SAA set on a crash course
The airline is technically insolvent and without new guarantees no one knows how this will end
The treasury is serving up tough love to SAA, refusing to extend more of the guarantees the carrier has become hooked on until it gets itself together. And, although SAA board chairperson Dudu Myeni seems to believe it will be business as usual without more support from the government, analysts say the complete withdrawal of state support will have serious consequences for the airline.
Myeni and SAA has become a major point of friction between what is regarded as a stand-off between the treasury, with resurrected Finance Minister Pravin Gordhan at the helm, and President Jacob Zuma. As Gordhan attempts to fend off credit-rating downgrades, resistance to reforms from board members at state-owned entities such as SAA have made this task more difficult.
Although Gordhan has made it clear that guarantees for state-owned companies can no longer be handed out like candy, it’s doubtful whether an embattled enterprise as large as SAA can survive without them.
But the airline does not only need government guarantees to access new financing, it also needs the support of the government for the auditors to sign off on its 2014-2015 annual financial statements, which were meant to have been submitted in September last year.
In February’s budget review, the treasury noted that SAA’s R14.4billion in guarantees would have been used up before the end of March. The airline has applied for a further R5-billion guarantee, which has not yet been approved. When the airline last reported in 2013-2014, SAA’s revenues exceeded R30-billion a year.
In his budget vote speech earlier this month, Deputy Finance Minister Mcebisi Jonas said the treasury needed SAA to do three things before further guarantees would be provided.
First, a full-strength board had to be appointed and, second, once appointed, it would have to finalise the appointment of competent executives in the vacant positions of chief executive officer and chief financial officer, among others. Third, the full board and executives would have to accelerate the implementation of the longterm turnaround strategy, including rationalising the airline’s businesses.
“Once all of these are implemented, government will be in a position to consider possible support that would enable SAA to table its annual financial statements for the last two years as a going concern,” he said.
But Myeni was quoted last week as saying the company has money and its aircraft are always full: “It will continue to operate without government guarantees in the future.”
The budget review in February said the airline would report a net loss in the 2014-2015 year.
“The carrier is technically insolvent and has been achieving a going-concern status on the basis of guarantees issued by government,” the review said. Technical insolvency is when a company’s liabilities exceed its assets, but it can still pay its bills. Some steps had been taken to turn the airline around, but the treasury said this would take some years for it to become a sustainable, standalone carrier.
A source with experience on the board of a state-owned enterprise said the first concern would be whether banks and other credit providers will withdraw their credit. In December last year, Citibank cancelled the airline’s credit facility.
James Geldenhuys, the head of aircraft finance at Nedbank Corporate and Investment Banking, said South African banks might have a better understanding of the circumstances and so be a bit more supportive. But suppliers would probably be less concerned about the financials (stateowned companies tend to get away with delayed financial reports more often than the private sector) but more concerned about developments in general. New suppliers may need to see the financials, but existing suppliers and banks are likely to see the carrier as quasi-government. Reluctance to do business with the airline will depend on whether there are other forms of security, Geldenhuys said.
A source familiar with aviation financing said SAA’s recently secured swap deal with Airbus (a deal to purchase 10 A320 aircraft will be swapped for a lease of five A330-300 aircraft) would not be affected because the aircraft themselves are security.
SAA’s air service licence, a condition of which is a consumer protection guarantee that must be lodged with the licensing councils, has not been affected. Its protection guarantee is in place and is valid until the end of September. Without this guarantee, SAA would not be permitted to operate on any domestic or international routes. The cost of the guarantee at the end of the 2014 financial year was calculated at R545-million.
Guarantees always have an expiry date. In the banking industry, guarantees typically expire in a year, said Geldenhuys. Although a loan can be repaid over five years, a new guarantee has to be issued each year. If this does not happen, the borrower is in default and the bank can call in the money.
“Everyone is hoping government will issue new guarantees at some point,” said aviation industry consultant Joachim Vermooten.
If SAA was forced to find cash in other ways, it could restructure itself and sell assets it doesn’t need to operate the airline, including property, its technical division and even the lowcost carrier Mango, he said.
Raising money on the market would be another option, but a company would need to have a profitable history for people to invest money in it, which would not be easy without audited financials, Vermooten said. Investors would also have to be convinced of proper restructuring and a plan of action.
The head of the University of Johannesburg’s department of transport and supply chain management, Jackie Walters, said private airline companies, such as Comair, have healthy balance sheets and finance themselves.
SAA needs to emulate a private sector company and, starting at board level, should appoint people who know the airline industry. “Governments are notoriously pathetic at running airlines,” said Walters. “SA Express wants to replace its entire fleet. You don’t do this with airlines [you phase new aircraft in over time].”
Vermooten said that if a company’s statements are not signed off as a going concern then assets and liabilities would have to be valued at a liquidation price — a rate paid in the event of a fire sale, which is lower.
The publication of these statements could trigger defaults in lease and lending agreements, in which there are usually covenants that require a business to operate on a financially sound basis, he said.
It’s not clear what path SAA might follow without the treasury in its corner.
“The Companies Act requires the directors to take a decision to place the company in business rescue once in financial distress, which SAA clearly is,” Vermooten said.
“Whatever the arrangements are with the directors, it’s very clear they are not pursuing the normal process.”
Emerging markets analyst Peter Attard Montalto said that, should SAA fail because of a lack of guarantees, Gordhan could be removed as finance minister. “President Zuma could also attempt a reshuffle on the grounds of the finance minister not acting in the national interest,” he wrote in a comment article published this week by capemessanger.co.za.
“If it were a company in the private sector, it would have been tickets,” said Vermooten. “It’s very clear it is technically insolvent, even from the financial statements from 2014. It needs a proper plan to get out of it and to become viable very quickly.”
SAA did not respond to a request for comment.