SAA Business Rescue process; Update on subsidiaries & strategic equity partnership; with Deputy Minister

Meeting report

The Chairperson said that the Committee would be provided details by South African Airways (SAA), with the assistance of the Department of Public Enterprises (DPE), on the current state of SAA, and when it anticipates the airline would resume operations.

Deputy Minister's opening remarks

Mr Phumulo Masualle, Deputy Minister (DM), Public Enterprises, said that all the challenges faced by SAA were well known. The global aviation industry had been negatively affected by the decline in travel because of the Covid-19 pandemic, and efforts to resuscitate SAA had also been affected by this. 

Mr John Lamola, Chairperson of the SAA Board, said that SAA was in the process of restructuring and setting itself up as a viable and profitable airline that South Africa and the rest of Africa could be proud of. He added that the current board was an interim one, which had the objective of ensuring the restructuring of the airline prior to its launch. Presently, it consisted of only four members.

Current status of SAA

Mr Thomas Kgokolo, Interim Chief Executive Officer (CEO), SAA, briefed the Committee on the progress of restructuring at the airline. The business rescue practitioners (BRPs) had filed a notice of substantial implementation on 30 April 2021 which had resulted in their exit from SAA after more than a year -- since December 2019 -- when the BRP's work had started. There were three key areas which required strategic focus during the transition phase:

• A receivership must be established to manage the settlement of outstanding liabilities;
• The receivership would settle liabilities over the next three years. There were concurrent creditors and unknown ticket liability;
• Implementation of the business rescue plan initiatives.

 

The BRPs had handed over the affairs of the business to the interim Board and executive management team to focus on developing and implementing an interim business plan to sustain the operations while a strategic equity partner (SEP) was being finalised, and the resumption of all flights.

An amount of R10.5 billion had been allocated to SAA for the implementation of the business rescue plan, of which R7.8 billion had been transferred to the airline by 2 June. The balance of R2.7 billion was to be paid to the subsidiaries as part of the business rescue plan. This amount was yet to be paid. The R7.8 billion transferred to SAA for its restructuring included:

• Voluntary settlement packages and employee liability paid to date, of R2 billion;
• Unflown ticket liability paid to date, of R800 million;
• Post commencement finance creditors paid to date, of R600 million.

 

On 11 June, Minister Gordhan had announced that the Takatso Consortium, comprising Harith General Partners, a leading investor in African infrastructure and airports, and airline management firm, Global Airways, had been selected as the preferred SEP for SAA. The Minister had stated that the objective of bringing a SEP to SAA was to augment it with the required financial and operational expertise to ensure a sustainable, agile and viable South African airline.

Some of the objectives of the partnership were:

1. To relaunch a viable, scalable, agile and sustainable national South African airline that was no longer dependent on the South African fiscus;
2. To build an airline that propels the growth of the South African economy, especially the tourism industry;
3. To build a model public-private partnership that leverages the commercial skills of the consortium, builds on the brand name and positive image of SAA, which together would serve the national interests of South Africa.

 

Two key elements of the partnership were ownership and funding.  The Takatso Consortium would own 51% of the airline, and the government 49%. The intention was to list the airline in the future to address future funding requirements and enable all South Africans to take part in its success. The Consortium would provide the required capital. There would be no further burden on the fiscus.

He added that a section 189 process had been initiated for SAA Technical (SAAT) and Air Chefs. Section 189 of the Labour Relations Act permits employers to dismiss employees for operational requirements.

The Chairperson opened the floor for discussion.

Discussion

Ms J Tshabalala (ANC) asked how many employees SAA would retain.

She asked the officials to elaborate further on the Memorandum of Understanding (MOU) SAA had entered into with the SEP. Additionally, what had led to the establishment of the consortium?

She expressed her disappointment regarding the fact that government had become a minority shareholder of the airline, as the Committee had advised Parliament to approve SAA’s business structure in the hope that the government would remain as the majority stakeholder.

As government was now a minority shareholder, how would it account to Parliament on the funding provided by government? Secondly, what relationship did SAA have with the labour unions, and how would the workers be represented in the newly established airline? Thirdly, had workers who had taken severance packages been fully paid yet?

Mr G Cachalia (DA) asked how much had been set aside to pay for unpaid salaries, and to pay creditors. How much money did SAA have to fund its operations? What amount was required to fund operational and working capital needs? What had been the knock-on effect of reducing the capacity of SAA, and had the effect been on the subsidiaries and their business case going forward?

