*Source: DTN News / The Times
(NSI News Source Info) JOHANNESBURG, South Africa - July 26, 2009: SAA doesn’t have the cash for 15 new aircraft ordered in 2002, writes Roger Makings. More turb
ulence at SAA: Airline in fresh pickle, this time for airbus deal worth over R1BN.
Just as SAA was showing signs of a turnaround, the airline finds itself fighting off another crisis that could again send it reeling into technical bankruptcy.
At the heart of the problem is a resolute Airbus, the French aircraft manufacturer, which is pressuring the cash-strapped carrier to honour a deal struck in 2002 to acquire 15 A320s, for which the airline does not have the money.
Sensing that it has SAA over a barrel, Airbus has said it would toss the carrier a lifeline if it increased the order to include two long-range A340-500s which SAA does not want.
It is believed that the type, of which Airbus is said to have surplus stock, is not popular with airlines — which Airbus denies.
“We can either perfect the deal, for which we don’t have the money, try to force a cancellation and run the risk of incurring damages, challenge Airbus in court over the validity of the contract or, preferably, find a solution acceptable to both parties,” says acting chief executive Chris Smyth.
If SAA honours the five-year- old deal, it would have to come up with R1.2-billion in pre-delivery payments. If it doesn’t, it will have to find more than R850-million to repay credits advanced for an earlier acquisition of aircraft owed to engine manufacturers as well as Airbus.
The airline does not have the money for either option and if forced to concede, will find itself technically bankrupt.
Industry sources say that Airbus, which is also feeling the effects of the recession, is hoping that the government will bail out SAA, as it has done previously.
The impasse began in 2002, when SAA’s then CEO Andre Viljoen announced that a multibillion-rand fleet renewal contract had been awarded to Airbus. The order was made up of 41 aircraft, including 15 A320-200 aircraft. The first of the deliveries would have been due early next year.
However, the airline found itself insolvent after a currency hedging programme went sour and, in the two years from 2002-03, SAA had recorded net losses of nearly R14.6-billion. The SAA board was forced to cancel the order for the 15 A320s. Airbus was notified, says SAA, and acknowledged receipt of such, but did not, apparently, concede that the deal was cancelled.
The airline acquired 21 Boeing 737-800s in 2000 during Coleman Andrews’ tenure. Four of these are in the stable of SAA’s budget airline Mango, and the leases on these aircraft begin to expire from next year. They were scheduled to be replaced by the 15 A320s.
As much as a showdown seems inevitable, SAA has several options. The least favoured is to challenge the validity of the Airbus claim in court, when that money, should it lose the case, could go towards the new aircraft which SAA is, in any event, going to have to buy in the next few years.
What the airline needs is time to come up with the funding.
“In the interim we can extend the leases on our Boeings until such time as we are in a position to go ahead with the Airbus deal,” said Smyth. He said SAA had achieved an operational turnaround which would need another three years to generate the capital needed for the acquisition.
Airbus was agreeable to the three-year extension but then introduced the deal-busting condition that two long-range A340-500s be added to the list.
“We are still evaluating the A340-500s and cannot take them until we are satisfied that they can work for us,” said Smyth.
“No airline can afford to be saddled with expensive aircraft that it doesn’t need. We must be satisfied they will not impact negatively on operational efficiency and profitability in the years to come, which is exactly what we are trying to correct.”
He said Airbus is a tough negotiator and although the two parties find themselves in an adversarial scenario, he believes that a solution can be found. Airbus, he said, had not issued summons, which indicated there was a will to find a solution. (The manufacturer did not respond to questions on whether it might seek legal recourse if the talks collapsed.)
“We are well on the way to be in a position to fund the deal. There will be an operational profit of more than R1-billion, although we may still show a net loss at the end of the financial year, firstly from a hedging loss, and secondly the Airbus deal, which can’t be ignored,” Smyth said.
“A substantial amount will have to be put aside for this to satisfy the auditors, whether it be to pay for the aircraft or force a cancellation, which I don’t expect will be necessary.”
Airbus described the negotiations with SAA as “constructive”, but added that as they were contractual, they remained confidential. In defence of the A340-500 an Airbus spokesman said: “The A340 remains popular on routes where carriers need the superior takeoff performance of four engines from high-altitude airports (like Johannesburg’s OR Tambo), on long-haul routes.”
