Mike Schussler: ‘Wrecking Ball’ Myeni’s SAA deal could have cost billions

The ‘What Ifs’, the things economists can debate until the cows come home. Below is a fantastic case in point. Well known economist Mike Schussler unpacks the SAA deal that never happened, thanks to Nhlahla Nene’s interference before he was sacked by President Jacob Zuma. It’s fascinating to see the importance of the airline to the country’s economy on the one hand but at the same time, it Myeni’s plan had gone ahead, it could very well have pushed South Africa towards the junk cliff sooner than expected. And deal or no deal, the airline will continue to be a burden on taxpayers, at least until competent leadership is put in place. SAA and South Africa are still on a slippery slope. – Stuart Lowman

By Carin Smith

Cape Town – South African Airways (SAA) could have cost the country an extra few billion rand if the Airbus deal was changed again, Mike Schussler of Economists.co.za told Fin24 on Thursday.

“As SAA already has government guarantees of R14.5bn and it probably needs at least another R4.5bn to stay afloat, that means that we as the tax payers will have to find about R19bn if SAA cannot pay or if SAA is closed,” explained Schussler.

Dudu Myeni, SAA chairperson
Dudu Myeni, SAA chairperson

South African Airways (SAA) chairperson Dudu Myeni wanted to reconfigure the airline’s Airbus swap deal, which was approved by then Finance Minister Nhlanhla Nene in July this year.

In Schussler’s view, the deal proposed by Myeni and the SAA board would have probably pushed those government guarantees of SAA to kick in if Airbus had decided they wanted the money  rather than change things again.

“As SAA is making losses still, the company cannot pay the Airbus group and that would result in SAA having to pay now. Government would probably have had to fork out actual money (our tax money) to cover debts at banks and other lending institutions that SAA has,” said Schussler.

In terms of a deal approved by Treasury and Airbus, SAA could swap the purchase of ten aircraft for a lease of five A330-300 aircraft from Airbus. Myeni and the SAA board, however, wanted to amend the swap transaction to allow SAA to purchase the A330-300 aircraft and enter into a sale and lease back deal with a local lessor or lessors.

Read also: Russell Loubser: SAA – only voters can stop the plundering by ANC cronies

The implementation of the approved swap deal, on the other hand, would mean that SAA would no longer be required to pay additional pre-delivery payments to Airbus, which would have amounted to about R603m.

The SAA board conceded defeat to Treasury on Monday after Finance Minister Pravin Gordhan directed it to conclude the swap transaction with Airbus in line with approval granted by Nene. This was after Gordhan, after his appointment, had given SAA an opportunity to make further representations.

According to Treasury, Airbus has indicated that it is amenable to the implementation of the swap transaction and has required that all legal documentation be in place by December 28 2015.

Airbus spokesperson Linden Birns told Fin24 on Thursday that the company is confident that everthing will be in place by the December 28.

“The next step will be to work with SAA to specify the aircraft and then we can launch production with a view to delivering the first aircraft during the second half of 2016,” said Birns.

Zapiro's animated look at how SAA chairwoman Dudu Myeni and President Jacob Zuma are literally wrecking the South African economy. More wizardry available at zapiro.com.
Zapiro’s animated look at how SAA chairwoman Dudu Myeni and President Jacob Zuma are literally wrecking the South African economy. More wizardry available at zapiro.com.

“The developments also signal to us that Airbus’ partnership and contribution in SA is appreciated. Airbus supports well over 2 000 jobs in the SA in manufacturing as well as many activities in high tech research being carried out by various universities and the CSIR that we partner with and co-fund.”

Schussler said an SAA financial memo – recently allowed to be made public after a gag order by SAA failed – shows that actual payments to Airbus would have been the worst possible outcome for SAA and South Africa.

“To pay the R19bn or so or close SAA would have a big knock-on effect. Closing SAA right away would destroy a large part of the tourist industry both locally and internationally for us and it would take over a year to recover. Job losses and tax losses would also form part of this,” said Schussler.

“The ‘bailing out’ of SAA would cost SA about R20bn in extra government debt, I would estimate, including knock-on effects and all that for Treasury to cover. This would have increased the government deficit to well over 4.5% of gross domestic product (GDP) even if there are spending cuts.”

In Schussler’s view this would then lead to the rand and bonds coming under pressure as junk status would be arrive within a year and that would have opened the flood gates of higher debt costs just as the economy is weakening. He said this scenario has already happened partly and could mean an even lower rand.

“SA would pay the price by having less government service deliveries such as medicine and books or fixing roads, for instance. Everyone would pay more for petrol, paraffin, maize, chicken, meat and medicine, for example,” said Schussler.

“The total cost to all South Africans has already been very big. For example, petrol prices would have dropped with more than 20 cents in January – a drop we are now unlikely to get. We already see a higher maize price due to drought and staple foods are going to rocket up in price and bread prices will also increase by at least 5% because of this debacle taking money away from other things people could have spent it on.”

In Schussler’s view professionals must be brought in to run SAA – from the board right through to to the CEO and CFO.

“We also need to get other airlines operating in the country to reduce the risk to tourism as SAA now is one of the biggest risks to the SA economy in general and the tourism industry in particular. SAA must not be a political tool or a place where one rewards friends. It is vital that it is run professionally and for the greater good of the country,” said Schussler.

“One cannot have statements like ‘we need another five years before SAA makes a profits’. It is clear to everyone that SAA needs real help, but that does not mean always more money. It means people and professionals who can do the work. As a minimum the old board must be held to account for the reckless trading as they have been warned by their own management. SAA should be an asset and not a drain on the country.” – Fin24

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