South African Airways last week offered severance packages to its entire workforce after the government said it would not provide more funds for rescue efforts, in what is the latest sign that the state-owned carrier is close to going under.

A five-month business rescue plan for SAA was initiated in December by the government in a last-ditch effort to save the debt-laden airline. But efforts have been crippled by funding challenges, worsened by the coronavirus-triggered unprecedented aviation crisis. Like many other airlines across the world, SAA has halted operations as countries impose travel restrictions in response to the virus outbreak.

On Friday, SAA tabled a draft settlement agreement offer open to all of its 4,708 employees that would see the termination of their employment contracts by April 30 in exchange for severance packages – they would be entitled to one week’s pay for every year of service, one month’s pay in lieu of notice pay and pay for outstanding annual leave.

The proposal came after public enterprises minister Pravin Gordhan told business rescue practitioners it would not provide more funds, lending guarantees or allow foreign financing of the rescue plan. 

Initial negotiations with unions were about job cuts but have since developed into a discussion about winding down the airline – without funding from the government, the BRPs have no choice but to wind down the business to avoid liquidation. Mixed reactions from labour representatives have trailed the lay-off proposal, reports show, but talks with unions are expected to continue this week with the deadline set for Friday, April 30.

While the severance packages of employees would be dependent on whether the company is able to sell some of its assets, the mutual agreement to terminate employment with defined retrenchment benefits is widely considered to be in the best interests of SAA’s employees. This is because it would be secured ahead of the creditors should a liquidation become necessary. In the event of a liquidation, some of the creditors’ claims would take preference over employee interests.

Speaking with Fin24, Rene Bekker, a top executive at the SA Restructuring and Insolvency Practitioners Association, said if a business rescue process requires funding and its shareholder do not provide the required funding, then the company, via its BRP, would have to find alternative sources of funding by way of a loan from a third party, normally a financial institution.

That would be nearly impossible in this case, however. Government funds have dried up and banks will not be willing to lend the carrier anymore. “If the BRP cannot reduce costs sufficiently for the company to be able to meet all its post business rescue liabilities, then there simply is no reasonable prospect that a company can be saved. The BRP is duty-bound to apply to court for the conversion of the rescue process into a formal liquidation,” explained Bekker.

So regardless of whether the severance agreement is reached or not, the collapse of the South African state carrier appears inevitable – either through a wind-down or liquidation – with implications on the wider economy. Almost 5,000 people will be out of jobs, adding to the already high unemployment rate in the country.

More so, SAA is embedded in South Africa’s aviation space and a bellwether of the country’s success in the crucial industry. Though the country’s domestic air transport market is one of the most competitive in Africa, there is a high level of co-dependence across the industry.

SAA plays a significant role in this cooperation. For example, SAA Technical (SAAT), in addition to SAA and Mango, is contracted by Comair – operator of British Airways and kulula.com – to maintain their aircraft. The state carrier also provides financial administrative and disbursement services to its code-share and franchise partners, SA Express and Airlink.

The decision of the government against providing further bailout for the carrier further indicates the government may be unwilling to provide more funding for other embattled public enterprises, many of which are in deep trouble and rely on state coffers for survival. 

Besides SAA, sheer incompetence and corruption have pushed entities like the South African Broadcasting Corporation closer to financial collapse while Transnet has come under scrutiny in recent times over the legality of multi-billion rand procurements, including the crisis-hit state power utility Eskom. The situation at the public entities has been cited as one of the main reasons for the series of credit downgrades inflicted upon South Africa amid prevailing economic crises.