More money for SAA but government wants assurances

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The South African government has provided R5 billion in loan guarantees for struggling national carrier South African Airways (SAA) but wants a clear turnaround strategy for the airline.

Public Enterprises Minister Malusi Gigaba yesterday said that a team had been set up to advise SAA on a turnaround strategy so that the airline could be stabilised. The team will include chairperson Vuyisile Kona, the CEO of Mango Nico Bezuidenhout, and South African Express CEO Inati Ntshanga. It has two months to come up with measures to turn the airline around. The team will show how SAA can be made independent of government support over the medium term.

SAA reported a R1.3 billion operating loss for the year ending March 31, which Gigaba said was below expectations, and R128 million in irregular expenditure. Of this, R4 million was deemed to have been wasteful. SAA increased its revenue in 2011/12 by 6% (to R23.9 billion), but this was offset by a 17% rise in operating costs to R25.2 billion.

The state-owned airline has accumulated losses of R14 billion over the last few years and received more than R15 billion in shareholder support. The government this month promised to shoulder R5 billion in loan guarantees for the airline. The Department of Public Enterprises’ director-general, Tshediso Matona, said on Monday that “The guarantee is for two years and allows the task team…which includes the Treasury, to develop plans for the airline’s future.” He emphasised that the R5 billion guarantee was a “recapitalisation instrument, it is not a bail-out”. 

The Department of Public Enterprises said in a statement on October 2 that the R5 billion guarantee would require the airline to develop a turnaround strategy to be approved by it and the finance ministry. “The guarantee will enable SAA to borrow from the financial markets, thus ensuring that the airline continues to operate as a going concern,” it said. The airline will also be required to provide the government with its financing strategy for a planned purchase of airplanes, the department said. This is necessary to cut down on SAA’s fuel bill, which increased 36% from R6.1 billion to R8.3 billion in 2011/2012.

Earlier this month the chief executive of SAA, Siza Mzimela, stepped down, and was followed by another two managers. Mzimela’s exit comes only weeks after the resignations of chairwoman Cheryl Carolus and eight board members. Shortly after the resignations, Gigaba, appointed eight non-executive directors to complement the remaining members of the board, and appointed Kona as new chairperson. It was anticipated that the terms of the majority of board members would come to an end at the annual general meeting scheduled for 15 October.

Gigaba this week said that the government has no intention of privatising SAA as it is too strategic for the government’s economic and developmental goals.
“The R5 billion loan guarantee given to South African Airways (SAA) by the National Treasury while one of the last intrepid private airlines, 1time, is facing bankruptcy is indicative of the uneven playing field in the South African aviation industry,” said the Solidarity union.

Piet le Roux, senior economics researcher at the Solidarity Research Institute (SRI) said that what is happening in the South African aviation industry is a process of destructive destruction. “Poor ideas and products displace better ideas and products: SAA, aided by the state, destroys its competitors, even if these competitors are better.”
“An indication of the competition-destroying effect of the special treatment given to SAA, compared to that given to the private airlines, is that only two of 11 private airlines that have spread their wings along with those of SAA in South Africa since the early 1990s are still in business today.”