Every year from 1994 to 2015, the World Travel Awards recognised South African Airways (SAA) as Africa’s leading airline. But behind the accolades, the flag carrier has repeatedly been given lifelines thanks to government guarantees. The last year SAA made a profit was in 2011.

Over the past decade, more than R16.5-billion in taxpayers’ money was spent on bailouts for the airline. In the February 2020 budget, the government set aside R16.4-billion, of which R11.2-billion was for SAA’s debt servicing costs. 

SAA has been fighting for its survival since it entered into voluntary business rescue in December 2019, and is facing liquidation after specialists were appointed at the end of April 2020 to try to save the airline.  

How did SAA end up in this mess?

After the government deregulated the domestic airline industry in 1991, SAA lost its national market share (of 95%), especially to Comair and FlySafair. The airline was also hit on its African routes, where Ethiopian Airlines started to erode its competitive position. Theoretically speaking, deregulation breaks the market power of a monopoly, and inefficiency will put you out of business in a competitive environment. 

Add the component of poor management and suspect tenders (pertaining to former SAA chairperson Dudu Myeni’s plan to buy several Airbus planes, sell them to a local company, and then lease the planes back), and debt starts to snowball. Additional poor management decisions include the desperate saving measures on essential expenditure, which led to the buying of “fake” parts. 

Unnecessary sponsorships (ATP tennis), given a tight budget, reflect poor management decisions by SAA. Sure, the weak rand played a role, but also for the competitors who managed to survive because of efficient management. 

So, what are the cards on the table? 

The cards include liquidation, foreign direct investment (FDI), and a rescue package under Section 16 of the Public Finance Management Act (PFMA).

The liquidation of the airline will reduce future ongoing operational losses, but will require the payment of creditors who rely on the so-called implicit guarantee of ongoing funding by the state. Thus, debt claims cannot be avoided, as would be the case with conventional companies. Besides, there is no consensus regarding the liquidation cost – ranging from R2-billion to R60-billion.

Another card is the “restart” of a new SAA, with a smaller international network. This airline would need to be financed by new investors, which might include large international airlines. In this case, the SA government will hold a minority stake, which requires a change of legislation to allow larger FDI into SA airlines. In attracting FDI, SAA could be revived as a smaller international franchisee airline in cooperation with a larger international airline.

A further card is an option of using citizens’ pensions as a business rescue package for SAA under Section 16 of the PFMA. 

Section 16 of the PFMA

The purpose of the PFMA is “to regulate financial management in the national government and provincial governments; to ensure that all revenue, expenditure, assets and liabilities of those governments are managed efficiently and effectively; to provide for the responsibilities of persons entrusted with financial management in those governments; and to provide for matters connected therewith”.

In terms of Section 16 of the PFMA, the minister can authorise the use of funds, including the National Revenue Fund (NRF), to finance expenditure of an “exceptional nature”, which is currently not provided for and which cannot, without serious prejudice to the “public interest”, be postponed to a future parliamentary appropriation of funds.  

Thus, Section 16 allows the Minister of Finance to sidestep normal budgetary appropriation processes in an emergency, to make money available for items of an “exceptional nature” or unforeseen circumstances.

“Exceptional” is synonymous with abnormal, atypical and extraordinary. However, the improvement of the financial position of SAA through recapitalisation has been constantly on the government’s agenda since the February 2017 budget. Four months later (1 July 2017), the National Treasury published a media statement titled Government transfers funds from National Revenue Fund to South African Airways. The argument was that SAA needed to be recapitalised to allow the airline to pay back its commitment to Standard Chartered Bank, thereby sidestepping a default.  

How exceptional is inefficiency and poor management over a period of 10 years, and how biased would such a transfer decision be towards public interest (that favours transparency and accountability)?

According to the July 2017 media statement, “default by the airline would have prompted a call on the guarantee, leading to an outflow” (take note: not will lead to an outflow) from the NRF and possibly resulting in higher awareness of risk related to the rest of SAA’s guaranteed debt.

The statement also adds that several options have been explored and, given the nature of the problems at SAA, Section 16 of the PFMA “had to be used as a last resort”. 

According to Finance Minister Tito Mboweni, the government is currently also considering several options, including that the government retains a percentage of the issued share capital in the new airline, finding private equity or strategic partners to take up shareholding in the new SAA, or approaching international or local funding institutions. Of course, local funding institutions include the NRF.

Thus, the government may – and possibly already has – partly funded the recapitalisation of the airline using the NRF. Accusations from the opposition Democratic Alliance (DA) state that former finance minister Malusi Gigaba used R3-billion of emergency provisions to recapitalise SAA in 2017.

The DA recently requested confirmation whether Mboweni had again made “unlawful” use of Section 16 in committing to provide and disburse public money for SAA’s restructuring. The DA also asked the court to interdict SAA and its rescue practitioners (Siviwe Dongwana and Les Matuson) from using the money by any means. The application for the interdict has in the meantime been withdrawn, given the government’s commitment not to use Section 16.

Tito Mboweni’s cards

Although Mboweni indicated that he would protect the efforts of those “who work day and night to make a success of this country”, he is up against a loaded team of government, SAA and rescue practitioners. The minister expressed a preference for closing down SAA, but Cabinet has given its backing to a business rescue plan.

Mboweni recently said that he did not authorise the “use” of funds from the NRF for emergency funding, although he did not exclude the possibility of approaching “institutions” to invest pension funds for this purpose. 

The impact and implication of using the NRF

What is in a name? A rose by any other name would smell as sweet. What is in a name, “using”, “investing” or “mobilising” pension funds? Do you smell a rose or a rat? Either way, it still boils down to the possibility of “getting access” to the pension funds of hard-working SA citizens to bail out a struggling, poorly managed state-owned enterprise.

Looking at the dismal track record of SAA and the bleak future of aviation in general (due to the global recession and impact of Covid-19), would an individual, conservative investor opt to invest in SAA? Only political allies making a political decision in their best interest, or aggressive investors being promised high returns on their investment, will take the bait. 

My next concern – will the new, restructured SAA be able to generate profit to remunerate the invested “institutions”, given that it currently has only five planes to fly? 

For a start, was the R3-billion emergency allocation (dated back to 2017) retrieved and paid back to the NRF? Geordin Hill-Lewis, representing the DA, argued that if SAA had spent the funds (of 2020), the country and the public purse would be irreparably harmed.

Most parties agree that SAA remains a strategic asset to SA and to its role as the flag carrier, where it assists as an economic enabler with benefits across a range of economic activity. However, the parties do not agree on the finance model regarding the bailout of SAA.

The new SAA needs to generate high profit in a competitive environment to be efficient and cost-effective in its management. Thus, the money need not be forthcoming from a future stream of “already recruited” pension contributions of so-called institutions. If the latter is indeed the case regarding the generation of income, it reminds me of the activities associated with a pyramid scheme. DM

Dr Cecile Duvenhage is a lecturer in the Department of Economics and Finance at the University of the Free State.