South African Needs Up To Another $1.2b/16.7b Rands To Complete Turnaround

Floundering state owned carrier, South African Airways, has requested further bailout money from the South African government. This comes just a month after it received its last cash injection of five billion Rands ($358m), which has apparently already been spent.

The flag carrier said they used three billion Rands to repay some of the SAA debts, and the rest went on ‘practical capital requirements’.

Speaking to Simple Flying, a spokesperson for SAA commented,

We have developed a five-year turnaround strategy with the support and endorsement of our shareholder (government). The airline has not been properly recapitalised for many years and this will be part of the implementation plan. This will be a journey with targeted break even performance in three years. In driving the execution of our strategy, we have begun to focus on profitable routes, right aircraft for the routes and markets we serve as well as overall cost alignment including the right skills and optimal capital structure.

A full and effective execution of the strategy will be enabled among other things, by a response to our funding requirements. We have quantified our funding needs and believe we are on the road to financial recovery. Our request to the shareholder under the current management and the Board, (announced earlier this year) has been of R21.7 billion in a period of three years and we have not shifted any goal posts on this. We have received less than a quarter of the amount we requested. We however  remain focused and encouraged by the results of our half-year performance which confirm that we are in the right trajectory. We must sustain and improve on this performance to ensure that the airline realises financial self-reliance in the shortest time possible.

Of the total amount, SAA have requested to receive 3.5 billion Rands ($250m) before the end of this year, and do not expect to be posting any profit until at least 2021.

What’s the problem at SAA?

According to the CEO, the key issues facing the carrier included a weak balance sheet and negative equity, not to mention bad publicity (possibly in reference to a BBC article published earlier in the month claiming SAA were on the verge of bankruptcy).

Outsider speculation lays the blame at the feet of the management, saying persistently poor management of the airline has led it to this disastrous point. Although the government bails out their airline time and again, it’s the nation’s taxpayers who end up footing the bill.

Many claim that SAA is nothing more than a vanity project, and that it should be abandoned and sold, although at this point in time it’s probably not worth very much at all.

It seems that the trend for poor management may not have been entirely bucked yet. Chief executive Vuyani Jarana led the presentation to government to demand more bailout funding but had no backup plan in place. According to him, it’s bailout or bust.

And yet, it has emerged that, despite their ongoing cash flow problems, SAA senior management are earning ridiculously large sums of money. Jarana himself gets paid 6.7 million Rands a year – that’s almost half a million dollars, and, of course, never misses a salary payment.

Vutani Jarana, new CEO of SAA and the recipient of a half a million dollar salary

Missing money?

According to South Africa’s Times news agency, in 2009 the SAA board members found numerous violations of the Public Finance Management Act, including discrepancies with tendering and procurement processes.

The former chair of the SAA board, Cheryl Carolus, testified this week before the state capture commission. According to her, the criminal charges and civil cases that were being brought against senior management at SAA have seemingly disappeared.

“We understood SAA was on very shaky ground … We came there and there was no CEO, there was an acting CEO. We set about acting on that and as a consequence we were advised to lay criminal charges and civil actions to retrieve monies we thought were illegally obtained. I don’t know what happened to those charges,” Carolus said.

She commented that there were also issues around price fixing and anti-competitive behaviour. Staff had low morale and management was fragmented. She said that this prevented the airline from every really having an opportunity to compete globally.

Although these issues occurred over a decade ago, the ripples from the poor management of SAA are still causing earthquakes today. Whether the government does go ahead and sell a stake in the airline, or simply continues bailing it out time and again, remains to be seen.