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SAA cash crunch builds pressure for change

Jan 13 2016 06:35
Liezel Hill and Fin24

Johannesburg – Government is under increasing pressure to enforce changes at South African Airways (SAA) after the carrier lost access to a short-term credit facility from Citigroup, exacerbating an already weak financial position.

The US bank cancelled a R250m banking facility for SAA on December 24, Moneyweb reported on Monday, citing an internal airline document.

As a result, SAA may not have access to free cash as of January 15, the report said. SAA spokesperson Tlali Tlali confirmed the withdrawal of the Citigroup facility and said the company is preparing a statement on the implications for its cash flow.

SAA has been surviving on about R14bn of government-debt guarantees and last posted a full-year profit in 2011. The company, which has requested a further guarantee from Treasury, has had seven acting or permanent chief executive officers in less than four years.

“SAA is in a very, very precarious financial position - it is technically insolvent,” said Joachim Vermooten, a Pretoria- based independent transport economist who says the carrier should cut unprofitable capacity. “Fundamentally that situation can’t continue.”

Selling Mango an option

SAA carried 9.3 million passengers to, from and within South Africa during the 12 months ended March 2014, according to its most recent annual report, published in January last year. Its fleet at the time stood at 63 aircraft, including eight operated by low-cost unit Mango Airlines.

Fund-raising options include the sale of Mango, which is profitable, and the carrier’s SAA Technical maintenance division, Vermooten said. Last year, the company closed unprofitable routes to Beijing and Mumbai and renegotiated supply contracts as part of a cost-cutting plan.

Treasury is working with SAA to ensure the company has enough liquidity to continue operations, Phumza Macanda, the Pretoria-based ministry’s spokesperson, said on Monday by phone. A process to appoint a new board is under way, she said on Tuesday.

SAA’s board reports to Finance Minister Pravin Gordhan, after responsibility for the airline was transferred from the Public Enterprises department just over a year ago. Among Gordhan’s first public moves after his appointment last month was to order SAA to conclude a plane-leasing transaction with Airbus, overruling an attempt by chairperson Dudu Myeni to instead lease the aircraft from a third party.

Further risk

While SAA still had room for about R3bn of borrowings under its going concern guarantees, the airline was struggling to raise funds because lenders were wary of assuming further risk, according to an internal November 6 memo compiled by the company’s head of legal risk and compliance, Ursula Fikelepi.

The board should ask the government for an equity injection “to arrest the financial decline and resolve SAA’s going concern, financial distress and reckless trading concerns,” according to the memo. The company was also working on a plan to consolidate existing debt, it said.

SAA “needs to change direction, it needs to stop operating on a reckless basis, it needs to curtail its operations, become profitable,” Vermooten said.

Fire Myeni - DA

The current financial position may have been avoided if SAA managed to conclude an equity partnership agreement with Emirates, estimated to be worth more than R2bn, said Natasha Mazzone, a Democratic Alliance member of parliament and shadow minister of Public Enterprises.

“That would have given it a desperately needed cash injection,” she said in a statement on Tuesday. “But the deal did not materialise, having been allegedly deliberately scuppered by (SAA chairperson Dudu) Myeni under suspicious circumstances.”

Mazzone called on Gordhan to fire her, “given all the scandals and mismanagement at the airline”.

On Gordhan’s first day back in the hot seat, he made it clear that individuals would not be allowed to run state-owned enterprises as their own “personal toys”.

saa  |  treasury  |  airline industry
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