Abu Dhabi, UAESunday 6 December 2020

South African Airways future far from certain despite government efforts to save it

The airline has survived on state bailouts and debt guarantees from the government for several years

South African Airways needs another government bailout to stay afloat. Reuters
South African Airways needs another government bailout to stay afloat. Reuters

South African Airways (SAA), the embattled state airline, appears doomed unless the cash-strapped government of Africa's most industrialised nation can find money to save the carrier.

A loss-making entity for more than a decade, SAA in December last year was placed into business rescue – a process of independent administration to revive ailing businesses if possible, or shut them down.

The airline has survived on state bailouts and debt guarantees from the government for several years. Its hopes of a return to profitability through administration took a serious blow when Covid-19 brought the global travel and tourism industry to a halt.

At a time when some of the world's most profitable and best-run carriers are struggling to survive, the fate of SAA – which grounded all its aircraft in March – seems all-but sealed.

“It’s pretty bad,” says Des Latham, a Johannesburg-based aviation analyst.

SAA, before going into administration, had around 40, mostly newer Airbus aircraft but it handed back the leases and kept just nine that it owned outright.

“It has retained the older Airbuses, which are 15 per cent more expensive to fly. So you can see, they’ve already built a problem into the changes they are trying to make,” says Mr Latham.

Ethiopian Airlines, Africa's aviation success story, has offered a partnership of sorts, but only if SAA makes a fresh start.

“SAA has a lot of legacy issues such as debt,” Ethiopian chief executive, Tewolde GebreMariam, told the South African state broadcaster SABC earlier this month. It owes almost 13 billion rand ($803.24 million), mostly in local bond issues.

Before the pandemic, Ethiopian carried more than 13 million passengers annually, while SAA moved only 4.5 million, according to the International Air Transport Association.

Ethiopian Airline's offer essentially includes aircraft, pilots and other technical resources to help SAA bounce back.

“Our offer focuses on the newly [restructured] airline,” Mr GebreMariam said.

Kgathatso Tlhakudi, director general of the Public Enterprise department, under which SAA falls, last week said the government is looking for a partner to relaunch the airline.

“We need a strategic partner for the clean-up [of the] airline, with a new balance sheet,” he said. “This work will take a while to realise, but we hope to be able to announce who that strategic partner will be before the end of this year.”

Mr Tlhakudi’s boss, South Africa's Public Enterprises Minister Pravin Gordhan, is fighting to keep the airline aloft. The ministry estimates SAA needs immediate financial help of 10.5bn rand to cover debt repayments, restructuring costs and immediate operational expenses.

For now, Mr Gordhan appears to have won a long-standing face-off with the country's Minister of Finance Tito Mboweni, who previously said the best option for SAA is to “close it down.”

Last week, Mr Gordhan said the state stood by its decision to find the money needed to complete the restructuring.

“At the end of the day we have a clear government mandate, authorised by a cabinet decision to move in the direction in which we are heading," he said in an interview with Johannesburg news website, Business Live.

Mr Gordhan insists that South Africa, which lies far south of the world’s major trade routes, needs SAA for “strategic purposes”. The airline remains a bridge to the world, and without it the country will be entirely dependent on foreign carriers.

Despite the logical arguments to keep the airline afloat, it remains unclear where the government will get the required funds. The treasury has predicted a 300bn rand shortfall in tax revenue this year, as the country's economy struggles to bounce back from the devastating impact of the Covid-19 pandemic.

Currently, the state is in talks with the International Monetary Fund for a $2bn loan. A letter from the IMF to the South African government, leaked last week by opposition members of parliament, showed the IMF's reluctance to approve the funds being used to bail out loss-making entities such as SAA.

“With respect to financial support to South African Airways, as we have noted in the past, subsidies to persistently loss-making state-owned enterprises, as elsewhere, need to be weighed against alternative uses of scarce public resources, including investments in alternative growth-enhancing and/or poverty-reducing investments," according to the letter obtained by parliamentary opposition party the Democratic Alliance.

Critics say the government should abandon efforts to rescue SAA and any additional funds it can find should go to crucial services.

“It’s inhumane to take away money from health, away from schooling, which is much needed in the country,” says Thabi Leoka, an economist in Johannesburg.

“We can live without it [SAA] – it's not ideal, but other airlines can service the country. Whatever little we have, we must allocate appropriately.”

Updated: October 25, 2020 03:01 PM

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