South African Airways Enters Into “Business Rescue”

Filed Under: South African Airways

South African Airways has been struggling for years (they haven’t turned a profit since 2011), and things have only gotten worse in recent weeks, as the airline has been on the brink of liquidation. SAA was going to restructure and lay off about 1,000 employees, but then employees went on strike, so they backtracked on that.

Well, it looks like we now know what’s next for the airline… kind of.

South African Airways Enters Into “Business Rescue”

South African Airways’ Board of Directors has announced that the airline has adopted a resolution to place the company into “business rescue” at the earliest opportunity, which was a unanimous decision.

This comes after consultations with the Department of Public Enterprises (DPE), as they’ve been trying to find a solution for SAA’s financial challenges. The goal is to create a better return for the company’s creditors and shareholders than any other viable option.

It’s stated that the airline is aware that this “presents many challenges and uncertainties” for staff, and that the company will engage in targeted communication and support for all employee groups during this difficult time.

The airline plans to operate a new provisional timetable, and will publish details shortly.

What Exactly Is Happening Here?

The announcement as such is pretty vague. Should we expect that it’s business as usual and yet another bailout from the government, or…?

With this procedure, a specialist practitioner will take control of the company, and the goal is to maximize the odds of survival for the company, or at a minimum to achieve a better return for creditors than if the company had just outright liquidated.

The government notes that the business rescue plan will incorporate the following:

  • 1. Existing lenders to SAA providing R2 billion as post commencement finance (PQF) guaranteed by the government and payable out of future budget appropriations in order for the business rescue process to commence and to enable SAA to continue to operate
  • 2. Government, through National Treasury, providing an additional R2 billion of PQF in a fiscally neutral manner
  • 3. The prevention of a disorderly collapse of the airline, with a negative impact on passengers, suppliers and other partners in the aviation sector in SA
  • 4. The full recovery of capital and interest on existing debt provided to SAA by existing lenders that is the subject of existing government guarantees will not be impacted by business rescue
  • 5. It will provide an opportunity to critically review the cost structure of the airline, while simultaneously attempting to retain as many jobs as possible; this really was clearly understood in the recent wage negotiation process between the unions and the company
  • 6. This approach also provides a structured opportunity to reorganize the state aviation assets in a way in which they are better positioned to be sustainable and attractive to an investment partner

Maybe I’m just a skeptic, but something tells me it’s going to be business as usual.

The company is getting about 270 million USD. But what’s really happening beyond that? They’re gong to “critically review the cost structure of the airline” and also “retain as many jobs as possible?”

I appreciate the sentiment, but it just doesn’t seem like they have concrete plans that are any different than in the past.

Bottom Line

The concept of a “business rescue,” and someone being appointed to turn the company around, sounds great on paper. That being said, I feel like a whole lot of nothing is going to happen.

If there’s one thing we’ve seen over and over at unprofitable state owned airlines, it’s that governments keep injecting money and airlines simply don’t change.

I just don’t believe that the government is willing to make the tough decisions to turn the company around, which could include laying off lots of employees, grounding quite a bit of the fleet, etc.

And the government may not even be wrong for just keeping the airline around as is (at least in comparison to letting them go out of business), because the airline may still be a net-positive for the country in terms of the access it provides to South Africa, and the correspondingly positive economic impact.

Do you think this SAA “business rescue” situation will be any different than the company’s past bailouts?

Comments
  1. This is a bailout. The airline is getting loans guaranteed by the South African government. There is a very high chance those loans will be repaid by the South African government since SAA has no path to profitable operations. So basically it’s just the government giving them 270 million dollars.

  2. As a South African and a tax payer we are fed-up with the government bailing out SAA. We have millions of unemployed citizens who live in shacks. All the money that went to SAA over the years could have made a big difference to those people’s lifes. A national airline is a luxury we cannot afford. I believe the tide has turned against SAA continuing as it is. Our minister of finance made it very clear that he wants SAA to shut down. The government made it clear there is no more money for bailouts. I believe business rescue is the right step, let’s see if the airline can realistically be turned around. If it becomes clear that it is not possible I believe it will be liquidated and shut down. It will be a pity for the staff as SAA has good people working for them but it is what it is and these things happen everywhere, look how many airlines went bang this year. If it happens there are many airlines that can pick up the slack, SAA does not have a huge market share and their international network is tiny. If there is something to be rescued and they can carry on I will support them. But for now big decisions have to be made. Interesting times.

  3. I know I’m a random commenter but I’ve heard from people high up at Ethiopian airlines and SAA that Ethiopian is planning on taking a sizable stake in SAA with an option to take majority control in 3-5 years when at which point SAA will be folded into ET. The government of SA is embarrassed and will try and portray this as a win. Stay tuned.

