Chris Gibbons conducts a multidimensional investigation of the Nationwide airline liquidation.

Chris Gibbons:
The focus swings to Nationwide Airline which went belly up yesterday. It has gone into provisional liquidation. The lawyers are involved and so on and so forth. The employees are saying, what now for us. Passengers are also saying what now for us because there is a process.

Someone to tell us what happens in this kind of process. Someone who has worked in airline liquidations before joins us now from Johannesburg. He is Werksmans director of the commercial litigation department Eric Levenstein. Eric, good evening to you and welcome to The World at Six. It is not a pretty process but it is a process nonetheless.

Eric Levenstein:
Unfortunately so, Chris. This goes back 10 years ago when Sunair went into liquidation in 1999 and here we are, full circle. We have got stranded passengers, you have got unemployed pilots, and you have got various creditors who are owed quite a lot of money. A provisional liquidator was indeed appointed last night. We are just going to have to wait and see who gets appointed and how he is going to take control of the situation.

Chris Gibbons:
What are the steps in the process?

Eric Levenstein:
Well Chris, the first thing that is going to happen is once the provisional liquidator gets appointed, he is going to have to meet with creditors, take directions and instructions from them. There might be an opportunity for the goodness of the company to be sold as a going concern, but time will tell whether that is in fact available to the liquidator.

It was reported in this morning’s press that there was a BEE deal that was on the cards which did not go through. Those parties, or that third party interested in the company might very well deal with the liquidator and take over the company. They might even trade the company for a period in liquidation, but that is going to require funding.

Chris Gibbons:
The question of who is a creditor and who is not a creditor from a passenger’s point of view, fair to say they are probably last in line?

Eric Levenstein:
Well, if they have to wait for the liquidation process to take its natural consequence, they are going to file claims with the liquidator in due course. But there have been reports in the press, the Department of Transport has said that civil aviation normally requires airlines to have continuous plans in place when their papers cannot be met.

And IATA, I think, in the DSP systems which run the airline ticketing will probably come to the party as they did 10 years ago with Sunair and meet passenger requirements in getting them around the country at this stage.

Chris Gibbons:
If the other airlines can help, they will. But obviously the other airlines have got to look after their own passengers first?

Eric Levenstein:
No question about it. But as I said, it did occur on the last occasion that the other major airlines operating in South Africa did try and assist. Obviously it deals with capacity issues. And here we are sitting on the long weekend, people are flying around the country, so it does not look too pretty.

Chris Gibbons:
I am not talking specifically about Nationwide, but in a process like this, what is it that triggers the demise?

Eric Levenstein:
Well. I think funding is the most important position that a company like this would find itself in. It seems like there has been negotiations on funding and new investors coming into play over a period as it has been reported, and that has fallen through.

So when cashflow becomes an issue and a company cannot pay its debt, directors are obligated in terms of the Company’s Act to put the company into liquidation. And if they don’t do that and continue to trade the company in insolvent circumstances, directors could be held personally liable in terms of certain sections of the Company’s Act.

So the quicker the move to put the company in the control of a liquidator, the better for all, including creditors.

Chris Gibbons:
That is the old reckless trading clause isn’t it and you can wind up losing all of your own personal assets if that happens.

Eric Levenstein:
Correct. That is correct. And directors will not be able to say that they have got a company in place with limited liability. The Act section 424 says you can pierce the corporate veil if in fact, creditors have been led down the garden path in credit continuing to be incurred at a time when the company cannot pay its debts.

Chris Gibbons:
Now in terms of preferred creditors, and again I am talking generally rather than specifically in this case. The banks are generally high up there, the tax man I think is probably normally first in the queue and everybody else follows along.

Eric Levenstein:
That is right Chris. How it works is secured creditors at the top of the pile and there you might find bond holders who hold security over the aircraft themselves been right at the top, they might be able to dispose of the aircraft under secured position. Or there might in fact be lease holders of these aircrafts are subject to lease agreements. The lease owners will own the planes and will be able to deal with them. And then the next in line are preferred creditors such as employees and SARS and then right at the bottom are your concurrent creditors who hold no security and unfortunately that included passengers.

Chris Gibbons:
So the process that unfolds now is that the liquidator and presumably the company’s management will sit down, draw up a picture of who is what and where and who is owed and what the obligations are and then they can say, right, okay, we have had an offer or we haven’t and then they move onto the next step?

Eric Levenstein:
Correct and obviously what the liquidator will try and do is realise maximum profit if the company is able to be sold or the assets are to be sold, to realise maximum dividend recovery for creditors. And as I say, time will tell whether that is a possibility. The aircraft licence itself will probably last another few months and then will probably be revoked by the Department of Civil Aviation.

Chris Gibbons:
Putting it very clearly for us and I appreciate that, Eric Levenstein, Werksmans director, commercial litigation department specialising in insolvencies talking to us from Johannesburg.

Well, earlier on today I took a view from a different side of the industry. I spoke to Comair and Kulula’s joint CEO Gidon Novick. And I began by asking Gidon for his reaction to Nationwide going belly up.

Gidon Novick:
Obviously it is always a surprise in the industry and it always seems to come at difficult times. So a long weekend, lots of holiday travellers and very unfortunately a lot of stranded people at the airport.

