SOUTH African Airways (SAA) is in a far more serious financial position than previously thought and it is clear the airline will need much more than the R5bn lifeline it recently and controversially secured from the government.
A "transition plan" the former board of directors of SAA drew up, and which Business Day has seen, shows that the airline will report a loss of R1.25bn for the past financial year. It reveals the crippling weakness of the airline’s balance sheet — its liabilities exceed its assets by 359%.
The tabling of the carrier’s annual financial statements was postponed last month when Public Enterprises Minister Malusi Gigaba was forced to play for time to secure the lifeline from the Treasury and avoid SAA’s auditors from flagging its status as a going concern.
The guarantee allows the airline to continue borrowing should it need to in an environment of high fuel prices.
The Department of Public Enterprises has conceded that more money will be needed from the Treasury to support the carrier. Therefore, Mr Gigaba had sought to strengthen the board through a skills mix that would take the airline forward. The new board members have skills in aviation, mergers and acquisitions, and financial management, according to the department.
Conditional to the R5bn guarantee is that the board oversee the drawing up of a long-term business plan in co-operation with technocrats from the department, the Treasury and SAA.
"The shift by the minister has been to entrench a more technocratic board at the helm of SAA as it going through this very tough time," department spokesman Mayihlome Tshwete said last week.
"Whatever strategies are presented must be guided by technical pragmatism because that will strengthen the minister’s hand in engaging with Treasury (for more money) and with the public, when communicating the strategy and plans for the airline."
The department was not expecting a speedy turnaround. "It won’t be overnight, there are variables which are out of SAA’s control, such as fuel prices and the economic downturn," Mr Tshwete said.
"It is difficult to say (when SAA will be profitable), it is going to be a process, but we have a shareholder that is committed to this process."
The transition plan talks about the failure of the 2009 programme of cost cuts, and restructuring to allow the airline to rebuild its balance sheet from retained earnings.
"SAA’s balance sheet was weak in 2009 and the carrier’s financial position has continued to atrophy despite a range of operational improvements," it said.
"SAA remains inadequately capitalised with a current debt-to-equity ratio of -359%. As a result, the group cannot adequately support the growth strategy at the centre of the 2012-15 corporate plan, or navigate cyclical adverse trading conditions."
This weakness undermines the airline’s ability to fund the acquisition of new, more fuel-efficient aircraft or to cater for the government’s ambition that it expand its route network.
By comparison, Singapore Airlines’ debt-to-equity is 8%, Ethiopian Airlines is at 54%, Lufthansa 75%, Kenya Airways 122%, and Air New Zealand at 226%.
Since 2006, SAA has been surrendering market share to its aggressive and better capitalised competitors, including Emirates Airlines, Ethiopian Airlines, Kenya Airways and Egypt Air.
The board has proposed that R2bn be invested on the fleet, which would allow SAA to improve its service offering.
The fleet renewal "will support a 10-year international network plan which aims to expand the east-west corridor, connect major global flows to Africa via Johannesburg, and fly nonstop on all international routes."
Over the next five years, SAA is expecting to take delivery of 20 Airbus A320s for domestic flights. To achieve its goals, SAA would need to lease six new A350 aircraft as soon as possible, and be able to take delivery of the aircraft between 2016 and 2018.
It is also envisioned that there would be some sort integration of SAA, SA Express and SA Airlink. This could take the form of a straightforward merger or placing them into a single holding company, allowing for cost savings on shared services.
SAA, according to the plan, "must be run on commercial lines borrowing on the strength of its balance sheet", the board said. "This requires an adequate capital base and from time to time capital injections that enable the carrier to realise its broader developmental objectives as defined by the shareholder, allowing the company to borrow for fleet expansion."
The rapid expansion of SAA’s international service since 1994 had not been matched "by a commensurate increase in the level of capitalisation", the board said.
Rising fuel costs have had an enormous impact on SAA’s bottom line. Fuel costs have increased from 24% of SAA’s total expenses in 2009-10 to 34% in 2011-12 and rose by R2.2bn last year to R8.3bn.
SAA declined to comment on the loss the company made in the past financial year.
"The actual position in relation to the company’s financials will only be known once the AGM (annual general meeting) has taken place (on October 15)," SAA spokesman Tlali Tlali said. "To provide any details regarding the financials before … would undermine the reason(s) why we have it in the first place."
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