SAA ‘deal with the devil’ to kill a competitor

South African Airways (SAA) concocted a devious and underhanded deal to kill one of its competitors, SunAir, and make money in the process. However, it backfired spectacularly.

Former Comair CEO Glenn Orsmond provided details about the SAA deal in his book, Crash And Burn – A CEO’s crazy adventures in the South African airline industry.

Orsmond was twice the chief executive of Comair, which operated both Kulula and British Airways. He was also the founder and CEO of 1time.

In this book, he provides readers with an insider’s tale of the South African airline industry over the past thirty years

One of the wilder stories he shared detailed how SAA devised a devious plan to remove Sun Air from the market.

In 1999, he received an unexpected visit from the former chief financial officer (CFO) at SAA, who reported directly to the CEO.

The SAA CFO enquired about Sun Air’s net asset value, and Orsmond confirmed it was about R70 million. “He then outlined his plan to remove Sun Air from the market.”

This entailed SAA gaining control of the airline by making a R50 million offer to the black economic empowerment (BEE) shareholders.

The acquisition of these shares would place SAA in control of Sun Air, and SAA could then force its liquidation.

Once liquidated, SAA would get back its R50 million investment as the liquidation would raise at least R50 million – the value of Sun Air’s net assets.

The big payoff for SAA, however, would be the revenue gains it would realise after eliminating a competitor.

The BEE shareholders were willing sellers, as the SAA offer would enable them to repay the bank debt they had incurred to fund their stakes in Sun Air and to earn a quick R32 million profit.

Comair didn’t mind writing off its Sun Air investment as it could be recouped within a few weeks through the inevitable increase in sales and revenue once its rival had ceased operations.

To make the deal work, they needed the buy-in from the Sun Air managing director. This was done by offering him the vacant SA Express CEO position.

They also had to deal with Safair, which was Sun Air’s biggest creditor. Safair had long-term leases with Sun Air for five MD80 aircraft.

In the event of Sun Air’s liquidation, Safair was entitled to lodge a creditor claim, which could include damages.

Such a claim would have drained Sun Air’s cash on a liquidation, making it impossible for SAA to recoup the R50 million it would have paid to the BEE shareholders.

SAA took care of this by paying Safair the R50 million upfront and offering a sweetener: SAA leased two new Boeing 737-800s from Safair.

Comair, in turn, agreed with Safair to take over Sun Air’s MD80 aircraft leases after Sun Air’s liquidation.

Everyone was happy: SAA, Comair, Safair, the BEE shareholders, and the Sun Air managing director.

• SAA and Comair were getting rid of an upstart competitor.
• SAA was all square with R50 million going out to Safair and ostensibly coming back once Sun Air’s happy net assets were realised to shareholders.
• Safair was happy because it was getting SAA and Comair as long-term lease customers. The BEE shareholders were getting a good price for their shares and having their debt settled.
• The Sun Air MD was getting a new job.

“But it was a deal done with the devil, and, not surprisingly, things fell apart, mainly because its implementation was not properly managed,” Orsmond said.

The first fatal mistake came when the SAA CFO called the Sun Air MD and advised him that SAA was Sun Air’s new controlling shareholder.

He then instructed the Sun Air managing director to immediately suspend all the airline’s operations.

He obliged, seemingly basing his actions only on this telephonic instruction. As a minimum, he should have asked for evidence of the changes in Sun Air’s shareholder structure.

He should also have called an emergency meeting with the board before agreeing to ground the airline.

“It is, unfortunately, nigh on impossible to restart the operations of an airline once they have stopped,” Orsmond said.

On the very day that Sun Air ceased operations, the vultures descended on the carcass.

SAA and Comair sent commercial teams into the Sun Air offices to download the membership base of its loyalty scheme, Air Rewards.

Both airlines hired extra staff to work over that weekend, calling all the Air Rewards members. They were offered bonus air miles to join our respective loyalty programmes.

Orsmond called the Sun Air MD and suggested Safair had blood on its hands for what had been done to Sun Air. “He quite accurately corrected me: ‘No, Glenn. We all have blood on our hands.’”

The dwal failed to work out as expected. SAA failed to secure the appointment of a friendly liquidator, as had been expected.

The liquidator smelled a rat, and an inquiry was held into Sun Air’s liquidation and whether it had been lawful under the Companies Act.

Safair’s lawyer erroneously handed the wrong file to the chairperson of the inquiry. It contained all the dirty secrets of the deal.

The liquidators had enough evidence to support a civil claim against SAA on behalf of the Sun Air creditors.

The SAA settled the claim before the court case. It is rumoured to have been a generous settlement to all creditors and staff.

SAA, Safair, and Comair benefitted from the underhanded deal. The losers were the South African public.

This article contained extracts from Glenn Orsmond’s book, Crash And Burn – A CEO’s crazy adventures in the South African airline industry.