Business Maverick

Business Maverick

SAA CEO Jarana resigns, placing SAA’s turnaround plan in question

Photo: South African Airways CEO, Vuyani Jarana, appeared before the Standing Committee on Public Accounts (Scopa) in Parliament on Tuesday 24 April to discuss the airlines annual report, financial statements, irregular, fruitless and wasteful expenditure for the 2016/17 financial year. Tuesday 24 April 2018. Photo by Leila Dougan

Not again. Not another one. SAA CEO Vuyani Jarana has resigned, becoming the eighth SAA CEO to resign in the space of six years, raising the question of whether the airline is now so run down from years of mismanagement and corruption that it's possible to save it at all. And there is the niggling issue of whether government even wants to save it.

The board of SA’s flag-carrier airline SAA has confirmed that it has accepted the resignation of its CEO Vuyani Jarana, a move sure to reopen a fractious debate about whether the airline is saveable and add fuel to the broader burning question about whether State intervention can save commercial operations in distress.

SAA Jarana now becomes the second CEO of a SOE to resign in a matter of weeks, after Eskom CEO Phakamani Hadebe, who announced his resignation on May 24. Although the reasons given by the two CEOs are somewhat different, there are also significant overlaps, with both CEOs complaining about the difficulty and inflexibility of operating within government’s bureaucratic strictures.

In the SAA case, Jarana’s resignation is spiked by a furious resignation letter leaked to Fin24 in which he blasted government for a grand collection of failings, hinting at the difference between the approaches of the finance ministry, which is just sick of bailing out SAA and the public enterprises ministry, which supports a substantial but expensive bail-out plan that Jarana drew up.

SAA board chairman JB Magwaza suggests the implementation of the plan (or something like it) will carry on, saying that “the airline will continue to implement actions to reduce SAA’s cost structure and make the airline more competitive domestically and globally”. However, the prospects of the full plan being delivered are now seriously in question, particularly given Jarana’s explanations for what went wrong.

In explaining his resignation to the board, Jarana said his turnaround plan required funding of R21bn to break even by 2021, but there was general funding uncertainty, reflected in the fact that over the past year and a half, the company was almost unable to pay salaries three times.

He acknowledged that SAA got a R5bn cash injection for the 2018/19 financial year but said this was used to repay creditors. According to Fin24, the letter says: “We have not been able to obtain any further funding commitment from government making it difficult to focus on the execution of the strategy. I spend most of my time dealing with liquidity and solvency issues. Lack of commitment to fund SAA, is systematically undermining the implementation of the strategy making it increasingly difficult to succeed.”

Jarana provided one example in which SAA approached Deutsche Bank to help refinance its debt in 2018. This attempt was complicated because government embarked on a process which resulted in the foreign borrowing limits approval being revoked, which meant that the airline had to cancel its agreement with Deutsche Bank. SA did manage to raise emergency funding from local banks, but ominously Jarana said the funding would be depleted at the end of this month.

Reading between the lines of Jarana’s resignation letter, it becomes clear that the turnaround plan was really struggling to get off the ground. He said, “We have always maintained the SAA debt levels are unsustainable; however, instead of reducing debt while aggressively implementing the LTTS (long term turnaround strategy), we have increased it thus attracting addition[al] interest charges which all undermine the plan.”

Jarana’s resignation lands a hot potato in the lap of the newly formed government of President Cyril Ramaphosa, and it doesn’t help that reappointed Finance Minister Tito Mboweni has explicitly said that he thought government should not fund an airline, arguing it is effectively a government subsidy for the rich.

Yet, national pride, the threat of big job losses, and government’s reluctance to accept that its past interventions have been in vain keep government pumping money into the enterprise.  It is estimated that SAA has received about R65.24bn in taxpayer funding since 1999, about R50bn of this since the government took control of it in 2007.

But now new choices face government, and its at least conceivable that this time the crunch has really come. Expect that ominous word “business rescue” to at least be on the agenda in the near future. “The resignation letter appears to strongly suggest that the airline is being forced into administration, deliberately or indirectly, by government,” Peter Attard Montalto, the head of capital markets at research company Intellidex, told Bloomberg


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