Guy Leitch.

Like watching reruns of a disaster movie, SAA has a ghastly fascination for most South Africans, especially the taxpayers. Latest estimates reckon the airline has blown over R50 billion, so we are all thoroughly invested in the success or failure of our once proud national carrier.

THE CURRENT SLOW MOTION train smash is the sale of a majority share to a strategic equity partner – the Takatso Consortium. The more time passes the greater the criticism of the deal. Public Enterprises Minister Pravin Gordhan is trying hard to make us believe that the ‘strategic equity partner’ (SEP) he has conjured up will finally put an end to this gross abuse of the taxpayer. I have my doubts.

The Takatso saga began a year ago. Gordhan was under great pressure to produce the long promised SEP to buy into what should be an unsellable asset – and much to my surprise, he did.

At face value the Takatso Consortium looked like a workable solution in that it combined three key ingredients: the airline operational know-how of Global Airways with the deep capital from Harith Partners and SAA’s remaining route network and assets.

Over the past year the criticism of the deal and the clamour for answers has grown into a cacophony. It has also caused open strife in government between the Minister of Finance and the Minister of Public Enterprises.

To help unpack the complex cloud of half-truths and accusations around the issues I will try answer the key questions:

‘SAA is going to break Gordhan’s promise of no more money’

Why does government need to sell SAA?

Since 2007 the airline has cost the fiscus around R50 billion – which should have been used to supply services to the poorest and not for a subsidy of wealthy airline travellers.

Then there is still the R16 billion worth of liabilities. Government would rather have this debt off their books and on a private entity’s. As long as the airline is a going concern, government does not have to find this R16 billion for a few more years.

What still needs to be done before the deal can be finalised?

The due diligence has been completed and the deal signed off. However there are still many tough regulatory hoops to be jumped through.

Since SAA was created by an Act of Parliament, this Act will have to be changed to permit a majority private ownership. Then there are the onerous licensing requirements, particularly getting an Aircraft Operators Certificate from the Civil Aviation Authority, which normally takes two years. Fresh applications will have to be made to the Air Services Licencing council – which has a massive backlog. And the deal is expected to require Competition Board approval – a submission which has yet to be made.

How long can SAA wait for the deal to be done?

SAA is haemorrhaging money at an appalling rate. The problem is – the airline is 20% of its former size, but is selling less than 10% of its pre-business rescue seats – and at questionable yields.

If it takes another year for the deal to be done, SAA is going to break Gordhan’s promise of no more money for it, by coming with begging bowl back to the taxpayer.

Why does Takatso want this deal?

The key reason is almost certainly because the airline has billions of Rands worth of assets, yet is being sold to Takatso essentially for free. Yes, Takatso promised to contribute R3 billion towards operating costs. But this is almost certainly not going to be sufficient to get the airline to a sustainable going concern condition. This has naturally given rise to accusations of an asset raid and the family silver being sold off to cronies.

There is also the concern that Takatso may use Harith Partners to access Public Investment Corporation funds and the Government Employee Pension Fund to mobilise cheap money for further bailouts. There is however at least some comfort that we have been assured that that this is not going to happen.

When the Takatso deal was announced many dared hope it would plug SAA’s losses.

What are the billions of Rands in assets SAA has?

In the face of mounting criticism that SAA was being given away, DPE issued a press release which claimed the airline was worth zero. Then the government appointed a private consultant to do a valuation, and they came up with a value of R859 million – which is a whole lot more than the notional R51 that Takatso is paying for a 51% share. But even R859 million may be far too low.

SAA has billions of Rands worth of tangible and intangible assets. Tangible assets are its land and hangars, and the airliners it owns. The land and hangars are on the 2018 balance sheet at R2.2 billion, others claim a more realistic valuation is around R10 billion.

SAA leases most of its aircraft, but unfortunately it still owns eight A340s outright. To replace the A340s with new aircraft would, at list prices, cost U$ 350 million dollars each – more than R5 billion apiece or R40 billion. However these old four-engine jets are no longer in demand, so all eight are worth perhaps U$ 20 million – or just R300 million.

