Many of South Africa’s listed companies will publish their interim or annual results for the period to end June during the next few weeks. Several have already done so.

The Johannesburg Stock Exchange’s (JSE) rules require that companies publish results within three months of the end of a reporting period, and shareholders and other suppliers of financing expect it. The JSE is quick to warn when a company fails to publish its results and shareholders are quick to exit the share, while banks and other creditors will immediately start to ask hard questions.

The outcome of this rigid requirement is that companies’ operating and financial health are reported regularly and corrected when things start to go wrong. The alternative is a non-performing company that will go bankrupt when it runs out of capital. The benefit of a company structure – that of limited liability – is that shareholders are not obliged to keep on throwing money into a bottomless pit.

Unfortunately, these rules and realities do not apply to South African Airways (SAA).

SAA lost all its capital more than a decade ago, when its liabilities exceeded its assets and equity by R368 million. Government funding and hard work saw some recovery in 2010 and 2011, but since then everything has gone wrong.

SAA has been in decline since 2012, with taxpayers cast in the role as capital providers and unwilling shareholders, effectively with unlimited liability. During the next six years, from 2012 to 2017, SAA suffered total losses of nearly R18 billion and by the end of the 2017 financial year, the airline reported that its liabilities exceeded its assets and equity by R17.8 billion.

The annual report for the year to end-March 2017 was the last that SAA published. It took management 11 months before it published the 2017 report. Nobody knows when the 2018 report will be done, nearly 17 months after the end of the financial year. Any other company in the private sector would have published its 2019 audited figures by now.

Ignorance is bliss?

SAA is in a difficult position. If it does not publish its reports, the ministers of public enterprises and finance, the banks and taxpayers will become even more impatient. But the publication of the figures will probably show that things are worse than expected.

Reading through the last 10 annual reports shows that operating costs increased faster than revenue in most years since 2012, and that SAA suffered an operating loss every year, with the notable exception of 2016 when the price of jet fuel dropped sharply. But by then SAA’s interest-bearing debt had increased to R14 billion and interest payments of R1 billion wiped out the operating profit of R522 million.

Summary of revenue, cost and profit

R million 2012 2013 2014 2015 2016 2017 Revenue 23 861 27 098 30 266 30 492 30 716 30 742 Operating cost 25 176 27 523 30 640 33 407 30 194 33 502 Operating income -1 315 -425 -374 -2 915 522 -2 760 Depreciation and impairments 63 -1 416 -1 933 -2 607 -896 -1 000 Interest -105 -189 -231 -608 -1 004 -1 590 Profit -843 -2 554 -1 170 -6 142 -1 478 -5 569

Source: Compiled from SAA annual reports

It is unlikely that things improved during the last two years. In the 2017 annual report, then CEO Vuyani Jarana noted that revenue showed no growth over the last few years due to low economic growth and strong competition from low-cost airlines in SA and international airlines globally.

Economic growth has slowed even more since then and competition has increased. The airline lost its status as the best airline in Africa to Ethiopia Air in 2017, according to the Skytrax World Airline Awards ranking.

SAA has been falling in the international rankings in comparison to other airlines year after year.

Jarana flaunted a long-term turnaround plan in 2017, but his resignation letter at the beginning of June 2019 indicated that it was impossible to achieve much. It seems reasonable to assume that costs have continued to increase.

Read: SAA gets state funds after CEO, chairman quit

Costly operation

The old annual report (2017) disclosed that around 55% of SAA’s operating expenditure is dominated in foreign currency. Just the weakening of the rand, from R12.90 per dollar in June 2017 to R13.42 in June 2018, would have added 4% to costs.

In addition, the price of jet fuel increased by around a third between 2017 and 2018, according to data from the International Air Transport Association (Iata). Jet fuel increased from around $60 per barrel to around $80 by the end of 2018. This increase, together with the weaker rand, is likely to impact heavily on fuel costs, which remained close to unchanged at R7.3 billion in the 2016 and 2017 financial years.

