Financial Mail - Investors Monthly
UP IN THE AIR
Will SAA fly again? Will Comair take to the skies once more? The answers aren’t clear
“I believe the private sector airlines have the capability and the capacity … to close all the gaps left by SAA
To fly, or not to fly, that is the question. That bastardised poetic line captures the pandemic scenario that placed aviation on hold.
A few SA airlines, three private and one state-owned, started skeleton services in June and are now operating on most domestic routes, but SA’s big airlines, SAA and Comair, aren’t yet up and running.
It is likely that Comair will resume flights in December if all the steps that will release it from business rescue are implemented. CEO-designate Glenn Orsmond is optimistic that it will shoulder SAA out of the way as the biggest local airline — and capture much of the business market that SAA will lose as a pared-down entity, assuming it is bailed out.
It is almost impossible to say whether SAA will take to the skies again. Elements of the government — and the executive — indicate it will do so. But the business rescue practitioners (BRPs) have reached a point where they simply don’t know if the R10bn or so they need to cover immediate and shortterm obligations — before resuming services — will be forthcoming.
Frankly, the costs of restarting SAA — which stopped paying its 5,000-odd staff in May — are astronomical. And the relaunch costs will be all for the account of the state, its shareholder. In other words, the taxpayer will have to bail it out irrespective of whether it opens again or shuts down. If it is liquidated, state guarantees will have to be paid out, but this may prove cheaper than restarting the entity.
At the same time, industry bodies the Airlines Association of Southern Africa (Aasa), the International Air Transport Association (Iata) and Airports Council International have warned governments that Covid-19 and the crisis it precipitated are not just affecting individual airlines, but the entire air transport ecosystem.
They are urging government to support all airlines, airports, air navigation and weather service providers and public and private sector suppliers across the sector’s entire value chain. Governments need to safeguard the entire air transport system as no modern economy can exist without air connectivity to efficiently move people and high-value goods between markets.
Worldwide, airlines still have fixed costs to cover. In some more cash-flush countries such as the US and Germany, governments have provided cash infusions for airlines. In May and June, Aasa and Iata lobbied the International Monetary Fund, the World Bank, the African Development Bank and other lenders, which set aside $30bn for Africa’s distressed airline and tourism industry, but governments are choking the flow of this relief.
Compounding the crisis are the arbitrary travel restrictions being implemented by some governments when they could be implementing a set of common biosecurity standards for air travel and tourism which have been issued by the UN’s World Health Organisation and International Civil Aviation Organisation.
Iata estimates that 272,000 of the 470,000 SA jobs supported directly in aviation and associated activity are at risk as airlines’ nascent recovery is hampered by Pretoria’s restrictions on international travel.
Louise Brugman, the SAA BRPs’ spokeswoman, refers to a host of conditions that need to be fulfilled to achieve business rescue. “We only own nine aircraft … part of the plan is … to cancel all the [other] leases, of which there are 44.”
The aircraft SAA owns are “gas-guzzlers” — five A340300s and four A340-600s. These aircraft are out to tender, which closed in February. But some of them were used for repatriation flights and food
deliveries in Africa during the lockdown. SAA stopped flying in October. “We aren’t flying cargo or repatriation flights. We can now move forward. We have a number of offers [for the aircraft],” says Brugman.
SA subsidiary Mango resumed flying in June. It is not subject to the business rescue.
If the National Treasury money doesn’t come through for SAA, a decision will have to be made whether a winddown, governed by the Companies Act, or a liquidation, in terms of the Insolvency Act, takes place.
Under a wind down, the 3,000-odd employees who have signed voluntary severance packages (VSPs) will remain intact. “They remain [in a wind-down] as a claim on the balance sheet against SAA,” Brugman says. “In a liquidation, nothing remains intact, and each employee is only able to claim [a maximum of] R32,000 in compensation.” So it is argued that a wind-down is better for the employees as the VSPs are more generous than that. A wind-down is a softer closure and doesn’t immediately trigger the guarantees. The state has guaranteed about R17bn SAA borrowings.
In April, the state told the BRPs there was no money for business rescue. It was then planned to wind down SAA in May, but the department of public enterprises told the BRPs it was committed to funding the entity. Insiders say the longer the state delays, the more likely it is that the (fiscally cheaper) liquidation route would be followed. Trade creditors — such as fuel suppliers — and banks could at any time apply for SAA’s liquidation. Each day the staff are not paid, they become (bigger) creditors. Any one of them could seek the liquidation of the entity.
Owing to funding delays, the immediate business rescue requirement bailout of R2.2bn has now increased to R2.8bn for staff salaries and benefits. “The last payment of salaries was in May,” Brugman says. A skeleton staff — including some senior executives, finance, IT and HR staff — have been paid on an ad hoc basis since then. There was a staff complement of just under 5,000 before the lockdown. In terms of the rescue plan, staff will be reduced to 1,000 while another 1,000 would go into a trainee layoff scheme. Brugman says: “The idea is when and if SAA is restructured and goes back into operation … hopefully with increased capacity it will require increased staff from the trainee layoff scheme.”
The BRPs believe SAA will be in a projected loss for the next three years — R3.09bn in 2021, R2.079bn in 2022 and R705m in 2023 before turning a profit of just R1.04bn in 2024. However, the retrenchment/ VSP costs are already projected to add to the losses and time is ticking by while the BRPs await the bailout.
