Liquidate SAA without delay 

The Organisation Undoing Tax Abuse (OUTA) calls on the Department of Public Enterprises and Treasury to liquidate South African Airways (SAA) and halt the drawn-out and exorbitant plan to revive what is an airline in name only.

“In our view, which is based on a considered analysis, SAA is beyond repair. Government should close it down and avoid wasting our country’s limited taxes. They should do the right thing and settle employees’ retrenchment packages and creditors’ compensation,” says Julius Kleynhans, Executive Manager for Public Governance at OUTA.

“SAA’s business rescue plan is fundamentally flawed and will fail,” says Joachim Vermooten, Transport Advisor to OUTA. “The plan is over-ambitious, based on unrealistic forecasts, does not take into account the depressing market conditions fuelled by the Covid-19 pandemic and, according to the Public Enterprises Minister, is only about half-funded.”

In his application to intervene in the Labour Court matter between the trade unions and SAA, the Public Enterprises Minister stated that DPE had requested R20 billion from Treasury for SAA’s rescue, but was only granted R10.5 billion. This previously undisclosed request exceeds the sum DPE had previously stated was the total required for SAA’s rescue and points to an almost 50% funding shortfall to complete SAA’s business rescue. By OUTA’s calculation, liquidation will cost several billion rand less.

“The plan’s estimated R2 billion to restart SAA’s operations is insufficient given the requirement to re-fleet and rebuild customer and supplier confidence in what has become an even more cutthroat market which requires deep pockets, agility, dexterity and optimised productivity. There is simply no room for the inefficiencies and flab that have characterised SAA and our SOEs,” says Kleynhans.

Amidst labour disputes, a failure to settle almost a year’s worth of unpaid wages and in defiance of the creditor-approved business rescue plan (BR plan), the DPE is determined to divert a quarter of the R10.5 billion Treasury appropriated explicitly for SAA’s rescue to Mango, SAA Technical and AirChefs, even though the plan makes no provision for them.

“It means the State is using the money for purposes other than those for which it has been made available. This will inevitably lead to increased future bailouts,” says Vermooten.

In their latest presentation, the business rescue practitioners (BRPs) stated that SAA’s subsidiaries would now be given R2.7 billion (for which no provision was made in the approved business rescue plan).  A further R600 million is budgeted for staff severance packages, for a total of R3.3 billion instead of the R2.2 billion contained in the BR plan.

To achieve this, the DPE and the BRPs have unilaterally slashed allocations intended for other purposes in the BR plan. They include:

• R1 billion less to cover the Unflown Ticket Liability (this reduces the BR plan allocation from R3.2 billion to R2.2 billion). Holders of unused SAA tickets were not allowed to vote on the BR plan at the stakeholders meeting on the basis that the BR plan guaranteed they, unlike trade creditors, would get 100% of their claims. The BRPs have been unwilling to explain how they managed to magic away a third of this liability when SAA has made no refunds or flown any customers who may have opted to rebook for travel at later dates.

• R600 million less to concurrent trade creditors. Because the approved BR plan determined an allocation of R600m to cover R8 billion in claims, this means trade creditors now stand to receive nothing.

• R1.7 billion less to aircraft lessors, again reducing the approved BR plan’s R1.7 billion allocation to zero.

Neither the DPE, BRPs nor SAA have accounted for the financial position of SAA, even though billions of rand were poured into losses incurred by SAA. No annual audited financial statements have been published since 2017. No update has been provided on the current level of losses incurred by SAA or on its real funding needs.

Upon implementation of SAA’s BR plan, the airline would already not be a going concern as the amount of R2 billion provided for its restart is insufficient to cover SAA’s first year loss of R 3.1 billion and the cumulative negative cash position of R7.4 billion at the end of its first year. (These figures are based on SAA’s optimistic restart business plan.) This would plunge the airline into the same financial distress cycle in funding past losses experienced since 2012. 

We believe SAA’s five-year business plan is deficient because:

• It does not include the salaries of the staff who accepted the voluntary severance packages (VSP) until their VSPs are paid out.

• It does not include the salaries of the staff who would remain behind at SAA, for its new start-up.

• It does not include ongoing mothballing costs and losses whilst SAA is not operating.

• It does not include funding of the start-up losses of R6.4 billion for SAA’s first three years.

• It does not include any provision for SAA’s loyalty schemes.

• The assumptions on traffic volumes, average fares and passenger loyalty have been much too optimistic. (As nothing was provided for maintaining passengers’ frequent flyer credits, or increased competition, the expected demand is more depressed than forecasted.)

• It underestimates creditor terms. Creditors who are expected to write off 92.5% or all their debt would probably demand deposits and prepayment for services instead of extending standard credit terms.

• The BRPs have been unsuccessful in selling any of SAA’s owned aircraft, which have been on the market for over a year.

“To put it mildly, SAA’s business rescue process has failed, with little prospect for the plan to be successful,” Kleynhans concludes. “Liquidation will be a one-off definitive expense instead of a perpetual and open-ended drain on the public purse.”

OUTA believes the long and drawn-out SAA business rescue has become a farce. If indeed the government continues to force this issue, OUTA will drive a concerted plan to call on all air travellers, tour operators and businesses to boycott SAA and Mango, as those who make use of the government’s airline would indirectly be supporting ongoing wasteful bailouts, which South Africa can no longer afford.

A soundclip with comment by Julius Kleynhans is here.