POUR­ING BIL­LIONS INTO A BLACK HOLE

In the week of the fi­nance min­is­ter’s new bud­get, it emerges that SA Ex­press is los­ing R1m a day of tax­pay­ers’ money

CityPress - - Front Page - SIPHO MASONDO sipho.masondo@city­press.co.za

There is no strate­gic rea­son they should not shut it down

SA Ex­press is los­ing more than R1 mil­lion a day, pay­ing leases on air­craft that lie idle in hangars be­cause they are too un­safe to fly. In the week that Fi­nance Min­is­ter Tito Mboweni an­nounced a R1.2 bil­lion bailout for the sink­ing state-owned air­line, five se­nior avi­a­tion sources close to SA Ex­press man­age­ment told City Press that in the five months since it was grounded, the com­pany has paid about R150 mil­lion to lease 21 air­craft.

About R80 mil­lion of that was used to pay for 13 air­craft which have not flown for five months. Most of them may never fly again be­cause they are scrap, the sources said.

As Pres­i­dent Cyril Ramaphosa se­cured more than R290 bil­lion in in­vest­ment in the coun­try’s ail­ing econ­omy on Fri­day, many mil­lions of rands are be­ing drained out of it – mostly by state-owned en­ti­ties.

SA Ex­press is the lat­est in a string of gov­ern­ment com­pa­nies drain­ing bil­lions from the fis­cus through bailouts and guar­an­tees.

On Wed­nes­day, Mboweni an­nounced a R5 bil­lion bailout for SAA in ad­di­tion to the R1.2 bil­lion bailout for SA Ex­press.

Last month, City Press re­ported that SAA was con­sid­er­ing sell­ing off as­sets as its debts out­stripped what it owned by R15 bil­lion.

In May, the Civil Avi­a­tion Au­thor­ity (CAA) grounded SA Ex­press’ en­tire fleet af­ter a safety au­dit un­cov­ered “se­vere cases of non­com­pli­ance” which posed “se­ri­ous” safety risks to its pas­sen­gers.

MIL­LIONS DOWN THE DRAIN

City Press has cal­cu­lated that in June and July, SA Ex­press paid about R50 mil­lion to lease its 21 air­craft, none of which flew a sin­gle flight in those two months.

At the end of July, the CAA granted SA Ex­press air­wor­thi­ness cer­tifi­cates for two air­craft. And by the end of last month, the reg­u­la­tor au­tho­rised the air­line to fly eight air­craft.

Two of the sources said this meant that the amount of money that SA Ex­press was pay­ing for “scrap air­craft” sit­ting in the hangars be­tween Au­gust and the end of this month was es­ti­mated at R40 mil­lion.

A se­nior avi­a­tion source said: “SA Ex­press does not own any air­craft. They are leas­ing all those air­craft. It sim­ply means that whether they are fly­ing or not, they have to pay for those lease agree­ments.

“Since they were grounded, they have been pay­ing for air­craft that they are not able to fly.

“It is like tak­ing R40 mil­lion worth of tax­pay­ers’ money and pour­ing it into a black hole.”

THE COSTLY SCRAP AIR­CRAFT

The sources said SA Ex­press was sit­ting with a dilemma in that, when it was grounded in May, the of­fi­cials had to “can­ni­balise” some of the air­craft in or­der to get oth­ers back in the air.

“Lease con­tracts in the avi­a­tion sec­tor are done in such a way that at the end of the agree­ment, the lessee has to re­turn the air­craft to the owner in the con­di­tion in which it leased them,” said one.

“But now SA Ex­press can­not do any­thing with the 13 scrap air­craft. They can’t fly them be­cause they are not air­wor­thy. They can’t fix most of them be­cause they don’t have the money to do so. But they also can’t re­turn them be­cause the owner will only take them if they are in the con­di­tion in which he leased them to SA Ex­press.”

In ad­di­tion, a portion of the lease pay­ment is set aside for main­te­nance – but SA Ex­press’ poor fi­nances have meant that it needed to dip into that money, which is now no longer avail­able for main­te­nance.

A se­nior ex­ec­u­tive at SA Ex­press’ sis­ter com­pany SAA said the trou­bled paras­tatal was “pay­ing for air­craft that are not gen­er­at­ing rev­enue”.

“That is bad for busi­ness. The sit­u­a­tion at SA Ex­press calls for hard bar­gain­ing and ag­gres­sive com­mer­cial ne­go­ti­a­tions,” he said.

“The ex­ec­u­tives there have a few op­tions: Get those air­craft back in the air as soon as pos­si­ble, or ne­go­ti­ate them­selves out of those lease agree­ments. They can go to the lessors and ask them to take back their air­craft, end the agree­ments and take the penal­ties.

