SAA’s R85 Million Lesson in Paying for Aircraft That Couldn’t Fly

By Garth Calitz

South African Airways has been handed another uncomfortable reminder that decisions made years ago have a rather irritating habit of coming back to collect the bill. The Special Tribunal has declared unlawful SAA’s decision to extend an approximately R85 million dry-lease agreement with local aviation company Flyfofa Airways, ordering that any profit or unjustified enrichment arising from the arrangement be recovered, together with interest.

The case is particularly interesting because the aircraft covered by the extension was out of service for part, if not all, of the contract period, yet SAA continued making payments. For those of us who operate in the real world of aviation, where an aircraft sitting on the ground generally represents a problem rather than a productive asset, this is where the story becomes rather difficult to explain. Apparently, in the wonderful world of state-owned aviation, an aircraft does not necessarily have to fly in order to remain financially airborne.

The origins of the dispute go back roughly a decade, when SAA moved to outsource its domestic cargo operation to Flyfofa Airways. According to the Special Investigating Unit (SIU), SAA proceeded with the arrangement despite internal assessments reportedly identifying Flyfofa as a high-risk supplier because of poor solvency and financial losses. In November 2016, SAA signed a three-year agreement with Flyfofa to dry-lease two Boeing cargo aircraft, with the contract running until 2019. That in itself was not particularly unusual; airlines lease aircraft all the time and cargo operations can be commercially viable when properly structured.

The interesting part came in July 2019, when SAA extended the arrangement for another 36 months for one of the aircraft. There was, however, a rather substantial complication: the aircraft was out of service and remained grounded for most of the extension period. SAA nevertheless continued paying Flyfofa. In the real world, when an aircraft is unavailable to perform the contracted operation, somebody usually starts asking fairly uncomfortable questions about availability, substitution, maintenance responsibility and value for money. In this case, those questions eventually arrived at the Special Tribunal.

The Tribunal found that the extension was concluded without the required procurement process and without the necessary National Treasury approval. This was not simply a case of somebody forgetting to attach the correct form to an otherwise legitimate contract. The Tribunal found that the decision breached Section 217(1) of the Constitution, which requires public procurement to be fair, equitable, transparent, competitive and cost-effective.

The decision was also not supported by a properly recorded, approved and reported deviation in accordance with Treasury Regulation 16A.6 and National Treasury Instruction Note 3 of 2016/17. The result was that the Tribunal declared the decision unlawful and set it aside on grounds of legality. In other words, the procurement rules were not merely bent around the aircraft; they appear to have been left standing somewhere on the apron while the contract taxied away without them.

The Tribunal has also gone beyond simply declaring the contract extension unlawful. Flyfofa has been ordered to provide the SIU with detailed information covering the costs and revenue associated with the aircraft during the period in which it was grounded. The company must also disclose whether a substitute aircraft was provided or whether alternative services were supplied during the affected period. Flyfofa has 30 days from 11 September to provide the information to the SIU's attorneys.

Once the financial position has been established, the Tribunal has ordered Flyfofa to repay any profit or unjustified enrichment arising from the unlawful arrangement, with the amount attracting 11% interest from the date of the order. It is important to distinguish this from saying that Flyfofa has automatically been ordered to repay the entire R85 million. The R85 million relates to the value of the agreement, while the Tribunal's order concerns the profit or unjustified enrichment arising from the unlawful extension. Exactly how much will ultimately have to be recovered therefore remains to be determined, but the interest clock is already running.

Special Tribunal Judge Chantel Fortuin was particularly clear about the wider consequences of the decisions taken by the SAA Board. “This conduct has a cost, and it is not only to the SAA alone. This is a cost to the public,” she said. It is a fairly simple sentence, but one that probably deserves to be printed in very large letters and attached to the wall of every state-owned enterprise procurement department. SAA's money does not appear from some enormous ATM hidden underneath Airways Park; ultimately, losses at a state-owned enterprise have consequences for the public purse.

