South African Airways (SAA) is on the ropes after years of financial mismanagement and a costly eight-day strike in November, with government officials clashing over whether another bailout is in order.
SAA is one of the most highly leveraged major airlines globally and many observers say its financial problems stem from corruption and theft.
The government’s handling of the SAA situation is contributing to the public’s loss of faith in the government and increasing the risk for major civil unrest in South Africa, according to a Dec. 2 alert from Predata Inc., which uses metadata from social media to predict geopolitical and market risks.
There is growing displeasure with government propping up several state-owned companies, including SAA, the risk intelligence firm said.
Pravin Gordhan, the South African public enterprises minister, has pledged to return the flag carrier to profit. However, Finance Minister Tito Mboweni repeatedly has called for the carrier to be closed down. In the interim, Gordhan is in talks with the embattled airline’s board and executive committee to secure a loan guarantee of at least ZAR2 billion to keep the wholly state-owned airline aloft.
SAA Cargo uses belly space on SAA’s passenger flights for cargo carriage and also operates two dedicated B737-300 cargo aircraft. For the year ending March 31, 2017 (the latest data available), the SAA unit transported 110,000 metric tons of cargo with a 54% cargo load factor. Cargo volume was down 3% from the 114,000 tons posted for the previous year.
SAA Cargo revenue at ZAR1.8 billion was 25% below target and 6% below the previous year’s revenue. Cargo’s financial performance continued to be adversely impacted by lower than expected volumes and yields.
SAA Cargo serves seven domestic and nine intra-African destinations, as well as most major international destinations, either directly as belly-hold cargo in passenger aircraft or through interline agreements with other carriers. SAA Cargo, through its facilities in Johannesburg, Cape Town and Durban, also offers cargo-handling services to foreign airlines.
SAA’s poor financial performance has led to reliance on debt underpinned by government guarantees to sustain operations. SAA is shouldering debt of about ZAR12.7 billion ($870 million), consisting of ZAR9.2 billion of legacy debt and a ZAR3.5 billion working capital facility provided by banks, according to a Sept. 18 presentation to South African lawmakers.
Speaking on South African radio Nov. 19, Mboweni said, “Close it down and start a new airline,” and added that a private-sector partner for the carrier is unlikely to be found. In a budget policy speech in October, Mboweni warned that SAA is unlikely to generate sufficient cash flow to sustain operations in its current configuration.
That solution is not shared by Gordhan. “The airline group will now go through a radical restructuring process which will ensure its financial and operational sustainability. There is no other way forward,” he said in Dec. 2 statement, adding that the government is committed to maintaining a “viable, sustainable, profitable national airline.”
“Over the past few days there has been intense discussions with lenders to secure the necessary funds to cover the operational and structural transition over the next few months,” Gordhan said.
SAA has been the recipient of ZAR57 billion in government handout money since 1994. The recent strike cost SAA an estimated ZAR50 million per day. Striking workers protested against possible job cuts and are demanding an 8% pay hike, while SAA has offered 5.9%, with the increase to take effect in March. SAA warned in November of approximately 950 job cuts.
In a Dec. 1 interview on South African government-funded television station SABC, Zazi Sibanyoni-Mugambi, president of the South African Airlines Cabin Crew Association (Sacca), which was one of the two unions participating in the recent walkout, said the union had not been consulted on any possible SAA restructuring. She charged that the carrier’s precarious financial position is the result of “corruption” and “mismanagement.”
SAA and regional sister carrier SA Express missed the end of October deadline to publish yearly financial reports for the second consecutive year. The carrier delayed paying full salaries to workers for November due to cash flow problems.
SSA’s fate could be determined by consistently profitable Ethiopian Airlines. Ethiopian is Africa’s biggest aviation success story, with main rivals SAA and Kenya Airways struggling with losses and relying on government support. The Ethiopian flag carrier had several discussions with Vuyani Jarana, SAA’s former chief executive officer, before his resignation in May about a possible stake in SAA, according to South African media. The talks have stalled as SAA hasn’t yet appointed a permanent replacement for Jarana.
In May, Ethiopian entered into a partnership with Ghana’s government to launch a new Accra-based airline that will initially focus on domestic routes.
Meanwhile, Virgin Atlantic founder Richard Branson said last month he would consider an equity share in SSA if approached by the government, according to media reports in Johannesburg.