SAA tests Nene

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The leasing arrangement with Airbus that was reached in March is a crucial part of SAA's turnaround plan. However, SAA chairwoman Dudu Myeni - without the agreement or involvement of SAA executives - unilaterally informed Airbus last month that the contract would be renegotiated. Nonexecutive board member John Tambi confirmed that the deal was to go ahead.

Treasury director-general Lungisa Fuzile wrote last month to SAA executives, warning of the consequences of this move and voiced strong objections. But Finance Minister Nhlanhla Nene has not taken action against Myeni or compelled her to abandon her plan with the consequence that large financial obligations by SAA will now become due.

There is also other fallouts as a result of the deal: nonexecutive director Tony Dixon has resigned, chief financial officer Wolf Meyer's resignation is imminent and chief commercial officer Sylvain Bosc has been placed on "special leave" and is unlikely to return to the airline. Bosc, a French national and the only executive with extensive global aviation experience, is negotiating his exit. Both Meyer and Bosc have been the objects of a witchhunt, say several executives.

By-passing the procurement process

Nene met the board of SAA last week to discuss the matter. He informed them that he required them to provide a new business case and to apply for his consent under section 54 of the Public Finance Management Act (PFMA) to change the structure of the transaction.

At the meeting, the board motivated for renegotiation. The March deal to lease five A330 wide-body planes to SAA will be changed to an outright sale to a third party that would purchase the planes on SAA's behalf. The third party has not been named by Myeni, either to Airbus or SAA's executives. The introduction of a third party would not pass scrutiny by Airbus regulators and would not be acceptable. If a third party is introduced it would amount, say SAA executives, "to by-passing the procurement process".

Myeni did not reply to requests for comment. Following last week's meeting with Nene, Tambi said: "Mr Nene has now been given a clearer understanding on the implications of the transaction. "The reasons for the negotiation were made clear. The chairperson has also written to the minister. It is going ahead," he said in an interview on Tuesday.

Treasury spokeswoman Phumza Macanda declined to answer detailed questions other than to say that any material change to the Airbus contract required the explicit permission of the finance minister. "All we can say is that the minister (has previously) approved a structure. Should there be a change to that, SAA would need to submit a PFMA section 54 application for approval and such an application has not been received from SAA," she said.

Obligations and payments

Nene's decision to wait for such an application from Myeni without taking any action to prevent her from going ahead will cost the airline and the fiscus dearly. The leasing arrangement negotiated in March will fall away and the contract will revert to its previous iteration. In this version, financial obligations - cash payments - of R1.5bn will need to be made in the next month. In addition to this, the airline will suffer a R1.6bn bottom-line loss from failing to lease the aircraft as promised.

In his letter, Fuzile spelled out the implication of this to SAA and the fiscus, which in the light of SAA's cash flow constraints would ultimately have to pay up. "The renegotiation would result in SAA defaulting on its obligations and payments would be triggered under existing government guarantees. This would place the already tight fiscus in an untenable position," reads his letter.

Asked whether Nene was aware that the cash obligations would now become due, Macanda said he was. She declined to answer why Nene had not taken steps to suspend Myeni, who is arguably in breach of her fiduciary responsibilities. Myeni enjoys a close relationship with President Jacob Zuma and has hosted meetings with SAA executives at his home.

While Nene may believe he should tread lightly due to the political sensitivities surrounding SAA, should the crisis have a knock-on effect on Treasury's fiscal targets and its ability to rein in spending, SA's credibility with investors and the markets may be called into question.

Source: Business Day