by Ogaga Udjo and David Swanepoel, ZA Logics Introduction Business Rescue is a legal remedy, under Chapter 6 of the Companies Act, (Act 71 of 2008), that attempts to save financially distressed entities by This article by ZA Logics, is the first restructuring their operations, which enables them to continue to operate in a of a three-part series titled solvent state while being restructured. “Restructuring for take-off: Business Rescue in South African Aviation”. ZA Take note that when Business Rescue Proceedings are discontinued (by an Logics Managing Director, Ogaga order of Court) after application by the Business Rescue Practitioner, an Udjo and Legal Counsel, David insolvent company is liquidated in terms of Chapter 14 of the Companies Act, Swanepoel, will discuss corporate 1973 (Act 61 of 1973). Business Rescue is similar to The United States restructuring dynamics within the Bankruptcy Protection Code, specifically Chapter 11 – “Reorganization”. The South African aviation environment. economic impact of the Covid-19 Pandemic has seen some airlines (and other This first article is titled "Setting businesses) in South Africa utilising this procedure evidenced, by inter alia The Scene", as background to retail giant Edcon Limited entering this process on 29 April 2020. aviation restructuring is set to provide context to the eight-year In South Africa’s environment, Business Rescue can commence either through history (that is still unfolding), a voluntary basis (by resolution of the board of directors), or by way of a regarding restructuring of South Court order (on application by an affected person, referring to a shareholder, African airlines. creditor, registered trade union or employee(s)-through their representatives). In the first instance, it must be shown that the company is financially distressed and; there is reasonable prospect of rescuing the company. In the second instance, the Court has to be satisfied that the company is financially “The last 10 months have distressed, has failed to meet an obligation in respect of its employees, or it is heralded an interesting time in just & equitable to do so for financial reasons, and there is reasonable this landscape, given that it was prospect of rescuing the company. Entering this process affords the the first time a South African opportunity to conduct a proper assessment of the company’s financial state-owned entity (SOE) entered position and develop a structured way forward that is accepted by affected into Business Rescue (i.e. SAA)” persons for implementation. The last 10 months have heralded an interesting time in this landscape, given that it was the first time a South African state-owned entity (SOE) entered into Business Rescue (i.e. SAA), and shortly thereafter SA Express, which may set precedent for other SOEs in distress. From an aviation perspective however, these were not the first airlines to enter into Business Rescue, with 1Time Airlines being the first in 2012. 1 “Covid-19 has not been the cause of the recent proceedings “ -rather an aggravating factor- even for Comair Limited with its decades of profitability.” Market Overview Prior to Covid-19, there were some Given the current Pandemic however, IATA’s latest forecasts (13 August positive trends regarding South 2020) estimate that for the full 2020 year, South Africa’s Air Transport African aviation: sector is at risk of losing 16.6M passengers, 289 000 jobs and reducing its contribution to GDP by R97.2BN ($US5.8 ). 1. IATA had noted that in 2017, 20.9 million passenger journeys were made Over the last 10-15 years, the South African aviation industry has been to, from and within South Africa, with characterised by: firstly, the domination of two airline groups– Comair aviation and tourism representing Limited and SAA Group, with relatively extensive networks; secondly, a burgeoning secondary/regional market, driven largely by SA Airlink and SA USD 9.4 billion in gross value added. Express; and lastly, new airlines trying to breach mostly into the primary This represented 3.2% of South route market, namely Velvet Sky, 1Time Airlines, and FlySafair respectively Africa's GDP and supported 472,000 (it is necessary to highlight that Safair Operations – FlySafair’s parent jobs. company – has been operating for over 50 years). The most aggressive strategy in this regard has been employed by FlySafair – for the full year ending 2019, they had 21% seat and 22% passenger share. What has been 2. Further, it had been forecasted that clear during the Covid-19 Lockdown is that FlySafair have relative financial over the next 20 years the South resources to weather through the storm, however one can only surmise African aviation market could more their exact (financial) position as their financial statements are not publicly than double in size, resulting in 23.8 available. million additional passenger journeys, over 372,000 more jobs, and a total of USD 20.2 billion in GDP by 2037. Figure: Demand and Supply in the Domestic South African Market 2019 Source: ZA Logics Analysis (MIDT data). 