Finance Minister Nhlanhla Nene instructed South African Airways (SAA) on Thursday to implement the original ‘swap transaction’ agreed with Airbus earlier in the year, through which the national carrier would lease five A330s from the manufacturer instead of buying ten A320s. The National Treasury approved the deal in September.

He also rejected an eleventh-hour amendment to the deal, proposed in November by controversial board chairperson Dudu Myeni, that SAA purchase the A330 aircraft and enter into a rand-denominated sale and leaseback of the aircraft with a local lessor.

The intervention had been heavily criticised and had also led to major tension within the airline, with several executive and non-executive resignations, as well as a vote of no confidence in Myeni by SAA’s pilots.

The Minister cautioned that, should SAA conclude a significant transaction with Airbus or any other party for which the airline had not received approval in terms of Section 54 of the Public Finance Management Act (PFMA), it “would constitute an act of financial misconduct which could be grounds for sanctions against the board in line with Section 83(4) of the PFMA”.

The rejection of Myeni’s proposal followed a National Treasury analysis of the board’s November 16 proposal, which concluded that “SAA had not demonstrated that there was certainty that the proposed amendment to the transaction structure would leave the airline in a better financial position than it would otherwise have been had the airline implemented the original swap transaction structure”.

In fact, it concluded that the proposed transaction structure would “actually leave SAA in a materially worse off financial position where it is unable to meet its commitments as they fall due”.

A key weakness in the board's proposal lay as much in timing as in content, with Airbus’s offer to reimburse SAA for the pre-delivery payments (PDPs) already paid for the ten A320 aircraft not yet delivered and to defer the remaining PDPs open until December 21, by which time Airbus was expected to have “agreed on an acceptable way forward with SAA”.

“Therefore, there was urgency to reach finality on this matter,” Nene said in a statement.

However SAA had yet to initiate a request for proposals (RFP) process to identify a domestic leasing company and would still need to conduct a due diligence of the prospective lessor and the lease rates. There was a risk that, once finalised, the terms might prove to be more “onerous” than assumed in SAA's alternative submission.

“Given that the RFP process had still to be initiated and could take some time to conclude, together with the fact that there was an urgent need to finalise this transaction, there was considerable risk that no such arrangement would be in place by the time the contract with Airbus must be concluded,” the National Treasury outlined.

“In the absence of having identified the financial institution that would act as the lessor, SAA would be required to make the immediate payments that would become due,” it added, noting that SAA was not in a financial position to afford the PDPs.

It warned that, should SAA have insufficient funds to meet the PDP payments and SAA defaulted on its obligations, cross-defaults would be triggered on the carrier’s guaranteed debt obligations, as well as other leasing arrangements.

“A default by SAA would have severe negative consequences for SAA and could have spill-over consequences for the country as a whole.”

In addition, given that the swap would have a material impact on SAA’s financial position, failure to conclude the transaction was preventing the finalisation of SAA’s 2014/15 financial statements, the holding of the annual general meeting and the tabling of SAA’s financial statements in Parliament.

“Consequently, the Minister of Finance has not approved the proposed amendment to the transaction structure and has instructed SAA that they must implement the transaction structure in line with the approval that had already been granted - that is, conclude the agreement to swap the purchase of ten A320s for a lease of five A330s from Airbus.”