SAA business rescue plan doomed to fail – OUTA

The business rescue plan meant to save South African Airways is unrealistic and doomed to fail.

This is according to the Organisation Undoing Tax Abuse (OUTA), which has called on the government to liquidate the troubled national carrier instead.

Transport Advisor to OUTA Joachim Vermooten stated that the plan – which was conceived by business rescue practitioners Siviwe Dongwana and Les Matuson – was fundamentally flawed.

“The plan is over-ambitious, based on unrealistic forecasts, does not take into account the depressing market conditions fuelled by the COVID-19 pandemic and, according to the Public Enterprises Minister, is only about half-funded,” Vermooten said.

According to OUTA, recently disclosed court papers filed in the application to intervene in the Labour Court matter between the trade unions and SAA showed that Department of Public Enterprises Minister Pravin Gordhan had requested R20 billion from Treasury for SAA’s business rescue.

Instead, the Department was only granted R10.5 billion, meaning there was a 50% funding shortfall to complete the plan.

In addition, OUTA said the DPE is determined to divert a quarter of the R10.5 billion Treasury appropriated explicitly for SAA’s rescue to Mango, SAA Technical, and AirChefs, even though the plan had made no provision for them.

“In their latest presentation, the business rescue practitioners (BRPs) stated that SAA’s subsidiaries would now be given R2.7 billion,” OUTA said.

“A further R600 million is budgeted for staff severance packages, for a total of R3.3 billion instead of the R2.2 billion contained in the business rescue plan,” OUTA added.

This meant the state will be using the money for purposes other than those for which it will be made available, which would inevitably lead to increased future bailouts, said Vermooten.

Slashed allocations

In order to accommodate the subsidiaries and increased severance packages, allocations within the business rescue plan have been slashed unilaterally.

This includes R1 billion less to cover the Unflown Ticket Liability – or the value of unused SAA flight tickets. This reduces the business plan allocation from R3.2 billion to R2.2 billion.

“The BRPs have been unwilling to explain how they managed to magic away a third of this liability when SAA has made no refunds or flown any customers who may have opted to rebook for travel at later dates,” OUTA said.

SAA flight ticket holders were not allowed to vote on the business rescue plan at a stakeholders meeting on the basis that they were guaranteed to get 100% of their claims.

In addition, the following cuts were also made:

  • R600 million less to concurrent trade creditors. Because the approved plan determined an allocation of R600m to cover R8 billion in claims, this means trade creditors now stand to receive nothing.
  • R1.7 billion less to aircraft lessors, again reducing the approved plan’s R1.7 billion allocation to zero.

Why SAA will fail

OUTA added that the allocation for restarting SAA operations would not be enough to make the company a going concern.

“The plan’s estimated R2 billion to restart SAA’s operations is insufficient given the requirement to re-fleet and rebuild customer and supplier confidence in what has become an even more cutthroat market which requires deep pockets, agility, dexterity and optimised productivity,” said OUTA Executive Manager for Public Governance Julius Kleynhans.

OUTA said the plan was deficient because it did not take into account:

  • Salaries of the staff who accepted the voluntary severance packages (VSP) until their VSPs are paid out.
  • Salaries of the staff who would remain behind at SAA, for its new start-up.
  • Ongoing mothballing costs and losses whilst SAA is not operating.
  • Funding of the start-up losses of R6.4 billion for SAA’s first three years.
  • Any provision for SAA’s loyalty schemes.

Furthermore, the plan was too optimistic in its assumptions on traffic volumes, average fares and passenger loyalty as nothing was provided for maintaining passengers’ frequent flyer credits, facing increased competition, and the expected demand which will be more depressed than forecasted.

The BRPs have also been unsuccessful in selling any of SAA’s owned aircraft, which have been on the market for over a year.

Liquidation is the best option

OUTA said that neither the DPE, BRPs nor SAA have accounted for the financial position of SAA, even though billions of rand were poured into losses incurred by the carrier.

“No annual audited financial statements have been published since 2017. No update has been provided on the current level of losses incurred by SAA or on its real funding needs,” the organisation stated.

Kleynhans said that based on OUTA’s considered analysis, SAA was beyond repair.

“Government should close it down and avoid wasting our country’s limited taxes,” he stated.

By OUTA’s calculation, liquidation would cost “several billion rand” less than the business rescue plan.

Kleynhans added that the government should focus on doing the “right thing” by settling employees’ retrenchment packages and creditors’ compensation.

Now read: SAA receives remainder of R10.5-billion bailout

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SAA business rescue plan doomed to fail – OUTA