Thread by @MaanoMadima

SANTACO's bid to acquire Mango Airlines has been rejected.

[Thread] will cover;
1) Mango's business rescue,
2) Relationship between SA Taxi and SANTACO and
3) SANTACO's attempted entrance in the aviation space in 2015 plus some running costs and why bid to acquire Mango failed.

Mango is a state owned company and is a subsidiary of SAA.

Mango commenced business in 2006 as a low-cost domestic airline facilitating business and tourism air travel in South Africa and regionally.

Mango was given a R100m loan plus interest to be paid in 5yrs by SAA.

16 Apr 2021 the board of directors adopted the resolution to place Mango in business rescue in terms of sec 129 of the Act.

Approval from Minister Gordhan
(the Executive Authority) was received on 22 Jul 2021 and on 28 Jul 2021 Mango was placed in voluntary business rescue.

Due to the hard lockdown and no flights operating between 26 March 2020 and 20 Jun 2020 when Mango resumed operations after traveling restrictions were relaxed, Mango’s Un-Flown Ticket Liability continued to increase.

Mango's creditor liability has since grown to over R2.8 billion with Forward Sales Liability
and Un-flown Ticket Liability at R183 million.

Mango was allocated funding of R819m from the Government funds granted to SAA to restructure its operations, by way of the Special Appropriation Act.

The funding allocation was to cover legacy debt and to provide for the restructuring of Mango.

https://twitter.com/MaanoMadima/status/1390227062481473544?t=85LpM9WECQOXiQDehbtJBA&s=19

Mango used to operate a fleet of 14 aircraft owned by 3 lessors.

2 lessors cancelled leases.

Mango only has a fleet of 2 aircrafts all leased from and owned by Macquarie.

Macquarie AirFinance is owned by Macquarie (50%), PGGM Infrastructure Fund (25%) and Sunsuper (25%).

Due to Mango leasing significant assets required to operate the business, the only material assets on the balance sheet are;

Spare engine that was acquired from SAA with a current book value of R97 million and

Furniture and Equipment with a current book value of R4.8m.

Sept 2021,Rescue Practitioner wrote to the board of SAA to establish the intention of SAA with regards to its continued ownership of Mango by SAA in view of the potential change of control in SAA, as well as possibility that Mango might still need finding support from its parent.

On 6 October 2021 the Practitioner received official confirmation from SAA that Mango would not form part of the SAA group in future and that no further financial support
would be directed to Mango other than the funding already allocated via the Special Appropriation Act.

It is important to note that SAA wnet into business rescue without Mango and came out with a crazy structure where the South African government owns 49% of SAA and all the debt.

https://twitter.com/MaanoMadima/status/1403294943209299968?t=TCH79TTJaC9VLxwBu4w3tA&s=19

2) Relationship between SA Taxi and SANTACO.

Nov 2018, SANTACO bought a 25% stake in SA Taxi for R1.7 billion.

SA Taxi used R1bn of the net proceeds of R1.2bn to settle interest-bearing external and shareholder debt.

SA Taxi provides asset-backed developmental credit lending for an
income generating vehicle.

Taxi owners are able to buy the vehicle, finance, insurance, car tracking, vehicle servicing and panel beating services all from SA Taxi.

Fully vertically integrated business model.

Transaction Capital stated that this was not a BEE deal, which would only enrich certain individuals, but rather, it is an equity partnership that will enable the equitable distribution of the value generated in the minibus taxi industry verticals to all taxi industry participant

How did SANTACO finance the R1.7bn purchase price?

R1.2bn was funded jointly by Standard Bank and Futuregrowth Asset Management for 15.7% of the ordinary shares and

R521m was facilitated by SA Taxi in the form of vendor finance for 9.3% vendor finance shares.

How much dividends will SANTACO receive and when?

Of the future dividend flows accruing to SANTACO, 90% will be applied towards reducing debt (the 25% was debt funded), with a 10% trickle flowing directly to the SANTACO trust from the outset.

Example of a typical vendor financing arrangement.

X Ltd needs sells 5% shares to a consortium.

Buyers don’t have the money to buy the 5% stake.

X Ltd then sells and simultaneously lends buyer money to buy the shares.

Buyers use dividends to repay the debt and the interest.

The vendor finance by SA Taxi resulted in Transaction Capital consolidating 81.4% of SA Taxi’s earnings.

