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Cape Town – The success of SAA’s turnaround strategy will come down to funding, says CEO Vuyani Jarana.
On Thursday, SAA briefed the Standing Committee on Finance (Scof) on the airline's fourth quarter report.
The going concern is a major challenge, Jarana stressed, as is financial stability.
The fourth quarter was not a good quarter, he added. The airline reported R1.2bn more losses, bringing the net loss to R1.8bn.
It also faced revenue losses of R900m, and rand strength accounted for R419m of revenue losses. Costs incurred were more than budgeted for at R656m, according to the report.
Jarana attributed the higher costs incurred to not implementing strategy. At the "centre" of this issue was the going concern, as well as a lack of capacity: staff with the expertise to implement the strategy.
SAA intends to break even by 2021, but much of this depends on strategy implementation and funding for working capital of R12.5bn, he said. The oversight forum, composed of SAA and Treasury, is working to define a capital structure with an appropriate mix of debt and equity.
"We said to the shareholder (Treasury), 'Here is the plan. If you trust the plan, it needs funding,'" Jarana said.
A critical element is for SAA to have a going concern status, he explained. The Auditor-General gave the airline a qualified audit opinion for its 2016/17 annual report, however, and flagged its going concern.
Further to achieving and implementing strategy, it is important to gain confidence from the market about the future survival of SAA.
"It’s not just good to execute strategy. Sometimes we face headwinds that undermine the strategy," said Jarana.
He explained that SAA was part of the International Air Transport Association (IATA) billing system and that if going concern is an issue, the airline can be requested to give an upfront deposit, even if it has not yet defaulted.
Jarana said he understood the importance of transparency, in terms of reports submitted to the committee, but media reports that follow may "have the impact of undermining strategy in an unprecedented way because of market sentiment," he said.
"The market sentiment is very critical."
As soon as funding is settled, then it will ensure the success of the strategy, he added. "If we delay it, even with the best resolve to execute the strategy, the market will move in the opposite way."
When asked if SAA would need a bailout, Jarana reiterated that the corporate plan submitted to Treasury showed there was historic debt of R9.2bn which must be managed, in addition to R12.5bn working capital which was required. Given certain assumptions, SAA can break even in three years' time.
However, as SAA stands today, its revenue cannot cover the cost gap. The airline is not in a position to pay off its debt – the principal and interest amounts. The airline is relying on funding, through either a shareholder capital call, or a strategic equity partner contribution.
SAA can be fixed, if the right skills are brought in, but it needs funding, Jarana added.
Business rescue
Responding to a question about business rescue as an option for the airline, Jarana likened it boxing – where in round six of 12 rounds, the boxer has to stop for a five-second break. This would be an opportunity to tell creditors to hold off, and get a business rescue practitioner to come in and draw up a plan and strategy.
This plan will still require funding.
"I doubt very much there is going to be a business practitioner who comes tomorrow to provide a new plan which is different to what we have done," he said.
The airline has already spoken to creditors and lenders to extend payment deadlines. An important thing for South Africans to realise is that SAA is backed by government guarantee, if business rescue is implemented, that could trigger the release of the guarantee. This has consequences not only for SAA but the country, said Jarana.
In addition, global markets do not consider business rescue favourably. "They think business rescue is kind of a liquidation or a Chapter 11 restructuring.
"When they see that, they think there is a risk they will not get their money… This is why I raised that our strategy is being undermined by what we say as South Africans."
Skills gap
Jarana also spoke on the lack of leadership stability at the airline, and said it was looking for permanent executives – people willing to leave their "comfortable jobs" to address the challenges in turning around the airline.
"SAA will not achieve success unless [we] have competent management in all aspects of the business. We need to capacitate the airline, the airline is depleted of skills." Jarana lamented that those with aviation skills had left to work for other airlines.
SAA is trying to source skills locally and globally to transform the airline and "bring SAA back to its feet," he said.
"The SAA brand – as we speak – is not as marketable as it was in the past. People see risks in working for SAA," said Jarana. He added that it takes a lot of encouragement to persuade people to join.
As he concluded his presentation, Jarana said he was still bullish about SAA, and there was commitment to execute the strategy.
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