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SAA feeling strain of Airbus deal

Sep 18 2009 07:36 James-Brent Styan

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Johannesburg - South African Airways (SAA) will announce its third successive loss for the 2008/09 financial year.

The company will soon officially announce its results, but acting chief executive Chris Smyth has already submitted his report to the Parliamentary Portfolio Committee on Public Enterprises.

Smyth said that SAA expected to make an operating profit of R1.1bn before interest and tax this year, but the net profit line would be negatively affected by the problems of the past.

One of the major items that has put SAA under financial pressure is the contract with the aircraft manufacturer Airbus. SAA signed an order for 15 new A320 aircraft in 2002. The value of the contract is about $727m and the aircraft would have been delivered in the 2010/11 financial year. They would replace SAA's existing fleet of Boeing 737s.

But SAA cancelled the contract in 2004 when, after two successive years of massive losses, it was staring at bankruptcy.

But apparently Airbus neither received notice of the cancellation nor acknowledged it. SAA is therefore contractually bound to the order. Airbus would want to hold it to the contract because it is itself being squeezed by the financial crisis.

Jan Blake, a senior SAA manager, explained the contract to the parliamentary committee.

Blake noted that Airbus has a serious problem with contract cancellations, since about 30% of its existing contracts have been cancelled.

SAA will however continue to negotiate with the aircraft manufacturer. Among the options being considered is the possibility of SAA buying fewer aircraft than originally planned.

If the contract cannot be cancelled this could mean a huge financial burden for SAA in 2010/11.

SAA spokesperson Robyn Chalmers told Sake24 that the negotiations with Airbus were continuing.

"Progress has been satisfactory," was all she would say.

It is understood that Airbus is willing to review the contract, but not to cancel it.

Meanwhile KPMG's investigation into SAA's activities is well under way.

The investigation is twofold.

The first phase involves an inquiry into Khaya Ngqula, the former SAA chief executive. Ngqula is being investigated for irregularities and tender fraud in which he is alleged to have been involved.

The second phase will look at other procurement and management issues at SAA.

All SAA purchases of significant value made between 2003/04 and February 2009 are being probed.

- Sake24.com

For more business news in Afrikaans, go to Sake24.com.

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