Listen: SAA given 90 days to address aviation law breaches

RYK VAN NIEKERK: Last week, the Air Services Licensing Council gave South African Airways (SAA) 90 days to address breaches of aviation law or risk losing its air service licences. The council asked, among other things, for more information regarding the status of the Takatso Consortium’s acquisition of a 51% stake in the airline.

The consortium issued a short statement today in which it reaffirmed its commitment to complete the deal as soon as possible, and that it is working closely with government to get it finalised.

Tshepo Mahloele is with me in studio. He’s the chief executive of Harith General Partners and the chairman of the Takatso Consortium. Tshepo, thanks for so much for joining us. What exactly is the status of this transaction at the moment?

TSHEPO MAHLOELE: Ryk, thanks for having me. Perhaps to give a bit of context to the whole process where we are, we are very well aware that it has taken a while since mentioned last year. When you’re dealing with some of these regulatory processes that perhaps some of government has to go through, we very well understand that there are bureaucratic processes.

It has also been, I think, maybe to be honest and frank, sometimes a bit frustrating.

However, we have to accept that we have to go through these processes and they are regulatory sometimes. But we have to be very cognisant of them because unless we go through them and do them properly we will fall foul of some of those [processes] that we have to go through and we will be found [wanting]. And we do not want to be found wanting.

RYK VAN NIEKERK: You want to do it –

TSHEPO MAHLOELE: Properly – going through those processes. And there are many, if you consider that there are various entities which regulate that process. And from a Department of Public Enterprises point of view, initially between itself and National Treasury, having like whole issues of PFMA [the Public Finance Management Act], and then from all the issues that they have now, which then relate to even SAA as a state-owned institution, it having its own sort of regulatory issues, SAA itself operating within the regulated environment, it having the processes that it must go through itself. So there are all those, and at different times they have to go through that.

The current one which came out last week – if I can just maybe take you through that one – from our point of view we have not as yet concluded the takeover of SAA. That is still a process that is unfolding with government. There are still conditions precedent which have to be met with government. And at the moment we are still going through [the] Competition Commission.

Until some of those processes go through, we are not in a position whereby even perhaps I think SAA is even in a position to go and file anything, perhaps, with the CAA [Civil Aviation Authority] to say we have concluded a transaction with this, because we have not reached that financial closure yet.

So it’s also, I think, a bit odd that perhaps the CAA would say, give us a sale and purchase agreement of a transaction not concluded yet, which is perhaps subject to some of the conditions of the Competition Commission, and saying that you have changed ownership when ownership has not even changed yet. So those are some of the challenges, perhaps, which you see happening and which SAA itself has to go through. It is not the consortium.

And so SAA must go through that. At this stage we are going through Competition Commission processes with our government and that process is proceeding, albeit not as fast as we would’ve liked. There are many interested parties in that process.

RYK VAN NIEKERK: So you believe the council acted without taking into cognisance that the process of this transaction is very complicated and is taking longer than expected?

TSHEPO MAHLOELE: I am not going to say the council acted in any other way. I think there are other conditions in that letter other than the issue of the Takatso Consortium, because there are issues also of, like, post holders in the letter which have to be attended to.

RYK VAN NIEKERK: Financial position changes?

TSHEPO MAHLOELE: The financial positions and all those issues. Perhaps the Takatso transaction becomes more the one to focus on from a public point of view. But in relation to where the process of the transaction is, I am sure SAA will be able to respond to that. That process is still unfolding at the Competition Commission with the government, and there are still issues still unravelling. We do not know if there are still going to be conditions imposed on the transactions or not. There are still interested parties putting their hands up in respect to that process, and that is taking a bit longer than what we thought it would.

RYK VAN NIEKERK: But are the hurdles administrative in nature, or are there certain strategic differences between the parties delaying the process?

TSHEPO MAHLOELE: Yes, from a Competition Commission point of view. I think between ourselves and the Department of Public Enterprises not so much. However, I think we need to be perhaps transparent and say that there are other sort of regulatory processes, besides the Competition Commission, that still need to be satisfied in relation to the government side.

