Will union’s SAA plan fly?

SOLIDARITY: AIRLINE FORCED TO SEARCH FOR STRATEGIC EQUITY PARTNER

Trade union claims to have moved government ideologically. Moneyweb

At a media briefing on July 10, trade union Solidarity announced it had suspended its plans to bring a court application for SA Airways to be placed under business rescue.

The union claimed that this followed a major victory when SAA chief executive Vuyani Jarana agreed to immediately start with the search for a strategic equity partner (SEP) for the struggling national carrier.

The earlier position was that SAA would first be restored to profitability before introducing an equity partner by selling a percentage of shares in the airline.

Connie Mulder, head of the Solidarity Research Institute, said that government moved from an “ideologically entrenched position” of centralism towards privatisation, presumably under threat of his union’s pending court application.

Mulder proposed that one of the super connectors, the Gulf airlines, or an African airline like Kenya or Ethiopian airlines could be considered as a SEP. The latter would be part of a strategy to develop a West African aviation hub.

It would have to be a partner who brings aviation expertise in exchange for some executive control over SAA and “not one or two percent sold to the Public Investment Corporation”, he said.

A closer look at Jarana’s letter to Solidarity shows that he gave general, high-level undertakings with no deadlines.

Solidarity asked: “That it be an immediate priority of SAA to recruit a SEP for purposes of private equity and that a deadline is set for this to happen.”

Jarana says in response that the government and SAA board have agreed to begin looking for such a partner and offers to share the project plan with Solidarity once it is finalised.

“We can project the start of the process, however, we cannot guarantee whether there will be appetite in the market,” he says.

“We therefore wouldn’t be able to commit to deadline for completion of the SEP process, it depends on the market.”

Solidarity then asks: “That the further capitalisation of SAA be borne largely by the SEP.”

To which Jarana answers: “While this is desirable, it will depend on the structure of the SEP transaction, the extent of private sector participation, and timing of the conclusion of the SEP transaction as well as the valuation of the stake that government will sell to a SEP.”

After the Solidarity presser on Tuesday, SAA spokesperson Tlali Tlali said: “We don’t have details at this stage as to the size of the stake and the commencement date, should this option prove to be a viable proposition.

“We will take our cue from the shareholder on such details.”

Jarana had earlier told a parliamentary portfolio committee that SAA needs R21.7 billion over the next three years to return to profitability.

It seems as if Solidarity is saying SAA should find a company that is willing to fund this fully or to a large extent in the hope that the turnaround would work.

The government and SAA board seem to agree, most likely because they cannot see that kind of money flowing from the fiscus.

It is therefore probably its empty pockets, rather than an ideological turnaround, that has led to the view that the SEP search should be expedited.

Jarana and his management team, however, are not so sure this is possible.

Commenting on the matter, transport economist Joachim Vermooten said it will be much more efficient to wind down SAA in its current form and start a new, focused airline, free of all the legacy contracts, overstaffing, inefficiencies, and culture of reliance on the shareholder.

The crucial question for any prospective equity partner would revolve around value. To be profitable and compete with its peers, SAA needs new aircraft. It cannot buy new aircraft because nobody would lend it money on the basis of its weak balance sheet.

Jarana called it a “catch 22”. Solidarity says it could still bring the business rescue application, should SAA not stick to the plan.

Free Market Foundation’s Leon Louw rejects business rescue as a viable option for SAA on the basis that “it [SAA] will certainly never be a going concern able to compete in the world of modern aviation”.