Supplementary Budget 2020

Gordhan calls for SAA, SA Express to merge, find equity partners

(iStock)
(iStock)

Cape Town – Government has proposed merging South African Airways (SAA) with SA Express and partnering the new entity with a minority equity partner to return the ailing airline to profitability.

During his Budget address in Parliament on Wednesday, Finance Minister Pravin Gordhan said government does not need to be invested in four airline businesses.

He said Public Enterprises Minister Lynne Brown has agreed to explore the possible merger under a strengthened board, “with a view to engaging with a potential minority equity partner, and to create a bigger and more operationally efficient airline”.

Where SAA chairperson Dudu Myeni will fit in the new entity is unclear, but it will put increasing pressure on her controversial tenure, following her Airbus contract fiasco in December 2015.

Treasury said it will take a few years before SAA can become a sustainable, standalone carrier.  “In the period ahead, government will seek opportunities to enter into strategic partnerships that allow SAA to draw on private-sector capital and technical expertise to improve its performance and expand its network,” it said.

The move to merge the SOEs follows the Presidential Review Commission report on state-owned enterprises (SOEs), which Gordhan said “is a very welcome guide to the path ahead”.

“The PRC report indicates that the mandates of some of our entities overlap, some operate in markets that should be more transparently competitive and some are no longer relevant to our development agenda,” said Gordhan.

“Some are in perpetual financial difficulties,” he added. “So we must take decisive steps to ensure that they are effectively governed and that they contribute appropriately to the attainment of the National Development Plan.”

Treasury said SOEs have been draining national resources over the past five years, with SAA one of the biggest culprits of the -2.9% return on equity in 2014/15.

SAA will report a net loss in 2014/15 as a result of high operating costs, increased competition on all routes, asset impairments and higher finance costs, said Treasury. “The carrier is technically insolvent and has been achieving a going-concern status on the basis of guarantees issued by government,” it said.

Of SAA’s R14.4bn total guarantees, R13.4bn was used to raise debt finance and R1bn is to be raised before the end of the financial year, Treasury said.

“Government remains committed to stabilising SAA,” it said. “As part of a broader turnaround strategy, steps have been taken to reduce aircraft leasing costs, cease operations on some unprofitable routes and achieve procurement savings.”

 “The strength of our major state-owned companies does not lie in protecting their dominant monopoly positions, but in their capacity to partner with business investors, industry, mining companies, property and logistics developers, both domestically and across global supply chains,” said Gordhan.

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