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Choosing to liquidate South African Airways, which was voluntarily rescued from business in December last year, is not simply an easy way out.
This is according to aviation economist Joachim Vermooten, who argues that the cost of the possible SAA liquidation is still difficult to determine. This is because SAA’s annual financial statements, which should have included assets and liabilities valued at net realization values, have not been released, as required by law.
It is estimated that for approximately 14 years, the state flag operator has incurred more than R28 billion in accumulated losses, although it has repeatedly been given lifelines thanks to government assistance or guarantees. In the 2020 Budget, for example, SAA was assigned R16.4 billion, of which R11.2 billion corresponded to the airline’s debt service costs.
What once again increased the stakes on an impending liquidation was that the Department of Public Enterprises (DPE) informed business rescue professionals (BRP) on Friday last week that it had rejected a request for additional financing of R10 billion. BRPs were told in a letter that they would have to continue the commercial rescue process with the available resources.
A report on SAA is expected to be released Monday.
“The SAA liquidation would reduce future ongoing operating losses, but will require payment of debt incurred under government-owned tenure and some administrative costs,” says Vermooten.
Liquidation of an SOE
Vermooten believes that the liquidation of a state-owned company (SOE), such as SAA, differs from the liquidation of ordinary companies, in that creditors (customers, suppliers and employees) rely on the so-called implicit guarantee of continued financing by the state. Therefore, your claims cannot be avoided simply as would be the case with unsecured creditors in a conventional company, in Vermooten’s opinion.
When looking at the actual cost of liquidating SAA, the impact on SA’s post-Covid-19 recovery plan should also be considered. Vermooten emphasizes that civil aviation networks are essential to the SA economy. In his opinion, state financial assistance in a non-discriminatory manner to all airlines proportionally to their market shares before regulatory grounding orders and the closure of the security operation should be part of the country’s economic recovery plan. .
For example, SAA was able to repatriate several South Africans who were stranded abroad and continues to carry cargo flights, including essential medical supplies to combat the pandemic.
Brian Pearce, chief economist at the International Air Transport Association (IATA), recently commented that there is still significant demand for cargo flights, but this could decrease as the global recession becomes more and more established. Nor does it make up for the lack of revenue from Lack of passenger travel.
According to recent IATA projections, the impact of the coronavirus pandemic on the South African airline industry could amount to 10.7 million less transported passengers and a loss of approximately R40 billion ($ 2.29 billion). He made the projections assuming that coronavirus restrictions are not prolonged and airlines can start flying again.
No other way
But Intellidex analyst Peter Attard Montalto is convinced that the SAA liquidation path has already been established.
“Although it was inevitable, the timing was always in doubt, as the DPE fought for money to keep the undead alive and the National Treasury tried to kill him. The Treasury has won and this is rare positive news,” says Montalto. “We hope (the BRPs) will wait a bit, but eventually they will be forced to apply for settlement in court. This if the leasing companies don’t land the fleet first since the situation is not salvageable.” He says there are debates over how much the liquidation would cost, ranging from R2 billion to R60 billion. This takes into account that most of the repayment of the outstanding guaranteed debt has already been allocated in the national budget.
Other creditors that come to mind for Montalto include Comair, to which SAA still owes around R700 million as part of a court settlement, as well as the money likely due to travel agents with outstanding reservations.
“There is currently a suspension of all creditor shares under the BRP process, but the floodgates will open as the liquidation occurs. For investors, the key is for banks to not speed up their claims given the already allocated money from the Treasury. National and that the liquidation cost itself is low, “says Montalto.
But is that the real problem?
For Vermooten, the key issue relates to the scale of activities that should be operated by a “post-bailout SAA”.
In his opinion, some other options for BRPs could include the sale of the SAA Mango and SAA Technical subsidiary to raise some money. They could also choose to dispose of equipment that would not be used in the future.
Another option could be to “restart a new SAA” with a smaller international network. He believes this could be funded largely by new investors, which could include large international airlines and the SA government with a minority stake.
Alternatively, SAA could “restart” as a smaller international franchise airline under contract with a large international airline. However, both options would require a change in legislation to allow more foreign direct investment in South African airlines.