For instance, [there is] the issue of legislation which would need to be passed for the finalisation of the transaction to go though; some of those conditions are in the sale and purchase agreement. Those are perhaps some of the challenges [that] I’m indicating need to be passed, and that’s why I say unless you go through those properly, you’re going to find yourself wanting.

As I say, it is what it is, but challenging, taking a bit longer, costing a pretty penny. However, unless you now go through some of those properly, you are going to find yourself wanting.

But we are finding that some of those are moving a bit slower. We need to say we cannot deny that there is a bit of a contested territory – if I can put it mildly.

RYK VAN NIEKERK: [Laughing] Can you maybe expand on that?

TSHEPO MAHLOELE: Let’s be honest, Ryk. I think that the transaction in itself has caused a bit of noise from perhaps a party point of view. And, as we know, some of these things, perhaps even like Eskom, SAA, some of the others, have become perhaps battlegrounds for some of the contestants, and perhaps are causing that. And that’s perhaps the way I would see some of those things. Therefore going through the processes and the motions side of things, we do need to then ensure that from a process, from a governance and a regulatory point of view, these steps are done properly. And from a Takatso point of view, we need to make sure that we go through those without falling foul of any of those regulations or processes that government on its side needs to go through.

RYK VAN NIEKERK: But that sounds concerning, because in many ways this transaction would be a blueprint for other state-owned enterprises when and if they should go the strategic equity partner route. Are you saying that the political infighting within the ruling party is one of the reasons why the actual signing of the final agreement is being delayed?

TSHEPO MAHLOELE: Not from the government point of view. We know that we have been working very well with the Department of Public Enterprises and government in terms of executing on the transaction. We know that perhaps from the outside point of view there have been some like noise or challenge from the outside point, but then from a government point of view, from a Department of Public Enterprises point of view, we have been working and going ahead in terms of ensuring that that is done.

We have not seen any sort of stalling from the Department of Public Enterprises.

So from our point of view we are seeing that. And we believe that from a public-private partnership point of view it’s perhaps some of the models which need to be done more in terms of ensuring that we can bring [in] some private-sector capital willing to take risk alongside the public sector, bringing some of their efficiencies, taking some of the risk, and bringing in some of the governance processes – and make this asset work and save a great brand that can do that.

We have seen [what] this lack of perhaps this entity being in the market has done to prices in the market, and what that sort of has [led] to, and we believe that that opportunity is there. And unless that – it needs to be satisfied, because that gap is clearly there.

RYK VAN NIEKERK: But the council has now given SAA 90 days to comply and provide it with answers to the issues they have raised. Do you think within the 90-day deadline you would be able to get all the regulatory approvals you need?

TSHEPO MAHLOELE: I earnestly hope so. They have to. Sometimes like when you are closing a deal, you know, that sometimes you even put the date to it [and] people will keep on dragging their feet. Perhaps sometimes you need some of that pressure to ensure that you get to the deadline and make sure that that happens. And some of this perhaps will help to ensure that that happens or like, no, we get to a deadline.

We are doing everything on our side to ensure that that happens. We hope that SAA on their side will be able to do it. But we engage on a daily basis to address all the final details of the negotiations we are having with our counterparty.

RYK VAN NIEKERK: We spoke a few months ago and one of the issues you raised was the unavailability of financial statements for SAA. That’s been a problem we’ve seen for many, many years. Have you had access to those statements to be able to do a proper due diligence?

TSHEPO MAHLOELE: We are now aware that the Auditor-General has finished some of the other years in terms of that. And then they are in the process of wrapping up, I think, the last year. So we are hoping that those should be finalised very soon. We are aware that they have done the preceding years, and they should finish the other years now from what we’ve been told. But the SAA board and management, we are told, are working very hard on that to ensure that those are done, and those must be done.

And we also saw, I think in the letter from the CAA, they are demanding that some of those get wrapped up, because I think even for closure of the transaction there are sort of certain undertakings which need to be given to ensure that that is in place.

RYK VAN NIEKERK: So have you been able to do a proper due diligence? Do you know actually what you are buying?

