Unprofitable South African Airways (SAA) Needs Big Bail-Out, Finance Chief Tells MPs

Published on Wednesday 18th February 2009

Unprofitable South African Airways (SAA) could not keep going without a big state capital injection, the national airline's executives warned yesterday.

SAA is expected to post a significant loss for the year to March for the third year running because of interest payments well in excess of R300m and losses from hedging against the volatility in the fuel price.

Higher fuel costs and falling passenger numbers have also contributed to its troubles.

SAA suffered a loss of R1bn last year, and its loss was R833m the year before.

SAA chief financial officer Kaushik Patel warned that the airline's precarious financial situation was likely to deteriorate even further as it was severely undercapitalised and burdened by debt, which exceeded its equity by 10%.

No business could survive in the long term with such a load, Patel told Parliament's public enterprises portfolio committee during a briefing. It was just not sustainable.

The economic meltdown would make the situation worse as passenger volumes and revenue slumped.

Public enterprises deputy director-general in charge of transport Andrew Shaw also warned that SAA was "very inadequately positioned to deal with the recent turbulence in the aviation market. It remains very thinly capitalised."

The carrier's sustainability was threatened.

SAA's level of indebtedness was among the highest in the world, and was even higher than those of American Airlines and Delta, which were placed under bankruptcy protection, Shaw said. He noted that 35 medium-sized network airlines were liquidated last year.

Failure to get sufficient funding from the government meant that SAA had to pay more for its borrowings than would otherwise be the case. "The interest burden as a whole is so big that it wipes out all operational profits," Patel said.

About R300m in interest has been paid this year on loans taken out against government guarantees of R2,86bn, and even more for the airline's total debt book.

SAA also has a liability of more than R1bn for its Voyager loyalty programme, which has still to be taken on to its books.

The Treasury turned down an SAA request for a R5,2bn capital injection, which would have brought the percentage of debt to equity down to a more acceptable 60%-70%. Instead, SAA got only R1,6bn in the 2009-10 budget.

Patel would not be drawn on SAA's estimated hedging loss, saying this would depend on the fuel price on the last day of the financial year.

But he stressed that after the R6bn hedging loss in 2004, which wiped out SAA's capital base, a conservative hedging policy was adopted. This limited hedging to 40% of SAA's total book compared with 80% at some international airlines.

SAA head of restructuring Vera Kriel told the committee that cost savings of R2,3bn were achieved in the period to December, about 35% higher than the target of R1,7bn and equal to the total 2008-09 target.

Acting CEO Chris Smyth emphasised that SAA was operationally sound and profitable. All of its domestic routes were profitable, as were all international routes last month, except for New York.

Africa was still the most profitable market.

SAA grew its share of the market in southern Africa by 13% compared with market growth of 8%; west Africa 11% (2%); central Africa 48% (31%); north Africa 27% (17%); and east Africa 5% (4%).

However, until last month the flights to the leisure destinations of Mauritius and Victoria Falls were unprofitable, and would be in the red for the year as a whole.

In Australasia, SAA grew 19% compared with market growth of 12%, capturing market share from Emirates and Qantas. South American traffic had fallen 7% and North America's 8% while the number of SAA passengers on Asian routes fell 12% as the market grew 6%. "Traffic from SA has declined by 2% overall," Smyth said.

He conceded the drug trafficking incidents involving SAA crew had caused "horrendous" damage to SAA's image.

The cabinet was also gravely concerned about this, it said in a statement after a meeting.


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