Chris Gibbons:
Was it forecastable? Was it foreseeable?

Gidon Novick:
You know Chris, the environment is difficult. The fuel price is obviously everybody and we have seen huge escalations over the last year. We have been fortunate to be bringing in our new fleet which is saving us a hell of a lot of fuel in terms of the fuel efficiency of the new planes. So we have been lucky on that score.

But I think in the South African context it is important to look at the competitive environment. And the competitive environment in the South African context is really three state owned airlines that one has to compete with been SAA, SA Express and Mango obviously. And in that context, competing with state owned airlines that don’t have to make a profit and certainly don’t always make a profit and get regular bailouts and handouts from government and taxpayers, it is a difficult and competitive environment. So from that point of view it is not a surprise.

Chris Gibbons:
You are also dealing with an industry where you sell me a ticket six months in advance of my travel perhaps, perhaps even longer. Six months down the line, instead of oil at $50 a barrel, you are dealing with oil at $100 a barrel. How do you factor that kind of variation into your planning?

Gidon Novick:
That is a challenge, it works both ways. Because on the one hand you cannot forecast what your costs are going to be at the time that the customer actually travels.

In reality Chris, most people we find are booking within let’s say six weeks of travel, even though there is a lot of forward planning. Most of the revenue comes in closer to the time. But I think as well, having all that cashflow, does keep some airlines going and around the world that is used by airlines in our view wrongly as a form of financing the operation. Whereas in reality, that money that gets paid by customers in advance should be set aside that if something does go wrong, or if things do get difficult, then customers can get their money back.

Chris Gibbons:
And that obviously is going to be a question mark in Nationwide case. But to come back to your point about the state run airlines, this is yet another example of a private airline going belly up in the South African market.

Gidon Novick:
Yes we were trying to work out earlier this morning how many airlines have gone belly up since privatisation which was only about 14 years ago. And you get pretty close to a number of around eight airlines that come and gone. And again the single variable, the single factor that all airlines face in this country is a state competitor who is difficult to compete with. Not because of service level, but just because of a bottomless pit in terms of financing and no kind of motivation to make a profit.

Chris Gibbons:
Gidon your airline shares went well up yesterday, presumably investors are assuming you will benefit from the demise of a competitor. Will that necessarily be the case and can we have an assurance from you as a low cost carrier that all is well on planet Kulula.

Gidon Novick:
All is well. Fortunately as I say the new fleet is helping a lot. The brand is strong. In terms of being opportunistic, we don’t see it as a huge windfall in terms of a competitor going out.

The biggest opportunity I think for us is just to see if there are good people within that airline that that we can attract. We are always looking for good people and maybe that will be the positive spin-off from our point of view.

Chris Gibbons:
The voice there of Gidon Novick, the joint CEO of Comair and Kulula.

I asked for a comment from World Air News Africa the magazines Deputy Editor. Kevin Barker, he joined us on the line from Durban.

Kevin Barker:
I don’t believe it is just the engine. I think a large player in this game was the grounding of the entire fleet of Nationwide by the Civil Aviation Authority. When they did bring them back online we still to this date have not been given a clear cut answer that this was the reason, this why we grounded the whole fleet, not just an aircraft or two. Which invariably leads to a serious loss of consumer confidence.

Since coming back online, the airline has not been able to bring its full fleet back on strength. Add to this using the older generation aircraft, burning fuel that equates up to 35 percent of their general operating costs. And you see that they are sitting with a very high target to beat especially when competing with airlines that are funded by the taxpayer’s money.

Chris Gibbons:
You are endorsing the point just made by Gidon Novick that you really struggle with an organisation that does not have to make a profit.

Kevin Barker:
If I look at the airline business in general, it is such a doggy dog business and one that exists on bums in the seats. That when you have taken a serious knock in your consumer confidence as Nationwide recently did, I think it is very hard to perform up against other airlines as Gidon said earlier with not necessarily on service levels but in terms of that bottomless pit of funding that you can hedge with and help yourself out of the tough times.

If one has a look in the last year, aviation fuel has gone up about 80 percent and without that big bucket helping you feed, you have really got a problem to try and maintain against someone who has that option.

Chris Gibbons:
The price of oil, obviously a critical factor, and once you get into that kind of downward cash spiral and obviously, hit a continued increase in the major input costs that proves fatal?

Kevin Barker:
Absolutely and it actually comes down to one of the pitfalls of operating older generation aircraft on the kind of route that we use in South Africa. Fuel burn versus the modern generation aircraft really ties you down into quite an ugly spot. And not been able to bring that full fleet of aircraft online, combined with the fuel prices, the older generation aircraft, you are looking the problem in the face from the word go.

Chris Gibbons:
So Kevin, where does this leave the other carriers in the South African market, especially the independent low cost ones? Are we going to see more pain or more price increases?

Kevin Barker:
I think inevitably, throughout the market, prices have to increase. Globally the airlines are announcing price increases at the moment. I think it is inevitable that the South African market is going to follow the same route.

Chris Gibbons:
The voice there of Kevin Barker, World Air News Africa deputy editor, talking to us earlier on from Durban.


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