TSHEPO MAHLOELE: We have been able to do that, because if you look at the way in which the transaction is structured: it is on a basis of we [are] taking it, [and] we are excluding, from the BRP process [business rescue process], we ensure that that debt which was supposed to be ring-fenced in the BRP process, is supposed to be taken care of. It’s not saying that it’s anything new, but it was supposed to have been taken care of, and was supposed to have been provided for.

So on that basis, we know what should be starting off because when SAA started afresh, that is the basis upon which that should be starting. And so therefore when we then come in, it should be on a basis of coming in with new capital to sort of ensure that we can pump in working capital to grow it and to ensure the ongoing growth of the entity, because that’s what SAA right now needs.

It needs more money. We even think that it might even need, because if you look at the market right now and how it’s also been dissipated, and if you look at issues of fuel, issues of infrastructure, issues of airlines flying in, it’s a very different marketplace competition-wise from what it was even 18 months ago.

So it’s much more competitive, so thinking that even the initial R3 billion that might be necessary, the stretch might even be a bit more than that as we come in.

So it’s going to be an even bigger competitive landscape that we’re going to need to be [competing in].

We are going to pump in the capital based on taking on the initial sort of assets that we’re taking over. We are giving that initial value to government based on the buildings that they are living in.

That is also because you must know that the other assets, the six planes which are there, are all leased. There aren’t all those other assets within that. And that was to ensure that at least we can have government still keeping a 49% stake, but we can go in there and be able to run the business and be able to make the asset compete and turn it around.

RYK VAN NIEKERK: Yes, the main assets would be the licences as well as the brand.

TSHEPO MAHLOELE: And the brand, because of the other staff in there – you have to change the whole culture. You have to change all the systems. You have to go in there and almost start afresh to make it able to be competitive. Basically, the main thing we believe in is more the brand.

You’ve heard people talking about the routes, all those things, but you know how competitive the whole thing to London is – like, is it making money or not making money? Right now you have [flights] to New York, or like to Atlanta , you have Delta [Air Lines], you have like United [Airlines] now flying in directly, even to Johannesburg and to Cape Town.

So with the value of those, and you coming behind – and this [SAA presence] has like dissipated. And so your competition landscape is not as easy as it used to be there. You have all these other international airlines now flying, not just to OR Tambo, but to Cape Town, even to Durban. It’s a much tougher landscape to get in. So our model has to take all those into account and see how you position this new SAA coming back.

RYK VAN NIEKERK: SAA is flying at the moment. Do you have any insights as to their operational performance?

TSHEPO MAHLOELE: [Sigh] We do have a bit of that. We know that it’s very challenging times for them. We know it’s very challenging times, actually, for even some of the players. If you consider, it’s very easy to see how many planes they are flying, what their market share [is]. Their market share is not what it used to be before BRP. If you look at what Airlink is doing, if you look at what Safair is doing, we have to be very honest about those. You can calculate that. At the moment I think they’re less than 8% of the market. It’s a very different airline to the one that people were –

RYK VAN NIEKERK: BA and Kulula have stopped operations. Doesn’t that change the playing field a bit?

TSHEPO MAHLOELE: But in Safair and in Airlink, if you look at how many planes right now Airlink has got, if you look at what Safair has done in like gobbling the market up, SAA still remains with six or seven lease planes; it still has not been able to like rev up as much as the other ones have been able to. Airlink has like over 50 flights …

RYK VAN NIEKERK: The transaction was announced back in June last year, so it’s been more than a year now. And a lot has happened during that year – as you’ve just articulated. In any private sector negotiation you will take into account those changes, and now we are sitting close to the middle of August. You have a 90-day deadline to go and renegotiate some of the terms because of the changes in the environment [that] could be challenging. What is your attitude still towards this deal, because it seems as if it is not proceeding or hasn’t proceeded as you would’ve foreseen.

TSHEPO MAHLOELE: I think, Ryk, from a proceeding point of view, we knew that it was going to be a difficult transaction, negotiating with government from a terms point of view.

From a market point of view – look, we started negotiating during Covid, in very difficult times. We knew that it was always going to be a bit of a challenge, even when SAA started flying, when Comair and Kulula got back into the market.

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At the time we also thought that they got back into the market a bit too early.

