The liquidation of SAA would be a disaster, said Public Enterprises Minister Pravin Gordhan, and Government agrees that business rescue is the optimal route to take.
In a column published by the Sunday Times, Gordhan said that liquidation would have led to the immediate grounding of the airline, which would have imposed severe consequences.
“Operations would have ceased. Passengers all over the world, already at airports, would have been left stranded. The costs of their repatriation would have been enormous,” explained Gordhan.
“The same would have happened at domestic and regional airports. Passengers already at the destination of their first leg would not have been able to return to their origins in an orderly manner. It would have cost us dearly in terms of future tourist and business revenue.”
Gordhan also highlighted that the liquidation of SAA would have had significant ramifications for the South African airline industry as a whole.
“A big part of SAA’s staff of around 10,000 people would have been affected, without the normal protections of the Labour Relations Act,” said Gordhan.
“It would have meant further redundancies in associated aviation-related businesses … We were concerned about contagion in the rest of the aviation industry.”
Advantages of business rescue
Gordhan said that the process of entering SAA into business rescue is the best chance of transforming the airline into a stronger company that can attract an equity partner.
“Business rescue will allow the airline to operate in an orderly manner. It keeps SAA’s planes and passengers flying. It also protects as many jobs as possible and the interests of the airline’s lenders.”
He said that it will also allow for the opportunity to review the current cost structures of the airline.
“This sector is known for its volatile costs due to, among other things, the cost of oil and low profit margins. Any operator in the aviation sector has little room for poor judgment.”
Financial experts disagree
Magnus Heystek, Investment Strategist and a Director of Brenthurst Wealth, recently told MyBroadband that the best way to deal with the SAA issue is to shut it down as soon as possible.
“Experience all over the world has shown that the best way to close a non-profitmaking airline is to do it quickly and suddenly,” said Heystek.
While this would cost money in the short-term, Heystek said it would still be much cheaper over the long run.
“The short-term impact on employment is also expected to be minimal as the other airlines flying in and to South Africa will almost certainly absorb the additional flyers and staffers into their operations,” said Heystek.
Heystek believes that continuing to support SAA means that government risks Moody’s downgrading South Africa to junk status.
“Government runs the risk of sending a signal to Moody’s and the other ratings agencies that it will continue to pour money into financially strapped SOE’s which would lead a further downgrade to junk status, and over time deeper into junk status, which will cost the country significantly more in the form of higher interest rates on the country’s sovereign debt.”