On Thursday, the South African government placed its embattled state-carrier under a rescue plan to prevent a total collapse of the airline, and allow it to keep operating. In line with this, South African Airways (SAA) will receive up to 4 billion rand ($274 million) in funding. The bankruptcy protection will allow a “radical restructuring” of the airline according to Public Enterprises Minister, Pravin Gordhan.
“This is the optimal mechanism to restore confidence in SAA and to safeguard the good assets of SAA and help to restructure and reposition the entity into one that is stronger, more sustainable and able to grow and attract an equity partner,” Gordhan said.
SAA, which last made a profit in 2011, has been heavily reliant on state bailouts for survival and funding of its operations – it has received 57 billion rand in bailouts over the past two decades.
Already struggling to settle its debts, the airline’s finances took a huge blow after the National Treasury refused to provide it with more funding. The situation got worse with a costly week-long strike by its staff last month.
On November 15, thousands of SAA workers embarked on strike action after the carrier failed to meet their demands such as higher wages and job in-sourcing. As a result, a number of flights were grounded while bookings were cancelled on others.
Reports show that SAA lost up to 52 million rand ($3.5 million) per day during the strike. It was eventually called off the following week after the airline’s management and unions reached an agreement.
Giving a breakdown of the business rescue process, Gordhan said the state would provide 2 billion rand ($136 million) to SAA in “a fiscally neutral manner” while existing lenders will provide an additional 2 billion rand loan guaranteed by the government.
While most consider the government-supported rescue process as another form of bailout, the Minister disproved such claims. “It must be clear that this is not a bailout,” said Gordhan. “This is the provision of financial assistance in order to facilitate a radical restructure of the airline” as well as prevent a “disorderly collapse of the airline.”
The business rescue process is expected to be directed by an independent practitioner. According to an SAA spokesman, the company’s board will announce the appointment of business-rescue practitioners in “the near future.”
Part of the rescue plan involves a review of the airline’s cost structure, putting a lot of jobs at risk. But Gordhan said there will be an effort to retain as many jobs as possible. SAA has more than 5,000 workers, and the SAA Group of companies hires thousands more.
“Business rescue allows for the airline to continue to operate while it is being restructured, as opposed to liquidation,” analyst Daniel Silke told AFP, adding that the rescue was a “lesser evil for SAA” and would save more jobs than a shutdown.
After nearly a decade of corruption and mismanagement under former president Jacob Zuma, South Africa has been struggling to get its public companies, such as the national airline and state power company, back on track.
The move to place SAA under the rescue process is in line with the provisions of the Companies Act that allows organizations in financial distress to file for business rescue. This gives such firms protection from liquidation and legal proceedings, enabling them to keep operating.
“This set of actions should provide confidence to customers of SAA to continue to use the airline because there will not be any unplanned stoppages of flights or cancellation of flights without proper notice should that be necessary,” Gordhan said.
South Africa’s state carrier is Africa’s second-largest airline after Ethiopian Airlines. SAA has a fleet of more than 50 aircraft, flying to over 35 domestic and international destinations.