It's payday AGAIN
Fly SAA.com for just R2bn
Nic Dawes and Jocelyn Newmarch
03 February 2007 11:59
News that South African Airways is seeking a R2-billion bail-out from the government has been roundly criticised by its competitors. However, economists say that without it, the troubled airline will be unable to attract much-needed private capital.
Chief executive Khaya Nqula said last year that SAA would try to raise the necessary capital on the markets so that government would not have to come up with it.
This week economist Iraj Abedian of Pan-African Advisory Services, also a non-executive director of Transnet, said that securing private sector funds will depend on whether “government comes to the party”.
South African Airways and the Department of Public Enterprises are going to the treasury yet again, seeking some R4-billion in state cash, loan guarantees, and private funding to stay afloat, and to grow the SAA fleet, even as losses mount.
The airline has previously said it needs “between R2-billion and R4-billion” to recapitalise, insisting it would raise the cash privately.
According to people familiar with the negotiations that took place this week SAA has decided to ask for R2-billion in new loan promises from the National Treasury, and permission to raise another R2-billion in the capital market.
Alec Erwin, minister of Public Enterprises, wants the government to provide backing for a larger, more stable SAA. He argues that under direct state control -- and separated from its parent Transnet -- the airline could be pushed to do better at delivering tourist and business passengers to South Africa. But the primary reason for moving SAA out of the Transnet stable is to relieve the larger group of responsibility for a deeply problematic subsidiary which was seen as an obstacle to Maria Ramos’s turnaround plans for rail and port operations.
This is the second time in three years that SAA has needed a major bail-out. In 2004 the airline got R6-billion through Transnet to close out its disastrous foreign currency hedges.
Critics believe SAA should be privatised and forced to compete on its own merits, and some ask why it needs cash for new aircraft when it controversially leased three of its newest Airbus A340-300 longhaul jets to the Indian carrier Jet.
The airline lost R652-million in the first six months of the 2006/7 financial year, and is planning 1 000 job cuts as part of an efficiency drive.
“The airline has experienced a tough year financially. While revenue is on track and passenger numbers are growing, operating costs remain a huge challenge,” said SAA spokesperson Jacqui O’Sullivan. She said the money would be used to strengthen the airline’s balance sheet and expand its route network and fleet. Further cost-cutting measures would also be investigated.
Others in the industry are more blunt. “[The bailout] is shocking,” said Glenn Orsmond, of low cost carrier 1Time. “It’s a u-turn on previous undertakings and they’re incurring massive operational losses.”
Meanwhile, Gidon Novick, CEO of SAA’s competitor, Comair, says that it’s time the state-owned carrier was privatised. “I don’t see any requirement for a state-owned airline. [Now] it’s not only one airline, but three airlines that are losing money -- SAA, SA Express and Mango.” Other airlines have been profitable from the start, he said, adding that the European Union does not allow member governments to fund airlines.
“Private businesses have an incentive to make profits. State-owned businesses don’t. That’s the difference that makes private business succeed and state-owned businesses fail, along with accountability to shareholders,” Novick said.
But privatisation might not be easy for the airline in its current state. “It’s not that no one wants to privatise it, it’s that no one wants to buy it,” said Abedian. Unless SAA is put in a profitable position, he said, no one will ever want to buy it.