South African Airways (SAA) says that the latest cash injection from the South African government of 5.5 billion rand ($376 million) is not enough to keep it going. A presentation to the country’s lawmakers last Wednesday showed the 5.5 billion rand they approved for the 2019/2020 financial year was insufficient.
Having not made a profit for the last seven years, and with losses of 5.7 billion rand for the current financial year, South African Airways is in a difficult position.
In total, South African Airways debt is over nine billion rand of legacy debt and 3.5 billion rand of working capital that has been provided to them by the banks. During the presentation, the airline told the ministers that it needs a further two billion rand working capital between now and December.
While South African Airways’ problems are vast, the airlines has been hindered by management and the inability to pay its debts in an increasingly competitive market. The South African national flag carrier needed a five billion rand bailout by the government during the 2018/2019 financial year.
The plan the airline has come up with to get back into the black is a long-term strategy based on the injection of 22 billion rand.
The South African government is reluctant to keep giving SAA more money
The government is reluctant to keep funding the airline while not seeing what SAA is doing to cut costs and streamline operations in a time when the country is experiencing weak economic growth.
With conditions the way they are, the government is considering how it would go about finding a commercial partner for the cash strapped airline.
During the presentation, SAA management said they were in negotiations with lenders for two billion rand working capital, but that they would have to meet certain conditions before the cash would become available.
According to Reuters SAA told the lawmakers:
“Lenders have the following conditions.” “Repayment of short-term funding of 3.5 billion rand by September 2019, which is already provided for, and a debt reduction and payment plan for the legacy debt of 9.2 billion rand.”
($1 = 14.6272 rand)
How has South African Airways gotten into this mess?
First of all, while we do not know if it is true or not, some rumors suggest certain executives at the state-run airline may have misappropriated funds. This, of course, would not be the first time an airline executive has perhaps awarded a contract to a family member or friend, or done something that has financially benefitted them personally.
South African Airways’ long-haul fleet is old and made up mostly of gas-guzzling four-engine Airbus A340 aircraft.
SAA is behind the times when it comes to efficiency, often leaving aircraft sitting at airports overnight and flying back to Johannesburg the next day rather than undertaking a quick turnaround.
South Africa’s geographical location does not promote either Johannesburg or Cape Town as a stopover, unless you were looking to get to Antarctica. Ethiopia’s Addis Ababa Bole International Airport (ADD) is a much better hub to use to fly to other parts of Africa.
What this means is that South African Airways is relying on its domestic market and tourists to keep in business.
How can South African Airways get themselves out of trouble?
First of all, SAA needs to replace its old aircraft with more fuel-efficient twin-engine planes like the Airbus A350 or Boeing 787 Dreamliner. This, of course, is easier said than done when you do not have the money, which means SAA needs to stop flying routes that are not profitable and streamline their operations.
By streamlining operations, we are talking about downsizing and outsourcing work that can be done for less money by private contractors. Perhaps some kind of partnership or codeshare agreement with one of the Gulf carriers could work.
Using Dubai as an example, SAA could fly between Johannesburg and Dubai and then let Emirates do the rest. All of this is easy to talk about hypothetically when the reality on the ground is entrenched in South African politics.
At the end of last month, South African Airways’ CEO Vuyani Jarana resigned, citing uncertainty about funding and the delay of his turnaround plan for the embattled airline. Aviation website One Mile at a Time quotes Jarana as saying:
“The strategy is being systemically undermined, and as the Group Chief Executive Officer, I can no longer be able to assure the board and the public that the LTTS (long term turnaround strategy) is achievable.
“Whereas the government injected R5bn of funding in the 2018/2019 financial year, a big chunk of that was used to fund creditors up to the end of March 2018. We have not been able to obtain any further commitment from the government making it very difficult to focus on the execution of the strategy.
“I spend most of my time dealing with liquidity and solvency issues. Lack of commitment to funding SAA, is systematically undermining the implementation of the strategy, making it increasingly difficult to succeed.”
Prior to Jarana joining SAA in 2017 the airline had seven CEOs in five years, which seems to point to the fact the airline is being kept on life support rather than trying to make it a profitable business.
In my opinion, the South African government needs to stop treating SAA like a political football and either inject the cash it needs or wrap it up and allow a new privately-owned airline to take over the routes it deems profitable.