Less easy to value are the routes and landing rights. SAA still has slots at Heathrow and these slots have been sold for as much as U$75 million (say another R1 billion) in 2016. However, the market has changed and it’s now far harder to trade slots at Heathrow – or any other airport.

SAA’s regional route rights are coveted by its rapidly growing competitors: Airlink, CemAir and Safair, so they must have significant value. However, they are supposed to have been allocated on a ‘use it or lose it’ basis and if SAA does not use them soon, then the Air Services Licensing Council may allocate them to SAA’s competitors anyway.

What about SAA’s debt?

As noted, the government is committed to pay off R16 billion of SAA’s historic debt, so the

consortium essentially gets the asset without any bank or finance debt. However, SAA still has payables of R3 billion, and these are increasing daily as the airline continues to operate at a loss. There is an additional large unflown ticket liability, plus the R900 or so million claim from Airlink for money payable to Airlink for ticket sales during the business rescue.

Add all the assets up and you get a value of around R3 – R10 billion with perhaps the same for the liabilities. So perhaps it really is worth nothing.

Takatso will be paying R3 billion over two years to cover operational losses. Could Takatso and Harith Partners get away with simply borrowing this R3 billion against SAA’s balance sheet?

Remember that no South African banks were willing to lend to SAA without state guarantees before the business rescue. (This may be one of the key reasons for the delay in finalising the deal.)

‘there has been little t alk of recapitalising the airline’

SAA may eventually present financial statements which show a positive net asset value, but if the assets are in property and intangibles they are not realisable and that is what lenders will be looking for. Furthermore, Harith already has billions of dollars under its control so they should have plenty of resources to fund SAA’s ongoing operations without having to leverage SAA’s non-existent balance sheet. So yes – Takatso will have to pay its promised R3 billion.

What of the future? Can we expect Takatso to rebuild the airline into a profit-making entity that we can be proud of?

It is an impossibly tall order. There are many reasons: A primary one is that the airline has shrunk to a shadow of its pre business rescue size. Further, it has lost many of its most valuable routes to competitors.

Then there is the actual shareholding: government claims it still has a ‘golden share’ which enables it to impose its own development agenda on the airline. This could involve a repeat of other failed attempts to use SAA as a tool to develop South Africa’s trade (such as the Beijing route which lost R1 million every time it flew.)

Even though the Takatso consortium has promised R3 billion to fund operating costs, there has been little talk of recapitalising the airline – and lack of capital was claimed to have been one of its biggest weaknesses over the past 15 years. With an insolvent balance sheet the airline is not going to be able to replace its obsolete fleet of aircraft. In particular, it is yet to restart long haul flying. Part of its problem must be that it has a fleet of gas guzzling four engine dinosaur aircraft with obsolete in-flight entertainment. These have uncompetitive operating costs and a poor passenger experience – which is not a recipe for success.

Where SAA V2 will get R50 billion to replace its fleet is thus an open question, as aircraft lessors may be understandably shy to finance SAA’s fleet after their last haircut. So SAA will have to continue to operate fuel hungry aircraft with a poor passenger experience, particularly for in-flight entertainment.

Then there is public perception. There is very real resentment against the enormous bailout costs carried by the taxpayer so far. And unfortunately there are concerns about safety, as pilots are now promoted on the basis of their socio-economic background and not on skill or experience.

There are already countless examples of SAA’s once much vaunted pilot standards having been compromised for political reasons: The Chief Pilot very nearly crashed after takeoff on the infamous Brussels vaccine flight. The newly appointed Head of Training is not qualified to instruct. A co-pilot who failed two breathalyzer tests at Heathrow has just been promoted to Captain. Given these safety concerns and the intense competition for passengers, it is hard to imagine SAA being able to attract the loads and the ticket yields it needs to compete with the global airlines.

The fear therefore is that Takatso will operate the airline for as long as they can while cannibalising the assets. And then, in a few years’ time they will simply walk away and leave the mess once again to the South African taxpayer.

Can we believe that SAA really will no longer require taxpayer bailouts?

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