SAA starts urgent hunt for equity partner
In a policy about-face, state-owned carrier SAA says it will immediately begin seeking a buyer to acquire a stake in the airline as it seeks to cut losses.
SAA group CEO Vuyani Jarana said management would have preferred to get the airline into shape first, but that given the pressure to fund SAA, “the shareholder [the state], the board and management had agreed to commence the process immediately”.
SAA spokesman Tlali Tlali confirmed the undertaking on Tuesday, but said the airline could not provide details about the size of the equity stake or a commencement date at this stage, “should this option prove to be a viable proposition”.
Jarana’s undertaking came in response to trade union Solidarity’s application in May 2018 to place SAA in business rescue.
The union took this step as an affected party in terms of the Companies Act. About half of its members work at SAA, though the union is not recognised at the airline.
Under the act, Solidarity based its business-rescue application on three aspects: SAA’s financial distress; that such a process would be just and equitable and for sound financial reasons; and that there was a reasonable prospect for rescuing the business.
The auditor-general’s report on SAA’s financial statements on March 31 2017 expressed material uncertainty about the going-concern status of SAA, and inquired why SAA had not given reasons for not adopting a resolution to file for business rescue.
Solidarity said SAA’s financial statements showed SAA had been insolvent for several years and that it had not turned an operating profit for six years. This created considerable doubt about the state-owned enterprise’s ability to pay its debts in the coming six months.
“Thus far, SAA has survived through massive government bailouts and government-guaranteed debt. This implies that SAA is not able to service its debt from operating income,” said Solidarity CE Dirk Hermann.
“It is fait accompli that SAA is insolvent, as evidenced by its latest financial statements with liabilities exceeding assets extensively,” he said.
Solidarity’s application led to talks with SAA, following which its terms for a turnaround strategy were largely met. This included part-privatisation, limited political interference, a transformation strategy balanced with skills and investigations into past irregularities. SAA also undertook to liaise with Solidarity in a structured way to find a strategic partner.
The heavily indebted airline has been searching for an equity partner since at least November 2017, but the approach was to first get the airline into shape to render it attractive to a private sector partner. The carrier has been running at a loss for a decade and has accumulated a huge debt. Jarana said in May the airline needed recapitalisation of R21.7bn over the next three years to turn it around.
In the 2017-18 year, it made a loss of R5.6bn.
Solidarity had now suspended its application for business rescue, “for the time being … [because] it is difficult to immediately proceed with litigation if the other party has conceded in writing to most of our demands”, Hermann said.
This did not mean Solidarity was abandoning the initiative. Hermann said the union was in a strong position to succeed with the application.
“We are not naive – SAA’s written undertakings are sufficient to suspend the application. However, we are very sceptical about the implementation of these undertakings. We have confidence in Mr Jarana’s good intentions, and we will give him the benefit of the doubt….
“However, we have less confidence in the shareholder’s political will to make radical decisions on private ownership of the SAA.
“We have our finger on the trigger,” Hermann said.
Business Day wrote in May that business rescue would mean that all of SAA’s loans would be called as well as payments to all suppliers.
This event may be significant enough to affect SA’s sovereign rating, Treasury officials believe.