By Thabile Wonci
JOHANNESBURG – South Africans were promised a radically structured airline by Finance Minister Tito Mboweni three months ago and we are still waiting with bated breath on what’s to come out of what seems to be strained working relations between Public Enterprises Minister Pravin Gordhan and SAA’s business rescue practitioners, Les Mutason and Siviwe Dongwana.
The core of the disagreement is the imminent future of SAA, whether it’s tenable to see the airline back on the air or must summarily wind down its operations after more than 80 years of flying the South African flag.
The question that we need to ask is if there’s still value for the state to owning a national carrier other than pride and patriotism?
Must the government continue with its involvement in the airline industry? Needless to say that SAA’s business model has been bloated and inefficient for years and has been nothing, but a fiscal drag.
All successful state-owned airlines share one thing in common – the government’s hands-off approach and no interference with the day-to-day operations. Ethiopian Airlines, Emirates, Qatar Airways and Turkish Airlines are such notable examples. Unfortunately, SAA stopped operating as a market-driven airline many years ago.
Notwithstanding Gordhan’s insistence that SAA is of national interest, South Africans and the markets alike are keen to know how the future of the restructured national airline will be funded. Will the South African government continue to guarantee its survival and at what cost?
There was always a case to restructure SAA, but sadly this was never backed by a solid strategic plan from its shareholder. By definition, a restructuring process can be taken to bring fundamental changes to the company’s capital or asset structure, sale of its attractive assets or even liquidation.
Therefore, the process of restructuring is interpreted as an attempt to change the organisational structure of the business in order to alleviate some or all of its short-run business constraints.
Restructures by nature are conducted in order to increase the competitiveness of a business and thereby enhance its value. And a restructuring process extends to changing the overall corporate structure in order to pursue a sustainable long-term strategy.
Usually, shareholders decide on a restructuring process for a number of reasons and with different objectives that they would like to achieve. The main purpose of restructuring must be to improve shareholders value, failing which the business will be susceptible to bankruptcy, liquidation or take-overs. Apart from maximising shareholders value, relief from debt obligation is among the famous reasons for business restructuring.
For SAA you can’t talk about restructuring without giving an indication as to where the money for working capital and business plan will come from. It is folly to believe that a corporate strategic plan must not be supported by a clear financial strategy with clear profit & loss and balance sheet forecasts. Key to the financial strategy must be funding sources – whether the current shareholder will inject the much-needed capital to fund operations, extend further guarantees to enable the business to raise capital from the credit/ bond markets.
Our preoccupation with SAA must extend beyond a mere restructuring plan to also include the nature of the restructuring, whether it’ll be an organisational or ownership restructuring type.
Clearly, the business has failed dismally to improve its weak financial performance and contain its debt levels. While one appreciates the role of the business rescue practitioners as defined in the Companies Act, however, there is no value left in SAA. The company has been on a steady course towards bankruptcy or liquidation. Its demise has long been inevitable.
As such, there is no compelling case that will ever justify further government spending in SAA. South Africa is marred with such poor performing and near-bankrupt state-owned entities. Inevitably, many instances of distressed state-owned enterprises (SOEs) have arisen because of particular finance structures and business models, heavy reliance on the fiscus and a complete absence of a vigilant shareholder. Given our constrained fiscal position, I foresee many SOEs already in financial distress will continue to struggle.
And with our government not being an effective shareholder or co-investment partner, it’s highly unlikely that we will see an arrangement between SAA, its creditors and staff members.
At the present moment, SAA needs a sufficient level of support from its affected creditors in order to explore a restructuring type that will involve debt transfers and debt for equity swaps. Having said that, who wants to have equity exposure in a business that’s already on its knees.
It would have been better if South Africa had a clear plan about the future of SAA and its involvement in the airline business. It’s futile and utterly wasteful to support an airline out of nostalgia and national pride.
SAA’s dormant business plan over the years actually rendered the business less innovative and slower to adapt to changing sectoral trends. Most daring, any business restructuring plan that SAA or its business rescue practitioners will come up with, will need to be backed by a solid capital injection.
Unfortunately, most banks have become less willing to lend to the company and for SAA to turn to other alternative sources of liquidity, they will need government support.
South Africa does not even have a matured distressed debt market for alternate sources that can invest capital in SAA. There are many external shocks that thwart the restructuring of SAA’s business – illiquid debt market, lack of experienced distressed debt traders who are familiar with restructuring processes.
Perhaps sound leadership will be the realisation that SAA has ran its course.
A silent plea to our government to focus on other things.
At best, hand over the management of SAA to Ethiopian Airlines through a management agreement.
South Africa has no endless flow of funds to keep bankrolling a failed national carrier out of sheer patriotism and national pride.
Thabile Wonci is the chief executive at Kogae Rainbow Investment Holdings and a senior partner at Kogae Advisory Partners.
