Aviation experts explain why 'bizarre' SAA draft rescue plan cannot fly

SAA (Supplied)
SAA (Supplied)

Of the several stories that have dominated South Africa's daily discourse over the period of the lockdown, the fate of South African Airways has been an ever-present feature.

With airlines grounded for the majority, its already tenuous position has become more dire by the day as business rescue practitioners and its sole shareholder and biggest creditor decide on its future.

This coming Monday, the practitioners intend to deliver a long delayed rescue plan for the struggling airline that will be voted on. A proposed draft of the plan, seen by Fin24 calls, for taxpayers to cough up about R4.6 billion more to save the debt-laden struggling national flag carrier.

Furthermore, it does not say how provision will be made for a further about R20 billion in losses foreseen during the first three years of operation.

The proposal only calls for a further working capital injection of R2 billion to restart the airline after the coronavirus pandemic is over; R2 billion for retrenching about 48% of SAA's about 5 000 employees; and R600 million to be distributed to general concurrent creditors. This is in addition to R16.4 billion already allocated to the national airline in past budgets for the repayment of historic guaranteed debt.

Unrealistic

Aviation economist Joachim Vermooten was underwhelmed by the practitioners' draft plan and felt it was unrealistic.

Aircraft numbers are expected to be cut by half within the first two years, according to the draft plan, yet revenue levels will be roughly maintained as a result of significant increases in fares and revenue per passenger. Such a large increase in fares will be difficult to achieve in competitive markets, he argues.

He also questions why the draft plan proposes waiting until year three before down scaling the airline as the draft plan envisages substantial losses of R19.9 billion in the first three years and only projects marginal profitability based on what appears to be unrealistic unit revenue increases.  

"The plan does not stipulate what will make any new airline different in terms of business model, management mandate or approach than have been the case in the past," says Vermooten.

Any new start-up airline envisaged would also create substantial start-up losses due to the operation of relatively large capacity aircraft and insufficient demand caused by travel restrictions as airlines would not merely pick up where they left off before the Covid-19 grounding orders.

Furthermore, Vermooten points out that the plan does not deal with the Covid-19 period during which SAA almost does not earn any revenue and only incurs costs. This while, in many other countries governments have provided specific Covid-19 assistance to their aviation industries, but so far that has not been the case in SA.

'Bizarre plan'

One of the experts, who spoke to Fin24 on condition of anonymity, finds it "bizarre" that the draft plan can even be described as a "rescue plan" for SAA.

"Honestly, they are going to struggle to find a private equity partner who is going to be happy to burn through R20 billion before anything happens."

What is also not clear for this expert from the draft plan, is whether it deals only with SAA or includes its subsidiaries low-cost airline Mango, SAA Technical and Air Chefs. Given the fleet size mentioned in the draft plan, he assumes only SAA is being delt with as only SAA is in business rescue, not its subsidiaries.

"The plan seems to indicate that SAA will rationalise its fleet and move into what the numbers say will be a move to a long haul only business from year three to four," says the expert.

According to another source with inside knowledge of SAA's operations, the draft plan mentions cost savings due to the section 189 retrenchment process. That process has been put on hold due to a Labour Court appeal by the practitioners in the matter of having had to halt the process due to unions the National Union of Metalworkers of South Africa (Numsa) and the South African Cabin Crew Association (Sacca) having obtained a court order stipulating that a rescue plan must first be tabled.

"The only savings related to employment costs SAA has at the moment, is the fact that it has not been paying salaries since 1 May," says this expert.

An aviation analyst, who also wouldn't be named, is of the view that three things would be needed for a business rescue plan for SAA to be successful - and he thinks all three these will be "impossible" to achieve.

"The appointment of a management team with expertise in running a modern international airline is unlikely; making South Africa the geographic gateway to the rest of the continent is difficult due to the geographic location and headway made by the likes of Ethiopian Airlines over the last 10 years; and achieving the same cost per seat as global competitors do on their enormous economies of scale will be hard," he concludes.

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