Ms M Clarke (DA) asked what the leanest structure of SAA would look like; how did SAA intend to institute consequence management, and could the Committee be provided with a list containing the corruption cases and their financial implications; what had the DPE meant when it indicated that government bailouts would be provided to SAA only in extreme conditions; as the state was now a minority stakeholder, what oversight did the DPE intend to exercise, and would this oversight be more vigorous than before; and would the oversight reports be submitted to the Committee timeously for it to analyse them? 

She also wanted to know when permanent appointments to the board would be made, and that the Committee be provided with a list of Takatso’s directors; why SAA’s subsidiaries had not been placed in business rescue, as Mango Airline's officials had indicated that if it had been placed in business rescue earlier, it would have been in a better position; who had been appointed to lead Mango’s business rescue. Ten, how competitive would SAA be, considering the current state of the aviation market, and would it be able to compete with other airlines?

Finally, she asked what processes would be put in place to rebuild the damaged image of SAA; did SAA plan to continue with its Voyager Mile incentive programme; and how many flights between Johannesburg and Cape Town did SAA plan to begin with?

Mr S Gumede (ANC) said that the presentation instilled hope in the Committee that SAA would be able to take off on 23 September. He asked that the Committee be provided with a progress report in the near future.

He asked whether there were any material concerns which could jeopardise SAA from taking off on 23 September, and commented that there was a risk in SAA flying only from Johannesburg to Cape Town.

He asked when a permanent board would be appointed and when it would be augmented, as it would not be able to function without its committees. He recommended that individuals appointed on the new board, including the CEO, be vetted so that the airline did not encounter the previous issues of corruption and financial mismanagement. The support of the Committee would be critical to SAA’s success, and for it to be provided, both the board and the executive would have to be transparent.

He asked why the R10.5 billion had been allocated over three years, as this increased the risk of the money being spent irregularly. He wanted to know how many aircraft SAA currently had, and their size. Additionally, had the business rescue process given the airline enough capacity to contribute to the survival of Mango? 

Mr A Lees (DA) said that the presentation had made reference to the government providing guarantees amounting to R500 million. He asked what conditions it had put in place to issue the guarantees, and whether further guarantees would be issued to SAA. 

Had the Department been provided with any indication as to whether Global Airlines was withdrawing or intended to withdraw from SAA, as there had been rumours that it was considering doing so.

He asked whether SAA had approached either the Development Bank of South Africa (DBSA) or the Public Investment Corporation (PIC) to provide it with funding. What was the current cash balance within the consortium, and how long it would last for?

As the airline had been technically solvent once it emerged from the business rescue, he asked whether it was currently solvent.

He wanted clarity as to whether the unflown ticket liability amounted to R2.2 billion. Additionally, had the liability been paid off. If not, did government intend to pay it off? If the government intended to pay it off, and it planned to spend only R1.2 billion, when would the remaining R1 billion be returned to the National Treasury? 

Ms Tshabalala asked how much the company owed to its staff and its suppliers. In addition, would the airline require shareholder funding? What impact would government’s minority status have on how SAA intends to trim its staff?

Referring to the Presidential Recovery Plan, she said that it looked to address the issue of local industrialisation, which was more difficult to implement if government was not the majority shareholder. She asked whether the newly established SAA would be referred to as a private airline.

SAA's response

Mr Kgokolo said that of the 1 000 employees approved by the BRP, 800 vacancies had been filled. However, these numbers would change during the course of the restructuring process.

The reduction in employees, aircraft and routes, had reduced SAA’s input costs. He added that it was important for SAA to be vigilant in ensuring that the route networks were routinely managed.

Referring to the question on consequence management, he said that in the previous meeting with the Committee, the executive had provided an in-depth summation of the developments taking place at SAA. The cases were currently being investigated by the law enforcement agencies, and some of the money had been retrieved. SAA would continue working with the agencies to ensure that consequence management was implemented. He said that the cases were being investigated by the law enforcement agencies.

SAA officials believed that although the brand had taken a knock, it was still valued. He explained that the company was currently looking at repackaging its offerings, and also embarking on a process of digitisation. It was also looking at the configuration of its aircrafts, and going forward, it was pleased that it had good route rights, which it believed would give it an edge going forward.

