BUSINESS MAVERICK

Stalemate: Government opposes business rescue practitioners’ decision to ground SA Express

By Ray Mahlaka 8 March 2020

Passengers board an South African Express Airways airplane at OR Tambo international airport in Johannesburg. (Photo: EPA / Mikko Pihavaara)

The state-owned airline’s financial position has worsened as it cannot pay aviation insurance and March 2020 salaries to its 1,000 employees. The appointed business rescue practitioners of SA Express, Phahlani Mkhombo and Daniel Terblanche, have decided to ground the airline, but the government has put a halt to this decision.

SA Express is in a precarious situation again as the business rescue practitioners of the struggling state-owned airline have decided to ground its entire fleet of planes. 

This is because funding from the Department of Public Enterprises to finance the airline’s operations while it is being restructured through a business rescue process has failed to materialise.

Without the urgent funding of an undisclosed amount from the department, SA Express has been forced to suspend some flights, ground its operations, and faces difficulties in paying March 2020 salaries to about 1,000 employees. Business rescue proceedings might also be hobbled, as without the funding, the appointed business rescue practitioners, Phahlani Mkhombo and Daniel Terblanche, will declare SA Express insolvent and start a process to liquidate the airline.

A source close to business rescue proceedings told Business Maverick on Friday 6 March that the airline’s financial situation is so perilous that it cannot pay aviation insurance on its fleet of 24 aircraft, pushing the rescue practitioners to ground the airline. Insurance is important in the aviation industry as it protects an airline’s business and passengers, including its pilots and crew.

Despite the successive government bailouts amounting to R1.5-billion that SA Express has received over the past two years, the airline is technically insolvent as its current liabilities exceeded its current assets by R374-million during the 2019 financial year. It recorded a loss of R591-million in 2019, more than three times the previous year’s R162-million loss.

Dust-up between rescue practitioners and the government

A stalemate between the appointed business rescue practitioners, SA Express management (led by acting CEO Siza Mzimela), and the Department of Public Enterprises has ensued, with the latter saying in a statement on Friday that it is concerned about how the rescue practitioners are restructuring SA Express. The source described the relationship between the three parties as “hostile” because the airline’s management is allegedly not co-operating with the business rescue proceedings. 

The government and SA Express management still want to call the shots at the airline despite it being under business rescue, a bankruptcy protection process provided for under the Companies Act that attempts to save financially distressed companies by restructuring their operations. The act empowers the rescue practitioners to assume both the authority of the board and the executive management, which gives creditors assurance that the rescue process is credible. 

SA Express was placed under business rescue by the High Court in Johannesburg on 6 February 2020 because it doesn’t have enough working capital to fund operations and pay its debts. The business rescue process was involuntary as it was sparked by legal action instituted against SA Express by its former creditor Ziegler SA, which is owed R11.3-million by the airline. 

SA Express didn’t respond to Business Maverick’s request for comment but referred questions to the office of Mkhombo and Terblanche. A lawyer representing Mkhombo and Terblanche said he wasn’t authorised to speak to the media. 

In a statement, the Department of Public Enterprises said it was concerned by the decision of Mkhombo and Terblanche to “ground” the airline without first presenting to the department a “comprehensive and feasible” business case for “the immediate stabilisation of the airline”.

Funding withheld for the business rescue process

As a sole shareholder of SA Express, whose flight routes typically serve smaller cities in SA and neighbouring countries as a feeder to South African Airways, the government oversees the operations of the airline. 

Department of Public Enterprises officials met the rescue practitioners last week, where they were presented with the business rescue plan. The department viewed the plan as “wholly inadequate and didn’t include any commercial elements” for providing SA Express with funding from the government in the form of Post Commencement Finance (PCF). 

To begin the business rescue process, the appointed rescue practitioners require PCF to ensure that SA Express’s operations continue. There is an expectation from the rescue practitioners that the Department of Public Enterprises would provide funds that would keep the airline airborne, pay salaries and fund other operational matters.

While it is unclear how much PCF funding SA Express requires from the department for business rescue proceedings, the airline previously said it required a R164-million government bailout for the 2020/21 financial year to remain operational.

Although the department says it understands that the business rescue process needs PCF, “the practitioners, with board and management, need to firm up the commercial case to enable funders to provide PCF”.

The department also says it has communicated to the practitioners that it is engaging with the National Treasury to seek the PCF either in the form of a government guarantee or cash injection

“The department has impressed upon the business rescue practitioners that the fiscus is constrained and, notwithstanding the National Treasury, is fully engaged on the matter and understands the severity of the situation,” it said.

The department says private equity partners, which will inject capital into SA Express in exchange for a shareholding, should be “vigorously pursued” by the rescue practitioners. A work session was planned for Friday to discuss the PCF, it added. The outcome of the work session is unknown.  BM

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