Cape Town - The South African Airways (SAA) board said the national carrier will continue to lease aircraft in the foreseeable future as, it is “simply not in a position” to buy them.
In response to questions posed by Parliament’s standing committee on finance, the SAA board said the national carrier’s weak balance sheet has influenced its capital acquisition decisions.
The board was asked to explain the business rationale for leasing aircraft, and whether it is indeed cheaper to lease aircraft in the context of SAA’s long-term turnaround strategy.
It responded by saying although it would indeed be better to acquire certain aircraft outright, the cash flow associated with outright purchases is wanting.
READ: SAA 'learnt lessons from controversial Airbus deal
“It is important to highlight that wide-body aircraft have more risks attached with outright purchase than narrow-body aircraft as the market is smaller in terms of reselling.”
The board, however, pointed out that the new accounting standards on leases will require the national carrier to recognise the aircraft in the balance sheet as if they are owned. This will be stated as such in the 2019 financial year-end.
Fin24 previously reported that SAA in 2002 entered into a purchase agreement with Airbus to acquire 20 A320 aircraft. The first ten of the A320s have been supplied and delivery of the remaining aircraft is expected to take place by 2017.
However, former finance minister Nhlanhla Nene had put forward a transaction plan that would see SAA swap the purchase of the remaining 10 aircraft for a lease of five A330-300 planes. The swap deal meant that SAA would no longer be required to pay additional pre-delivery payments to Airbus, which would have cost R603m.
Drama around the deal ensued when SAA chair Dudu Myeni attempted to renege on the leasing contract. At the time, Myeni and the former SAA board wanted to amend the transaction to allow SAA to purchase the A330-300 aircraft and then enter into a sale and leaseback deal with a local lessor.
Following President Jacob Zuma’s sacking of Nene on December 9 2015, SA's new Finance Minister Pravin Gordhan in late December backed Nene’s previous swap deal.
Guarantees ‘not sustainable’
In its responses to Parliament, the SAA board concurred that government cannot continue to provide guarantees to sustain the ailing national carrier. “Attention must be given to ensure that the company is properly capitalised,” it said.
The board further said it is in the process of appointing a “Restructuring Strategic Adviser” to review the national carrier’s long-term turnaround strategy and to provide recommendations on identifying the priorities for the turnaround and implementation plan.
In September, the government granted SAA an additional going-concern guarantee of R4.7bn, increasing its total guarantees to R19.1bn.
READ: SAA bleeding billions more than first reported
In its 2017 Budget Review, National Treasury said SAA has used R3.5bn of a R4.7bn going-concern guarantee, with the remainder likely to be used in 2017/18.
The board highlighted its concern that SAA is using up the available short-term capital that has been secured through the guarantee.
“The current position is that in the short term, the losses incurred will be a significant threat.”
The board believes, however, that the long-term turnaround strategy should see a successful turnaround in the medium term.
On the question whether the R1.9bn impairments of aircraft that contributed to SAA’s losses in the 2014/15 financial year was a “once-off” transaction, the board said the impairment will need to be assessed annually. “In the 2015/16 financial year the exercise was done. This exercise will be performed again in the 2016/17 financial year-end and once it has been completed, then we will be in a position to confirm.”
The Democratic Alliance’s Alf Lees told Fin24 earlier that SAA’s added loss (the board admitted that the budgeted loss for 2016/17 was going to be R3.5bn and not R1.7bn as had been expected) “will represent a real cash loss as it will not contain the R1.9bn Airbus deal impairments that contributed to the R4.9bn loss in the 2014/15 year”.
“It is a massive increase of a R2bn increased loss when compared with the R1.5bn loss declared in the 2015/16 year."Read Fin24's top stories trending on Twitter: