South African Airways (SAA): update by Minister

Meeting report

The Chairperson welcomed the Minister of Public Enterprises.

Presentation on status update on SAA
DPE Acting Director-General, Adv Melanchton Makobe, updated the Committee on the business rescue stating that the business rescue practitioners (BRPs) filed a notice of substantial implementation on 30 April 2021, which resulted in the exit of the BRPs at SAA since the process started in December 2019.

Key areas still requiring strategic focus:
• Receivership was established to manage the settlement of outstanding liabilities.
• Implementation of the business rescue plan initiatives.

The BRPs handed over the business to the Interim Board and Executive Management Team to focus on:
• Develop and implement an interim business plan to sustain the operations while a strategic equity partnership is being finalised.
• Resumption of flight operations.

Status of Subsidiaries
• The business rescue plan recognised the deteriorating financial situation.
• Success of business rescue plan is dependent on financial viability of subsidiaries.

Funding for SAA and Subsidiaries
• Funding requirement for SAA and subsidiaries was approved by government.
• R2.7 billion for subsidiaries was part of the request.
• R3.5 billion required over three years must be approved by government.

Special Appropriation Bill for Funding Subsidiaries
• Allocation of R10.5 billion in 2020 MTBPS to SAA for implementation of business rescue plan.
• Special Appropriation Bill tabled in Parliament on 24 February 2021 to enable R2.7 billion to flow to subsidiaries.
• The R2.7 billion formed part of the R10.5 billion requested for the SAA business rescue plan.

SAA Funding and Actual Expenditure

• R10.5 billion was allocated in the 2020 Second Adjustment Appropriation.
• R2.7 billion of it for the subsidiaries is unpaid to date.

Market Overview – Domestic Market
• Skylink Airways has announced its intentions to start operating in the domestic market as of September 2022. The new airline intends filling the gap left by SAA on the Cape Town and Johannesburg bases.
• The COVID-19 third wave is expected to slightly slow down passenger demand.

Resumption of Operations
SAA currently preparing for resumption of operations and focusing on:
• Subsidiaries alignment for resumption of operations.
• Communication strategy geared towards resumption of operations.

Cargo Update
• Africa was the strongest of all regions driven by Asia-Africa trade expansion – International Air Transport Association (IATA).
• SAA to review cargo strategy to align market changes and Ekurhuleni Aerotropolis advancement.
• Investment in infrastructure and IT systems is needed to support the new business model.

Strategic Equity Partner (SEP) Process
• The Department is in final discussions with the Strategic Equity Partner (SEP).
• Both parties are concluding due diligence.
(See document for further detail)

Minister Pravin Gordhan stated that the Department hoped to receive further announcements in the future on the progress of SAA.

Discussion
Ms C Phiri (ANC) welcomed the exit of the BRPs and applauded the Department. The situation is improving, and there is hope for South Africans that the country’s pride – the SAA – will return. The work done has proved the citizens and Members wrong who believed that the request for R10.5 billion was a waste of time. The Department is moving in the right direction.

On the Minister and his team’s process for restarting Mango and the new SAA will it be the same routes as previously and will aircraft be leased or bought?

Does the Minister have a good relationship with the Minister of Transport? The permits for the new airline must be issued because SAA must be prioritised. If permits are issued to other airlines wishing to venture into the business, how does this hamper the operation of SAA?

When will the Committee be informed of the identity of the Strategic Equity Partner. Is it guaranteed that the SEP process will be finalised in the stipulated four to six weeks? Members have been waiting a long time for this process to come into commercial operation.

Some unions have taken SAA to court. What is the progress with the severance packages across all unions? How many employees will be employed to work at the new airline?

Mr G Cachalia (DA) noted that the understanding from experts is that it will take four to five years of loss-making before the new venture becomes profitable. Given that the R10.5 billion is needed for the SAA rescue plan, how can the subsidiaries use R2.7 billion of this? Will the remaining R0.8 billion cover all outstanding liabilities? How will losses be financed going forward? In terms of costs, what fuel price will be contracted at, and will this price involve a BEE premium?

On the eight profitable routes out of the thirty that were covered, which will be covered, and how is this going to be met?

