Can SAA soar without its wingman?

The government’s effort to nail down a strategic equity partner with fat pockets hasn’t worked out. But if the national carrier cleans up its financial act, it could still be in with a chance

When Public Enterprises Minister Pravin Gordhan announced that the Saa-takatso deal had fallen through, he assured the public that the national carrier would be able to negotiate future turbulence.

This may be true. But, as the state sets its sights on SAA’S expansion, the airline will have to find funding — which could be difficult to come by given its risk profile.

Announcing the government’s decision to call off the SAA sale last Thursday, Gordhan said his department is convinced that the airline has the ability to sustain itself for the next year to 18 months.

Gordhan also gave assurances to the airline’s staff, telling them not to worry about their jobs.

“We will ensure that we work with the board and management before the elections — and the next administration will do so after the elections — to continue to support the sustainability of SAA,” he said, referring to national and provincial elections set for 29 May.

The airline has come a long way since just over four years ago when it became the first state-owned enterprise to go into business rescue.

SAA’S financial woes were well documented at the time. The airline had struggled to pay its employees and speculation was rife that it would be shut down.

When SAA exited business rescue in April 2021, it was a far leaner airline.

The business rescue practitioners slashed SAA’S employee headcount from 5 000 to fewer than 1 000 and its fleet was reduced from 46 to just six. The restructured SAA would still have to come to grips with an aviation market that was reeling from the devastating effect of the Covid-19 pandemic.

Enter the Takatso Consortium, which Gordhan said would help bring about a sustainable national airline.

“The new SAA will not be dependent on the fiscus. It will be agile enough to cope with the current uncertainty, and improvement, in global travel … We want to relaunch SAA as an iconic South African brand and are confident that we have the right partner to achieve this objective,” the minister said during a briefing on the government’s chosen strategic equity partner.

Takatso was expected to inject R3 billion in working capital into the restructured airline.

Last Thursday — when, almost three years after the Takatso deal first was announced, Gordhan confirmed that it had fallen through — the minister reiterated that SAA will not get any more bailouts from the treasury, noting that “there are various other ways in which immediate financing can be obtained”. Since 2018, the government has injected R38.1 billion into SAA.

“So we want to make that clear. There is no going back to the past,” Gordhan added.

“There is no reliance on government itself. It must run its operations as efficiently as it can and as profitably as it can and sustain itself as we go forward.”

It is difficult to tell exactly what kind of shape SAA is in today without having sight of its finances.

But the auditor general has recently painted a grim picture of the airline’s sustainability, noting in a report to parliament that the process of pinning down a strategic equity partner appears to have been a distraction in efforts to rebuild SAA’S governance and accounting structures.

The airline lost most of its finance staff while it was under business rescue, according to the auditor general.

The audit of SAA’S 2022-23 financial statements are expected to be completed at the end of this month.

Speaking to the Mail & Guardian in the wake of last Thursday’s announcement, aviation expert Linden Birns noted the government’s ambitions to expand SAA’S fleet and routes.

“That’s quite a capital-intensive exercise,” he said.

Gordhan did not make clear what SAA was going to address the funding gap that Takatso’s working capital was meant to fill, Birns added.

He noted that although SAA’S revenue is in rands, the airline is operating in a dollar-denominated industry, a fact which makes it vulnerable to the local currency’s weakness.

“Of course, if you’re going to start opening up routes, intercontinental routes, it’s not just about flying the aeroplane, it’s also about having the infrastructure and staff there … So it’s a big open-ended question,” he added.

There is also the question of how the market — lenders, lessors, underwriters et cetera — perceive SAA’S risk, given the auditor general’s appraisal of the airline’s financials, Birns noted.

But Phuthego Mojapele, another aviation expert, was quite bullish about SAA’S prospects, noting that the airline’s management, led by interim chief executive John Lamola, has successfully steered it through turbulent market conditions.

“With the introduction of the Perth route, as well as one to São Paulo, Brazil, it clearly demonstrates that they had a plan in place should Takatso be there or should it not be there,” Mojapele said.

“So all that needs to happen now is for them to reactivate the plan based on Takatso not being there, which is something they have been working on for a long time.”

Mojapele noted that SAA is well positioned when it comes to the African market, later adding that there is a good case for the airline to expand its routes beyond the continent — particularly for reprising its London and New York flights.

The fact that SAA has burnt aircraft lessors in the past means the airline may need a government guarantee if it plans on expanding its fleet, Mojapele said.

Like Birns, transport economist Joachim Vermooten noted that it is difficult to assess SAA’S prospects in the absence of its financial statements.

That said, if SAA is to see through the state’s expansion ambitions, it will need an upfront capital injection, according to Vermooten. “Otherwise its start-up losses will start to overload it … If it’s smaller, it is more controllable,” he said.

On the market’s perception of SAA, Vermooten said the airline needs to sort out its finances. As the auditor general’s report suggests, this will require an investment into the airline’s internal capacity.

“The auditor general’s report wasn’t very complimentary. And actually it had a disclaimer noting that they couldn’t verify anything. Now, you need some believability before you can invest,” Vermooten said.

Although there certainly is still appetite to invest in flag-carriers like SAA, financiers require that normal principles of financial management are followed, he added.

“Nobody puts in money just to lose it.”

The collapse of the strategic equity partner arrangement with Takatso raises questions about whether the government will pursue another avenue for partially privatising SAA — such as an initial public offer, which is the route it took with Telkom.

According to Vermooten, most successful efforts to partially privatise state-owned airlines have taken the public listing option.

“That’s the normal process. The strategic equity partnership approach doesn’t really work,” he said, citing the government’s failed attempt to sell a 20% stake in SAA to Swiss Air back in the early 2000s.

“If one thing happens to the strategic equity partner then the whole thing is in smithereens. So you need a market-based approach.

“And the normal disciplines of the market are applied,” Vermooten added.

“Your financial results have to come out. The responsibility for the financial results is vested in the board etcetera. So that’s normally the way to go.”

‘The auditor general’s report wasn’t very complimentary. It had a disclaimer noting that they couldn’t verify anything’