South African Airways torn between two clashing business ideologies
The South African Airways’ business rescue process is still struggling to find much direction. At the heart of this dilemma is a fundamental clash between the ideologies of using state-owned enterprises as drivers of development and job creation, against running an airline according to sound business principles as a commercial enterprise.
The business rescue practitioners for the flag carrier have stated that they intend to publish their long-awaited business rescue plan on Monday, June 8, 2020, roughly six months after the airline – which has received about R30 billion in government bailouts over the past decade – was placed in voluntary business rescue.
Once published, affected parties – which include creditors, the government as the airline’s shareholder and employees – will vote on the plan. During this week, they were able to provide feedback on a draft proposal submitted by the practitioners. The practitioners, Les Matuson and Siviwe Dongwana, submitted their initial draft business rescue proposal for the airline in January. But this had to be adjusted, mainly due to the impact of the spreading coronavirus pandemic and eventual related flight bans.This proposal, which was leaked to the media, boiled down to the call for an additional R4.6 billion in funds to continue running the airline. These funds would have to come either from the state or an equity partner.
If these funds are secured, the draft plan proposes that R2 billion be used to restart the airline after the coronavirus pandemic is over, R2 billion be set aside for retrenching about 48% of SAA’s roughly 5 000 employees, and R600 million be distributed to general concurrent creditors. This would be in addition to the R16.4 billion already allocated to the national airline in past budgets for the repayment of its historic guaranteed debt, mainly to SA’s major banks.
After the leaked document appeared in the media, Matuson and Dongwana were quick to point out that it was a draft which had not “received agreement or comment from any of the relevant affected persons.” In a separate letter to affected parties at the end of May, the practitioners said they saw a reasonable prospect of rescuing the airline if the money to do so is provided, presumably by the state since no equity partner has yet been forthcoming. If the necessary funds cannot be obtained in time, they might legally have no other option in the end but to apply for the liquidation of the airline.
Both the practitioners as well as Minister of Public Enterprises Pravin Gordhan have indicated to Parliament recently that they would prefer liquidation to be avoided.
At the same time, a “Leadership Compact” between Gordhan’s Department of Public Enterprises and unions represented at the airline have been working on a plan to see how the current SAA can be restructured into a “new airline.”
“This will not be the ‘old SAA but the beginning of a new journey… which will be a proud flagship for South Africa,” the DPE said in a statement at the beginning of May. No further details of this proposed plan have been announced.
“The draft business rescue plan makes an assumption that there is a rational evaluation of the prospect of business success of a ‘new airline’ owned by government, yet the pattern from the past suggests that government does not run state-owned enterprises on business principles,” said Dr Morne Mostert, director of the Institute for Futures Research at Stellenbosch University."
So, the prognosis is done on business principles, but the pattern is one of political principles. If you, therefore, evaluate the draft rescue plan in terms of political principles, you realise SAA is seen as a symbol of recognition for government and not as a business.” For Mostert a fundamental question to ask is whether taxpayers – whose voices are largely absent from the rescue process – actually want such a symbol they may have to keep bailing out.
“It is extremely unlikely that there will be a plan revealed on Monday that all affected parties would vote for and any (potential) investor would look at the track record of the airline,” he said. “One has to look at the multiple perspectives of the stakeholders in the airline. It is understandable that unions want to act in the interest of their constituents and want a new airline to secure some of the jobs. It is also understandable that employees want to secure their future and understandable that creditors want a rescue of the business rather than a liquidation, as certain creditors will benefit from a rescue more than a liquidation.”
For Mostert the problem at hand is not principally about saving the airline, but rather about changing government policy. According to the draft rescue plan leaked earlier in the week, the new airline may incur about R20 billion in further losses in its first three years of operating.
“The draft rescue plan is not strategic. It does not explain how the new business or airline would be successful. The evidence of SAA’s history is unfortunately against expecting there to be a business case for continuing with it,” says Mostert. For Captain Grant Back, chairperson of the SAA Pilots’ Association, the business rescue draft plan is “just a box ticking exercise” by the practitioners with little substance. “In my opinion it has no chance of being accepted by the airline’s creditors.
Either the practitioners will have to seek more time to get a better plan drafted or, in the absence of funds, move to wind down or liquidate SAA,” he said. “Minister Gordhan and President Cyril Ramaphosa have both indicated that they are committed to seeing SAA continue. SAA will, however, need to morph into a leaner and better run airline for it to have a chance of success and these are principles most of the labour unions have committed too.”
To give SAA a fighting chance it needs four essential ingredients in his view — namely time, leadership, skills, and most importantly the funds to see it not only survive coming months but also help it through though a post COVID-19 recovery.
He cautions that time is fast running out for SAA to be rebuilt on sound business principals where the survival of the company and the preservation of jobs are paramount.”
With the utmost respect to the all the parties – including unions – that are fighting and working 18-hour days to see SAA weather this storm – without the immediate appointment of proven airline turnaround specialists in key positions, SAA will not get off the ground,” says Back.
“Gone are the days of a no accountability for poor business decisions or appointing people based on favour or political connections like [former SAA chair] Dudu Myeni who was recently declared a delinquent director for life.”
The North Gauteng High Court last month made this order after an application was brought by the Organisation Undoing Tax Abuse and the SAA Pilots Association. The judge found that Myeni knowingly took SAA and the country to the brink of disaster by delaying the conclusion of certain deals which would have benefited the airline, and that she displayed a complete disregard for public funds.
In reaction to the draft rescue plan, Mashudu Raphetha, president of the National Transport Movement said, in order to have a sustainable and profitable SAA – or new holding company – significant changes in policies need to be addressed to afford SAA a home ground advantage. Furthermore, due to no SAA salaries having been paid since 1 May, the union is not willing to accept any deferred payment arrangement as part of a rescue plan.”
NTM also requests the selection criteria to be used to retain some employees. No favouritism or nepotism will be tolerated, whether in the old company or any NewCo,” said Raphetha.Linden Birns, managing director of aviation consultancy Plane Talking, explains that the need is for a South African airline that will connect local and foreign markets.
“As for the leaked SAA rescue plan, until we see how big a rabbit Finance Minister Tito Mboweni pulls out of his budget hat, we can only regard it as a paper exercise,” says Birns. “But more important is for government to provide relief to rescue the entire distressed air transport industry and system in the country.”
