Bye bye SAA

Government’s decision to place the South African Airways (SAA) into business rescue represents a big change in South Africa. 

It may not be a true ‘Thatcher’ moment, but it is significant as it shows that government, or the president at least, has acknowledged that government cannot run an airline and that there is no more money to throw at the problem.

This will result in two options.

The first is a liquidation scenario and the second is for government to sell (or give) the airline to a third party, in essence, to privatise it.

It may also become a blueprint of how the government will deal with other functionally bankrupt State-Owned Enterprises. 

However, in SA nothing is predictable and rational. President Cyril Ramaphosa may experience significant opposition from factions within his ruling party which will complicate matters.

Business Rescue

But first, let’s look at the business rescue process. Despite the name “business rescue”, its intention is not to keep the business operational. It is mainly aimed at protecting the company against a liquidation application from creditors, and trying to ascertain whether continuing with operations would give creditors a better outcome than an immediate liquidation would. 

This decision is the responsibility of the business rescue practitioner. This practitioner should be an “independent”  and needs to be appointed within five days. This can be one or more individuals or even a company.

The practitioner basically replaces the existing board and management and assume all decision-making power. It is also highly unlikely that this practitioner would be able to turn the bankrupt SAA around as government has poured R57 billion down its throat since 1999. 

It is also highly unlikely that the SAA is profitable on an operational level. 

The airline battled to pay salaries in November and there is a serious cash-flow problem, but the R4 billion the airline received from commercial lenders and government will allow the airline some breathing space. 

Unfortunately, the nature of the airline business will limit this period.

The airline business is built on trust. No one will fly on an insolvent airline. Why would they? People have options to fly on several airlines and there are other options in South Africa. Why would anyone take the risk?

The SAA can, therefore, expect to see a significant drop-off in bookings, which would amplify cash flow problems and accelerate the race to liquidation.

However, there may be one other option on the table, and that is the sale of the airline. The “P” word has never been popular within the ANC, but according to the law at least, the business rescue practitioner should be independent and have the mandate to take such a decision.

It remains to be seen how independent the government allows the practitioner to be.

Ramaphosa’s power position

The process will not be straight forward. There seems to be significant opposition from within the ANC  to pull the SAA’s plug. Cosatu already stated it was aggressively unimpressed with the way the president, Pravin Gordhan and Tito Mboweni took decisions without informing all stakeholders, especially partners of the ANC.

Even on Wednesday morning, government’s legal team indicated it would oppose trade union Solidarity’s application for business rescue. A few hours later the letter addressed to ministers and deputy ministers was sent indicating a radical change in plans. It is clear that it was not a cabinet decision, but one from the president. 

It is yet unknown what triggered the decision. 

Was it a unilateral political decision or did a creditor threaten to bring a liquidation application?  Time will tell.