part," said Mans.

For the South African Transport and Allied Workers Union (Satawu), it is devastating that the process of salvaging the airline "from the ruins of corruption and maladministration" demands that its component parts to be downsized to the bone.

"Apart from drawing lessons from the previous SAA, the reconstructed airline has the potential to create balance between government, labour and business," Satawu said in a statement.

The National Union of Metalworkers of South Africa (Numsa) and the South African Cabin Crew Association (Sacca) - representing the majority of SAA employees - said it would deal with "shortcomings" in the plan in due course.

"Crucial to the success of a restructured SAA is a complete break with the past, especially with respect to past management and executives who were ultimately responsible for SAA's demise," Numsa and Sacca said in a statement.

The National Transport Movement wants to see transformation, improved working conditions, the eradication of "some unfair discrimination" at SAA, the avoidance of using "sporadic" consulting companies, and the avoidance of "job for pals", and corruption going forward.

For Captain Grant Back, chairperson of the SAA Pilots Association (Saapa), the approval of the plan must usher in "a new era of transparency and accountability at the airline", if SAA is to succeed. Saapa has repeatedly emphasised the value and necessity of competent leadership with experience in the industry.

"Our primary objectives over the last seven months have been to save jobs, to reduce the reliance on the fiscus and to work towards a revitalised airline in a way that retains cost flexibility while carrying no risk," said Back. Saapa wants to see SAA take to the skies as soon as possible as a globally competitive airline contributing to SA's economy.

During the creditors' meeting, Kgathatso Tlhakudi, acting director general of the DPE, indicated that the department would be announcing the interim board of the "new SAA" soon. The interim CEO for the airline will be Phillip Saunders, currently SAA chief commercial officer.

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