On the question of the Voyager Mile programme, he said that SAA would not do away with the programme. In fact, on the previous day the Chairperson of the board had released a statement announcing the extension of the Voyager Mile expiry date from March 2022 to March 2023, which would allow for loyal customers to continue benefiting from the programme. In addition, a new bonus had been added for those who would fly with the airline from the beginning of its restart.

Referring to the question on the flight frequency, he said that there would be three daily flights from Johannesburg to Cape Town. The executive was monitoring the demand, and did not want to over-commit. 

He said that at this stage, SAA did not have material concerns that could affect the restart. The officials were currently dealing only with operational issues, which were being managed. SAA would be restarting with six narrow body planes, which included the A390 and the A320, and one wide bodied aircraft, the A330.

He confirmed that the airline was solvent at this stage. Furthermore, the working capital it currently had would carry it through until the transaction with the SEP was concluded.

Air Chefs had been responsible for servicing the lounges of SAA, and it would continue to do so. The executive management had expressed hope that there would be an improvement in the food provisions at the airline. He clarified that Air Chefs also serviced other airlines operating in South Africa. The executive management believed that with a leaner structure, Air Chefs should be able to maintain itself with the clientele it had, over and above SAA’s demands. Presently there were negotiations taking place with all stakeholders to ensure that Air Chef's business model was sustainable going forward. Management had also thought about introducing a diversification strategy, so that Air Chefs could also look at operating outside of the aviation sector.

Mr Fikile Mhlontlo, Chief Financial Officer (CFO), SAA, said that the R2.7 billion referred to in the presentation was related to unpaid salaries, and there was a process in place between the DPE and SAA to channel those funds into the subsidiaries.

On the government guarantees, he said that National Treasury used them as an assurance when choosing to lend an entity money. There was a process under way to clear all guarantees that had been issued in prior years, as the government wanted to do away with all the guarantees it had provided to state-owned enterprises (SOEs). The implication of this was that now SAA had to raise its own guarantees, like any other business, and once it had restarted, it would put in place guarantees amounting to R700 million. He added that SAA was in the process of clearing the old guarantees, with R500 million worth of guarantees still remaining.

He said that the majority of the R10.5 billion allocation had been spent on the items that it had been appropriated for, with the exception of the portion spent on subsidiaries, where only R991 million had been made available out of a total of R2.7 billion.

The reason for the funds being spread over three years was related to the allocation of R3.5 billion for certain liabilities that had been compromised as a result of the business rescue process. An agreement to pay the creditors this amount over the next three years had been put in place. This money had been set aside by government, and was over and above the R10.5 billion allocation to SAA.

He confirmed that SAA did have working capital and a sustainable cash balance which could carry it until the SEP was concluded.

Mr Lamola assured the Committee that the board had full confidence in the management, as led by the CEO. While it was a small board, it was hands-on and since its appointment it had been reviewing all the challenges faced by the airline. The board was aware that SAA had a chequered record of cooperative governance and a tainted brand image, so it wanted to ensure that it took actions which were meticulous and in line with the law. 

While the board was aware that there was no provision in the South African Companies Act for an interim board, as such, it had attempted to be accountable on issues such as compliance and financial management. Furthermore, the board viewed itself as a guardian of the Public Finance Management Act (PFMA), ensuring the proper disposal of assets and that government money was utilised correctly. These matters were assessed on a weekly basis.

Referring to how the board functioned, he said that the board had an operating model where each member was a chairperson of the board of each subsidiary. Mr Nick Fadugba served as chairperson of the SAAT Board, Prof Edna van Harte served as chairperson of the Air Chefs Board, and Ms Bembe Zwane served as chairperson of the Mango Board. He added that Mr Fadugba was a seasoned aviation specialist, and had assisted the DPE in preventing the loss of aviation skills and expertise at SAA.

On the question of SAA’s relationship with the trade unions, he said that where the unions felt that the executive was not receptive to their concerns, they could raise their issues with the board. The board had been concerned with the issue of salaries not paid to the staff of Mango and SAAT.

All stakeholders were working together to ensure that SAA rose once more.

Mr Kgathatso Tlhakudi, DG, DPE, said that the airline was economically important to South Africa, as it linked the country with its trading partners and it brought in tourists.

