- It is unclear what Pravin Gordhan and Tito Mboweni mean when they say they will “mobilise” funds for a restructured SAA.
- Different tranches of money will be required as different aspects of the restructuring take effect, according to the DPE.
- An aviation economist says the government is playing conflicting roles as enabler and regulator of the airline market.
Minister of Public Enterprises Pravin Gordhan and Finance Minister Tito Mboweni on Thursday wrote a letter to South African Airways’ business rescue practitioners, committing to “mobilise” funding for restructuring SAA – but it remains unclear where the money will actually come from.
The letter, which does not mention particular amounts or sources of funding, was requested by SAA’s business rescue practitioners in order to determine whether a rescue plan, accepted by creditors on Tuesday, can actually be implemented.
According to the Department of Public Enterprises (DPE), which represents the government as SAA’s shareholder, the rescue plan projects that an amount of R13.1 billion will be required to fund the restructuring of SAA over the short to medium term.
Funding in stages?
“Different tranches of money will be required as different aspects of the restructuring takes effect,” the DPE said in a statement, confirming that a letter of commitment was sent to the rescue practitioners.
This raises the question whether the DPE intends to “mobilise” funding in stages.
The DPE makes it clear that the funding commitment gives effect to Cabinet’s support of a new airline “and the concerted effort to mobilise funding from various sources, including from potential equity partners for the uptake of the new airline”.
At the same time, the DPE acknowledges that the global airline industry has been devastated by the impact of the Covid-19 pandemic.
“There are possibilities for airline partnerships to improve the scale and scope of the aviation industry and ensure continuity of value creation to the South African economy,” states the DPE.
Yet, it is unclear whether “airline partnerships” would mean actual equity investment in SAA, or, as in past attempts with other airlines, to merely work together in order to create greater scale and cost savings.
As for ownership, the DPE said:
“[W]hile maintaining a certain level of presence in the ownership of the new carrier, it welcomes the attraction of a mix of local and international investor groups to provide the new airline with technical, financial, and operational expertise to ensure significant South African ownership whilst diversifying the investor base.”
Show the money
So, where will the money come from?
Mboweni has been clear in the past that there can, in his view, be no more money for SAA from state coffers. In fact, no money for SAA was allocated in his recent supplementary budget.
As for chances of getting more funding from local banks, it is unclear how much appetite remains to pour loans into SAA. The government has already provided four large local banks with guarantees totalling about R16.4 billion for loans made to SAA.
READ | SAA rescue plan hinges on the vote of these four banks
This amount has been accounted for in previous national budgets and is to be paid over the next three years. Whether this money will actually be available, however, remains to be seen, especially in the light of the destructive impact of the Covid-19 pandemic and related lockdowns on the SA economy.
As for finding a strategic equity partner for SAA, aviation experts have told Fin24 in the past that, in the light of the very negative impact of the pandemic on the aviation industry in general, they cannot see how any private investor would be interested in SAA, especially since continued government interference at the airline cannot be ruled out.
Furthermore, despite the DPE repeatedly stating that its vision is that of a commercially viable “new SAA”, which also plays a developmental role, it is uncertain whether these two objectives can successfully be “married” in a new SAA.
Playing field
State-owned regional airline SA Express is already in provisional liquidation, while JSE-listed Comair, which operates its own Kulula.com as well as British Airways domestically in terms of a licence agreement, is in business rescue.
Both Comair and private airline Airlink have put in large claims against SAA in the business rescue process. They form part of the group of concurrent creditors which stand to only get about 7.5 cents in the rand in terms of the rescue plan. Even SA Express is a concurrent creditor of SAA.
This raises the question of whether it is entirely “fair” for SAA to once again obtain state aid, while the whole of the aviation industry in the country is battling to survive due to the impact of the pandemic. State aid relates to funding provided other than on rational investment principles.
The question becomes especially relevant in the light of the government’s role as both the enabler and regulator of the air transport industry in South Africa, while at the same time also being a participant in a competitive market, explains aviation economist Joachim Vermooten.
Over the past decade, the SA government already bailed out SAA to the tune of about R30 billion. Since SAA went into business rescue, the practitioners already spent R5.5 billion. Furthermore, it is estimated in the plan that SAA will need R2.8 billion just to operate in July and August.
Vermooten points out that, despite the “excessive” level of state aid already granted to SAA in the past, the airline’s production declined to only 10% of the seats produced in the domestic market in 2018 and 2019.
Before the pandemic led to flight bans, three private domestic carriers as well as SAA’s own low-cost subsidiary Mango, operated at about double SAA’s activity level.
“Due to the conflicting roles of the government as enabler and regulator of the airline market and as the owner of a market participant, it is necessary to ‘level the playing field’ to achieve competitive neutrality contained in equal treatment of all market participants,” says Vermooten.
“The principle of equal treatment implies that all participants in the air transport market should be treated equally in terms of legislation, rules and opportunities. The government’s domestic air transport policy itself states that, to achieve effective and fair competition, it is important to treat all air carriers equally.”
Furthermore, he says the government’s current Covid-19 restrictions also impede the return of a healthy competitive air transport market. The funding envisaged in the business rescue plan, therefore, effectively “indemnifies” SAA against the impact of losses incurred during this lockdown period, while no such assistance has been made available to other carriers.
What is more, the rescue plan makes provision for a total of R2.15 billion for SAA subsidiaries Mango (which is not in business rescue), SAA Technical and Air Chefs. The plan also foresees R6.4 billion of losses and new debt of R12.6 billion after five years, which peaks at R14.3 billion after three years – all this based on “very optimistic assumptions”, according to Vermooten’s calculations.
“This will bring about further exposure to the fiscus to retro-active funding of SAA’s future losses. That implies the rescue plan [in effect] requires a funding commitment of R35.5 billion to R43.4 billion,” he estimates.
“The grant of state financial aid to SAA and regulating demand and supply in the market on uneconomic levels could turn back the clock to an effective subsidised air transport monopoly in domestic air services.”