The question now is whether the government will step in to defuse the standoff or whether SAA will have to go it alone. Another bailout would be hugely unpopular and Smyth and his team are likely to have to stare Airbus down on their own.
ulence at SAA: Airline in fresh pickle, this time for airbus deal worth over R1BN.
Just as SAA was showing signs of a turnaround, the airline finds itself fighting off another crisis that could again send it reeling into technical bankruptcy.
At the heart of the problem is a resolute Airbus, the French aircraft manufacturer, which is pressuring the cash-strapped carrier to honour a deal struck in 2002 to acquire 15 A320s, for which the airline does not have the money.
Sensing that it has SAA over a barrel, Airbus has said it would toss the carrier a lifeline if it increased the order to include two long-range A340-500s which SAA does not want.
It is believed that the type, of which Airbus is said to have surplus stock, is not popular with airlines — which Airbus denies.
“We can either perfect the deal, for which we don’t have the money, try to force a cancellation and run the risk of incurring damages, challenge Airbus in court over the validity of the contract or, preferably, find a solution acceptable to both parties,” says acting chief executive Chris Smyth.
If SAA honours the five-year- old deal, it would have to come up with R1.2-billion in pre-delivery payments. If it doesn’t, it will have to find more than R850-million to repay credits advanced for an earlier acquisition of aircraft owed to engine manufacturers as well as Airbus.
The airline does not have the money for either option and if forced to concede, will find itself technically bankrupt.
Industry sources say that Airbus, which is also feeling the effects of the recession, is hoping that the government will bail out SAA, as it has done previously.
The impasse began in 2002, when SAA’s then CEO Andre Viljoen announced that a multibillion-rand fleet renewal contract had been awarded to Airbus. The order was made up of 41 aircraft, including 15 A320-200 aircraft. The first of the deliveries would have been due early next year.
However, the airline found itself insolvent after a currency hedging programme went sour and, in the two years from 2002-03, SAA had recorded net losses of nearly R14.6-billion. The SAA board was forced to cancel the order for the 15 A320s. Airbus was notified, says SAA, and acknowledged receipt of such, but did not, apparently, concede that the deal was cancelled.
The airline acquired 21 Boeing 737-800s in 2000 during Coleman Andrews’ tenure. Four of these are in the stable of SAA’s budget airline Mango, and the leases on these aircraft begin to expire from next year. They were scheduled to be replaced by the 15 A320s.
As much as a showdown seems inevitable, SAA has several options. The least favoured is to challenge the validity of the Airbus claim in court, when that money, should it lose the case, could go towards the new aircraft which SAA is, in any event, going to have to buy in the next few years.
What the airline needs is time to come up with the funding.
“In the interim we can extend the leases on our Boeings until such time as we are in a position to go ahead with the Airbus deal,” said Smyth. He said SAA had achieved an operational turnaround which would need another three years to generate the capital needed for the acquisition.
Airbus was agreeable to the three-year extension but then introduced the deal-busting condition that two long-range A340-500s be added to the list.
“We are still evaluating the A340-500s and cannot take them until we are satisfied that they can work for us,” said Smyth.
“No airline can afford to be saddled with expensive aircraft that it doesn’t need. We must be satisfied they will not impact negatively on operational efficiency and profitability in the years to come, which is exactly what we are trying to correct.”
He said Airbus is a tough negotiator and although the two parties find themselves in an adversarial scenario, he believes that a solution can be found. Airbus, he said, had not issued summons, which indicated there was a will to find a solution. (The manufacturer did not respond to questions on whether it might seek legal recourse if the talks collapsed.)
“We are well on the way to be in a position to fund the deal. There will be an operational profit of more than R1-billion, although we may still show a net loss at the end of the financial year, firstly from a hedging loss, and secondly the Airbus deal, which can’t be ignored,” Smyth said.
“A substantial amount will have to be put aside for this to satisfy the auditors, whether it be to pay for the aircraft or force a cancellation, which I don’t expect will be necessary.”
Airbus described the negotiations with SAA as “constructive”, but added that as they were contractual, they remained confidential. In defence of the A340-500 an Airbus spokesman said: “The A340 remains popular on routes where carriers need the superior takeoff performance of four engines from high-altitude airports (like Johannesburg’s OR Tambo), on long-haul routes.”
The question now is whether the government will step in to defuse the standoff or whether SAA will have to go it alone. Another bailout would be hugely unpopular and Smyth and his team are likely to have to stare Airbus down on their own. 
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