MIAMI — South African Airways (SAA) is in dire straits. Africa’s second largest airline and one of its most historic is in danger of liquidation, according to a report from Business Day Live, a daily South African newspaper.
The report comes in the wake of a series of financial struggles for the Johannesburg-based airline. The airline’s chief auditor Yakhe Kwinana resigned earlier this week, citing her worry about damage to her personal reputation in the wake of a potential liquidation.
Kwinana is subject to numerous allegations of impropriety, including approving questionable deals that increased SAA’s costs.
In the last several weeks, South African has missed or is in danger of missing several payments to creditors, including a 250 million rand ($18 million) loan that Standard Bank of South Africa has requested immediate repayment on.
Meanwhile, the company faces a September 6 deadline from Hong Kong’s registrar of companies, which has threatened to withdraw SAA’s right to serve its daily Hong Kong – Johannesburg route unless the airline submits financial statements the registrar.
The problem for SAA is that right now its financial situation is so dire that if the carrier submitted its current financials, it would not be considered a viable business and forced to withdraw from Hong Kong anyway. Thus, in order to survive, SAA urgently needs a loan guarantee of 5 billion rand ($350 million), after losing 2.3 billion rand ($161 million) in fiscal 2014, and a still undisclosed amount in fiscal 2015.
But the South African treasury, headed by finance minister Pravin Gordhan has refused to provide the guarantee until a new board and management are installed. Meanwhile, SAA’s finances and the political will to bail it out are also hampered by an advanced investigation from the Organisation Undoing Tax Abuse (OUTA) a citizen’s advocacy organization.
Solving South African Airways’ plight
The challenges that face South African Airways are the same that face almost any state owned airline in poorer countries with a more populist economic bent. Whenever governments own airlines, the temptation to step in and overrule potentially unpopular but necessary business decisions is simply too great.
The revolving door between the Zuma administration and SAA’s senior leadership continues to hold back a restructuring process, including maintaining loss making routes, and perhaps more damaging, holding back a decision on the Airbus A350 or the Boeing 787 for the future of the widebody fleet.
The reality is that South African Airways desperately needs to cut back its long haul route network to include just London, New York, Frankfurt, and Washington. It should also deploy some of the widebody aircraft freed from these routes on routes to Northern and Central Africa.
If SAA is going to lose money on longer distance routes, it might as well lose money on shorter routes that will be valuable as African aviation expands. To achieve all of this while maintaining viability, South African needs to prune its cost structure and reduce its headcount. And it needs to rationalize its fleet, settling perhaps on the A350 as was previously planned as the long haul fleet type and the A320neo as the short haul fleet type.
All of this will require re-capitalization, and that’s where the problem comes in. Privatizing SAA is the right thing to do, but it would rob the Zuma government of a politically valuable tool. The other option is to seek outside investment, and that’s where the Middle East Big 3, or even a Chinese carrier like Hainan Group or Air China could come into play.
South Africa is still a valuable and important market in global aviation, and so the future for SAA may well be membership in Etihad Airlines Partners. Right now, there are no easy answers in Johannesburg.