South African Airways has told the country’s parliament that it needs close to US$1 billion in taxpayer money to stay afloat, as it continues to fight against allegations over executive corruption and financial improprieties.
The state-owned carrier told a parliamentary finance committee on 4 August that it needs a 13 billion-rand bailout (worth approximately US$961 million) to meet its debts and operating costs.
“Cash flows generated by SAA are not sufficient to cover the operations of the business,” SAA said in a corporate plan presented to the parliamentary committee. Despite not generating enough cash, the state-owned carrier said it expected to be profitable again by 2019.
Finance Minister Malusi Gigaba confirmed the government was discussing the potential bailout and considering its options, but said he will not reach a decision on any plan before October. He said the government was also negotiating with SAA’s lenders to defer nearly 7 billion rand (US$519 million) in repayments that become due in September.
South Africa’s government previously bailed out the state-owned carrier in July, to protect it from defaulting on a loan repayment to Standard Chartered Bank worth 2.2 billion rand (US$163 million). That month, the government also granted about 20 billion rand (US$1.48 billion) in state-backed guarantees.
Gigaba told the parliamentary committee on 4 August that he would consider all options, including a proposal by SAA to appropriate 6 billion rand (US$444 million) in funds from the country’s Public Investment Corporation, which manages state employee pensions.
He said any taxpayer money given to the airline would only occur alongside clear and stringent conditions. Despite promising to consider several different options, Gigaba said the government would not countenance privatising the carrier.
Although the opposition Democratic Alliance party has repeatedly called for SAA to be sold off, Gigaba said the airline would only consider dispensing non-core assets, which it was currently in the process of identifying.
Although SAA is now on life support, continued government aid is inevitable, at least in the short term, for political and economic reasons, said Scott Edmundson at Webber Wentzel in Johannesburg, because the government has no realistic alternative.
“It is extremely unlikely that the government would voluntarily permit or allow SAA to be liquidated or declared insolvent or to go into business rescue,” he said. “As a state-owned company, this would be hugely embarrassing for the government and the ANC ruling party, which is already under severe political pressure.”
Any major change to the government’s approach would be seen as a concession to opposition parties and a further political blow at a time when it can ill afford any further setbacks, he said.
“Allowing SAA to default on its significant borrowings would result in a demand on its government guarantees and crystallise its liability under those instruments, which would trigger cross defaults on SAA's various other financing and leasing commitments,” he said.
SAA is a candidate for business rescue – a debtor rehabilitation regime similar to Chapter 11 protection in the US – but it would seem there is no intention by the board to pursue this, he said.
“One cannot rule out the possibility of a third-party creditor bringing insolvency or business rescue proceedings against SAA in respect of any unpaid amounts, although we would expect the SAA board to oppose any such application,” he said.
Although SAA operates in a tough environment, several of its problems are self-inflicted, he said. The carrier has long suffered from political interference and instability at board level, attracting criticism for poor corporate governance and a lack of aviation expertise at board level, he added.
The carrier’s problems were further compounded by a decision by the South African Labour Court on 4 August, reportedly ordering the suspension of several SAA executives ahead of a corruption investigation.
In a statement on 8 August, the National Union of Metalworkers of South Africa said the court had ordered the suspension of SAA’s former acting chief executive Musa Zwane, head of procurement Nontsasa Memela, head of baseline maintenance Chaile Makaleng, and Princess Tshabalala, an executive also in the airline’s procurement department.
According to the union, the court decision came about after South African Airways tried to block its members from protesting against corruption at the carrier, which it said was the cause of the airline’s troubled financial position. It cited studies by EY and law firm ENSafrica, which reportedly detailed incidents of “wide scale looting and corruption” at SAA.
Elsewhere, the carrier continues to battle accusations of corruption levied against it from several organisations. In March, the Organisation Undoing Tax Abuse lobbying group and South African Airways Pilots Association filed a lawsuit against Dudu Myeni, the chair of South African Airways, accusing her of gross negligence, financial mismanagement and potentially corrupt practices.
Christodoulou & Mavrikis partner Chris Christodoulou said the carrier’s problems will continue unless it appoints an industry-only board with a non-political appointee as chairperson, allowing it to build a strong management team capable of stemming toxic infighting and alleged corruption.
Although the appointment of Vuyani Jarana, formerly of Vodacom Group, as a new chief executive is promising, his inexperience is reminiscent of the last appointment of a chief executive outside of the industry, who lasted less than two years in the post, he said.
“The board itself did not display any signs of understanding what it takes to run an airline, and less so to turn around an ailing carrier,” he said. “Basic airline economics seems to have eluded decision-makers from shareholders down to management, and those who had any understanding deserted the airline in droves.”