Khaya Sithole | SAA’s revival budget – a gross miscalculation

This week, as the country moved
to Level 3 lockdowns with the economy gradually opening up, two documents
surfaced that intrigued me.

The first document emerged from
the business rescue team at South African Airways. The team – which was
assembled in December 2019 – has become more famous in recent times for its
failure to produce any rescue plan.

The law under which they draw
their mandate, rightly calls for a speedy process in business rescue matters.
The reason urgency is important in business rescue proceedings, primarily due
to the fact that organisations that enter business rescue are already in some
form of distress. Burdening them with a lengthy and costly process would
therefore be antithetical to the entire concept of rescuing a business from a financial
cliff.

Secondly, the process suspends
all pre-existing obligations, which simply means that suppliers and service
providers who would have engaged with a distressed company with the hope that
payments would be honoured on time; have to then wait for the rescue process to
give guidance on whether they can be paid at all.

The consequence of that
moratorium is that companies that have high cash flow exposure to a distressed
entity feel the pinch of any delays in the rescue process. The amounts due to
them – whilst not being disputed – become a remote possibility with every
passing day when other costs are prioritised. Failing to table a rescue plan on
time was therefore a disaster not just for the internal stakeholders at SAA but
for every entity that was owed by the airline.

The most prominent of the
affected creditors – Comair – had spent 14 years fighting SAA and finally
winning a settlement which suddenly looks like a false dawn. The business
rescue team has allocated a figure of R600 million to all unguaranteed pre-existing
creditors. This amount is distinct from the amounts owed to those lenders and
creditors who have a state guarantee to sort them out. Those with the state
guarantee, are primarily the banks which theoretically had no business lending
to an entity that regarded the publication of financial statements as an
administrative option. Yet for as long as the state committed itself to the
idea of owning and running an aviation asset, guarantees were made available to
entice the lenders to advance more money to SAA.

The sum of these exposures – R16.4
billion – forms part of the rescue team’s calculations and dominated
conversations this week after the draft plan was leaked. The Democratic
Alliance, in particular, referred to a R21 billion bailout which gave the
impression that the business rescue team had determined that R21 billion is
needed for their plan to succeed. This is slightly misleading, as the R16.4
billion had in fact been committed by the state long ago.

The incremental amount – accounting
for the difference between the R21 billion total and the R16.4 billion – is the
amount that the business rescue team can be held to account for.  This is made up of R600 million for
pre-existing creditors; plus two tranches of R2 billion earmarked for funding
the retrenchment process of current employees and – more controversially – starting
SAA version 2.0.

The shape of things to come

The commitment to pre-existing
creditors is important for the various suppliers and service providers to SAA
who have seen not only a key customer heading to business rescue, but every
other customer in the aviation sector also being subjected to the lockdown. However,
a key disclaimer relating to the R600 million is that it would be paid over a three-year
period.

The consequence of this is that
companies that are going to be allocated a share from the R600 million not only
have to accept much less than what they are actually owed, but also have to
wait to collect the reduced amount.

Another point of debate has been
whether the allocation of R600m and R4 billion in any form is warranted. The
difficult aspect of this conversation is the intersectional nature of the aviation
value chain. Allocating R600 million to affected creditors may be the
difference between survival and extinction for some of them.

Given the general economic
fallout expected from the pandemic, a solution that seeks to pay over a three-year
period may be more elegant than any alternative.

The R2 billion relating to
funding the retrenchment process also polarises opinions. Those who feel that
employees contributed to the woes of SAA by embarking on strike action towards
the end of 2019 (as articulated by Minister Pravin Gordhan), are likely to be
less empathetic to the plight of workers. The alternative, however, is that any
process that fails to cater to the displaced workers, will mean that the public
purse has to be invoked either way. This may be through the addition of such
workers to the resources allocated for current economic interventions, or the
longer-term effects of dealing with increased unemployment.

Whether the state should then
allocate another R2 billion to revive SAA will dominate the national discourse
for days to come. That it can cost R2 billion to do so is nothing but a gross
miscalculation by the business rescue team.

This is simply because absolutely
no one knows when the aviation sector will start resembling anything similar to
the scale that warrants the return to the skies of SAA and other airlines. Putting
any number to the cost of the revival is just one more ill-advised step from
the business rescue team. One has to empathise with them, though. Imagine a tabling
a plan to reviving SAA with no figures attached to it. That would make their
recent roasting in Parliament seem like a Valentine’s date.

But perhaps the rescue team knows
enough about South African politics to know that an airline will exist whether
we like it or not. If they had any doubts, the second document of interest released
this week was the ANC’s latest attempt at convincing us it has an economic plan
– the Economic Reconstruction document authored by Enoch Godongwana. It mentions
the need for a National Aviation Industrial Strategy to be established.

That document obviously assumes
that the key exhibit of what politicians believe to define the success or
otherwise of a national aviation strategy – a National Airline – is going to be
with us for years to come. And that is the type of reality that we all need to
make peace with, for peace’s sake.

Khaya Sithole is an accountant, academic and activist who writes and Tweets on finance, economics and politics. Views expressed are his own.