Should South African Airways (SAA) be put into business rescue? Such a drastic move would allow SAA to deal with its crippling debt burden and reorganise its business into something viable.
In its absence, the only choice is for the government to continue pumping billions into the national airline. There would be some very big risks in doing so, including triggering a loss of confidence in far bigger government entities, but if it is done wisely it might well be the best option.
SAA has made a meal of the fact that the government is its shareholder. It has allowed it to borrow far more than the strength of its balance sheet would justify on its own. But that preferential lending status has to end at some point.
It is reminiscent of Greece during the European debt crisis: having grown used to borrowing at the EU’s credit rating, the wheels came off when creditors suddenly started treating Greece as if it would have to rely on its own balance sheet.
SAA is now facing a similar situation. The airline is hopelessly uncreditworthy and without the government standing behind it, it cannot survive.
The auditor-general issued a scathing set of financial accounts in March, revealing that the airline was insolvent to the tune of R17.8bn and lost R5.6bn in the 2017 financial year. It could only keep the doors open, thanks to a R10bn cash injection from the government and R19bn in guarantees on its debt.
Over the past six years, SAA has burned an average of R250m a month, but that now seems to have almost doubled. It is now burning R15m every day
The auditor-general raised questions about why the airline had not already filed for business rescue, suggesting it may be trading in violation of the Companies Act for not having done so. The auditor-general qualified his opinion, basically saying that SAA’s financial management is such a shambles he was unable to be confident in the numbers.
The airline has continued to haemorrhage cash. It has lost another R5.7bn in the 2018 financial year, according to management accounts I have seen, which is R2.9bn more than it budgeted in its own turnaround plan.
Over the past six years, SAA has burned an average of R250m a month, but that now seems to have almost doubled. It is now burning R15m every day.
On those numbers, SAA will need a capital injection well over R20bn to continue to function and considerably more if it is going to be recapitalised so it can compete effectively.
The airline is limping with R16bn of debt, R8.3bn of which is due in the next year. To add to the pain, it has more than R1bn sitting in various African countries which it cannot extract.
If SAA files for business rescue, lenders will head straight to the National Treasury’s doors for their money, thanks to the guarantees. But that may not be the worst thing. The Treasury could settle the lenders, then SAA could be reorganised into something viable. The R19bn would be cheaper than the required equity injection it would have to make anyway.
So far, the Treasury has not seemed keen on a business rescue. In its latest annual report, SAA’s new board says the Treasury has agreed to continue pumping cash into it until 2021. The Treasury may fear a crisis in confidence among all creditors to the government, as well as the political ramifications of abandoning a state-owned company.
SAA could be the government’s Lehman Brothers — the entity that was allowed to fail, triggering the 2008 global financial crisis. The far bigger fear is Eskom. The government has guaranteed R350bn worth of its debt, 18 times the amount it has guaranteed in SAA.
Eskom is also in a serious financial state, with large losses expected. Like SAA, it has been unable to raise debt on the bond market. Its balance sheet is too huge for banks to be able to extend much more to it, even if they wanted to.
A liquidity crisis has been brewing and there is plenty for creditors to worry about. Tipping SAA into business rescue could trigger a run on Eskom. However, it is just possible that Cyril Ramaphosa’s new broom will give creditors enough confidence to trust him. The appointments of strong boards at SAA and Eskom have been a good step toward stability.
If strong confidence-building changes at Eskom including a new permanent CEO, are announced at the same time as business rescue for SAA, the fallout could be manageable. The disaster of SAA is a result of Jacob Zuma’s stubborn protection of incompetent leadership of the airline.
Business rescue would be an appropriate conclusion, as well as providing a way to truly rebuild the airline, including introducing private-sector partners. Ethiopian Airlines could be one: in January it agreed to take a 45% stake in a resurrected Zambian Airlines, with the Zambian government holding the balance. SAA would be a totally different scale, but the model could apply.
It is time to think the unthinkable. SAA has accumulated R32.1bn of losses in the past six years, to which it is adding R15m a day. Business rescue may be the one thing that changes its fortunes for good.
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