Transaction Capital owns 74,9% of SA Taxi.

SANTACO owns 25.1%.

SANTACO is the umbrella body governing the industry and act as the principal mouthpiece for taxis.

Bridgestone partnered with SA Taxi to launch Taxi R15 tyre.

Santaco president stated that he wanted Santaco to adopt a resolution at its 2019 conference for members to only use Bridgestone tyres.

Bridgestone sells the tyre for R1,322.50 to SA Taxi members vs its price of R1,700

In a presentation to the portfolio committee on transport in Parliament, SANTACO stated that their annual buying power consisted of;
Fuel: R18bn
Insurance: R2,5bn
Tyres: R600m
Vehicle Maintenance: R2,7bn
Lubricants: R110m
Labour costs: R4bn
Vehicle Financing: R4,2bn.

3) SANTACO had intended to enter the aviation space in 2015 and raised R200m.

They wanted to use the R200m to to operate at least two aircraft.

Flights would've been operated initially by Air Aquarius, who would supply two 120-seater aircraft, crew and aviation licences.

SANTACO read the below statement from Boeing and went ahead with.

"Starting an airline is tough. Running a profitable airline is even tougher. From startup airlines to established industry leaders, the process involves constant learning and adaptation.” – Boeing

SAA doesn't want Mango Airlines anymore and Mango is on sale together with its debt pile of R3bn.

Assuming R3bn worth of debt before you even start flying is suicidal as aviation is capital intensive.

SANTACO's members not SANTACO do have money, but need to pick their "routes"

Remember Mango currently only has 2 aircrafts all leased and owned by Macquarie.

Mango has other direct and indirect costs such as;
Fuel,
Salaries,
Landing costs,
Ground handling fees
Taxes

Mango is being sold for R280m but only has a spare engine with R3bn worth of debt.

Budget (low-cost) airlines use ⬇️ strategies to cut costs:

Fuel hedging: "locking in" current fuel price.

1-type-aircraft fleet: cuts maintenance costs.

Short-haul flights - Short distance flights mean that a large number of flights can be fit into the schedule et al.

Someone asked, why doesn't SANTACO work on getting their own airline off the ground.

I stated previously that airlines are capital intensive.

There are so many costs one needs to incur prior to even flying such as;

1) One need to obtain an air service licence, either for domestic routes, international routes, or both depending on the intention of the airline. The Department of Transport hardly gets more than one or two applications per annum.

2) When applying for an air service licence, there is a requirement that an un-flown ticket liability guarantee be put aside to mitigate the risk of an airline exiting the market.

The guarantee is a percentage of the airline’s projected bookings for a year.

3) A new airline must also provide guarantees to service providers such as Air Traffic and Navigation Services (ATNS), ACSA and fuel suppliers. These guarantees together add up to more than R50 million to be paid by the airline even before the first flight is launched.

Ability to manage working capital and/or cash flow is critical to the ability of a new airline

According to Airline Association of Southern Africa, once the airline launches, operational costs are sizeable. A cash flow of +-R200m needed for the day-to-day running of the airline.

The industry made net losses of $52 billion this year, cutting these losses to $12 billion in 2022.

Mango's operating profit for FY19 was R977,508,604 ⬇️ to R462,820,562 in FY20, and
⬇️ further for FY21 to an operating loss of R157,142,929.

Why is this important?

By end of 2021, airlines had receive life support from their governments, totaling $243 billion since the beginning of the pandemic.

Between 2003 and 2020, SAA revived a total of R19.114bn in guarantees and cash injections of R31.243bn from the SA government.

Without govt support, do you have the capacity to cover those above-mentioned costs?

Requirement: you buy Mango for R280m and its R3bn debt.

Bidders needed to submitted proof that they have the capacity to assume the debt. This is what led to some bids following off the table.

Market participants: "if you want to participate in the aviation space, do not go via Mango Airlines. It only has a spare engine that was acquired from SAA with a current book value of R97 million and +-R3bn in debt that you need to assume. Do not go there".

SANTACO:

Feb 2021 saw Greyhound and Unitrans ceasing their operations and the following were auctioned in Sep 2021;

buses,
trailers,
local route permits and
brand assets (trademarks).

Question: do you think SANTACO should've bid for Greyhound and Unitrans to reduce competition?