South African Airways Faces Long Haul After Funding Lifeline

(Bloomberg) -- South African Airways finally secured the funding it needs to keep flying for the time being, yet there’s still a long way to go before the state-owned carrier can claim to be stable.

SAA probably has enough cash to keep operating for as long as eight months after the Development Bank of Southern Africa stepped in with a 3.5 billion rand ($240 million) injection, according to Joachim Vermooten, an independent aviation consultant. The carrier is running at a loss of about 500 million rand a month and the situation may deteriorate as it scraps flights and reduces ticket prices to attract wary customers, he said.

The loss-making airline was put into a local form of bankruptcy protection late last year and administrators at Johannesburg-based Matuson & Associates have little more than a month left to come up with a workable plan to turn it around. They’re working in the meantime on cutting costs, and on Thursday said they are reviewing supply contracts and canceled almost 100 domestic and international flights based on weak bookings.

Matuson & Associates have said securing an equity partner for SAA is at the heart of its rescue strategy -- an option that’s been talked about for years but never materialized.

“It would not be possible to get an equity partner in until SAA demonstrates a turnaround and level of profitability to enable a reasonable return,” Vermooten said Wednesday. “I cannot foresee this soon.”

Ethiopian Interest

SAA has lost money since 2012 as it grapples with high costs, an inefficient jet fleet, mismanagement and corruption allegations. Pooling resources with a partner could enable SAA to reduce operating expenses, while the sale of equity would also help pay down debt.

Carriers that have expressed an interest in the past include Ethiopian Airlines Group, which said in October it would consider a deal in part to defend African airlines against competition from rivals in the Gulf. The Addis Ababa-based airline didn’t respond to requests for comment.

The state-owned DBSA’s decision to put cash into SAA came months after the government agreed to provide it with a 2 billio-rand lifeline, and the move has raised eyebrows in some quarters.

Mkhuleko Hlengwa, the chairman of the South African parliament’s public accounts committee, told a state-owned radio station the money is being lent without enough due diligence as the airline has failed to release financial statements.

And while Grant Back, chairman of the SAA Pilots Association, welcomed the DBSA intervention and said it should reassure passengers that it’s safe to buy tickets, he said the management team must be replaced en masse.

“Until now, government has failed to hold management accountable for the downward spiral of the airline and this cannot continue,” Back said in an emailed statement. “Managers are still making poor decisions at grave cost to the airline.”

Louise Brugman, a spokeswoman for Matuson & Associates, declined to comment.

--With assistance from Roxanne Henderson.

To contact the reporters on this story: John Bowker in Johannesburg at jbowker2@bloomberg.net;Paul Vecchiatto in Cape Town at pvecchiatto@bloomberg.net

To contact the editors responsible for this story: Anthony Palazzo at apalazzo@bloomberg.net, Mike Cohen, Paul Richardson

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