The Tribunal has consequently directed that its judgment be sent to the Minister responsible for SAA, as well as the current SAA directors and Board Chairperson, so that action against those responsible for the 2019 contract extension can be considered. Under the Public Finance Management Act, action may be taken in relation to financial misconduct. The Companies Act provides mechanisms for directors to be declared delinquent or placed on probation, while matters involving evidence of corruption or criminal conduct could potentially be referred to the National Prosecuting Authority or the Hawks. The suitability of directors involved in the decision may also be reviewed.

The Minister has been ordered to file a report with the Registrar of the Tribunal within 90 days of the order, confirming what steps have been taken and, where applicable, the outcome of those steps. Which means that, several years after the aircraft was supposed to be doing something useful, the paperwork may finally be getting signed out. Whether the resulting accountability will travel at anything resembling the speed of a Boeing freighter remains to be seen.

The Flyfofa matter forms part of a much wider SIU investigation into historic procurement and governance at SAA. The investigation was authorised by President Cyril Ramaphosa under Proclamation R2 of 2020 and covers allegations concerning the affairs of SAA, including procurement and contracting involving Airbus aircraft and maintenance, repair and overhaul services. The Flyfofa case therefore provides another glimpse into the procurement and governance problems surrounding SAA during one of the most troubled periods in the airline's history. For the current SAA management, much of this is history. Unfortunately, history has a nasty habit of arriving with an invoice attached, and in this particular case the invoice apparently comes with 11% interest.

There is also a broader aviation lesson buried underneath all the legal terminology. Aircraft leasing is a sophisticated commercial business, and an aircraft can legitimately remain under lease while undergoing heavy maintenance, awaiting parts or being temporarily unavailable for operational reasons. A lease does not automatically become improper simply because an aircraft is on the ground. The important questions are what the contract requires, who carries the risk, what alternative capacity is available and whether the operator continues receiving the value for which it is paying. In this case, however, the Tribunal has specifically required information about the aircraft's grounded period, the costs and revenues associated with it and whether substitute aircraft or alternative services were provided. That information should provide a much clearer picture of what SAA actually received in return for the payments it made.

The case is another reminder that aircraft economics and public-sector procurement do not exist in separate universes. An airline has to make rapid operational decisions because aircraft become unavailable, maintenance programmes change, schedules move and cargo commitments still have to be met. But commercial urgency does not remove the requirement for proper procurement procedures when public money is involved. If a deviation from the normal process is genuinely necessary, it has to be properly justified, documented, authorised and reported. Otherwise, what may look like an operational shortcut at the time can become a very expensive legal detour several years later.

The irony is that the aviation industry itself is usually rather unforgiving about serviceability. An aircraft that cannot fly is not quietly ignored. Engineers want to know why it is grounded, maintenance planners want to know when it will return to service, operations departments want replacement capacity and finance departments want to know why an asset is not earning its keep. The same basic logic should apply to public procurement. If an organisation is paying for an aircraft, it should be able to explain what operational value that aircraft is providing. If the aircraft is grounded, it should be able to explain why the payments continue and what alternative arrangements are in place. And if the contract itself was concluded without the required procurement approvals, the questions become considerably more serious.

The Special Tribunal has now effectively put the brakes on the Flyfofa extension and sent the matter back for a financial reckoning. The next step is to determine precisely how much was unjustifiably gained and how much can be recovered. There may also be further consequences for individuals involved in the decision, depending on the findings of the relevant authorities. For SAA, meanwhile, the case is another reminder that rebuilding an airline is not simply about acquiring aircraft, opening routes and filling seats. It also involves cleaning up the legacy of decisions made when governance and financial discipline were apparently flying at rather different altitudes.

And perhaps that is the most appropriate conclusion to this particular episode. In commercial aviation, an aircraft sitting on the ground is usually called an asset awaiting maintenance. In this case, it appears to have become something rather more exotic: a revenue-generating stationary object. The aircraft may have been grounded, but the payments apparently weren't. Now the Tribunal has grounded the contract itself, and the taxpayer gets to wait and see how much fuel was burned on the way to discovering that perhaps somebody should have asked why the aircraft wasn't flying in the first place.