The SAA Business Rescue Plan: An analysis

Mark D Young says plan is peppered with caveats, disclaimers and relies on goodwill of parties to walk away from the mess

The SAA Business rescue plan – Picking at the spaghetti

17 June 2020

As is the norm in things governmental in South Africa, the long awaited business rescue plan for South African Airways was made public at night. On a national holiday.

All 110 pages of it, including the seven annex pages, can be downloaded here (https://matusonassociates.co.za/saa/) .

It makes for interesting reading. Certainly, in the bald summaries presented, lie, perhaps, many viper nests. To whit, the two rescue practitioners do make a passing reference to having referred numerous matters they have discovered to the SIU for follow up.

However, they also make passing swipes at Solidarity's application to the courts regarding SAA as being a reason for a “collapse in revenue and confidence” late last year that led to the rescue process.

The headline numbers shown in annex A are R8.8 billion in assets versus R26.7 billion in liabilities as of March 2020. However, annex B lists the creditors alone as being R38 billion in December 2019. So, as ever, the actual numbers are misty although the ending of some aircraft lease agreements in the interim may explain the discrepancy.

Nevertheless, it is this company that our Public Enterprises minister and President say will be “renewed” and “arise from the ashes”. Who is going to get burnt the most in the process though?

It would appear to be the creditors.

According to the summary of salient dates in the document, there have been at least 8 meetings with the employees or their committee. It could be more as the final item dealing with this aspect titled “Consultation with employee's representatives on draft rescue plan” gives a date range of 1-15 June 2020. There is no method of divining how many meetings were held in that period with the employees or their representatives. We are told they stopped dealing via their committee and preferred to use the “social compact” avenue set up by government.

In contrast, the creditors have had only four meetings. All appear to have been over and done in a day. This could simply be the efficiencies of private enterprise at work or something else.

As mentioned, annex B to the report (33 pages) lists debts of around R38 billion Rands.

Looking at some of the items, most of which have a cross next to them depicting that they have not yet been “verified and accepted” by the BRPs (after 6 months?), it is hard not to wonder how they were incurred or allowed to run so high.

In New York: R370 thousand to the Sheraton in Times Square, and the “New York one time account” entry at R6.49 million. There are several similar “one time accounts” in various cities with combined figures totalling many hundreds of thousands. Time may reveal what these are for.

Fuel is the very essence of an airline's existence. Without it, you can't do anything. One would expect the suppliers would be paid when due.

The numbers suggest otherwise and here is a summary of the most obvious outstanding bills: R13 million to three World Fuel services accounts, R6.43 million to Vivo Energy (Fuel in Ghana, Uganda and Mauritius), R8.38 million to Total South Africa, R32.7 million to Shell South Africa, R64.9 million to Sasol, R51.6 million to Puma Energy (Fuel in Angola, Malawi, Zambia and South Africa), R5.3 million to Engen in various countries and R51 million-odd to BP.

Secondary to fuel, airport, navigation, radar and other services are needed. These debts are equally impressive. Eurocontrol who supply air navigation, radar control and clearance in Europe, was owed R7.17 million in December 2019. On reflection, however, in real money that is less than 300 000 Pounds which is probably what Ryanair spend on any normal given day. Easily overlooked.

However, it is closer to home that essential services have run up noteworthy numbers.

ATNS, who provide departure, en-route and approach services in South Africa (and are another SOE) is owed R23.7 million. The last two private airlines to fold, Velvet Sky and Skywise were, according to rumour, grounded for owing around R23 665 000 less on their accounts.

ACSA is shown as being owed R35.57 million for airport landing, parking and other fees.

Then there are airport handling charges – getting luggage on and off aircraft, check in formalities, buses to and from aircraft, servicing of toilets and the like. It appears from the annex that Swissport (most international destinations) and Bidair Services are jointly looking at around a R34.2 million debt.

Now while these numbers would give most people sleepless nights, they will all magically get 13x cheaper than the actual debt when the “newly profitable, self sustaining” airline emerges from the rescue plan.

It is proposed that unsecured creditors all get just 7c in the Rand. These payments, however, are to be made in a pro-rata manner during the next three years. The BRP process envisages just R600 million being made available to these creditors. Nothing more.

Now, there is also the matter of secured loans made by various banks about which much has been written. The banks listed are Investec, ABSA, Standard, Nedbank, First Rand, Ashburton, Sanlam and Momentum. Page 88 off the plan lists the banks and the debts guaranteed by government. In total, they amount to R10.9 billion including pre and post business rescue amounts.

The Development Bank of South Africa (DBSA) also made a loan during the rescue process of R3.5 billion.

According to the plan, the repayment to the DBSA (including R168 million in interest) is slated to be made within the 2020/21 fiscal year.

The private banks, however, notwithstanding the guarantees they hold which state they would be paid by 31 July this year, have been presented with a three year schedule between FY2020/21 to 2022/23. The final estimated interest bill is in the region of R1.79 billion taking the total repayments due to the banks to around R12.7 billion.

Now, all of this is before the “new” SAA turns a wheel. And the rescue plan is highly dependent on the airline meeting the numbers put forth in the forecasts.

These envisage that the airline will start flying later this month with just six narrow body aircraft on domestic routes and then ramp up in early 2021 to cover more routes.

The projections show that by November 2021 the carrier will have 19 aircraft (all narrow body) and in December 2021 seven wide body airliners will be added.

Routes to be serviced include the usual local suspects (Cape Town, Durban, Port Elizabeth) and regional routes will include 19 destinations with Abidjan via Accra being dropped.

Internationally the plan calls for services to Perth, New York, Frankfurt, London and Washington.

Now, while all that sounds fantastic, there is a big if.

The creditors need to accept accept the proposed 13-fold compromise on the debt so that the “new” SAA can start with a clean slate.

The plan further assumes that SAA will use the same registered entity. This is probably due to the fact that changing it will mean they have to re-negotiate landing and bilateral rights in all destinations. Messy, time consuming and costly.

There is also the small matter of start-up financing of around R2.8 billion mentioned just to get going by the end of June.

An additional R2.2 billion will be needed within a month of the plan's acceptance to cover the cost of retrenching staff to leave just 1000 employees.

In total, counting guaranteed debts, interest, financing, lease and other costs it looks as though another R14 billion or so may will be needed in the next three years.

However, there is a small fly in the ointment regarding the estimated revenue which could make that number greater. Paragraph “b” of the assumptions (annex C) states that there can be no certainty about when regional or international flights will be allowed post Covid 19.

There can be no argument with that statement.

A further caveat is hidden away in paragraph 45 on page 107 of the plan which states that the projected balance sheet was “...prepared pre-Covid19 on the assumption the business rescue plan is adopted.”

And therein lies the rub.

If creditor's do not accept the plan, they get zero cents in the Rand (unless they hold the guarantees as mentioned) and the company will be liquidated.

If they accept the plan and the re-structure goes ahead, many of them will still have to supply it in some manner and there is still a risk that the end result in three years is a repeat of the current scenario.

All in all the business plan, as published, throws up far more questions, than it answers.

Peppered, as it is, with caveats, disclaimers and relying on the goodwill of hundreds of parties to simply be willing to walk away from the mess, it seems more like a wish list than a plan with any real prospect of success.

Especially given the uncertainties of the post pandemic world.