On the Strategic Equity Partner, in the past only a few airlines expressed operational and non-financial interest. How has this changed? What are the terms and conditions of the new SEP?

Ms O Maotwe (EFF) stated that the poor performance of the subsidiaries should not have come as a surprise. It should have been anticipated and the BRPs should have given a full presentation on the impact of SAA's grounding on the subsidiaries. The capitalisation of Mango – which should have been described as the rescue of Mango – would not have been an issue if the future of the subsidiaries was thoroughly discussed.

What is the impact of the continued loss of revenue by Air Chefs? How is this loss even occurring given that Air Chefs is not operational?

On the R7.8 billion transferred to SAA for restructuring, what happened to the R4.4 billion not reported on in the presentation?

It is clear that DPE is pushing for SAA to resume its services. What will be different this time around? Would it not be better to wait for the strategic equity partner finalisation and new strategy implementation before rendering of services? How can DPE already know the SEP structure and strategy?

Are the aircraft still being rented, and if so, what is the rental payment per month? If there is a contractual rental payment, when does this contract end?

Mr N Dlamini (ANC) was concerned about the grounding of Mango due to technical issues with aircraft. Does this have an effect on the new airline? What is the nature of the technical issues? Are the issues due to employees refusing to work due to lack of payment?

Ms M Clark (DA) asked if the restructuring of SAA Technical (SAAT) to the correct business size had been finalised. Is SAAT able to continue its operations in terms of business viability?

Has Mango’s financial status – which would have prevented its operation from 1 June 2021 – been resolved? Will Mango be able to continue flying as normal?

Has Air Chefs looked at other business models? For example, SA Airlink provides customers with a meal in a box able to be taken home, which is a more sustainable model. Who are the owners of Skylink Airways, and are they being considered as an equity partner?

What is the progress in reaching a resolution with the pilots? What is the current status given that SAA anticipates flying in the near future? When SAA becomes operational again, does it intend entering the cargo service market?

Who would SAA use as a third-party capacity supplier, and are negotiations taking place on this?

How would the investment in infrastructure and IT systems be dealt with to support the new business model, and what are the associated costs and timeframes?

For transparency purposes, the 30 shortlisted equity partners should be disclosed to the Committee. Can DPE provide a breakdown on the cost of the business rescue? Do the costs associated with creditors and aircraft leases form part of the business rescue, or are they additional costs which SAA would have to bear going forward?

Ms V Malinga (ANC) was concerned that the success of the business rescue plan is dependent on the financial viability of the subsidiaries. Why is this the case? The Executive should examine the BRPs because the challenges still faced by SAA mean that the BRPs did not ensure that SAA reaches its full potential. She suggested that when SAA becomes operational again, every Member of Parliament must use it.

Ms J Tshabalala (ANC) referred to the National Development Plan (NDP) and asked if agreements have been made by government to ensure the SEP is not simply focused on making a profit, but also dedicated to social responsibilities in light of the huge unemployment in the country.

She asked for an update on the negotiations with the South African Airways Pilots’ Association (SAAPA) on severance packages. She also requested a comprehensive report on the unions, on the employees considered for the new airline, and the employees that were retrenched.

What are the details of the regulating agreement with the new airline moving forward, and what is the nature of the demands made by SAAPA? Can DPE provide a breakdown of the expended funds given by the government for the new airline? She suggested that the Committee deliberate with the BRPs on the lessons learnt. Were the payments made to the BRPs worthwhile? How did the BRPs spend the money?

The Committee should pride itself on the work done to save SAA. However, the Committee and DPE must consider how this market will be traversed moving forward. SAA should also take the opportunity to transport the COVID-19 vaccines.

Mr S Gumede (ANC) said credit must be given where it is due. He believed that this was a learning process for the Committee. State-Owned Enterprises (SOEs) were collapsing. SAA had failed to the point it would have been completely liquidated without the business rescue plan. The presentation was well-constructed. However, timeframes should have been included so the Committee could have been in a better position to monitor the progress of the initiatives.

On the R4.4 billion not reported on in the presentation, can answers to that question be provided in writing for the purposes of accountability?