He explained that as the government was no longer in a position to fund SAA, it had taken the decision to restructure SAA and its subsidiaries, with the intention of selling its stake to a SEP. Government would still retain a significant shareholding in the business to ensure that national priorities were given attention. Government’s intention in sourcing an SEP was to ensure that there was continued support for the airline in the future. Citing Malaysia as an example, he said government-owned entities had been transferred to the private sector, and this had succeeded. The South African government wanted to replicate this. Presently there were entities that government had control over, and they were all still accountable to Parliament. 

The Department was pleased that the consortium was majority black-owned, as this ensured broader representation of previously disadvantaged South Africans in the aviation sector. He expressed his optimism that a solid base had been created through the restructuring process which would ensure that SAA grew once more.

He urged the South African public to play a role in SAA’s revival in the future. Government had contributed R14 billion to SAA, to ensure that it was resuscitated. Going forward, SAA would ensure that jobs and skills were retained.

He clarified that government had allocated R2.7 billion this year to restructure SAA’s subsidiaries. The Department had learned several lessons from SAA’s BRP that it planned to use to ensure that Mango’s business rescue process was not as long. There were ongoing discussions with the unions on how to prevent SAAT and Air Chefs from going under business rescue.

Referring to the question on bailouts, he said that through Treasury, government had communicated that the era of funding operational shortfalls was gone. However, it would continue to make financial contributions to SAA during the restructuring process. 

He added that the Takatso Consortium was black-owned, and chaired by Mr Tshepo Mahloele. More details would be shared in due course with the Committee and South Africans on how the consortium would be structured. In the future, the Department and the consortium would appoint a permanent board and executive. 

The current government guarantees for SAA were historical, and were being paid off by the entity. There was a commitment through the business rescue plan that the remaining debts would be paid and the guarantees resolved. He expressed hope that going forward SAA would be able to structure a corporate guarantee.

The Department had confidence that SAA would be able to resuscitate itself, even though it was operating in a competitive space, as it had a strong brand and was still loved by South Africans.

Further discussion

Mr Cachalia said many of the questions had not been answered, and for those that were answered, adequate information had not been provided. He listed the questions which were not answered -- specific details on the guarantees, what constituted a bailout, how much funds the consortium currently had and when SAA anticipated the current funds in the consortium would run out. He said that there was no clarity on the ticket liabilities, the prospective funding from the PIC and the DBSA, and whether Global Airlines was withdrawing or not.

Mr Tlhakudi responded that government had not provided new guarantees to SAA. He clarified that the current guarantees were linked to the historical funding of SAA, and those numbers could be provided to the Committee.

Referring to the current funds available in the consortium, he said it would not be prudent for the Department to share this information at this stage, and should rather be communicated at a later stage. However, it had been mentioned by SAA that there were enough funds until the SEP took over.

On the ticket liability, of the R3.4 billion set aside for the liability, R2.2 billion had been allocated, with R1.2 billion yet to be provided. There were discussions with government to ensure that the money was provided through the R3.5 billion that had been allocated.

Presently there were no discussions between SAA, the DBSA and the PIC.

He clarified that the rumours of Global Airways pulling out were not true.

He said the R2.7 billion that was outstanding would be provided once management had concluded its engagements with the unions to ensure the restructuring of the subsidiaries and the businesses.

Mr Cachalia said that the questions posed had been clear, yet the answers had been sub-standard. He had written all the unanswered questions on the chat group, and if the officials did not answer them, the sitting would have been a waste of time.

Mr Gumede said the Committee should allow the Department and SAA to prepare all the financial information.

DM Masualle said that most of the questions asked had been answered, and they had been answered honestly.

Referring to the rumour of Global Airways pulling out, he said the Department had information that the rumours had been made without any basis.

There was no intention of providing SAA with new guarantees -- rather, government was focused on exhausting the current guarantees. Further, no attempts had been made to get the DBSA and PIC to provide funding.

Referring the consortium’s balance sheet, he said that the consortium had enough funds to sustain the restructuring process between now and the completion of the due diligence process, which was near completion. 

Mr Gumede suggested that Mr Cachalia send his written questions to the Department through the Chairperson.

The Chairperson said that he had the responsibility to protect all those involved in the meetings, and it had been wrong for Mr Cachalia to term the meeting as being a waste of time.

He thanked all the officials for their input during the meeting.

Adoption of minutes

The Committee considered and adopted its minutes of 2 June, 18 August and 25 August 2021.

The meeting was adjourned.