South Africa Bails Out Airline After Investor Search Fails
South African Finance Minister Tito Mboweni agreed to a 10.5 billion rand ($641 million) bailout for the country’s grounded national airline, after a lengthy search for private investors in the carrier fell flat.
Mboweni made the announcement in Wednesday’s medium-term budget policy statement, ending a long personal resistance to providing more funds to a company that hasn’t made a profit for almost a decade and has long relied on state support. The outlay adds to the 16.4 billion rand the Treasury set aside over three years in February for South African Airways to repay its guaranteed debt and cover debt-service costs.
The fate of the national carrier has become an emotive topic in South Africa as the country struggles to recover from the Covid-19 pandemic and the longest recession since 1992. Public Enterprises Minister Pravin Gordhan has argued that a new, competitive airline can still be created from the current SAA, but opposition parties, analysts and Mboweni himself view the carrier as an expensive distraction at a time when state finances are severely stretched.
Mboweni’s stance was that funds would have to come from outside entities, but the only potential backer to officially come forward was Ethiopian Airlines Group, Africa’s biggest carrier, which made clear it was only interested in an operational role. Airlines around the world are battling their own crises due a a slump in demand for air travel amid the pandemic, and the emphasis has been firmly on cutbacks rather than expansion.
SAA’s funds will instead come from other South African government departments, with the biggest cuts to the allocations for police and tertiary education. Basic schooling and health will also give up capital for the benefit of the national airline.
South Africa’s cabinet made the decision to fund the business-rescue plan and has not attached conditions, Treasury officials said in a lockup session before the budget presentation. The cash will be used for worker-severance packages and ticket refunds as well as basic startup costs, according to a rescue plan published by administrators in June.
SAA hasn’t flown a commercial flight since its planes were grounded to contain the coronavirus in March, and travel restrictions remain in place to several key destinations to prevent a resurgence in infections.
State-owned companies continue to present significant risks in the form of contingent liabilities and direct requests for state support, the Treasury said in the budget statement.
Other companies highlighted as risks include:
- Airports Company of South Africa, which doesn’t have sufficient funds for its operational requirements
- Eskom Holdings SOC Ltd., which has used up 320 billion rand of its 350 billion rand in government debt guarantees. Financial support for the utility is reduced by 4.2 billion rand over the medium term
- The Road Accident Fund is the government’s largest contingent liability and its accumulated deficit is seen growing to 593 billion rand by 2022-23
- The Land Bank started paying overdue interest from August, after first defaulting on debt in April. It was allocated 3 billion rand in June and has approached the government for additional financial support.
- The South African National Roads Agency Ltd.’s revenue shortfall will cost the fiscus an additional 300 million rand in 2020-21.
©2020 Bloomberg L.P.