The R5bn guarantee extended to South African Airways (SAA) was not a bail-out but a "lifeline" that brought stability and created space for new investment plans‚ the cash-strapped airline's annual general meeting heard on Monday‚ 15 October 2012, Business Day reported.
The meeting had been postponed last month to allow the Department of Public Enterprises to lobby the Treasury for the guarantee. The majority of the board resigned before it was granted.
SAA's financial circumstances had been so perilous it had been "at a heavy risk of trading recklessly"‚ the department's director-general‚ Tshediso Matona‚ said. "The risks were enormous and we had to take a speedy decision. We needed to give them a guarantee and throw them a lifeline‚" he said.
"The guarantee is for two years and allows the task team, which includes the Treasury‚ to develop plans for the airline's future."
Matona said the R5bn guarantee was a "recapitalisation instrument‚ it is not a bail-out". It gave the airline time to develop plans‚ which would need to be approved by the shareholder - the Department of Public Enterprises - to motivate for SAA to recapitalise.
New‚ fuel-efficient aircraft are needed to cut SAA's fuel bill‚ which added R2.2bn to operating costs in the past financial year and caused the airline to lose R1.25bn for the financial year to March 31.
Public Enterprises Minister Malusi Gigaba said that "uncomfortable and difficult" questions would be asked at SAA as it came to grips with a demand from its shareholder to craft a plan that will win support from taxpayers and the Treasury.
He said the plan should ensure that the airline was profitable and placed on a sustainable footing.
Gigaba took the extraordinary step of insisting that any changes made to the airline's accounting policy that call for the re-statement of its accounts be approved by him. SAA's auditors had raised "an emphasis of matter" relating to the "re-statement of corresponding figures and irregular expenditure"‚ he said.
Gigaba expressed concern that the re-statements‚ while acceptable accounting practice‚ had cast "aspersions on the integrity of the numbers year-on-year".
An effect of this practice‚ he said‚ could be seen in SAA's equity balance which was reflected as R2.9bn on March 31 2011‚ but after an accounting change and re-statement, the equity at March 31 2012 was reduced to R475m.
"The fact that these re-statements are not prevalent at other‚ comparable‚ airlines is equally disconcerting‚" Gigaba said.
The auditors identified R128m in irregular expenditure. Much of this‚ SAA chief financial officer Wolf Meyer said‚ reflected the incorrect renewal of contracts. Only R4m of had been identified as fruitless and wasteful expenditure.
Reflecting on the past year's performance‚ Meyer said controllable costs - which excluded items such as airport charges‚ fuel price fluctuations and maintenance costs - rose 5%. Fuel costs accounted for 33% of operating costs‚ up from 28% the previous year.
In the year to end-March‚ revenue rose 5% to R23.8bn - which was insufficient to return the airline to profit resulting in a R1.3bn operating loss.
Gigaba said his department was cognisant of the toxic trading conditions within the aviation sector but he questioned whether SAA's leadership had responded adequately and timeously "with a responsive business strategy to mitigate or cushion the airline against these exogenous factors".
SAA achieved "only 13 out of 29 key performance indicators‚" he said.
"It is disconcerting that the majority of those targets not met relate to the key performance areas of financial value creation or commercial objectives as stipulated by the shareholder‚" Gigaba said. The new strategy for the airline must be presented to Gigaba by December 15.
The board has been given three months to find a replacement chief executive after Siza Mzimela left in the weeks that followed the dramatic exit of much of the airline's former board.
The government had no intention of privatising the carrier as SAA was too strategic for the government's economic and developmental goals‚ Gigaba said.