Pravin Gordhan’s Hobson’s Choice at SAA

There is been an increasing cacophony of calls to close down SAA. The airline is costing the South African taxpayer so much money it threatens the fiscus and our sovereign credit rating. And it just keeps getting worse. The airline is a drug addict, always coming back for – and being given – its next fix.

New CEO Vuyani Jarana has demanded a further R5-billion “now”. This is in addition to the R10-billion already given to SAA six months ago, and he says the airline will require a further R12-billion to stay afloat over the next three years. It’s losing R5-billion a year at the moment and flying 6.5 million passengers, so each passenger is being subsidised by R770 – up from R500 two years ago.

The poor need these funds – yet they are subsidising airline passengers. This is diabolical, and it’s going to get worse. Jarana is cutting routes, which reduces revenue, so the losses will increase.

The decision Pravin Gordhan must take is whether to believe management can turn the airline around with the R17-billion it has budgeted. And as an aside, they are also demanding not just this R17-billion to fund operating costs, but an unspecified larger amount to recapitalise the airline to reduce the R20-billion debt burden.

The precedent is not good. The taxpayer has even less basis to believe that this time around the management team will be any more successful in turning the airline around than the 10 that have preceded it. In fact, the odds are longer, as management haemorrhaged its best talent under former Chair Dudu Myeni. And the airline market has changed – making it far harder for SAA to compete.

Each new CEO has been appointed with much fanfare and the expectation that this time it will be different. Yet it never is. The losses just get larger and from past performance, this will be another R17-billion down the drain – and then it will demand more.

So what should Pravin Gordhan do? The easy answer is to yield to the chorus shouting that it must be shut down. But even if we leave aside considerations of social and political impact, and look at only the hard numbers of shutting it down, it’s just not feasible.

Can SAA really just be closed down – or sold off? The hard truth is no. There are no plausible buyers for a terminally ill airline, and it will cost far more than the currently demanded R17-billion to close it down. For starters, the airline still owes the government around R20-billion, which would have to be written off. And it owes banks R9.8-billion for operating capital loans. Call it R30-billion.

What about the assets? To put it bluntly, there aren’t any. Almost all its fleet is now leased. An Airbus A330 costs around R3-billion and the airline has 11 A330s and 17 A320/319s – most still relatively young. I estimated at the end of 2017 that the airline owes R43.40-billion on aircraft leases. It’s hard to determine what losses the airline would incur if it cancelled these leases – but it can’t just hand back the keys and leave the lessors with the “cold comfort of concurrent creditors”. That’s because those canny lessors put in cross default clauses with the other state institutions so that if SAA defaulted, many other leases and loans would become due.

When former SAA CFO Wolf Meyer warned of this risk it was estimated it would expose the state to having to find another R300-billion to pay back the other SoE loans. So the state would have to settle the aircraft leases. With end of lease costs this could be perhaps R10-billion – for a total R40-billion cost to close the airline down. And that excludes 10,000 severance packages.

The bottom line is that Gordhan has no choice – he just has to find another R17-billion for the airline’s next drug fix, or find the R50-billion to settle debts and wind it up, or face R340-billion in consequent liabilities if the airline is allowed to crash and burn.

We just have to hope and pray that this time around this particular management team can turn it around and sell of a chunk – or all of it, as a going concern. DM