South African Airways to Scale Back in 3-Year Break-Even Bid

JOHANNESBURG (Capital Markets in Africa) – South African Airways is striving to return to profit in three years by reducing the size of the network and transferring planes to its low-cost carrier as Chief Executive Officer Vuyani Jarana embarks on a recovery plan.

A turnaround of the state-owned airline is among the more urgent priorities of newly appointed Finance Minister Nhlanhla Nene, who is seeking to avoid a repeat of the government bailout approved by his predecessor Malusi Gigabalast year. The carrier’s net loss widened more than threefold to 5.6 billion rand ($473 million) in fiscal 2017 and the company may not be able to operate as a going concern, South Africa’s Auditor General said last week.

“We now have a clear strategy and clear path to profitability defined by the board,” said Jarana, who became SAA’s first permanent CEO in three years when he started work in November. “We are looking at a three-year window to get to a break-even point. We continue to revise the strategy as we see more opportunities.”

SAA will continue to cut or reduce loss-making routes and transfer unneeded planes to profitable low-cost carrier Mango Airlines, Jarana said. The company halved the number of flights from Johannesburg to London’s Heathrow airport last month, and in 2017 canceled or reduced the frequency of flights to African capitals including Luanda, Abuja and Kinshasa. The company is also looking at assets that could be sold to raise more funds, the CEO said.

The airline has a fleet of more than 50 planes and flies to cities in 25 countries, according to its most recent annual report.

New Partner
A fund-raising plan laid out by Jarana last year to sell a stake to an equity partner will have to be shelved until the balance sheet has been repaired, the CEO said. A new investor would “most likely be attracted to an SAA that’s actually dealt with its own challenges and restructured,” he said in a phone interview Monday.

In his report filed to parliament on Thursday, Auditor General Kimi Makwetu said six consecutive years of losses, a lack of working capital and maturing loans were all barriers to a return to profit. In attempting to establish SAA’s financial position, he found the company had failed to properly value assets or correctly record irregular or wasteful expenditure.

Under former Chairman Dudu Myeni, the airline became embroiled in allegations of mis-management and corruption that plagued the nine-year rule of ex-President Jacob Zuma, who was replaced by Cyril Ramaphosa last month. Myeni has been summoned to give evidence to a parliament inquiry into the misuse of state funds Tuesday, though the parliament said late Monday that she won’t attend.

“We are busy talking to the National Treasury about how to fund the new plan,” Jarana said. “We are quite clear that the new plan is solid and we are very aggressive about implementing it.”

Should the government need to recapitalize SAA or any other state-owned company, it will be done in a way that doesn’t increase the budget deficit, the National Treasury said in an emailed response to questions, adding that the carrier’s annual general meeting would take place by the end of this month.

The airline’s liabilities exceeded its assets by 17.8 billion rand at the end of fiscal 2017, according to the AG’s report.