We thought that maybe they got too aggressive – Kulula and Comair. And as you are aware, we actually even made a bid for them before we made a bid for the other one. So we did have a bit of maybe that insight.

As to maybe that, I will be a bit honest and say like the extent to which I think now the international players have come into the South African play, we hadn’t modelled that to that extent.

So that has been a bit, I think, bruising, maybe to international sort of modelling within the plan. We have to be really honest in that regard, and have to reassess how that is going to work, even affecting your ancillary sort of strategy. Negotiating with government is not that easy.

We still think that on the initial terms that we had agreed upon, we can still make this model work. It was going to be a model on which we were going to be driven by the demand, and take it, build it up properly, and not because it’s an environment in which we’ve got now very high interest-rate inflation going up. It’s very sort of like a tough market. Debt is becoming very expensive. But it’s also an environment where like you can use it to take on the incumbents in a different manner to the way where they find themselves right now.

So how we use that can also be to [our] advantage from the base at which we start. I think we can still sit with the conditions we negotiated, hoping that those do not deteriorate further than what they have already deteriorated.

But I think the opportunity to get in and scale up will need to be taken perhaps sooner than what we thought maybe [it] initially would be. We thought that it would be a bit a slow, a slow-like build. But I think, seeing what has happened, the growth will perhaps thereafter need to be slightly more aggressive than what we had modelled for.

RYK VAN NIEKERK: That’s an interesting perspective. But don’t you feel in a bit of a cul-de-sac? You’re going to need to sign that agreement and then make do with the market as it is? Well, to put it differently, can you walk away still? [Laughter]

TSHEPO MAHLOELE: Ryk, if you look at where we’ll be starting off at, and if you look at where the other competitors, especially the SA-based competitors are at, we still believe that the opportunity is there. If you look at what the other local players are charging customers, I think that is a bit bad. It shows that there’s a massive opportunity. If you look at how flights are not available, and people are being treated by the incumbents, we believe that the opportunity is there.

So therefore from a market opportunity point of view, that is still there. We don’t believe that it’s something that we still want to walk away from.

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From a focus point of view we still believe that SAA has a very big opportunity in terms of [operating] regionally. So therefore that is still very much there. We’re still looking at issues, [and] there were discussions that they were having with Kenya, and we believe that that is still a great opportunity to look at from a pan-African point of view.

So there are still opportunities in there that we think should be exploited and which remain. But that will still require that, I think, sooner rather than later the transaction should be closed and not suffer any more deterioration.

RYK VAN NIEKERK: But I’m sure you would like to see operationally how SAA is performing. Is, for example, [Takatso CEO] Gidon Novick still destined to be the CEO?

TSHEPO MAHLOELE: I think with our partnership with Gidon and the other guys [at Takatso partner Global Aviation], at the moment we trying to manage the issues of conflict. And it’s only once the transaction is finalised, to ensure that there’s no conflict, that those considerations will be looked at because right now, as we do due diligence and we are looking at the thing, we are not in a position to enable him to look at SAA information or whatever, because –

RYK VAN NIEKERK: Ja, he operates a competing airline at the moment [Lift].

TSHEPO MAHLOELE: Yes, so we are not in a position to enable him to look at that. They [Global Aviation] are minority partners at the moment, at 20%. But once we get operational we can then revisit those issues. At the moment we are unable to expose them to any of these things, because of competition issues and not to like expose SAA to the competitor.

RYK VAN NIEKERK: So [with] the situation as we sit here, you are still fully committed. There are regulatory hurdles to get over, but you foresee in the hopefully weeks and months to come to have a firm handshake and actually a signed contract?

TSHEPO MAHLOELE: That’s what we are working very hard towards. And hopefully some of these pressures will ensure that we meet that deadline and it causes everybody to put shoulders to the wheel and ensure that we do that.

RYK VAN NIEKERK: Tshepo, thank you so much for your time today. That was Tshepo Mahloele, chairman of the Takatso Consortium.

TSHEPO MAHLOELE: Much appreciated, Ryk.

This article originally appeared on Moneyweb and was republished with permission.
Read the original article here.

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