Matuson races against time to rescue the national airline
Business-rescue practitioner Les Matuson has begun a race against time to restructure SAA before the cash runs out for it to continue operating.
Because SAA in its present form cannot generate enough revenue to pay for operations, the R4bn in precommencement funding from the Treasury and the banks will have to fund the gap until the airline breaks even.
Even with the tools of business rescue at his disposal, this is a tall order.
Matuson’s task is essentially to prepare a business-rescue plan in consultation with creditors, directors, management and other affected people for adoption at a creditors meeting.
As this will affect shareholder rights, it would also probably have to be approved by the government, SAA’s only shareholder. Once adopted it must be implemented on exactly those terms.
During the period of business rescue, Matuson will have full management control. While the board remains in place, it has no authority over the affairs of the company. He will have leeway to take decisions in SAA’s interests that management has not been able to.
Business rescue allows for a general moratorium on legal proceedings against the company. It also allows for the suspension of any obligations SAA took on before the business-rescue process. Usually this would include debt restructuring and haircuts for lenders. But from
the statement issued by public enterprises minister Pravin Gordhan last week, the government has already undertaken to repay all SAA’s outstanding debt
— about R9.2bn — and interest costs. The banks will not come out short in the process.
A key focus will be on the management of cash. SAA, according to documents prepared by its board and presented to parliament last week, has a cash burn rate of at least R500m a month. In the board’s turnaround strategy, SAA was projected to break even by 2020/2021.
That projection has now changed after a year of bad trading conditions, oil prices higher than expected and a global downturn in the aviation sector.
November’s strike worsened the revenue shortfall by at least R400m.
Airlines get most of their revenue upfront through ticket sales, but incur the expense only much later. It is not clear, and unlikely, that SAA will be able to maintain its former revenue levels while in business rescue.
Passengers are no longer likely to choose SAA for flights they plan to be taking in six months’ time.
With only enough funding to last at most four months, Matuson is going to have to move very fast indeed.
It is likely that the R9.2bn in debt relief that government has spread over the next three years beginning April 2020 will have to be front-loaded. Assets or stakes in assets that can be sold will have to be — even if these are state-owned companies such as Air Chefs and Mango.
There will be no more time for more debate about the merits of private participation.
SAA, if it emerges from business rescue, will of necessity be a dramatically different and probably smaller business.
Because of its dominance of the domestic aviation sector, this will have significant consequences for other businesses in the sector. The competitiveness of domestic travel — and therefore the price consumers pay for their tickets — will certainly be different in future.
The Airlines Association of Southern Africa is sounding nervous about what the end result of all this may be. CEO Chris Zweigenthal says the effect could be devastating because there is a high level of co-dependence across the industry.
The tariffs and charges in respect of the Airports Company SA, Air Traffic and Navigation Services, SA Weather Service and SA Civil Aviation Authority, for instance, are all predicated on an expected number of flights and passengers. So too are their capital expenditure infrastructure programmes.
If SAA shrinks, or eventually drops out of the picture altogether, the effect on all of these companies will be substantial, and with it the knock-on effect on other domestically operating airlines. The confidence shock could also go beyond SAA.
The entire industry value chain, from the airlines to air transport infrastructure and service providers in tourism, requires predictability. All are highly vulnerable to any sudden loss of market confidence and loss of bookings as a result of cancellations.
Domestic airlines other than SAA also rely significantly on SAA Technical (SAAT), a subsidiary that is also part of the rescue process. If SAA was to shrink too suddenly or too much, the viability of SAAT could also come into question.
These are all big constraints that will make this businessrescue process particularly challenging. Over the past 25 years, opportunities to restructure SAA, by selling a part of it in more favourable circumstances, for instance, have been missed or abused. It is terribly late in the day to be trying to do these things now.