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How SAA avoided a crash-landing

2019-12-08 20:00

With funds depleted and liquidation looming, Ramaphosa could not afford the airline collapsing on his watch

National carrier SAA was just hours away from total collapse when the decision was taken to place it into business rescue.

With funds running out, booking agents stopping selling tickets, ticket insurers dumping the airline and lenders unwilling to touch the company, SAA was facing what board members believe would have been one of the biggest corporate failures in South African history.

Global ticket sales fell by 40% in a matter of days and lenders began calling in their money.

“In banking terms, we call this a run on the bank. We had a run on the airline,” said an SAA insider.

A source in Ramaphosa’s inner circle said that when Cabinet took a decision late last week on “radical restructuring”, as Public Enterprises Minister Pravin Gordhan announced on Monday, there was a sense that the situation could be turned around.

“But things escalated too much and a decision on the business rescue had to be made,” said the source.

“It could have been worse if that decision had not been made. The lenders were calling in their loans.”

An SAA board member told City Press that last month’s wage strike, which cost the airline more than R50 million daily, had triggered a chain reaction that led to the run which hurt cash flow badly.

The striking unions’ warning that it was not safe to fly with SAA as some of those at work were unqualified personnel, had a hugely negative effect on SAA’s reputation.

“People considered all these things, which then affected our reputation and our forward-booking because people book tickets ahead by anything between six and 12 months,” said an SAA source.

In the past week, board members were spending hours with creditors “begging them not to call in their loans”, without any success.

Executives had to prioritise spending.

“We had to prioritise the payment of fuel, lessors and other related services to ensure that we could continue flying,” said a source.

All the plans were already in place to stop operations if the funding challenges were not resolved timeously.

CATASTROPHE WAS IMMINENT

“All the plans were already in place to stop operations if the funding challenges were not resolved timeously. If we had stopped flying for one day, that could have been the end of the airline. We were very, very close [to stopping flying]”, said the SAA board member.

In the meantime, the board and management were in “intense discussions” with lenders and with the government as the shareholder.

The lenders would not touch the airline in the absence of “certainty that the company will continue going forward, and not just for a month or two or three, but also that the shareholder will be able to repay”.

“We were very close to running out of money. And, without funding from lenders or the shareholder, we would have had to close. So, there were just two options on the table: the business rescue, which is not totally ideal, or liquidation. Now if we had liquidation, there would have been chaos at the airport,” said the board member.

A shutdown of Africa’s biggest airline would have affected subsidiaries such as Air Chefs, SAA Technical (Saat) and Mango.

Other airlines such as Comair, and many other international airlines which land at major airports, would have been affected as Saat supports them with maintenance services.

The Airports Company SA, aviation services company Swissport and Air Traffic & Navigation Services would all have taken a significant hit as SAA is their main client.

Although the national carrier employs just under 12 000 people, all in all about 470 000 employees would have been directly and indirectly affected.

“So, it is a wider economic issue and I think that is why the shareholder understood that it had to support the airline,” said the board member.

A highly placed government source said that if SAA was liquidated, it would have had to pay the full amount owed to creditors – and the fiscally strained South African state would not have had the money for that.

The collapse of SAA on President Cyril Ramaphosa’s watch would also have damaged him politically.

Gordhan was unable to persuade Finance Minister Tito Mboweni, who has taken a tough stance on cash-guzzling state-owned enterprises (SOEs), to extend a loan guarantee under the prevailing circumstances.

“When you go to a bank as an SOE, the bank must say that in the event that you default, who is going to pay? And that is where Treasury comes in. Gordhan felt strongly about the guarantee, but Treasury did not bite,” said a Treasury official.

An intervention by the Banking Association SA which contained strict conditions, including that both Gordhan and Mboweni co-sign the guarantee and that made some reference guarantee of ticket sales, was also rejected by Treasury.

ENTER THE RESCUE PRACTITIONER

The breakthrough came on Wednesday, when lenders agreed to provide a R2 billion package on condition that the airline was managed by a business rescue practitioner who would “decide how the money will be used to ensure that value is preserved”, said the SAA insider.

“Ultimately, the lenders dictated that they would provide funding under certain conditions. If the lenders said no, we would probably have had to liquidate.”

The government agreed to give SAA a cash injection.

There was more haggling over the business rescue practitioner, with Gordhan insisting on a black professional while the board felt he lacked the experience that the grave situation demanded.

Gordhan, who has been accused of purging black executives and promoting whites in SOEs, was concerned that the “optics would be wrong if a white practitioner was appointed”, said the insider.

In the end, veteran practitioner Les Matuson – who has managed business rescue at African Bank, Evraz Highveld Steel and Vanadium, Steinhoff’s Mayfair Holdings and some Gupta companies – was appointed by the board. He will work alongside a mainly black team from audit firm Deloitte.

Matuson now has two weeks to determine whether the airline can be saved or liquidated, and assets sold off to pay creditors.

He will then have another two weeks to propose a business rescue plan and restructuring proposal to creditors and the shareholder.

A government source said: “The rescue could still come back. This thing is viable and the state could still keep it if you do certain things. Or, it could come back and say that the state must just sell this thing, or recommend an equity partner. But the views of the rescue practitioner could still be influenced by the shareholder.”

THE UNIONS WANT JARANA

The major unions organising in the aviation sector have vowed to ensure that SAA and government toe the line in saving the 11 000 jobs at stake as the national carrier undergoes business rescue.

The unions have also placed a negotiating condition to government, saying they want ex-SAA chief executive Vuyani Jarana back as part of the business rescue expert team.

This week, the SA Cabin Crew Association (Sacca) and metalworkers’ union Numsa announced that they would support Solidarity’s pre-Thursday application for the airline to be put into business rescue under a practitioner of their choice.

They have now also written to government saying that they want direct input into the turnaround strategy.

Speaking to City Press, Sacca president Zazi Nsibanyoni-Mugambi said the only other option put on the table by the three unions was to have a court-appointed practitioner run the process.

“We have a problem with this hand-picked candidate and the minister was clear in his media statement that he was actually giving him the scope of what he is supposed to do, which is wrong,” she said.

Numsa spokesperson Phakamile Hlubi-Majola said the unions also wanted Jarana to be part of the process.

“We have insisted that we will only accept the rescue process if it includes Jarana as an expert to assist the rescue practitioner ... If the intention was to rescue, then they should not have a problem with bringing Jarana on board as an expert. We want to save these jobs. We cannot afford to lose 11 000 jobs; that is what we are fighting for,” Hlubi-Majola said.

The unions dismissed views that the recent week-long wage strike at the airline was what pushed the ailing national carrier over the edge.

They said one of the reasons for their strike was to avoid exactly the mess SAA is in.

“Our purpose for that strike was to force a change in behaviour in the board, the management and the shareholder, especially relating to their procurement spend, which is what got them into this mess,” said Hlubi-Majola.

JOBS ON THE LINE

While the unions insist that there should be no job losses, government officials insist that there is no way a post-business rescue SAA can carry its workforce.

A senior official said that placing SAA in business rescue also removed it from all the other influences that were outside the business imperative, such as political consideration.

“Dysfunctional SOEs are draining money from service delivery. That thing subsidises the life of the rich and the middle class, and not the poor, because they are the ones who fly.

“The jobs are also overpopulated. Out of up to 12 000 staff, we need about 7 000. So, about 5 000 have to go if you are serious about running the economy. Job creation should be about the reality and the quality of the job.”


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January 26 2020