Is SAA’s Proposal to Secure R2.25bn Premature?

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DUDU RAMELA: As reported by Business Day, South African Airways [SAA] has presented a comprehensive five-year, two-phase corporate turnaround strategy to the government, which may involve seeking a R2.25 billion investment facility along with a strategic equity partner.

We’re joined by transport economist Dr. Joachim Vermooten to discuss this. Thank you for your time today, Doc.

To clarify, we do not have access to the plan and haven’t seen it ourselves. What we want to explore is when a business should consider entering the market.

JOACHIM VERMOOTEN: Good evening. Thank you for having me. The critical point is that SAA must establish and show that it has complete control over its assets and liabilities, alongside proper accounting practices, which should lead to an unqualified audit report in its next [results] release, which is coming up soon.

It’s essential to demonstrate that investors can trust the figures, especially when considering any capital investment or recapitalization.

The 2023 results for SAA indicated positive equity, but much of that stems from asset revaluation.

Essentially, having cash as equity is crucial to cover expansion costs; the growth of routes requires substantial capital, equating to a new business that often incurs startup losses. It’s vital to avoid overexpansion to maintain liquidity.

In my view, it’s premature for SAA to rush. They should adopt a conservative approach and present accounts that receive auditor support with an unqualified opinion, assuring financial institutions can trust the figures and forecast reliability.

DUDU RAMELA: Doc, you mentioned the need to demonstrate reliable numbers in their financial statements. What insights can you provide regarding the actual state of South Africa’s financial health?

JOACHIM VERMOOTEN: Well, we know they have not yet released their March 2024 results, which were due in August last year.

They should soon be publishing the audited financial statements for 2025.

They are indeed lagging on one set of accounts, and there’s a need for enhancements in corporate governance and financial controls, which led the Auditor-General to issue a disclaimer for the 2023 accounts, indicating they cannot make any statements.

DUDU RAMELA: You mentioned needing various things in place before entering the market. Is the market sensitive to budget or pricing? I guess I’m inquiring about alternative ways they can present their products and fares.

JOACHIM VERMOOTEN: The key element is the credibility of the projections. These should be grounded in reliable and bankable accounts, providing certainty; otherwise, it fosters uncertainty, particularly in the current climate, making risk evaluation challenging.

They currently possess about R4.7 billion in equity, mainly from asset revaluation. While this indicates solvency, it doesn’t position them to absorb short-term losses associated with significant route expansions.

I recommend they first stabilize their internal operations and adopt a tempered growth outlook moving forward.

Thus far, they have taken a conservative approach, benefitting from a financial strategy utilizing wet-leasing for aircraft, aircrew, and maintenance. This effectively transforms fixed costs into variable ones.

However, now is the time to address the issues noted by the Auditor-General before progressing with their growth plan.

DUDU RAMELA: You touched on aircraft. How would you describe the current landscape of the global aerospace supply chain? Is there sufficient capacity for new aircraft?

JOACHIM VERMOOTEN: That’s a fascinating query. Like many aspects of aviation, it resembles juggling numerous balls.

Currently, we face risks from President [Donald] Trump’s imposed tariffs, which are bound to increase aircraft prices, regardless of their assembly location, as they depend on a globally connected logistics network.

Looking from another perspective, there are used aircraft still grounded due to the Covid situation.

With new aircraft, several are being returned by Chinese carriers as the Chinese government has prohibited airlines from accepting American-made planes, notably those from Boeing.

This means we may witness a return of new aircraft to the original equipment manufacturers [OEMs], which will then need to be reassigned.

Thus, there’s potential for acquiring new equipment, yet one must remember that doing so entails deposits and prepayments.

Additionally, there are challenges in engine logistics, as some renowned companies have had to guarantee an entire fleet of aircraft but face difficulties in operating those fleets due to complications with the new variable-status engines.

Consequently, the situation is quite volatile, and SAA’s current approach of wet-leasing appears financially sensible.

However, continuing that strategy may pose additional challenges.

The primary concern for me is that the growth rate needs to be manageable; anything beyond that becomes unfeasible from a liquidity perspective.

DUDU RAMELA: There has been a robust discussion here about the relevance of a national carrier. Consider a country like Ethiopia; Ethiopian Airways is the pride of its nation, among other things. Why does a country need a national carrier—or does it?

JOACHIM VERMOOTEN: A national carrier isn’t necessarily a requirement. It has been more widespread on the African continent, often reflecting a political rivalry: “My airline is bigger than yours, or my losses are greater than yours” [chuckles].

Globally, even national carriers in China are publicly traded entities. For a Chinese carrier to invest in new fleets or routes, it must package the project and list it on a stock exchange, where financial analysts scrutinize the viability of the plans.

There’s no guarantee from the Chinese government of financial support for national carriers; they rely on private capital through shares sold on public exchanges.

This exposes such plans to thorough analysis, ensuring that only viable projects receive funding. I believe this approach is more sustainable, fostering financial discipline and encouraging adaptation if a project fails to succeed.

SAA, on the other hand, seems overly reliant on expectations of government funding.

The sooner we can transition towards a publicly listed model, the better.

DUDU RAMELA: Before you go, Doc, I must ask: What’s your take on the state of the aerospace sector across the continent? Flights are quite expensive, which may deter travel and create a barrier, especially with discussions around the African Continental Free Trade Area that seems stagnant in terms of movement.

JOACHIM VERMOOTEN: Absolutely. The concept of an African free trade market is promising, much like the European Union model, but steps towards regulatory alignment in aviation are progressing too slowly.

We have something called the SAATM, the Single African Air Transport Market, aimed at realizing the Yamoussoukro decision from 1989, which feels outdated.

In Europe, there is an entirely integrated internal market where airlines operate without the need for bilateral agreements between nations.

Regulatory authorities are essential for operations, allowing local airlines to serve underserved markets across Europe. For instance, I recently flew from Italy to Spain with a Dutch carrier. Such arrangements aren’t feasible under current bilateral agreements globally but would be possible with a unified internal market.

This integration would allow airlines to capitalize on excess capacity and meet the demands of undiscovered markets, highlighting the benefits of a fully integrated internal market.

DUDU RAMELA: Thank you for your insights this evening, Doc. Dr. Joachim Vermooten is a transport economist.

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