From where is the money for board remuneration coming? How much did the business rescue plan cost? What COVID-19 strategy has been implemented?

Given the Airlink announcement of its intention to fill the gap left by SAA in 2022, is it possible that the delay in SAA becoming operational was deliberately caused by powerful competitors in the market?

He stressed that addressing the core issues will allow SAA to resume operations, and that these core issues should be prioritised ahead of the peripheral issues. The finalisation of the SEP and the financial strategy should be prioritised. Serious talks should also be held with Treasury. He also suggested that regular meetings between the Committee and DPE be held so the situation could be monitored.

Ms Tshabalala asked if timelines could be given on the restructuring of the subsidiaries. SA Express was placed under provisional liquidation in April 2020 due to operational and financial challenges over a number of years despite financial support from government. By October 2020, an interested buyer was identified, however, the identified party could not produce the acquisition funding. The process was expected to be concluded by the end of 2021. What is the progress?

The Chairperson asked what is causing the R2.7 billion which forms part of the allocated R10.5 billion, to remain unpaid. How will this payment be expedited? The longer subsidiaries like Mango remain grounded, the more likely challengers in the market will exploit the business opportunities created by the grounding of the subsidiaries.

What is being done to ensure that SAA, which will operate on a clean slate, does not face the same challenges as before?

Approximately when will the new airline become operational? Which policies have been implemented to ensure that the new airline does not face the same problems which SAA previously faced? What will happen to those with SAA Voyager membership status?

Will the hangar space and other property occupied by SAA remain the property of SAA?

Minister's response
The Minister noted that SAA went into business rescue in December 2019. This business rescue process took an extraordinarily long time and was accompanied by the associated fees. The final number is not yet available but will be provided as soon as DPE receives it. The cost of the business rescue process is estimated to be R220 million. A portion of this goes to practitioners, with a larger percentage going to lawyers and consultants.

SAA exited business rescue on 30 April 2021 on the basis of being a solvent business. However, its operations had not yet resumed.

One of the pitfalls of the business rescue process is that, apart from the repatriation flights for South Africans, the transportation of personal protective equipment (PPE), and a vaccine trip, opportunities in the cargo market were abandoned and not utilised when SAA was under business rescue.

A key point to highlight is that during the business rescue process, the business is under the total control of the BRPs. Unless told otherwise, no other entity has influence over the manner in which the BRPs choose to operate the business they are operating. There were implications for the subsidiaries, as explained in slide 5 of the presentation.

The Minister said there were initially about 30 SEP expressions of interest, either in SAA in its entirety, or for part of SAA such as the cargo business. A transaction advisor was appointed to screen each expression of interest because often these interested parties would not have the finances to support their interest. This screening process narrowed down the 30 to about five. The new interim SAA board had an opportunity to interact with the shortlist earlier this year. This shortlist was narrowed down even further due to the prolonged impact of the pandemic.

With the third wave experienced in parts of South Africa, and even countries with a large number of vaccines available, such as the UK, there is very little knowledge at the moment how long the pandemic will last. The longer the pandemic lasts, the greater the risk that new virus variants will develop. Recent news from Vietnam is evidence of this.

The SEP process is in the final stage of its finalisation. The way in which this process operates is there is an agreement in principle of a possibility of a partnership. There is then a process of due diligence, both by government into those interested, and by those who are interested into SAA itself. This process can take six to eight weeks and has already begun. Once it is concluded, a sale-and-purchase agreement is entered into, which finalises the arrangement.

Within this process, DPE must ensure that it secures certain rights, for example, the domicile of the airline, the routes travelled, and the branding of the airline. The Voyager membership status forms part of these discussions, with other foreign loyalty programmes being considered to replace the Voyager programme, which is deemed to be aged.

When the business rescue process started, it was very clearly stated that the total cost would be R14 billion, of which R10.5 billion would be acquired immediately. However, it took a long time to acquire this R10.5 billion. By the time the appropriation took place, the R10.5 billion itself was split with R2.7 billion going to the required restructuring of the subsidiaries. The delay in the payment of the R2.7 billion is indeed caused by the parliamentary process as it required a Special Appropriation Bill, which should be processed later this week by Parliament. After this processing, DPE will be able to account for the remaining amount. The additional amounts, as indicated by the presentation, are amounts that will be used to pay out the lessors. This was the deal reached between the BRPs and the aircraft lessors.

