NEWS ANALYSIS: The missing business case for SAA
The plan is sketchy and the numbers implausible, but the major players are expected to give it the thumbs up anyway
For six months’ work, the draft business rescue plan for SAA is shockingly sparse. It also fails to make even a slightly convincing case for starting a new airline.
However, it shouldn’t come as a surprise if a majority of creditors and “affected parties” give it the thumbs up.
The smaller creditors are hugely outweighed by the banks, whose debt is guaranteed by the government. They are going to get paid anyway. The “affected parties”, which include employees and the department of public enterprises as shareholder, will want to support it as well. It tells them what they want to hear: that it will be a simple and relatively inexpensive process to start a new airline.
This is the proposal. A new state-owned company is formed and buys the entire shareholding of SAA. Government capitalises the new company with R2bn. Former SAA employees — about half the existing workforce — who are recruited to staff the new company do so on much less generous terms of service. Government also comes up with another R2bn to pay the retrenchment costs of those who cannot be hired.
The debts of the old SAA are settled like this: the banks and other lenders are repaid their loans and interest, which amounts to about R16.4bn. The rest of the creditors will get a small portion — it is not decided yet how small — of what they are owed. The government will come up with R600m to pay this, but only over time as the new company earns revenue.
Other than the banks and the trade creditors, both SA Airlink and Comair are owed money by SAA. They do not stand much hope of seeing it. SA Airlink is owed some R500m for ticket sales and Comair R790m, which is the outstanding portion of a R1.1bn fine levied on SAA by the Competition Commission.
With the R16.4bn already made provision for in the medium-term budget announced in February (but still to flow over the next three years), the government must come up with an additional R4.6bn. As the retrenchment costs can be deferred, the case that public enterprises minister Pravin Gordhan will be able to put to his cabinet colleagues is that for a mere R2bn, SA can have a new flag carrier and the aviation sector in SA will be saved.
Only the numbers in the plan, the projected statement of income and expenses, make the exercise look implausible. Three years of heavy losses are projected — R19bn before interest and tax — followed by another four years of flat performance. As the plan is sketchy at best, there is no suggestion on how the losses will be covered.
A list of assumptions accompanies the income statement, which includes the number of passengers, the number of flights and kilometres flown, the load factors, the average revenue per customer earned, and so on. But other than these there is no business plan for how the business will run. What routes will be flown and which aircraft will be used have not been included in the draft plan.
The most striking feature of the old SAA was the alarming number of loss-making routes it flew. The main reasons were high overheads — staff costs, for example — and high operating costs as the fleet was not optimal for the routes it flew.
In their analysis of routes during the business rescue process, the rescue practitioners found that even if the airline was able to slash costs by 25%, there would still be a large number of unprofitable routes. These included all SAA’s domestic routes, three of the nine international routes and four of the 15 regional routes. It is doubtful then that a R2bn capital injection by the government will enable a new airline to go very far. For perspective, at the time that practitioners Les Matuson and Siviwe Dongwana took over the company, it was costing R2bn a month to run.
The plan makes a vague reference to engagement with three potential strategic equity partners. One was not interested and the other two would need to be engaged once again as initial discussions had taken place before the Covid-19 crisis. But notably, there is no indication that serious interest may have been in the offing.
Since the plan doesn’t exactly hang together, and since Matuson and Dongwana had previously been convinced that a restructured SAA would cost in the region of R7.7bn, it is puzzling as to why they now believe the same can be done for so much less.
Whatever their motivation, it could be the reason the rescuers have included an escape clause near the end of the document. The plan is dependent on receiving the necessary government funding by June 27, they say, three days after finance minister Tito Mboweni tables an adjusted budget.
If Mboweni can find some more money to throw at the bailout, then the new airline project could live on for now. If not, the rescue process will have come full circle, with much money having flowed since December to very little effect.