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South Africa’s government will relinquish control of the loss-making national airline and give it an additional bailout in a bid to stave off liquidation.

South African Airways will be placed under voluntary business rescue, a local form of bankruptcy protection in which a court-appointed administrator will take charge and try and turn it around. Once that process is underway, the government will give it a 2 billion-rand bailout ($137 million) and provide guarantees to raise the same amount in new loans.

The process is fraught with risk.

South Africa’s powerful labor unions are expected to fight job cuts the airline needs to return to profit and creditors will likely be reluctant to agree to losses. The government is also facing demands from other beleaguered state companies for funding — stretching its already limited finances — and doesn’t have the leeway to give the carrier more support if the restructuring fails.

“We do not see government coming up with a solution that definitively can work,” said Susan Booysen, director of research at the Johannesburg-based Mapungubwe Institute for Strategic Reflection. “Asking for SAA to be placed on urgent business rescue is an instrument that kicks the can into somebody else’s court and says: ‘Now, you solve it.’ I fear that government is throwing in the towel.”

SAA offers flights to more than 30 domestic and international destinations and has been operating since 1934, when the government took over the assets and liabilities of Union Airways. The carrier has posted losses since 2012 as it grappled with the high operating costs of an aging, inefficient jet fleet and a bloated workforce — as well as high taxes, political interference and corruption scandals.

Operating Constraints

While SAA’s Johannesburg base is a major international destination, its position at the southern end of the continent means it lacks the potential to become a major hub. The scope for profitable regional flights is limited by the relative poverty of neighboring nations.

Efforts to establish a wider African business have had limited success as global giants including Dubai-based Emirates Airline and Turkish Airlines add dozens of sub-Saharan destinations and Ethiopian Airlines, the continent’s biggest carrier, turns Addis Ababa into a major hub.

Business rescue “is the optimal mechanism to restore confidence in SAA and to safeguard the good assets of SAA and help to restructure and reposition the entity into one that is stronger, more sustainable and able to grow and attract an equity partner,” Public Enterprises Minister Pravin Gordhan said in a statement on Thursday.

The South African Cabin Crew Association and the National Union of Metalworkers of South Africa, which represent about 3,000 SAA workers and staged a week-long wage strike last month that grounded a number of flights and caused bookings to be canceled on others, said they were still formulating a response to the decision.

Solidarity, a labor union that represents about 280 staff at SAA and its associated companies, filed a lawsuit last month aimed at forcing the airline into business rescue — a measure it contended was needed to safeguard the interests of workers and taxpayers whose money was being squandered. The union said it will suspend its application after it was agreed that the process would commence on Thursday.

South Africa’s Companies Act enables firms in financial distress to file for business rescue. If granted, a business-rescue practitioner is appointed to help the company reorganize and assess whether it can be turned around. Companies in the process of being rehabilitated are protected from liquidation and legal proceedings, enabling them to keep trading. Creditors have to sign off on any restructuring plan.

Gordhan said SAA’s existing creditors will be repaid in full, the airline’s cost structure will be reviewed and as many jobs as possible will be retained. SAA has more than 5,000 workers, while thousands more are employed by its associated companies and suppliers.

Customers Reassured

“This set of actions should provide confidence to customers of SAA to continue to use the airline because there will not be any unplanned stoppages of flights or cancellation of flights without proper notice should that be necessary,” Gordhan said.

SAA spokesman Tlali Tlali said the company’s board will announce the appointment of business-rescue practitioners in “the near future.” It also plans to publish a new provisional flight timetable “shortly,” he said in an emailed statement.

With about 130 domestic flights a day, SAA plays a critical role in the travel industry which is approaching peak season, according to Matthew Fubbs, sales director of travel agency The Holiday Factory.

“Business rescue is the better option at the moment, because if SAA had to be liquidated it would be catastrophic,” he said. “The travel industry wants to see SAA survive, but not to continue operating as it has been.”

(Updates with travel agent’s comments in last two paragraphs.)

–With assistance from Paul Vecchiatto, Amogelang Mbatha and Alastair Reed.

©2019 Bloomberg L.P.

This article was written by Mike Cohen and Christopher Jasper from Bloomberg and was legally licensed through the NewsCred publisher network. Please direct all licensing questions to legal@newscred.com.

Photo Credit: South African Airways aircraft at O.R. Tambo International airport in Johannesburg, South Africa. Waldo Swiegers / Bloomberg