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SAA bailout scramble: Why the rush, asks FMF

Sep 21 2017 17:52
Carin Smith

Cape Town - The threat of a domino effect of more state-owned enterprise (SOE) debt - already totalling about R434.1bn - becoming immediately payable could be the reason for government's urgency to try and bail out South African Airways (SAA) yet again, the Free Market Foundation (FMF) proposed on Thursday.

About R17.9bn in SAA guarantees could become immediately repayable if it defaults, the FMF believes.

Standard Chartered Bank demanded repayment of R2.3bn and Citibank wants its R1.8bn back by end-September. If SAA defaults, the remaining guarantees automatically become payable due to the cross default clauses in the lender contracts. A further R7.9bn is due between 2019 and 2022, the FMF pointed out.

Government is pushing an emergency Appropriation Bill through Parliament to facilitate another SAA bailout of R10bn.

Fin24 reported last week that National Treasury has drafted a special appropriation bill to recapitalise SAA with a R10bn bailout, which it hopes to table in a special parliamentary sitting.

The FMF - an independent public benefit organisation founded in 1975 - argued that the use of the word “emergency” implies an unexpected and unanticipated event, yet "no one can pretend that SAA’s financial crisis was not known".

The debate on whether bailout funds for SAA should come from Telkom, the Public Investment Corporation or the government pension scheme is therefore irrelevant, according to the FMF. That is why the important question to ask, in its view, is why government is so determined to press ahead with another “bailout”, namely to protect more SOE debt from being affected.

Bailouts

According to FMF executive director Leon Louw, a (new) R10bn "bailout" will not get SAA out of trouble and taxpayers will not be off the hook. In his view, bailouts, guarantees and "misplaced national pride" cannot change hard facts.

"A government guarantee is a promise to pay. It is a taxpayer-backed, solid, financial commitment. Government has provided guarantees of R19.1bn to SAA to date. SAA has raised loans against R17.9bn so far," said Louw.

In Louw's view, SAA will never be in a position to pay back the loans or be a financially viable, competitive airline.

"Irrespective of where the funds come from, it is not enough and never will be. Total state aid over 10 years is close to R24bn. Government seems to have lost the plot over SAA. SAA is bankrupt and no amount of capital injection can turn it into a profitable commercial airline," he said.

In Louw's view, it is too late to privatise SAA as no one will buy it.

"The only choice is to liquidate and sell the few remaining assets of worth. That way we will at least save the R370m cash SAA is haemorrhaging every month," said Louw.

"That equates to R1bn every three months that, in the view of the FMF, could be better spent on providing the poor with basic services, infrastructure, housing and welfare.

Louw emphasised that talking about bailing out the national airline implies it can move forward as a going concern.

"The R10bn is not a bailout at all. It is a temporary stopgap to plug a huge hole in the airline’s ability to pay back maturing debt and its inability to fund working capital to pay for everyday operational expenses. It looks backwards not forwards," said Louw.
 
"The reality is that R10bn will cover the R9bn of debt maturing at the end of September, leaving R1bn for working capital. Given that SAA is losing R370m every month, at the end of December, SAA will be back cap in hand to Treasury for taxpayer money."

The past

The FMF explained that geography and technology have played a significant role in SAA's challenges.

"SA used to be the gateway to Africa, and, due to government stifling of competition via bilateral agreements and limited airport slots, SAA could and did dominate southern African skies. Apartheid isolation also played a role. No longer," said the FMF.

"Competition is tough from Middle Eastern airlines, including Emirates and Turkish Airlines, that now fly all over the African continent."

Technology has changed the game, with more fuel efficient aircraft able to fly longer distances. There is no need to refuel in Johannesburg any longer.

SAA has only 17.6% of international market share against the 24% of Emirates, for instance. In the view of the FMF, this is not good enough to generate economies of scale.

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