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“They can also look at the scrap air­craft’s book value, buy them and write them off,” said the se­nior SAA ex­ec­u­tive.

A for­mer act­ing SAA chief ex­ec­u­tive said he was well aware of the prob­lems at SA Ex­press.

“I am not sure if they will be able to re­pair all the air­craft on the ground to the point where they are able to fly again. It is un­likely that they will be able to re­turn all of them back to air,” he said.

“They have taken parts from many of those air­craft to fix the ones in the air. In the avi­a­tion sec­tor we call that ‘rob­bing parts or com­po­nents’.”

The for­mer ex­ec­u­tive said he hoped SA Ex­press’ man­age­ment team could turn the air­line around. “Tech­ni­cally, the guys they have there are good. I have worked with some of them ... But I won’t lie to you, things are not look­ing good.”

The air­line has also not pre­sented its lat­est fi­nan­cials to Par­lia­ment, which it should have done by the end of Sep­tem­ber, be­cause its books are in sham­bles.

The SA Ex­press fleet con­sists of 10 Bom­bardier Q400, eight Bom­bardier CRJ200 and four Bom­bardier CRJ700 air­craft.

AN­OTHER BAILOUT

A man­ag­ing di­rec­tor at one of SA Ex­press’ com­peti­tors, who ben­e­fited from the air­line’s ground­ing by cap­i­tal­is­ing on its un­ser­viced routes, said the R1.2 bil­lion bailout that Mboweni an­nounced this week was not enough to haul the state-owned com­pany out of the woods.

“The R1.2 bil­lion will help ad­dress his­toric debt, but it is not enough to take the busi­ness for­ward,” he said.

“SA Ex­press will carry on run­ning at a loss and the debt will get big­ger and big­ger. The debt on its bal­ance sheet is about R2 bil­lion. Even if gov­ern­ment paid that to­mor­row, it will still need to re­cap­i­talise the busi­ness.”

The gov­ern­ment has two op­tions: put more money into SA Ex­press or shut it down com­pletely, he added.

“The prospect of that busi­ness re­turn­ing to prof­itabil­ity is not that good, and there is no strate­gic rea­son why they should not shut it down.”

The se­nior SAA ex­ec­u­tive agreed that Mboweni’s bailout was in­suf­fi­cient, and said gov­ern­ment should rather close down SA Ex­press and ac­quire a larger stake in pri­vate air­line SA Air­link.

“SAA al­ready has a 4% stake in SA Air­link, and if we buy a big­ger stake in the com­pany, we could use it as a feeder air­line for SAA not only in the coun­try, but also across the re­gion,” he said.

South Africa’s avi­a­tion sec­tor, the SAA ex­ec­u­tive said, would only sur­vive through strate­gic ac­qui­si­tions, al­liances and part­ner­ships.

An­other for­mer ex­ec­u­tive at SAA agreed that SA Ex­press was an un­nec­es­sary drain. “Is SA Ex­press fit for pur­pose? The an­swer is no. It has been strug­gling to make money, even when it had no se­ri­ous com­pe­ti­tion,” he said.

“Not only is the air­line not sus­tain­able, but it is also not re­quired. Try­ing to keep it up is like throw­ing money into a black hole.”

An­other highly placed avi­a­tion source said tax­pay­ers should brace them­selves for the state fork­ing out an­other R2 bil­lion in bailouts for SA Ex­press – be­cause the banks have re­fused to lend the air­line more money, de­spite a R1.74 bil­lion gov­ern­ment guar­an­tee an­nounced by Pub­lic En­ter­prises Min­is­ter Pravin Gord­han in Au­gust.

WHAT SA EX­PRESS SAID

SA Ex­press spokesper­son Madikwe Mabotha said the air­line had made sig­nif­i­cant progress since it was grounded in May.

“Re­turn­ing from three months’ lay-off to full op­er­a­tion was never go­ing to be easy,” he said. “The ground­ing cre­ated a huge mar­ket gap in the in­dus­try that quickly opened up an op­por­tu­nity for our com­peti­tors to ex­ploit.

“So far, SA Ex­press has re­launched a to­tal of seven ma­jor lo­cal and re­gional routes, fo­cus­ing on des­ti­na­tions with prof­itabil­ity po­ten­tial by of­fer­ing im­proved fre­quency at tim­ings that suit our cus­tomers. They in­clude, among oth­ers, Jo­han­nes­burg to Lubum­bashi in the Demo­cratic Repub­lic of Congo; Walvis Bay, Namibia; Bloem­fontein; Kim­ber­ley; Richards Bay; and Hoed­spruit, with more routes to come early next month.”

Mboweni’s R1.2 bil­lion bailout would help the com­pany set­tle some of its debt and re­turn to fi­nan­cial sta­bil­ity, Mabotha said.

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