Plane Talking MD Linden Birns describes the BRPs’ prediction of turning a profit in three years as rather optimistic.
Airlink CEO Rodger Foster — whose privately owned airline restarted in June with local and regional flights — isn’t sure SAA will fly again.
“Obviously the government has made very strong commitments that it wants to resuscitate SAA. That is determined by financing. Up until now, we haven’t seen the funding for the business rescue plan to be implemented. It can’t be implemented without the funding. When one listens to the government, then one has to believe it will muster … the funding. But things are pretty tough. There is a massive fiscal deficit in terms of the tax revenue that is not being generated because of the economic consequences of the lockdown. We also know that whatever monies are remaining in the fiscus have already been committed to causes that are far higher priority … than the national carrier … Is there a need for SAA to return to business? Is there a need for taxpayers to continue funding it? The answer to those questions is no. I don’t see a developmental role for SAA anymore. I don’t see a need for that airline anymore. I believe the private sector airlines have the capability and the capacity … to close all the gaps left by SAA and they will work in conjunction with the big international airlines … at the intercontinental and long-haul level. I don’t see any detrimental consequence of SAA not coming back.”
However, Birns believes SAA could still take to the skies as the government remains insistent of its commitment.
Airlink, the former SAA feeder but now fully independent mainline domestic and regional operator, started limited activity in June with about 10% of its normal flight activity. It is now about 44% of its normal activity, “but we are only generating about 25% of our
normal revenue”, says Foster. His airline has signed an interline agreement with Qatar Airways — giving Airlink customers access to Qatar’s 650 flights a week to over 90 destinations while Qatar benefits from Airlink’s Southern African network of 45 destinations.
Nevertheless, Foster says “we have some way to go in rebuilding the business”. At current levels it is difficult, he says, to be sustainable. However, the airline is expanding its routes to Mozambique and Angola. Its regional reach includes St Helena, Tanzania, Zimbabwe, Zambia, Madagascar and Namibia.
Safair CEO Elmar Conradie says its low-cost operation, FlySafair, has focused on rebuilding “to our previous capacity”.
Before the lockdown, FlySafair operated 12 aircraft and was averaging 84 flights a day across 11 routes. It had 24% of SA’s domestic market, making it the largest single brand in the market. When the lockdown was implemented, it ceased operations. From June 15, FlySafair took off between Joburg, Cape Town and Durban. Capacity was reduced to 20% in the context of a domestic passenger market that was down 92% year on year in the first post-lockdown phase.
With level 2 from August and level 1 from September, FlySafair’s capacity rose to 35% in August, 36 flights a day, and then to 65% in September, or 55 flights a day. Now capacity has reached 80%. Industry players say an airline normally breaks even at about 70%-75% load factor.
FlySafair admits it has been “in survival mode, nowhere near recovery”. With operations on the brink of full capacity, “we can start to hope for limping towards some sort of recovery”, Conradie says.
FlySafair has managed to retain its 1,135 staff and to avoid a retrenchment process. Its routes include Joburg to Cape Town, Durban, Port Elizabeth, East London and George, as well as Lanseria to Durban and Lanseria to Cape Town. It also flies between Cape Town and Durban, East London and Port Elizabeth, and between Durban and Port Elizabeth and East London.
Airlink’s secondary routes serving Upington, Pietermaritzburg and Bloemfontein have been, according to Foster, a challenge.
Airlink started cross-border activity in October, and capacity on the Joburg/Harare flight has been “quite responsive”.
Foster says the company is being frugal and “continues austerity measures”. With the combination of weaker passenger volumes and weaker yields, “no airline is really sustainable under these circumstances”. However, revenue is covering fuel and activity costs, he says.
Airlink had 60 planes operating before the lockdown. The sale of eight aircraft had assisted with cash flow and liquidity. At present, 26 of the remaining aircraft are active, “though not fully deployed”. The balance of the fleet is “in mothballs”, but there are plans to bring them back into service.
Foster believes it is likely Comair will return to the fold. “We know there is a syndicate of investors, most of whom have been associated with Comair for a long time … There is a fairly good chance Comair will get back into business again.” But it will be difficult for Comair, having been in hibernation since April, to resurrect the business.
Birns agrees with Foster that Comair is likely to take off again. Unlike SAA, Comair’s liabilities do not exceed its assets, Birns says.
On September 18, the business rescue plan for Comair was approved by its creditors and shareholders — which avoided the airline going into liquidation.
Orsmond believes that Comair “became fat and lazy in the past few years” and was heading for material losses even before the lockdown. A business rescue process was implemented in May, but due to its lack of liquidity it has been unable to re-enter the market.
In terms of the business rescue plan, the preferred investment consortium — made up of several former Comair board members and executives — will invest R500m in equity in return for a 99% shareholding once the suspensive conditions of the business rescue plan are met. A 15% share will be allocated to a broad-based BEE partner within a year.
Comair intends to retain a fleet of 25 aircraft. Its 2,200 workers, 200 of whom have been retrenched or taken VSPs, have not been paid since May. The consortium has agreed to pay medical aid and some hardship allowances before introducing reduced salaries “for a ramp-up period” from December. Full employment is proposed only from July. The last hurdle for the consortium is approval by the Competition Commission in November.