2 SOUTH AFRICAN AIRLINES PREVIOUSLY OR CURRENTLY IN BUSINESS RESCUE As mentioned earlier and tabulated here, the first commercial airline in South Africa to enter Business Rescue was 1Time Airlines in September 2012, with Fly Blue Crane next in 2016; in an eight year period – five South African airlines have entered into Business Rescue Proceedings. Given the regular executive changes at the respective airlines, incumbent CEOs and immediate outgoing CEOs at the time, have been noted. Table: South African Airlines Currently or Previously under Business Rescue Source: ZA Logics Analysis (data: Various Business Rescue Filings and Integrated Annual Reports). 1Time Airlines (Pty) Limited Looking at the first airline to utilise this remedy – burdened with substantial overheads, high fuel costs and 1Time Airlines (Pty) Limited, was a low-cost carrier an aged fleet. operating in Southern Africa, with Johannesburg (OR Tambo) as their operating hub. According to the Prior to the business rescue proceedings, it Business Rescue Plan: unsuccessfully attempted compromise with its creditors. The main reason for the failure of the The company suffered considerable losses over scheme of arrangement was that the Airports the 2011 (R47.6M) and 2010 (R48.2M) financial Company of South Africa refused to accept it. years, and was not operating profitability. It was Consequently, the decision to enter Voluntary cited that 1Time Airlines had employed the wrong Business Rescue was made by the board on 16 strategy regarding the FIFA 2010 Soccer World September 2012, and Business Rescue Cup, together with an inefficient business model Proceedings commenced on 17 September 2012. 3 Salient features of 1Time Airlines Business Rescue This proposal was not supported as the parent company, Plan at time of submission were: 1Time Holdings was not prepared to irrevocably commit to and confirm their rights under the rights issue. Extension of the legal moratorium for a period of Further, no financial institution was prepared to 24 months; underwrite the proposed rights issue, dooming the Successful recapitalisation of the company was proposed rights issue to failure. Finally and critically, as critically dependent on: i. A rights issue to 1Time Airports Company’s support for the Business Rescue Plan Holdings’ shareholders to raise a minimum of R60 could not be obtained (being the largest concurrent million and ii. Debt equity swops with the owners creditor, owed R147M), the other creditors were reluctant of the leased aircraft (secured creditors); to commit to any of the proposals. A dividend of R0.20 payable to concurrent creditors, excluding Airports Company South Africa, over a period of 36 months from expiry of the extended legal moratorium. Fly Blue Crane Fly Blue Crane was a short-lived, scheduled regional -a year after its inaugural flight- and on 3 February 2017 carrier that aimed to operate secondary and tertiary announced that flights had to cease. The company cited routes within Southern Africa; it was founded by the reason for entering into Business Rescue as being to former SAA executives, Siza Mzimela, Theunis “re-engineer and strengthen their business”. Potgieter and Jerome Simelane. From a network and fleet perspective, the airline operated 2 wet-leased The Business Rescue Practitioner was quoted as saying: Embraer E145 50 seater aircraft, based at OR Tambo “I am very confident about the airline’s future, and have International Airport, to Bloemfontein, Nelspruit, every reason to believe that it is a matter of time before Kimberley, George, and Cape Town, with plans to Fly Blue Crane overcomes its challenges. The introduce flights to Namibia, Mozambique, Botswana, management and staff are here and working very hard, Zimbabwe, Swaziland and the Democratic Republic of and looking very motivated and determined.” The South the Congo. African Department of Transport cancelled their international services license to Namibia, Swaziland and The airline had stated that one of their key strategic Mozambique on 13 September 2018, two years after their differentiators was to reduce ticket prices by “15- Business Rescue commencement. As it stands the airline 30%”. As part of post commencement capital raising is currently a shell company in process of formal efforts, a R30 million bridging finance loan was deregistration by the Companies and Intellectual Property obtained from the Industrial Development Corporation Commission. – much less than the R240 million requested - subject to the condition that Fly Blue Crane should not Fly Blue Crane’s short existence was not surprising given negatively impact South Africa’s state- owned airlines, the lack of adequate capital raised and an being SAA, Mango Airlines and SA Express. undifferentiated model that would - and did - face tough competition from SA Airlink and SA Express, who were Further, an undisclosed Gulf carrier expressed strongly established on Fly Blue Crane’s target routes. investment interest however, this did not materialise.