Testing times for subsidiaries caught up in SAA maelstrom

An international private equity group has been waiting nine months for Mango – the broke, low-cost subsidiary of South African Airways (SAA) – to return two Boeing 737-800 aircraft after the leases expired in July last year.

Read: Why did PwC not identify corruption at SAA? 

The planes are stuck at SAA Technical (SAAT), another broke subsidiary of SAA, which is undertaking the work necessary to ensure compliance with return conditions.

Such conditions are agreed upon at the outset, and airlines need to make provision for funds to meet them at the end of the lease. Over and above technical requirements, the conditions often include specifications regarding seat configuration and painting of aircraft before they are returned.

According to Carlyle Aviation Partners, Mango is incurring penalties that amount to 50% of the lease amount.

Mango, on the other hand, says the extent of the penalties must still be discussed with the lessor.

One of the planes was eventually returned a week ago, and SAAT says the other will be ready by the end of April and that Carlyle could deliver it to its new lessee, FlySafair.

Mango unable to pay

According to a senior manager at Carlyle, who asked not to be named, Mango has been unable to pay SAAT for the work that had to be done.

Last year Carlyle made weekly payments to SAAT as the work progressed, but SAAT eventually fell behind schedule and Carlyle stopped its payments.

SAAT confirmed that Carlyle had been making payments, but blames Covid-19 disruptions – which made it difficult to get the necessary spares and consumables – for the delay.

According to Carlyle it even paid for work on one of the aircraft engines that was done at Lufthansa Technic in Germany.

On return to South Africa however, the engine got stuck in customs because Mango failed to pay the import duty.

SAAT confirms that payments were made by Carlyle in this regard. It confirms that the engine arrived back at its workshop on December 15 last year, and says Mango would have been entitled to reclaim this cost from Carlyle anyway.

Salaries

In the meantime, the staff of SAA’s subsidiaries are bearing the brunt of the precarious financial situations of these companies.

SAA has been in business rescue since December 2019, but this did not include the subsidiaries.

The SAA business rescue practitioners are therefore not legally mandated to spend any of the post-commencement finance to assist the subsidiaries.

The staff of a third subsidiary, Air Chefs, have not been paid since the hard lockdown, while SAAT staff have only received between 25% and 50% of their salaries every month for the last year.

In May last year Public Enterprises Minister Pravin Gordhan told parliament that Mango would cut staff salaries by 50%.

In March SAAT management promised to pay full salaries for the first time, but eventually only paid a portion early in April and have paid nothing since.

In a message sent on April 7, staff were encouraged to apply for shortened work hours and take paid or unpaid leave. That would “enable the likelihood of SAAT paying 100% of the worked half-time”, staff were told. The situation will be reassessed at the end of June.

Domino effect …

The National Union of Metalworkers (Numsa) has been vocal about the problems within the SAA group and is considering litigation.

Solidarity said staff at SAAT are “very close” to withholding their labour.

That could result in an even deeper crisis for the airlines that depend on SAAT for technical services – including Mango, SAA, Comair’s Kulula and British Airways flights, as well as several international airlines.

Several aviation experts confirmed that SAAT must inspect their clients’ aircraft before flights and certify that they are airworthy. If SAAT staff are unavailable, it could take time to make alternative arrangements and this could disrupt flight schedules.

Local airlines FlySafair, Airlink and CemAir do their own repairs and maintenance and are therefore not dependent on SAAT.

Comair has been trying to wean itself off SAAT for some time by entering a partnership with Lufthansa Technik to establish a local facility, but that was dependent on Comair’s purchase of several Boeing 737 Max 8 aircraft.

The Max was however grounded globally after two devastating air crashes elsewhere and Comair, which has since gone into business rescue, is cancelling the order. Comair is therefore reviewing its partnership with Lufthansa Technik.

Minister’s focus not on strategic asset

Transport economist Joachim Vermooten questions Gordhan’s focus on SAA, which provides a service that many other airlines also do, while seemingly ignoring SAAT, which has a strategic role to play in South Africa and the region.

Auditor-General Tsakani Maluleke reported that SAA has not submitted financial statements for 2019/20. There is substantial uncertainty about its ability to continue operating as a going concern with it being in business rescue.

The subsidiaries also failed to submit financial statements due to SAA’s business rescue and the “interdependencies of the subsidiaries within the group”.

Mango funds

Mango’s financial statements for the previous year are also still outstanding, she stated.

In the last available SAA statements, for 2016/17, the group reported that SAA held R357 million of surpluses on behalf of Mango in an interest-bearing account.

Mango confirmed that it got the money back from SAA, but when the SAA business rescue practitioners (BRPs) Les Matuson and Siviwe Dongwana took control in December 2019, there was nothing left of it and Mango owed SAA R300 million, which is still outstanding.

The BRPs earlier indicated that they planned to substantially conclude the SAA business rescue by the end of March. That could have enabled funds transfer from SAA to its subsidiaries, but the BRPs missed the deadline with no further indication of a new schedule.