SAA needs extra R6 billion from state as costs bite

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South African Airways (SAA) warned yesterday it would post a loss this financial year and said it was in talks with the government for a recapitalisation of about R4 billion-R6 billion to fund operational costs, its growth strategy and fleet renewal, Business Day reports.

The injection of state funds would be in addition to the R1.3 billion subordinated loan SAA already has from the government, and the R1.6bn “going concern” guarantee it obtained to underpin its cash requirements after the auditor-general raised concern last year about its ability to generate sufficient cash to fund operations, Business Day newspaper reports. “This year we will have to go through the same process and the guarantee required will probably be higher,” SAA chief financial officer Wolf Meyer told Parliament’s public enterprises committee yesterday.

SAA’s weak balance sheet would also have to be addressed if it was to finance its future growth and fleet renewal, as its debt to equity ratio was “high”, Meyer said. The funds it needed depended on the growth strategy adopted. The form the aid would take was still under discussion, Business Day says. Meyer confirmed in an interview with Business Day the that the airline “would probably be in a loss situation” in the 2011-12 financial year to end-March. This is an indication of the soaring operating costs after it reported a net profit of R782 million for the year to end-March 2011 and a R442 million profit the previous year.

SAA chairwoman Cheryl Carolus insisted in Parliament yesterday that the billions required was not a bail-out for mismanagement or for “going wild”, but to fund SAA’s future growth. She urged that this injection be seen as part of SA’s infrastructure expansion programme and dealt with in the same manner as Transnet, which is undertaking infrastructure expenditure of more than R100 billion.

The Department of Public Enterprises’ deputy director-general responsible for transport, Raisibe Lepule, said yesterday it was “fully behind” SAA’s request. The department believed SAA needed to be an appropriately capitalised airline, and one able to deliver on its growth strategy. Carolus said SAA’s capacity to generate its own cash had been decimated by the soaring fuel price, which had taken a “huge whack” out of operating profit. The weak and volatile rand had also had a significant effect, she said. The trading context was “very tough”.

SAA CEO Siza Mzimela said it was “sad” that high fuel costs had “completely” wiped out the strong gains SAA had made in growing revenue and passenger numbers and expanding its route network. The Durban to Cape Town route, which previously had made a loss of about R90 million for both SAA and Mango, had become profitable in the last three months. As part of its future growth strategy SAA would like to increase its three times a week direct flight to Beijing to a daily service connecting Latin America and Asia. Expanding African routes would also be a priority.

On the fleet renewal programme, Meyer said SAA was looking to take delivery of 20 narrow-bodied Airbus A320 for its domestic routes between next year and 2017. It also needed to start planning for the replacement of the wide-bodied international fleet for delivery from 2017-18. Mzimela reported that baggage pilferage had [decreased] significantly since all role players such as Airports Company SA and ground-handling operators implemented “Project Zero”. The rate of reported pilferage at OR Tambo International Airport had fallen from 0.76 incidents per 1000 passengers in July to 0.35 in December and there had been multiple arrests and suspensions at the airport.

State-owned airline SA Express could also be facing losses this year. CEO Inati Ntshanga said yesterday the airline’s fuel costs were R100 million over budget and operational costs were beginning to exceed revenue. A profit of R127 million had been budgeted, compared with last year’s R51 million bottom-line profit. Whether this materialised or not, or whether SA Express reported a loss, would depend on how its auditors decided to deal with R32 million in nonrecoverable value-added tax claims — accounted for as trade receivables — and in what year the amount had been written off.

These unaccounted-for debts, brought to light by a whistle-blower in September last year, meant that SA Express would have to withdraw and restate its 2011 financial statements, Ntshanga told the public enterprises committee members. Restatements for 2009 and 2008 might also be necessary, he said.

Committee members said they were enraged that Parliament had been “misled” about the figures, Business Day says. SA Express chairwoman Lilian Boyle said that “we were all misled” and questioned the role of the auditors in the saga as s ome of the anomalies had dated as far back as 2006. Matsotso Vuso, head of the SA Express audit and risk committee, said the amounts concerned fell below the materiality threshold applied by its auditors.