  4. Most discussions round SAA tend to have a lot of “just let them go bust” comments, but the whole issue is a very serious one for the SA government.

    There is very little depth to the South African aviation market – SAA (including it’s LCC Mango) comprise about half the entire market. There are many routes which are only served by SAA.

    Comair (including Kulula) is about 6m passengers per year, Safair is about 3m, Airlink is about 2m – and that is about it. SA express (which looks like SAA but is separately government owned and also loss making) is about 1.5m

    Compare those figures to SAA which is about 10m (7m SAA & 3m Mango) and there is no way that SAA can go down (and be grounded) and other airlines can simply take up the slack.

    The UK government can let Thomas Cook go under (almost as large as SAA) and it barely creates a ripple in the UK aviation market – but for SAA to go down rips a huge hole in the SA aviation market which will take a long time to fill.

  5. There basically trying to fix the problem with the mindset which caused the problem. Why don’t they spend some money on a leader who hasn’t been plagued by the airline’s misfortunes and who can focus on turning it around. It may not be easy, but that’s why I think an outsider is needed to fix it, and someone who won’t give up unless necessary.

  6. Flying SAA from LVI to MQP in April for safari. How worried should I be? Should I make alternative travel arrangements?

  7. Look, Ben, I appreciate you’re not a professional journalist, nor a South African so not familiar with our laws. South Africa was very strong foundations to set out good corporate governance and very modern company law. Business rescue is not just a bailout it is a legal step and status which is not a liquidation but a severe step that takes all control away from government and SAA management. The business rescue practitioner (who has now been appointed in the afternoon here in SA) has full and outright control, is independent and not employed by or coming from government or any political party. Under business rescue there are strict rules around what can happen and ultimately a court must approve the business rescue plan. The practitioner will likely made radical cuts to staff and assets and whatever comes out will NOT be the SAA of the past. Either it will be a leaner and profitable airline or it’ll be a sale of assets with the result of no airline remaining at all.

    This is a massive and extremely positive step to end the drain this airline has been on the fiscus and the only alternative would’ve been liquidation and chaos with no prospect of preserving the viable assets and operations of the airline.

    FWIW, a lot of this was detailed in South African media coverage that has been online since at least 8hrs prior to your posts but I see you just copy pasted the press release. The board adopted this resolution following an order by the president, this was not a decision taken by SAA management. The bailouts are over, the R4bn are bridging to allow the maximum effectiveness of business rescue. I’d appreciate if you could do some more reading and update your post accordingly because what you’ve shared above is uninformed and unhelpful.

  8. What I am most intriguied about is if SAA goes under will IAG take advantage of this opportunity to grow into the #1 spot in the SA market?

    They have a strong brand down there through BA and Comair/Kulula.

  9. IAG has nothing to do with Comair and Kulula other than that Comair licensed the franchise from them and a very small minority stake

  10. Sure sounds like the equivalent of US Chapter 11 plus assigning a master to workout the next steps with post petition financing (which would take priority over all other creditors). Creditors with loans backed by assets (like planes) wouldn’t have their status changed but, if like in the US, the master (or in this case also the government) could prohibit a creditor from reclaiming assets, even if they are security for a loan, since to do so would adversely impact other stakeholders.

    Again, I don’t know how the law in South Africa works but it seems this is comparable to US bankruptcy processing. If so this could either end up with SAA coming out of it, as likely a smaller company and shedding expenses (think pensions, leases, etc like US airlines did via bankruptcy), packaging the airline for sale to someone else or liquidation. Obviously the wild card is the government involvement.

    I sure as hell wouldn’t be buying tickets on them if I could avoid it. I gladly bought tickets and flew through Delta’s, American’s an USAirway’s bankruptcies but I trusted US law and also that they were using it to shed cost, not to go out of business. I wouldn’t be as comfortable that is the case with a foreign carrier.

  11. Let’s just hope they last long enough to launch The A350 on the NYC route and then stay afloat til my flight in March :). Oh, and that they decide to invest huge amounts in their business class product to turn things around

  12. @Mjolnir22 – LVI – MQP is definitely not an SAA route, it is most likely operated by SA Airlink. Which is a privately owned and profitable airline.

    @Michael – thanks for your informative post, I agree that Ben’s post was not well researched and sent a message that was simply not accurate. Business rescue is a major step in the right direction, let’s see what comes out of it.

  13. Not much point in getting the company on its feet again if they continue appoint incompetent people to run SAA. That is the long and the short of it. If the company is to survive the unions will have to be ignored. Either way radical changes will be taking place

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