The new SAA will determine what the most feasible option is between buying and leasing aircraft.

The outcome of the business rescue process will be a new airline which is financially viable and not dependent on the fiscus. Throughout the business rescue process, DPE made it clear that SAA will not expect or request additional money from government itself. Whoever the new SEP is will bring in the money to operate the new airline. Government takes the responsibility of using the total amount of R14 billion to “clean up” the airline and deal with the historic costs of the airline.

DPE is beginning to see light at the end of the tunnel. However, the question of routes and fleet and so on is partially dependent on what is viable at a particular point in time. Additionally, SAA’s situation is not helped by the frequent issuing of licences to airlines in an already limited market. South Africa’s open-air policies will be detrimental to the country in the long run, especially if the pandemic is prolonged, and if the opening and closing of borders becomes a semi-permanent feature for the next year or beyond.

A great deal will be learned from the summer in the northern hemisphere about the relationship between flying between countries and the spread of infections and possible new virus variants.

There will be careful consideration in the new airline on what the most cost-effective options are for routes and fleet, including new IT systems and platforms. These are areas that every airline in the world is considering to ensure that costs are reduced.

One of the lessons learnt from this experience and from the experiences of other SOEs, is that if there is a mismatch between revenue and the cost structure of an entity, that entity is doomed. Unless the cost structure is fixed on the one hand, and the revenue is fixed on the other hand, and granted there are no “bail-outs” from government, that entity will not be financially viable, let alone commercially viable.

The disclosure of the strategic equity partner and the precise arrangements are commercially-sensitive. Transparency is important, but in a commercial agreement, which involves people from the private sector, it is important that the process is executed as quickly as possible, but also as carefully as possible so that the final arrangements are consistent with the law and are financially viable at the end of the day.

The Minister said that Mr Cachalia still seems to premise his comments on SAA being reliant on the fiscus moving forward, and it has clearly been stated that this is not the case.

Issues such as the fuel price will be considered by SAA once it is no longer grounded. Any premium paid to anybody can, ultimately, will cause the demise of any business. There is a point of concurrence on this sort of issue.

The future business will finance its own losses but will also benefit from its own profits at that particular point in time.

There was a lot of inconsistency in how the BRPs handled the grounding of subsidiaries and the impact thereof. DPE is faced with a serious set of challenges and it is clear that SAA Technical must be restructured to achieve the correct balance between cost and revenue. SAAT also most likely lost around 70-80% of its business during the total lockdown, both incoming international and domestic flights. This had an evident impact on revenue, but at the same time, SAAT is a very important entity with a large degree of potential and will dealt with on this basis.

Air Chefs managed to operate to a certain extent for a short while, but it is essentially dormant except for one or two things that it is doing. The reason for its losses will be investigated shortly.

On the questions about what SAA will be doing different this time around, DPE is aware of and is keeping in mind the balancing act between resuming operations before the finalisation of the SEP and resuming once the SEP has been finalised.

Currently, Mango continues to face financial difficulties, and there are some decisions to be made in the short term about this. The crowding-in of multiple different airlines is creating an additional challenge together with the shortage of money. Additionally, the type of deals entered into by the previous management with lessors is a cause of serious concern to DPE. There was an almost exploitative relationship between the lessors and Mango, which will worsen Mango’s situation significantly.

The Minister said he is unsure who the owners of Skylink Airways are.

Cargo is still regarded as an important line of business for SAA. DPE will update the Committee on what emerges from the discussions with the SEP on that. The final cost of the business rescue process will also be provided, and this amount will be subjected to an audit. DPE will ensure that it acquires a full understanding of what happened and how the money was actually spent.

DPE acknowledges that it should consider understanding the dynamics of the business rescue process, the practitioners, and the lessons which can be learnt. In particular, DPE should look into any neglectful conduct by the BRPs themselves.

On the SEP, it is important to note that in any arrangement or partnership of this kind that DPE enters into, DPE tries its best to secure certain “sovereign” rights. There are many examples around the world of the golden share and golden agreement which protect national interests such as the branding of the airline. This situation is currently receiving attention.

