SAA secures R3.5bn in funding to keep afloat until June
South African Airways (SAA), which has secured the R3.5bn it required from banks to continue financing working capital requirements until June, has urged government to make a speedy decision on future financial support.
The cash-strapped airline requested R21.7bn from government in 2018 to recapitalise its balance sheet and provide working capital. This forms part of its three-year turnaround plan, which it said will see it break even by the 2020/2021 financial year. It suffered a s R5.7bn loss of 2017/2018 and expects to lose another R5.2bn in the current financial year.
While government has approved the turnaround plan, only R5bn was provided for in the medium-term budget policy framework in October 2018. This was used to pay bridge financing facilities.
The company's plea comes ahead of finance minister Tito Mboweni's budget speech on Wednesday, when he is also expected to unveil a package for Eskom, the power utility whose financial crisis is seen as the biggest threat to the country;'s economy. In comments that drew a sharp reaction from SAA CEO Vuyani Jarana, Mboweni has previously said the country would be better off closing the airline rather than throwing money at it.
“The key is to get certainty,” acting CFO Deon Fredericks said at a briefing . Because of SAA’s uncertain future, banks remain reluctant to provide long-term debt, which would be cheaper than the short-term financing SAA currently relies on. The lack of clarity has also led suppliers and creditors to impose stricter payment terms on the airline, placing further pressure on its already precarious cash flow situation.
It has also limited SAA’s ability to hedge its exposure to currency and oil price fluctuations, a major cost driver, the airline said.
Treasury declined to say whether any provision for support has been made in the budget.
Joachim Vermooten, a transport economist and research associate at the University of Johannesburg, said cutting SAA's losses from around R5bn to R6bn a year to breakeven by 2021 requires an improvement of about R3bn for 2020 and another R3bn for 2021.
"They've implemented a lot of small actions, but it remains to be seen if that will ad up to get to such a huge improvement," he said.
Vermooten urged open and accelerated discussions between the airline and government about the future funding. "If government can't afford it, that should be communicated so that the turnaround programme be accelerated if needs be."
Fredericks said negotiations have started with banks to extend the payment terms of R9.2bn bank debt that is due at the end of March, while a further R4bn is required for working capital in the 2019/2020 financial year. The R3.5bn loan funding, secured on February 15, was offered at lower interest rates than a year ago, indicating improved confidence levels from lenders, he said.
All SAA’s debt of R12.7bn is currently guaranteed by government. Ideally, an airline of its size should have debt of around R4bn to R5bn, highlighting the need for SAA’s balance sheet to be recapitalized in order to improve its ability to compete.
Should the full required amount not be provided by government, the airline will adjust its plans, Jarana said. In the six months to September 2018, SAA beat its budgeted targets in the turnaround plan on revenue, operating costs and reported a smaller net loss than expected, he said.
Part of its turnaround efforts included the scrapping of one Johannesburg-Heathrow flight, which allowed the route to earn a gross profit for the first time in a decade, Jarana said. A new supply chain policy has already realized cost savings to the tune of R299m, while improvements have also been made at SAA Technical and on domestic, regional and other international routes.
A new organisational design, built around three key operational areas with its own management teams – domestic, regional and international - should be completed by the end of March. It is premature to say how this could affect staffing levels, human resources director Vuyi Raseroka said. The SAA group, which includes the airline, its technical division and catering business Air Chefs, employs roughly 9,500 people.
UJ's Vermooten urged open and accelerated discussions between the airline and government about the future funding. “If government can’t afford it, that should be communicated.”