News Column

SAA continues to cut losses but further bail-out 'crucial'

February 21, 2014

Linda Ensor



Struggling South African Airways (SAA) will report a smaller loss in the year to end-March despite the ravaging effects of the weaker rand on fuel costs‚ the state-owned airline's chief executive‚ Monwabisi Kalawe‚ said on Wednesday (19 February).

This would continue the trend established last year of reducing losses and boded well for the success of SAA's long turnaround strategy. However‚ a further substantial cash injection by the state would be crucial to the airline's return to profitability.



Financial support could be announced as early as next week by Finance Minister Pravin Gordhan in the 2014/15 budget.



Kalawe told the National Council of Provinces select committee on public enterprises that the discussions taking place between the Department of Public Enterprises and the Treasury on a cash injection by the state were "constructive and positive".



The recapitalisation is needed to strengthen the airline's balance sheet‚ a key element in its long-term turnaround strategy‚ which has targeted 2017/18 as the year in which it will break even or make a small profit. At the moment‚ SAA has negative equity and is dependent on a R5bn state guarantee‚ which Kalawe said only allowed SAA to borrow the money it needed at significant cost.



Rand weakness



"For the nine months to December‚ SAA saved R300m on a sustainable basis‚ of which R75m was savings on fuel costs‚ R83m on maintenance and R129m on overheads‚" Kalawe said. This was in addition to the R1bn saved in 2012/13.



"Unfortunately‚ all costs in rand terms have been adversely impacted by the dramatic weakening of the rand against the US dollar (17% year-on-year)‚ which underlies around 65% of SAA's costs‚ especially fuel‚" he said. Exchange rate volatility cost SAA more than R1bn this year.



SAA reported an after-tax loss of R1.2bn for the year to March 2013‚ on revenue of R25.5bn‚ bringing its cumulative loss over the past decade to more than R15bn.



Kalawe told MPs that in terms of the cost-reduction programme‚ SAA aimed to reduce the cost per available seat-kilometre 20%‚ from 7.04 US cents in 2012 to 5.63c. By the end of December this had been reduced to 6.26c. As part of a cost-savings exercise‚ SAA will end its flights to Buenos Aires next month.



SAA's turnaround strategy involves the divestment of the South African Travel Centre and the creation of a new company‚ South African Aviation Assets Group‚ which will be the holding company for all the state-owned airlines, SAA‚ SA Express and Mango‚ which will negotiate a network plan.



SAA spokesman Tlali Tlali said the rationale for the plan to create a new holding company was to harness the synergies and collective buying power of the three airlines. It would require the adoption by Parliament of enabling legislation. Corporate finance advisers Bowman Gilfillan would assist with the divestment.



"The new company would require an equity injection and SAA was awaiting a decision on this‚" Kalawe said. Subsidiaries SAA Technical‚ Air Chefs‚ Voyager and SAA Cargo would be fully corporatised.

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Source: Bizcommunity (South Africa)


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