The days of Government bailouts are numbered for some

Yesterday, Turnaround Talk published an article which pointed out that Government has bailed out SOEs to the tune of R233.6 billion and have only received a return on investment of R1 million. And that was from an SOE that Government offered no bailout money.

We then questioned the future standpoint that Government would take when it comes to these requests. Will it continue with its Rubicon approach of providing bailouts to these institutions despite their poor performance (because it has set an untenable precedent), or will it take the Biblical approach of refusing to adhere to further requests?

As with everything in South Africa, Government is very much taking a horses-for-courses approach when it comes to this. I listened to an interview between Jeremy Maggs and interim SAA CEO Professor John Lamola with great interest. According to Lamola, the days of Government bailouts for SAA are gone.

Surviving but not thriving

Jeremy Maggs: While South African Airways (SAA) has posted a modest profit, its chief executive officer John Lamola, says an equity partner is still necessary. He says the carrier is operationally surviving, but it’s not commercially thriving. Professor Lamola, a very good afternoon to you, can you explain the difference?

John Lamola: The difference is that South African Airways is in a state of transition, as is well known, that we are in the throes of having a strategic equity partner to take South African Airways into a higher scale of operations. The envisaged South African Airways should be able to have the number of aircraft – as well as the route network – that will enable it to fulfil its role as a national carrier that does intercontinental routes and … will be a commercially viable company that can compete with global companies. Currently, we are just keeping South African Airways operationally viable, which we have managed to do successfully.

Jeremy Maggs: What is the status, professor, as far as the consortium deal is concerned? And it seems to still be delayed, what is the reason for that?

John Lamola: The reason, as we understand it, is essentially regulatory, the Competition Commission in particular, where now things have gone from the Competition Commission to the tribunal. Beyond that, there are a number of traditional commercial conditions precedent that the Department of Public Enterprises and the Takatso Aviation people are working on. From there, will be minor aviation regulatory approvals that will be required as there will be some change of control in the airline’s management. But it’s all systems go from what we understand.

Frustrating growth ambitions

Jeremy Maggs: But the fact, professor, that this deal is taking such a long time to conclude, is that frustrating your growth ambitions to take you to that higher scale that you were referring to?

John Lamola: Indeed, it is a serious frustration. But we have turned that frustration into a strategic posture where we as the management of SAA have somehow insulated ourselves from all the complications relating to the Takatso consortium and have focused on a strategy of getting South African Airways operationally viable …

We have rebuilt South African Airways from where it was when it went into business rescue as a totally different airline with a different culture and some kind of a trajectory that has redefined the size of South African airways that we will have.

Survival strategy

Jeremy Maggs: Professor, can SAA survive long-term without the consortium deal, and if it falls through, what is your survival strategy?

John Lamola: South African Airways will survive [just] as any business. We have within ourselves a responsibility to ensure that the business is successful. South African Airways has just closed its financial year, for instance now at the end of March, where we were able to post a profit, both operational profit as an airline and a net profit as a group of companies. We have a strategy. We are growing our fleet. We have a route network that goes into the year 2026 and we are implementing that.

Jeremy Maggs: You did show a small operating profit, but in terms of your balance sheet, professor, how much historic debt is the airline still carrying and what are the plans to pay that off?

John Lamola: South African Airways’ balance sheet has essentially been overhauled by the business rescue process. SAA is technically solvent, there is no debt as such sitting on SAA’s balance sheet.

The outstanding funds that are expected for the business are ring-fenced as part of the business rescue plan.

Those monies currently, so there’s R1.5 billion that is still awaited from National Treasury to conclude the business rescue plan, those funds are not going into the operations of SAA as such, except for the issue of the unutilised ticket liability, which are the air tickets of people who were flying between 2016 and until Covid 2020, when SAA went into business rescue. All of that has been ring-fenced into a receivership, as it is called, under the business rescue plan.

Categorical conclusion

Jeremy Maggs: Professor, aside from that R1.5 billion that you’re still waiting for from Treasury, can you state categorically that the era then of government bailouts is over for the airline?

John Lamola: Absolutely, that is an absolute emphasis and statement from the shareholder, from the government, and we have emerged since September 2021 with a plan that South African Airways will survive from its own cash generation. We have been able to generate R5 billion cash, plus during this past financial year when in business rescue only about R2 billion was provided for SAA working capital, and we’ve been able to a show profit out of that and to lease, growing our fleet from the original six aircraft to where we are now getting close to a total of 12 aircraft without any government support or guarantees.

Jeremy Maggs: But professor, you still remain under pressure. You’ve been quoted as saying that every month the South African market is being cannibalised by the growth and buoyancy of the industry and particularly global airlines that you claim are cannibalising the South African market. What does that mean and what particularly can you do about it?

John Lamola: That statement I made didn’t necessarily or doesn’t necessarily focus on South African Airways as such, but it is a view of the South African airline and aviation industry because remember …

Jeremy Maggs: Of which you are part of, professor.

John Lamola: Yes, of which we are part of indeed. We, as South African Airways who are in a better position than our competitors in that we are having this backup that we’re hoping will materialise with a strategic equity partner, where R3 billion will be put into South African Airways …we believe that the sooner that is concluded, the better and then we’ll be able to scale up South African Airways to a point where we’ll be able to not only defend, but also expand our market share.

Don’t run to the betting shop

I put a section of Lamola’s comment to Maggs in italics because it contains an important caveat. Does the fact that there will be no more Government bailouts for SAA mean that there will be no more Government bailouts for all SOEs?

Don’t bet the house on it.

Government can ill afford to take this approach with the infamous Eskom, especially at a time when the stability of the beleaguered utility hangs by a thread and is one significant cold front away from total collapse. However, the writing is on the wall. South Africans have taken matters into their own hands. Solar power is more accessible to property owners and businesses alike. New green producers will generate more electricity than Eskom by 2025. This is both good and devastating news for Eskom. On the one hand, this will mean that there will be significantly less demand on the national electrical grid. However, it also means that there is a business case for clients to jettison Eskom altogether, and when that happens, will Government still reward gross mismanagement?