The point raised about profit versus social responsibility is an important one, but it must be recognised that the new airline will start small and grow as the demand and opportunities grow. A new quality that airlines require in their management and leadership teams is agility. Situations can change very fast, which is evident from the experiences with the pandemic. This quality of agility can be seen around the world as different airlines try to position themselves. One aspect of an airline’s social responsibility is the maintenance of the balance between protecting livelihoods and protecting lives themselves.

DPE is looking carefully into the number of employees that will be retained, and how these employees will be demographically representative. DPE will also look into the funding for the social and labour plan (SLP). The concept exists and a number of people have already signed on. This process will receive attention in the coming weeks.

It is not certain if DPE received value for money out of the business rescue process. There are examples where business rescue was executed in a much more efficient way than in the SAA case. An opportunity will arise where DPE and the Committee can discuss if the process was value for money and if it was done as efficiently as it could have been.

Processes have started in the restructuring and reorganising of the subsidiaries, particularly at SAAT. More precise timelines will be provided as the business plans become clearer.

For everyone, this has indeed been a key learning process on SOEs and business rescue, whether to save a business or shut it down, and the consequences for the workers and fiscus. Additional work is being done through the Presidential SOE Council, and when that work is completed, it is very likely that the President will report to the Committee and the public at large on the steps moving forward. However, it is clear that the current situation for many SOEs is not a tenable one.

Avoiding liquidation is an important goal. Liquidation has a particularly detrimental effect on employees. The welfare of employees is not unimportant, particularly given the high levels of unemployment in South Africa and the impact of the pandemic.

The Minister explained the remuneration for the acting CEO and others comes from the current operating costs. DPE is trying to minimise this amount so that remuneration does not become a burden while the SEP process is finalised.

A key element of the COVID-19 strategy is the quality of agility. A number of airlines have shown remarkable agility both in terms of the gauge size of their aircraft, and the manner in which they have seized opportunities where others failed to do so – so-called commercial opportunism. However, this opportunism is part of the business ethic that can be found in this and other sectors.

The key objective of the SEP and the financial strategy is that the airline must be self-sustaining. At the end of the day, there will not be demands on the fiscus by the new airline. Expectations must be managed in terms of the speed in which things can be done, with the ramping-up process being something that can be planned. However, the predictions will not be very accurate during a pandemic or following a pandemic.

The so-called “born again” SAA should indeed not repeat the mistakes of the past. The new SAA intends to take off closer to August 2021, although DPE is doing its best to expedite the due diligence process with the SEP and vice versa. DPE will provide an update on the Voyager programme once the overall discussions currently taking place have been completed.

Some of the property that can be seen at airports is SAA property, particularly hangars and suchlike. However, office space is leased from Airports Company South Africa (ACSA).

Department response
Adv Melanchton Makobe clarified the finance utilisation of the R7.8 billion transferred to SAA. R3.4 billion was utilised for voluntary settlement packages (VSPs), salaries, PCF (post-commencement finance) creditors and un-flown ticket liability.

The remaining R4.4 billion is in the SAA account and will be utilised for the working capital to pay for the pilot VSPs that have not been finalised and to cover further un-flown ticket liability. SAA is currently in negotiations with the pilots to resolve the VSP. The VSP amount has been agreed on, but the further demands that pilots have made on the cancellation of the regulating agreement remain outstanding; the pilots want to be paid for the three months they have been unable to work. Once this issue is finalised, the VSPs can be paid to the pilots and the pilots can exit the system.

On the ongoing litigation, SAA is taking the regulating agreement to the Labour Court to terminate it. If there is no agreement during negotiations with the pilots, the court process will take over. The loss by Air Chefs is mainly as a result of the salary bill, as there is no income being generated.

On the SA Express liquidation, the court has extended the final liquidation date to 29 July 2021. However, the buyer is still seeking financing to purchase SA Express. The process is ongoing as SA Express is not yet fully liquidated. DPE is hopeful that the buyer will be able to source the funding and prevent final liquidation.

The Committee adopted the minutes of 26 May 2021.

The meeting was adjourned.