Sunday, October 21, 2012

South African Airways in financial difficulties

South African Airways (SA) has seen a portion of its board members resign after a dispute with the government over the airline's finances and strategy. The airline has posted large financial loss for the year ended March 2012, requiring immediate government intervention in the form of loan guarantees. Both resignations and the loss came as a surprise and will likely lead to tighter control by the airline's only shareholder - South African government.

With little warnings, SA's Chairwomen left the company together with seven other board members late last month, followed by the airline's CEO soon after. Neither side has revealed what exactly caused the resignations, but it is safe to assume that disputes over a bail-out contributed to the development. South Africa's Public Enterprises Minister Malusi Gigaba, in charge of overseeing the airline, has appointed new board members and established a task time to "give a consolidated view and roadmap for a turnaround" and issue a report by mid-December.

314ck - South African Airways Airbus A340-211; ZS-SLA@ZRH;02.09.2004
In early October, the government provided SA with $600 million loan guarantee for a period of two years, warning that it will require management to present a sound turnaround strategy and be transparent in its execution. But there are already fears that funds provided will not be sufficient for SA, as part of the money might be spent on refleeting. Alarm bells are also ringing over the airline's very negative debt-to-equity ratio. Mid-October, SA reported operating loss of close to $150 million despite rising revenues, which is in stark contrast with profits in recent years. The financial report was delayed until after the board members resigned. Gigaba said the airline performed "below expectation" blaming weak internal oversight.

SA's newly appointed Chairman Vuyisile Kona emphasizes that his goal is primarily to improve the airline's finances and "stop losing taxpayers’ money". He is experienced in airline business having already worked for SA as a senior executive. Disputes have resulted in him leaving the company as well, back in 2005. He confirms receiving clear instructions from the government to break even.

However, despite South African government's concerns and warnings that bailouts will be less generous in the future, it is widely believed that it is ready to support the flagcarrier. The government has admitted it is not looking at privatization. South African national airline group also revealed it is contemplating the launch of secondary hubs in East or West Africa, either through SA or its South African Express unit, citing Ghana as an example of an attractive country.

Even with supportive government, SA's new management has an important task of returning the airline to profitability. While the importance of responsible management team is unquestionable, some responsibility lays in the government as an owner of the airline, which should not tolerate unmotivated and passive administration. This route seems to have been taken by India after it approved massive capital injection for state-owned Air India recently.