Opting to liquidate embattled South African Airways, which went into voluntary business rescue in December last year, is not simply an easy way out.
This is according to aviation economist Joachim Vermooten, who argues that the cost of SAA's possible liquidation is, as yet, difficult to determine. This is because SAA's annual financial statements, which should have included assets and liabilities valued at net realisable values, have not been made public, as is required by law.
It is estimated that over approximately 14 years, the state-owned flag carrier has incurred over R28 billion in cumulative losses, though it has repeatedly been given lifelines thanks to government assistance or guarantees. In Budget 2020, for example, SAA was allocated R16.4 billion, of which R11.2 billion was for the airline's debt servicing costs.
What again raised the bets on an imminent liquidation was the Department of Public Enterprises (DPE) informing the business rescue practitioners (BRPs) on Friday last week that it had turned down a request for an additional R10 billion in funding. The BRPs were told in a letter that they would have to continue with the business rescue process with whatever resources are available.
A report on SAA is now expected to be announced on Monday.
"The liquidation of SAA would reduce future ongoing operational losses but will require payments of debt incurred under the government's tenure of ownership and some administrative costs," says Vermooten.
Liquidating an SOE
Vermooten believes the liquidation of a state-owned enterprise (SOE) - like SAA - differs from the liquidation of ordinary companies, in that creditors - customers, suppliers and employees - rely on the so-called implicit guarantee of ongoing funding by the state. Therefore, their claims cannot simply be avoided as would be the case with unsecured creditors in a conventional company, in Vermooten's view.
In looking at the actual cost of liquidating SAA, one should also take into account the impact on SA's post Covid-19 recovery plan. Vermooten emphasises that civil aviation networks are essential for SA's economy. In his view, state financial assistance on a non-discriminatory basis to all airlines pro-rata to their market shares before the regulatory grounding orders and lockdown should be part of the country's economic recovery plan.
For example, SAA was able to repatriate a number of South Africans who were stranded overseas, and is continuing with cargo flights, including of essential medical supplies to fight the pandemic.
Brian Pearce, chief economist of the International Air Transport Association (IATA) recently commented that there is still significant demand for cargo flights, but this could slow down as the global recession increasingly sets in. It also does not make up for the revenue shortfall from the lack of passenger travel.
The impact of the coronavirus pandemic on the South African airline industry could amount to 10.7 million fewer passengers transported and a loss of about R40 billion ($2.29 billion), according to the recent projections by IATA. It made the projections presuming the coronavirus restrictions are not prolonged and airlines are allowed to start flying again.
No other way
But Analyst Peter Attard Montalto of Intellidex is convinced that SAA's path to liquidation is now set.
"Whilst it was inevitable, the timing was always in doubt, as the DPE scrabbled for money to keep the undead alive and National Treasury tried to kill it off. Treasury has won and this is a rare piece of positive news," says Montalto. "We expect (the BRPs) to wait a short while but will ultimately be forced to apply to the court for liquidation. This if leasing companies don't ground the fleet first on a view the situation is not rescuable." He says there are debates over how much liquidation would cost – ranging from R2 billion to R60 billion. This is taking into account that most of the repayment of outstanding guaranteed debt has already been appropriated in the national budget.
Other creditors that come to mind for Montalto include Comair, to which SAA still owes about R700 million as part of a court settlement, as well as money likely owed to travel agents with outstanding bookings.
"There is currently a stay on all creditor action under the BRP process, but the flood gates will open as liquidation occurs. For investors the key is that banks don’t accelerate their claims given already appropriated money from National Treasury and that liquidation cost itself is low," says Montalto.
But is that the real issue?
For Vermooten, the key issue relates to the scale of activities that should be operated by a "post business rescue SAA".
In his view, some other options for the BRPs could include the sale of SAA's subsidiary Mango and SAA Technical to raise some money. They could also opt to dispose of equipment that would not be used in the future.
Another option could be to "restart a new SAA" with a smaller international network. He believes this could be majority funded by new investors, which could include large international airlines and with the SA government holding a minority stake.
Alternatively, SAA could be "restarted" as a smaller international franchisee airline under contract with a large international airline. Both of these options would, however, require a change in legislation to allow larger foreign direct investment into South African airlines.