South African Airways (SAA) is testing the domestic debt market ahead of a planned bond issue to raise R1.5bn to ensure it has sufficient cash in the coming months while a task team devises a turnaround for the distressed carrier.
SAA chief financial officer Wolf Meyer said money from the bond issue would be "significantly cheaper" than the loans the airline had taken out in the past three months‚ with possible savings of about R100m. It is also intended to provide a predictable and smooth cash flow for the airline.
Meyer said SAA had applied to use the two-year‚ R5bn guarantee from the government that was extended to it late last year to keep the carrier solvent.
A R1.5bn portion of this was set aside to secure funding for short-term operational requirements.
The balance could be used only if there was a "material adverse variance in forecast assumptions"‚ SAA spokesman Tlali Tlali said. This included a "significant oil price spike or a drastic weakening in the exchange rate".
In the meantime‚ SAA had negotiated a second bridging-finance facility from Absa and Investec for R570m‚ which would be released in the coming week‚ he said. This was on top of a R400m facility negotiated with Nedbank in December and an increase of an existing facility with the same bank by R150m.
The bond issue‚ which would probably be completed before the end of March‚ was "a cash management exercise"‚ Meyer said.
SAA wanted to pay down the "expensive facilities" and keep "a float of between R300m and R500m" as a buffer.
For the past three years‚ aviation has battled the dual demons of high fuel prices and depressed demand.
This has taken its toll on SAA‚ which reported a R1.25bn loss in the year to end-March. It is unlikely it will report a profit for its 2013 financial year‚ which closes at the end of next month.
In the past six weeks‚ the rand has depreciated by about 5% against the dollar‚ which has pushed up the cost of inputs such as fuel. Oil prices have also climbed.
The Department of Public Enterprises was concerned about "the rate at which SAA is burning through money"‚ department spokesman Mayihlome Tshwete said.
"But we understand that this speaks of deeper problems within the company‚ with its business model‚ and which the turnaround strategy may provide solutions for‚" he said.
One condition of the R5bn guarantee was that a turnaround strategy be devised. Over the past six years as many as nine reports have been produced by consulting firms with advice on how to turn SAA around.
A team led by the department's aviation team and including the chief executives of all three state-owned airlines has until the end of next month to present a strategy to Public Enterprises Minister Malusi Gigaba and Finance Minister Pravin Gordhan.
The cash SAA is raising would "stabilise" operations and ensure sufficient working capital to take care of day-to-day business‚ Tshwete said.