Wages are likely to have continued to increase, as have indirect employee costs.

The cost of accommodation and refreshments has increased by 40% since 2015, to R1.4 billion in 2017.

Assuming that the trends of the last few years persisted in the year to June 2018 – only a marginal increase in revenue, continued cost increases and higher interest charges due to growing debt – it is possible that SAA’s loss in the 2018 year increased to more than R6 billion.

Continuing the exercise, the loss for the year to March 2019 could have increased to more than R9 billion as the rand declined to worse than R14 per dollar and jet fuel prices increased to a high of $100 per barrel, before falling to between $80 and $90 for most of the past year.

Forecast of revenue, costs and profit

Reported

Forecast

R million 2016 2017 2018 2019 Revenue 30 716 30 742 31 600 32 000 Operating cost 30 194 33 502 35 700 38 700 Operating income 522 -2 760 -4 100 -6 700 Depreciation and impairments -896 -1 000 -500 -1 000 Interest -1 004 -1 590 -1 600 -1 600 Loss -1 478 -5 569 -6 200 -9 300

Source: Author’s analysis

We can only hope that the forecast is wrong and that SAA is doing much better than the trend of the last few years suggests. If the forecast is fairly accurate, the balance sheet would scare the likes of junk-bond junkies like Michael Milken and Jim Casey.

At the end of the 2017 financial year, SAA had total liabilities of R33.7 billion and total assets of only R15.9 billion. The negative equity of R17.8 billion is calculated after taking account of decades of accumulated losses totalling R33.6 billion at March 2017.

If bankruptcy had different levels, SAA’s would hit a new record if the trends of previous years continued in 2018 and 2019.

The estimated losses would have increased the negative equity position to more than R30 billion, depending on whether SAA accounted for the bailouts it received from taxpayers as loans or new capital, and whether this funding was used to reduce debt or pay salaries.

SAA’s financial state and the fact that the latest formal figures are more than two years old raises the question of whether SAA is creditworthy. In reality, a bankrupt company that posts a huge losses year after year and cannot produce an income statement would not even get an appointment with an assistant branch manager in Riviersonderend.

Banks aren’t talking

It proved impossible to get confirmation from banks on their exposure to SAA. FNB nearly admitted to it when it referred Moneyweb to Rand Merchant Bank, but RMB replied that “client confidentiality precludes us from commenting on client-specific matters”.

The most interesting response was when somebody at another bank pushed the wrong button when forwarding Moneyweb’s questions to the financial director, asking him if they should reply with “the usual response of client confidentiality”, and a few minutes later we got that.

Moneyweb received the same response from other banks.

The 2017 annual report listed Standard Bank, Nedbank and Citibank as SAA’s bankers. Citibank cut its exposure to SAA in August 2017 when it refused to roll over debt of R1.8 billion when it became due after Standard Chartered Bank refused the same on a loan of R2.2 billion earlier.

Standard Bank and Nedbank, as well as other local and international banks with offices in SA, refused to admit to their exposure. The five large local banks that offer corporate loans probably all have exposure to SAA given SAA’s total debt of nearly R17 billion in March 2017 (and probably closer to R20 billion now).

Nedbank Group CFO Raisibe Morathi, in an interview with Moneyweb after the banking group published its results last week, said that Nedbank has total exposure to state-owned enterprises to the tune of R20 billion. She declined to list the entities, but said the bank’s exposure is down from R24 billion (as at the end of December), and is backed by government guarantees.

The risks brought on by SAA’s weak balance sheet and continued losses cannot be ignored. It will take just one small problem to derail the whole airline. SAA nearly lost its landing rights in Hong Kong in 2016, when the Hong Kong registrar of companies threatened to deregister SAA because it did not publish its results.

In addition, airports around the world and fuel suppliers would like proof that SAA will be able to pay its bills.