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May 25, 2018

There is been an increasing cacophony of calls to close down SAA. New CEO Vuyani Jarana has demanded a further R5 billion “now”. This is in addition to the R10 billion already given to SAA six months ago, and he says the airline will require a further R12 billion to stay afloat over the next three years.

The poor need these funds, yet they are subsidising airline passengers. This is diabolical – and it’s going to get worse. Jarana is cutting routes, which reduces revenue, so the losses will increase.

The decision the South African government as shareholder must take is whether to believe management can turn the airline around with the R17 billion it has budgeted. The precedent is not good. The taxpayer has even less basis to believe that this time around the management team will be any more successful in turning the airline around than the ten that have preceded it. In fact, the odds this time are worse, as management haemorrhaged its best talent under former Chair Dudu Myeni. And the airline market has changed, making it far harder for SAA to compete.

But can SAA really just be closed down – or sold off? The hard truth is no. There are no plausible buyers for a terminally ill airline, and it will cost far more than the currently demanded R17 billion to close it down. For starters, the airline still owes the government around R20 billion, which would have to be written off. And it owes banks R9.8 billion for operating capital loans. Call it R30 billion.

What about the assets? To put it bluntly, there aren’t any. Almost all its fleet is now leased. It’s hard to determine what losses the airline would incur if it cancelled the leases, but it can’t just hand back the keys and leave the lessors with the ‘cold comfort of concurrent creditors’. That’s because those canny lessors put in cross default clauses with the other state institutions, so that if SAA defaulted, then many other leases and loans would become due. When former SAA CFO Wolf Meyer warned of this risk, it was estimated it would expose the state to having to find another R300 billion to pay back the other state-owned-enterprise loans. So, the state would have to settle the aircraft leases. With end of lease costs, this could be perhaps R10 billion, for a total R40 billion cost to close the airline down. And that excludes 10,000 severance packages.

The bottom line is that Gordhan has no choice – he just has to find another R17 billion for the airline’s next drug fix, or find the R50 billion to settle debts and wind it up, or face R340 billion in consequent liabilities, if the airline is allowed to crash and burn.

We just have to hope and pray that this time around this particular management team can turn it around and sell off a chunk – or all of it – as a going concern.




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