SAA now on a wing and a prayer without equity partner

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JEREMY MAGGS: Well, this is hardly shocking news and probably shouldn’t come as a surprise, but the controversial deal to sell 51% of SAA (South African Airways) to the Takatso consortium has crashed after the government raised the price for the airline. So what now for the troubled carrier?

Read: Government scraps deal to sell SAA, Gordhan says

Let’s turn our attention to Guy Leitch, who is an aviation commentator, writer and editor of SA Flyer Magazine. Guy, a very warm welcome. As I’ve just said, you can’t be surprised at this turn of events, surely?

GUY LEITCH: Hi, Jeremy. Well, funnily enough, I was partly surprised because government has been hammering away at this deal for so long that they’ve shown such incredible determination to make it succeed against all odds that when it finally collapsed, it did come as a surprise. But in retrospect, with the benefit of 20/20 hindsight, it now really does appear to me that the deal was pretty much torpedoed below the water line as long ago as two and a half years ago, within six months of it actually having been entered into.

Read: Why and how the SAA-Takatso deal fell apart

I think the reason for that is because Pravin Gordhan, the DPE (Department of Public Enterprises), was using the deal as a smokescreen to get SAA back into the air. They spun out the deal as long as they possibly could, while they gave SAA a chance to start rebuilding some of its routes, some of its fleet. Now Pravin Gordhan can turn around and say, ‘Well, actually we don’t need the deal anyway because SAA is sustainable, at least for the next 18 months to two years’.

JEREMY MAGGS: Do you buy that, that it is sustainable for the next year and a bit?

GUY LEITCH: I don’t know what it’s doing for money at this stage. I had a bit of a barney with Professor John Lamola in this past week, where I quoted the numbers back to him that he’d provided for the parliamentary committee and allocations, where they’d lost R776 million over nine months. In other words, they’re going to lose, if you extrapolate it, R1 billion for the year. Where is that money going to come from? I don’t know.

Read/listen: Streamlined SAA 2.0 no longer a shadow of its former self

They’ve squeezed out what low-hanging fruit there was already in terms of blocked funds in places like Nigeria, Zimbabwe and Angola. So how they are funding operations at this stage is something of a mystery. Gordhan did say though, that if they needed further money, it wasn’t going to come from the state, that they had to look to finance their assets. In other words, they had to hock or mortgage their valuable property portfolio. Perhaps that’s how he anticipates them keeping going.

JEREMY MAGGS: How do you think it’s being currently funded?

GUY LEITCH: As I said, it’s a good question because they were allocated another R1 billion in the current budget, although they were quick to point out that that R1 billion was historic debt. It was business rescue debt that they were still paying off. So obviously there’s a big difference between income statements and balance sheets.

Here they might be operating marginally at a break-even level. But the moment you start putting in the necessary reserves for aircraft maintenance and depreciation and so on, a marginally positive cash flow sinks into a big loss. That’s probably how they’re getting by for now.

JEREMY MAGGS: So an equity partner is crucial then?

GUY LEITCH: I would think so. I’ve also just been listening to Gidon Novick saying that let’s not forget that you don’t really need a lot of capital to run an airline, and he’s proven that himself by starting Lift with next to no money and just wet leasing aircraft. SAA has been doing the same with these three Turkish Boeings that they’re operating. So they could continue to operate in a relatively low capital base.

But the reality is that if they are to fulfil what government wants them to fulfil in terms of flying the flag to national destinations and expanding their routes from 19 routes to 40, which is what Gordhan mentioned, they’re going to need to be able to get a lot more new aircraft, and that will require at least a strong balance sheet to impress the financiers. So a strategic equity partner would be most welcome.

Read:
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I also heard the ANC saying that actually they wouldn’t be averse to getting another strategic equity partner in on the whole deal, which is very promising because, quite frankly, government, especially our government, has no role in trying to run a business as difficult as an airline.

JEREMY MAGGS: Was Takatso a bad choice in the first place?

GUY LEITCH: No, I thought it was actually a really inspired choice. It brought together the two key elements that SAA most needed, and that was capital, which came from the Harith General Partners component, and airline skills, which was coming from Global Aviation.

Unfortunately, the Competition Commission ruled out the Global Aviation input and pushed them out of the deal. I think that that was really when the wheels fell off the deal.

So if they could put together another deal like that, or I would be very happy to see a tie-in, a proper joint venture or a proper shareholding being sold to an airline like Emirates or Ethiopian, and both of those deals were on the table in SAA version one.

JEREMY MAGGS: How difficult is it, Guy, to determine the true value of South African Airways in the current market?

GUY LEITCH: It’s not difficult. They’ve had a solidly independent valuation done in the last year, and that came up with a value of pretty close to R6 billion. A lot of that value is in the property because the airline operation itself is worth next to nothing. It doesn’t own any aircraft of significant value, they’re all leased. Yes, it has a couple of routes, but it’s not really properly using them. It has a couple of slots into Heathrow, which used to be worth a lot, they’re not worth so much anymore.

So it’s the non-aeronautical assets, which are the strength of the SAA balance sheet, and those are easy to value.

JEREMY MAGGS: Always a pleasure to talk to you, Guy Leitch, editor of SA Flyer Magazine.