Doubts about how far new SAA will fly on its R10.5bn
Scepticism the bailout will be enough or that a partner can be found
The government’s commitment to pay the R10.5bn that SAA desperately needs to conclude its business rescue may draw a line under its legacy issues, but a question mark still hangs over future funding and the viability of the new airline expected to emerge from the process.
Presenting the medium-term budget this week, finance minister Tito Mboweni emphasised that the R10.5bn “is allocated to SAA to implement its business rescue plan”.
He added: “We need to make it clear that the continuous funding of inefficient, nonfunctional state-owned enterprises has to be reconsidered. In this instance, we will work togetherwith the DPE [department of public enterprises] to deal with these matters. For our part, we are determined that whatever the demands, we cannot break the fiscal framework.”
SAA is not the only state-owned enterprise in need of funding. The Treasury confirmed that the Land Bank was recapitalised with R3bn and the funds had been disbursed. A further R7bn is needed by the Land Bank over the medium term.
The Treasury added that the South African Post Office, SABC and Denel will not be receiving any additional funding.
Asked about plans to provide further funds for SAA, the Treasury said the DPE is “working on securing a strategic equity partner for SAA to assist in bringing in the desired skills and [to] augment the recapitalisation provided to the entity”.
The new funding for SAA is in addition to the R16.4bn allocated in the February budget to settle guaranteed debt and interest with banks. It is being funded by cuts to other budget allocations.
The DPE welcomed the funding, saying that “failure to allocate the funds would have resulted in the liquidation of the airline at the cost of more than R18.5bn”.
Of the R10.5bn for SAA, it is understood that R5bn is required immediately to cover working capital of R2bn, pay for salaries, property and insurance and help restart the airline, R800m is due to creditors for goods or services rendered, and R2.2bn is for voluntary and forced retrenchments.
About 3,700 SAA employees have been retrenched. SAA now employs about 1,000.
The balance of the R10.5bn would be to cover about R3bn in unused ticket liabilities, R600m for creditors lacking government guarantees and R1.7bn for aircraft leases.
It is expected the business rescue practitioners will get the R10.5bn in January, with bridging finance secured until then.
A Nedbank spokesperson confirmed the bank had agreed, with four other South African banks, to provide government-guaranteed post-commencement bridging finance to a maximum of R3.6bn in response to a request by the business rescue practitioners, public enterprises and the finance ministry.
Nedbank said the bridging finance can only be used for essential expenses such as severance pay and salaries and would be repaid when the R10.5bn is received. “The bridge funding cannot be used for the costs of any new airline,” it said.
Absa, Standard Bank, Investec, the Development Bank of Southern Africa and RMB, on behalf of FirstRand, declined to comment.
Market commentators agree the R2bn earmarked as working capital for restarting the airline is insufficient considering the size of the new SAA. The airline is forecast to make losses over the next three financial years until breaking even in the 2024 financial year.
The business rescue plan forecasts losses will be R3.2bn, R2.25bn and R916m in the 2021, 2022 and 2023 financial years, respectively, before the airline delivers its first profit of more than R800m in 2024.
Industry analysts question the plausibility of SAA’s rescue plan.
Linden Birns, MD of aviation consultancy Plane Talking, says to avoid further taxpayer bailouts, SAA will have to find a buyer but “there is no talk from the government about selling the company lock, stock and barrel”.
Birns says the “only one who has put their hand up publicly” is Ethiopian Airlines, which told Bloomberg in October it would be willing to provide planes, pilots and maintenance services to SAA.
But this does not square with the government’s developmental and transformation mandate. “And what does that do in getting the taxpayer any kind of return on this investment that we are making now because all of the revenues would be repatriated to Addis Ababa,” says Birns.
Aviation economist Joachim Vermooten calculated that the scale of operations envisaged for the new SAA, which will see it operating in all market segments and expanding into a fleet of regional aircraft, requires an initial base of R8bn, which will reach R18bn by year three.
If one adds the R2bn in working capital earmarked in the R10.5bn allocation, this means a further R16bn would be needed to cover the airline over the next three years.
Vermooten says the R2bn to restart SAA would not provide a sufficient capital base to represent a going concern if one considers the projected losses in the first three years and other cash-flow requirements.
Birns says: “There is nothing in this plan apart from the R2bn of working capital to cover restart costs. All I can say really is that I hope whatever does emerge will be sustainable, but I have my doubts about it.”
Nothing in this plan apart from the R2bn of working capital to cover restart costs Linden Birns
MD of aviation consultancy Plane Talking