What a rash of bad headlines last week for South African Airways (SAA).
First, we learned that it is not R5bn the airline needs to save itself, as previously reported. It needs to raise R21.7bn over the next three years, some of it debt and some of it equity.
The R5bn previously reported was just the bridging finance required until a hoped-for recapitalisation in October.
Then we learned that SAA boss Vuyani Jarana attempted to present the latest financial results behind closed doors when briefing MPs last Thursday.
The meeting was eventually cancelled.
And when the financial report was released later that afternoon after a scuffle with the DA, we learned that SAA had far bigger losses than expected: R5.6bn for 2017-18.
At the end of it all it looked blindingly obvious that SAA must be sold or rescued. Commentators rushed to say so. But how considered is that view?
It’s a pity that Jarana did not make his presentation on Thursday. He has a story to tell, not that much of a good story, but a story worth listening to at least, and one that casts the debate about business rescue in a different light.
Apart from the misjudgment that parliamentary secrecy was a good idea, Jarana is open about both the airline’s financial position and its strategy and is frequently available for interviews.
More than most other companies, SAA was hit hard by the political environment of the past 12 months.
Weak domestic demand due to the weak economy, weak international sales due to uncertainty over SAA’s future as a going concern, a rising oil price and an unexpectedly strengthening rand from November combined to hit the national airline with higher costs and lower revenue. It could not have flown into a more perfect storm.
The year-to-date results showed that of the R5.6bn in losses, close to R1bn was due to currency movements.
SAA, which historically has made huge losses due to hedging, does not have an aggressive hedging policy.
It has what Jarana calls a "quasi hedge" because while it loses revenue when the rand strengthens (50% of sales are in hard currency, in which the dollar dominates) it gets the upside in costs, in particular for fuel.
Only this time the oil price rose dramatically too, a triple whammy for a struggling airline located way down at the bottom of Africa.
The business rescue practitioner would still need to solve the funding problem. Business rescue would mean that all SAA’s loans — the R9.2bn plus May’s R5bn — would be called as well as payments to all suppliers.
Another big chunk of the losses — about R1.6bn — came from SAA’s debilitating legacy of solvency problems.
Jarana says the plan had been to remove costly wide-body aircraft from domestic routes and extend the leases on the narrow-body aircraft.
But the latter proved impossible when the lessors, alarmed at the short leases SAA was able to offer because of financial constraints, wanted its aircraft returned.
As aircraft must be returned with certain maintenance already done, the refusal triggered large maintenance expenses and rendered the strategy unimplementable.
In other words, SAA was not able to implement its strategy because of its funding problems. On top of this it was hit by a range of exogenous shocks.
Had a business rescue practitioner been in charge, would the outcome have been different?
The business rescue practitioner would still need to solve the funding problem. Business rescue would mean that all SAA’s loans — the R9.2bn plus May’s R5bn — 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.
The sale of SAA, or a part of it under these conditions, would not be in the government’s favour.
Interestingly, no one is arguing any more about whether partial privatisation should happen. From the SAA management to the Treasury the view is the same: the best option for SAA is to fix it up to make it attractive enough to a buyer.
It is possible that a business rescue practitioner would have had a better strategy and that it would have hedged better against the risks. Perhaps it would have tackled costs, especially personnel costs, more aggressively. But as SAA has had access to the world’s best aviation consultants to draw up its turnaround plan, that is not a foregone conclusion.
It is really important then that SAA — and especially Jarana — get out into the public arena and engage over their strategy so that a more informed view can be made on whether business rescue is the best option.
The last thing they should ever do is to try to hold what should be public engagements behind closed doors.
With R55bn of taxpayers’ money down the SAA hatch over the past 23 years the public has a right to know, in as much detail as necessary, about what is happening at the airline.
• Paton is deputy editor.
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