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SAA rescue plan meant to address past sins, not lay out the airline's future - BRP

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SAA rescue plan meant to address past sins, not lay out the airline's future - BRP

19th November 2020

By: News24Wire

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The business rescue plan for South African Airways (SAA) is not intended to formulate a strategy for the future of the airline, according to Siviwe Dongwana, one of the state-owned flag carrier's joint rescue practitioners.

Formulating a strategy for a "new SAA" would be the prerogative of a new board, a new executive management team and whichever strategic equity partner the airline's shareholder - the Department of Public Enterprises - can get on board to enhance or contribute to the strategic and operational issues of the airline. 

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Finance Minister Tito Mboweni allocated R10.5-billion in his recent mini budget for the implementation of SAA's rescue plan. According to Dongwana, the R10.5-billion is enough to address and settle "the sins of the past".

It also includes about R2-billion in working capital intended to give the new management and potential strategic equity partner "an adequate runway to settle in whilst the airline is undertaking interim flying".  

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"Interference by successive boards into operational issues undermined the business. Evidence of such interference and meddling with operational issues is now coming out at the Zondo Commission based on testimonies by both former board members and executives," says Dongwana.

"The amount allocated for the implementation of the plan will go a long way in alleviating the financial strain to many suppliers and service providers of SAA, particularly those in the aviation industry which suffered immensely from the absence of flying during the lockdown."

Over the years, government bailouts of SAA were mainly in the form of debt from commercial banks provided to the airline on the back of government guarantees. This resulted in the company's long-term debt ballooning from about R2-billion in 2011 to about R12-billion in 2019. By 2019 financing costs had risen to R1.3-billion a year, meaning much needed cash required for working capital had to be directed to debt repayments.

"The plan seeks not only to address the sins of the past, but has also created a clean slate for a restructured, albeit smaller airline in the short to medium term, that may attract a strategic equity partner," explains Dongwana. "It is common cause that no strategic equity partner wants to deal with the legacy issues of SAA like debt, nor any potential investee for that matter."

Furthermore, the payments to employees for severance packages, also included in the R10.5-billion, are important, in the view of Dongwana, as some are unlikely to find employment going forward. As for the refunds to passengers with unflown tickets, this is not only important for those consumers, but will go a long way in restoring credibility of the airline and the government as the shareholder.

As for total losses of about R6-billion the rescue plan foresees for SAA over the first three years after it resumes operations, Dongwana says this amount was based on assumptions relevant at the time of formulating the plan in July 2020.

"Those assumptions continue to change with the passage of time, taking into account the many variables attached thereto, thus require further revisions," he explains. "In addition, future operating losses if any, would arise first out of the strategies implemented by the company and secondly based on the scale of flying operations. The issue with SAA has never been about the absence of a business but the management thereof."

For Dongwana there is a business case for SAA in that it has a good route network and is dominant in the African market. 

"SAA still has some very profitable landing slots at prime destinations, enabling it to compete with other international commercial airlines. There remains a healthy demand for a full-service airline in the South African market. As a group, SAA and its subsidiary companies like Mango have the potential to be competitive in this market," he says.

"The manner in which the plan responds to affected parties is a clear demonstration of the clear balancing act required to address their various interests at the same time ensuring that the airline is able to continue on a stronger financial footing."

The rescue practitioners were able to reach a compromise with creditors, including aircraft lessors, regarding repayment. An agreement was also reached with employees to reduce the employee numbers down from over 4 700 to 1 000. The majority of employees have opted to take voluntary severance packages and the remainder are going through a section 189 retrenchment process.

"Revised terms and conditions of employment for the restructured airline are being finalised, which would result in significantly lower employment costs for the airline going forward," says Dongwana.  

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