Founder: Turnaround Talk
The business rescue and turnaround professions have existed for several years in South Africa. Despite this, the professions only gained significant exposure (prominence) when South African Airways (SAA) was placed into business rescue.
Plenty of expectations hinged on the SAA rescue. South Africa was entering a significantly challenging economic environment, which the looming Covid-19 pandemic would only exacerbate. Plenty of companies would become financially distressed and eventually enter into business rescue. SAA was supposed to be the poster child to sing the profession’s praises.
However, the challenges that beset the rescue were evident from the outset. As a result, the SAA rescue would not only be challenging, but some argue that it has become farcical.
With the rescue still ongoing (some three years after the airline was placed into business rescue), significant questions are being asked about the airline’s future.
Empty promises
The News24 article points out that, increasingly, it appears the government has been making promises about SAA that it has no intention of keeping.
There are two key performance requirements for the future of SAA Version 2. The first is that it must be financially sustainable and thus meet Minister Pravin Gordhan’s promises of not requiring any further taxpayer funding.
The second is that a majority shareholding be sold to a capable and experienced private sector operator who can impose the necessary disciplines for the airline to operate profitably (and thus pay tax, instead of using it.)
It is evident that there is mounting evidence that the finances don’t add up – and that even the Department of Public Enterprises (DPE) appears not to think the Takatso Consortium takeover will happen.
The article adds that Gordhan has made numerous assurances that the airline will no longer be using taxpayers’ money. (For example here, here and here.)
However, in a parliamentary report of 25 February, we have had sight of the long hidden mess of SAA finances for the past few years and, even more tellingly, the projections for the next few years.
In The Citizen of 14 March, Hein Keyser (formerly of Mango) wrote: in January, Public Enterprises Minister Pravin Gordhan said that SAA was trading profitably. Less than a month later, National Treasury said the airline lost R50 million during the first three quarters of the 2022/23 financial year. But the budget tabled on 22 February projected SAA’s losses at R786.7 million, against revenue of R3.8 billion and expenses of R4.6 billion.
The News24 Article points out that, significantly, for 2023/24 for the 24/25 financial years, the budget projections make no mention of the R3 billion operating capital Takatso is supposed to be injecting into the airline as its dowry. This raises the questions as to whether government already thinks that the Takatso deal is never going to happen.
Image By: Waldo Swiegers / Bloomberg
The article adds that the revenue growth projection presented to Parliament are, by any reasonable standards, wishful thinking. Wayne Duvenage of the Organisation Undoing Tax Abuse (OUTA) says: “I don’t believe SAA will achieve the growth and revenues budgeted for over the next three years. R13 billion income by 2024/25 from R3.5 billion this year?”
Optimistic budgeting is one thing – but cash flow is king and here SAA falls down badly too. SAA’s projected R3.3 billion negative cash further confirms that the airline is not sustainable without ongoing taxpayer support. This is where the R3 billion Takatso dowry would be really helpful.
Ignoring the real red tape
The News24 article points out that Gordhan previously promised to complete the long delayed Takatso consortium takeover at the end of March 2023. This is a deadline he gave for the fulfilment of all the regulatory and compliance hurdles. Competition Commission approval is the easiest of the hurdles.
Reality checks show more difficult and time-consuming challenges.
Reality Check 1:
A hitherto ignored obstacle to the Takatso deal is that the South African Airways Act (Act, 0) would have to be changed. Legal counsel asserts that the “SAA Act in its present form does not contemplate any shareholders other than the State”. In the normal course of Parliamentary work, the amendment of an Act may take longer than a year.
Reality Check 2:
SAA requires licences to operate: The two key licences are an Aircraft Operators Certificate (AOC) and an Air Services Licencing Council (ASLC) approval. The Civil Aviation Authority (SACAA) issues AOCs and a simple amendment can take 6-18 months. Legal counsel says that this will be necessary if key figures such as the CEO or safety postholders change with the Takatso takeover. Yet the SACAA confirms that as yet, “No application regarding the [SAA] AOC amendment has been made.”
Reality Check 3:
A Takatso takeover will naturally involve a change of directors, which the Air Services Licencing Council (ASLC) will have to approve. There is also a question mark as to whether SAA’s air route rights would need to be revalidated by the ASLC. My enquiries reveal that no application has been made to the ASLC for a pending change of ownership.
What of the future?
The News24 article points out that, despite the red ink all over the financials, as South Africa’s “flag carrier” SAA is committed to resuming long-haul flights. Yet SAA currently has only two airliners capable of performing long-haul routes. These are an obsolete Airbus A340-300 and a slightly newer Airbus A330-300. These aircraft have terrible fuel consumption and ancient in-flight entertainment systems which will struggle to compete with the more modern A350s and Boeing 787s operated by the other airlines.
Since government presumably doesn’t have the money to spend around R5 billion for each new long-haul aircraft, they will presumably have to be leased. After SAA’s business rescue it is safe to assume that these leases will be at high interest rates and will have to be underwritten by our non-investment grade government.
Further, if it is to get back into long-haul flying, it simply doesn’t have the route network left anymore. What diminishing market share it had, has been lost over the past three years to other operators who stepped into the gap left by SAA and are able to operate these routes far more efficiently.
The article adds that there is enormous resentment amongst the South African taxpayers against the vast waste that SAA has cost the state. Add in the perceived safety risk and SAA will no longer be the first choice for travellers. This means it will have to compete on price – which against far larger and more cost-efficient carriers is a recipe for continual bailouts.
Image By: Steve Buissinne via Pixabay
Clarity if you please
One of the biggest challenges of the business rescue/turnaround process is the time it takes to implement a business rescue or turnaround plan. Despite the calls for early intervention, bureaucracy slows the process down.
All stakeholders in the SAA rescue need to sit down and clarify their intent for the airline’s future. Many countries worldwide have proved that a different approach needs to be taken to ensure the sustainability of airlines. The airline cannot sit in perpetual purgatory.
