Global insight

Can of worms at ‘insolvent’ South African Airways?

Can of worms at ‘insolvent’ South African Airways?

SOUTH African Airways (SAA) is in desperate need of a miracle in 2016 if there is to be a cataclysmic transformation of the flag carrier’s dwindling fortunes and a rebuilding of its battered reputation.

In November, a leaked memo shockingly laid bare the parlous current state of SAA’s finances – and exposed new wounds to the public, writes Thelma Etim. The controversial document sent from Thuli Mpshe, SAA’s acting chief executive to the airline’s board, described the carrier as ‘financially distressed and trading under insolvent circumstances’.

An attempt was made to gag South Africa’s press and media from disseminating the memo’s damaging contents, which focused on the airline’s inability to meet its payments to European planemaker Airbus – a long-standing supplier of its jetliner fleet.

SAA had entered into an aircraft ‘swap transaction’ stemming from a 2002 deal to acquire 15 A320-200s. That agreement was amended a few years later to include an additional five aircraft and the leasing of others, claim reports.

Earlier this month, South Africa’s treasury issued a statement confirming a new arrangement, which would see SAA replace the planned purchase of 10 A320s ‘for a lease of five A330-300s’ and that the new agreement was underway and scheduled to conclude on 28 December.

Under that new contract, SAA would no longer be required to pay additional pre-delivery payments (PDPs) to Airbus, which would have amounted to US$40m, says a statement from the treasury department. “As the airline takes delivery of each of the A330s, the PDPs that have already been paid, which total more than $100m, will be refunded by Airbus,” it discloses. The treasury claims this latest transaction will improve the African airline’s financial position by “alleviating cash flow pressure and improving profitability”.

SAA Leaked Memorandum

However more revelations about some of the company’s allegedly flawed processes are likely to be brutally exposed in the New Year as Ernst and Young Forensics continues scrutinising the airline’s business transactions to uncover the reasons behind SAA’s losses, as part of on-going investigations into its procurement activities.

The global accountancy and consultancy firm has so far scrutinised 48 contracts, representing a significant portion of the largest contracts SAA has entered into. Ernst and Young’s draft report shows that 28 of the 48 contracts it has examined were ‘improperly negotiated, poorly contracted or weakly managed’, admits a statement from SAA, released on 8 December.

“A logical deduction must be that if these (many of which are the largest contracts awarded) suffer these weaknesses then the bulk of the smaller contracts will be at least if not worse,” it observes. “Potentially 60 per cent of SAA’s total procurement could be in one way or another subject to weak business controls. This must lend itself to some idea as to why the airline makes such large losses.”

The SAA statement also reveals: “The board has asked the question of management (particularly the financial executives) how it takes an external Ernst and Young investigation to identify these, whilst management does not.”

Meanwhile, some corrosive internal politics (regularly documented in the local media) appear to be behind the ‘musical chairs’ scenario currently being played out among key SAA posts, thereby robbing the airline of core stability at management level – ostensibly another ‘weakness’ in need of urgent attention.

On 30 November, the carrier announced that Phumeza Nhantsi would assume the role of interim chief financial officer, following the resignation of Wolf Meyer.

That news came just 10 days after SAA was forced to retract a media statement over the suspension of its then chief commercial officer Sylvain Bosc which, it says, was issued ‘prematurely’ (the web page containing the original statement has also since been removed).

The new statement reveals Bosc was suspended as a result of ‘serious allegations related to an alleged misrepresentation made by him to the [SAA] board in respect of the [carrier’s] Abu Dhabi route’ and an investigation is under way.

It continues: “Bosc is yet to receive notification of the disciplinary enquiry and formal complaints arising from such suspension.

“To the extent that the [earlier] media release may suggest that Mr Bosc has been found guilty of any misconduct or impropriety, it is sincerely regretted and no impairment to Mr Bosc’s identity was sought or intended.”

That embarrassing retraction and apology is the latest remarkable gaffe for which SAA – an international carrier with a fine reputation, whose inception dates back to the 1930s – simply cannot afford.

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