What You Need To Know About The SAA Saga
8 September 2017 | SA Views | Natalie Mayer

South African Airways is the flagship airline of SA. It was established in 1934 after the government acquired Union Airways, an independent commercial airline that had been in operation since 1929. Today, SAA flies to 56 destinations across the world, and is one of the largest aircraft fleets in Africa. The airline owns the low-cost carrier Mango, and has partnerships with Airlink and South African Express. SAA is also a member of the Star Alliance, which allows it to share airport terminals, and allows passengers to connect to more destinations over the globe as well as participate in a rewards programme.

SAA’s financial situation - beyond repair?

Despite being a large and popular airline, SAA has been making an operational loss for more than ten years, and is deeply in debt to suppliers to the tune of around R6.785 billion, due at the end of September this year. Chief financial officer Phumeza Nhantsi disclosed that in addition to the loss of R2.8 billion expected in 2017/18, the airline will suffer a further loss of R1.8 billion in 2018/19, and could only potentially make a profit in the 2019/20 fiscal year. Furthermore, Deputy Finance Minister Sfiso Buthelezi noted that SAA’s cashflow is affected by R1.05 billion that cannot be repatriated from Angola, Zimbabwe, Nigeria and Senegal, though efforts are being made to retrieve these funds.

SAA went into a negative cash position in July of -R568 million, forecast to increase to -R936 million in August. At the beginning of August, SAA recorded a net loss of R1.459 billion year-to-date, versus R1.388 billion in the same period last year. Government guarantees to SAA rose from R1.3 billion in 2007/08 to R19.1 billion by September 2016 - working out to a 35% rise every year, which is simply unsustainable. Since 2008 when SAA’s solvency issues first arose, the ANC government has spent R23.3 billion in bailouts and guarantees for SAA.

What is the government doing about it?

On 30 June 2017, the state-owned company received a government bailout of R2.2 billion, but still needs a further R20 billion worth of government debt guarantees.

The Cabinet is due to make a final decision on how to fund the R10 billion recapitalisation of SAA by the end of September, according to new Finance Minister, Makusi Gigaba. He and three other ministers (Communications and Postal Services, Public Enterprises, and Economic Development) have been considering options such as granting share equity, public-private partnerships, or selling  the government’s Telkom shares. The government currently owns a 39.75% stake in Telkom worth approximately R14.4 billion, which could possibly be bought by the Public Investment Corporation (PIC), the custodian of pensions of government employees, as well as other funds.

The R10 billion recapitalisation includes the R2.2 billion already granted in June; the extra R7.793 billion would be used to repay R6.785 billion worth of loans due 30 September, and the remaining R750 million would be used as working capital.

More bailouts are not the solution

SAA’s main competitor, Comair, is making a profit in the same business environment - so a turnaround is theoretically possible. But SAA’s financial woes stem from severe mismanagement, and the constant bailouts are clearly not helping to resolve the situation.

Critics of the government’s efforts to recapitalise the airline suggest that SAA should rather be sold to private equity investors, as the government has failed in its numerous attempts to turn the business around.

Even Gigaba, in a memo to Cabinet, stated that recapitalisation will only solve the airline’s low cash reserves temporarily. He said that unless SAA reworks its business model to include initiatives in the turnaround plan, the problem of low cash reserves will remain. Gigaba is concerned that the airline does not have the necessary commercial skills to create and implement these initiatives.

However, SAA is currently working with Seabury consulting group to re-evaluate its long-term turnaround strategy, including its recapitalisation needs, which would include a proposal on the rationalisation of routes. "It is incumbent upon the SAA management and board to aggressively implement the recommendations of the five-year turnaround plan," Gigaba said.

In the meantime, the National Education Health and Allied Workers’ Union (Nehawu) is concerned that the PIC’s potential involvement in the recapitalisation plan could put government workers’ retirement funds at risk. Nehawu recommended that Gigaba remove the entire SAA board, and remarked that: "the looting and normalisation of profit loss is deeply entrenched and will require strong leadership, prosecutions of those who are lining their pockets, and a sound turnaround strategy to save the airline from total collapse."



Natalie Mayer

Natalie Mayer is an independent writer and editor with 12 years’ experience. She has a B.Com in Economics (UCT) and a Master’s in Sustainable Development (University of Stellenbosch) and has worked for a number of high-profile clients, such as the United Nations Educational, Scientific and Cultural Organization (UNESCO), Nedbank, the Sustainability Institute, Counterpoint Asset Management, Pearson Education, and of course, Sharenet - to name a few. Natalie has written and edited research papers, textbooks, print and online articles, and website content on a vast array of topics, including finance and money matters, education, property, social and environmental issues. She is passionate about communication that meets the needs of the audience, and her particular strength is to bring clarity to text.

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