| Thu 27 Feb 2003, 12:18 | | Sun Air's new lease on life |
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In a bid to replace the hefty funding requirements of South Africa’s ‘executive airline’ with virtually risk-free annuity income for the next three years, small cap Millionair Charter has agreed to write-off R24m and sell Sun Air for the princely sum of R10.
Two weeks ago, Millionair announced that it was to buy the 50% of Sun Air it did not already own from joint venture partner, AirQuarius Air Charter, at no cost to Millionair. Today (Monday 17 February) the company has announced a change of plans, saying it will sell its entire stake in Sun Air to a Pretoria based risk management company, CIRC, for just R10. In return, Millionair will acquire a 10% stake in a newly created subsidiary of CIRC, which will house Sun Air, for R1 and will write off R24m relating to its Sun Air investment.
In its interim results announcement for the six months to August last year, Millionair claimed that Sun Air was trading ahead of budget and was due to break even by the second quarter of this year. Now, however, it appears that Millionair has chosen to cut its losses with the airline, deciding to go back to its leasing and general aviation roots.
The key to the deal is the all-important R74m worth of annuity income they will get from a 3-year lease contract with Sun Air. According to the terms of the deal, the current lease agreement for two specially designed DC-9 aircraft that Sun Air has with Millionair has been extended for the next three years. Thereafter, CIRC will have first option to renew their contract for a further period of five years, and Millionair will also have first right of refusal to lease a third aircraft to CIRC and Sun Air, as well as any further aircraft required thereafter.
Add this to a statement in Monday’s announcement claiming that “it has become impossible for the parties to meet their obligations in terms of funding requirements for Sun Air,” and it makes sense that Million Air would prefer to replace the existing capital requirements with the safer annuity income it can get from the aircraft leasing arrangement. The essence of the deal is embodied in a statement by Millionair CEO, Johan Botha, who said "the agreement with CIRC will allow Millionair to revert to its core business of aircraft charter and leasing, with a substantial assured income from Sun Air."
According to director of CIRC, Len Kirchner, poor management and weak marketing are the main reasons for the airline’s lack of success. That said, CIRC itself brings no expertise to Sun Air in terms of its management skills, but Kirchner says CIRC will be able to turn the business around simply through a substantial increase in its marketing drive, and a consequent improvement in the number of “bums in seats.”
In order to run the business profitably, Kirchner says it is important to get the cash flows right, and that can only be achieved through increasing the number of people using the airline. Sun Air’s previous “suits only” policy hasn’t worked, and CIRC says it will be making a concerted effort to get more people flying on the airline.
Thus, in spite of concerns that CIRC is not bringing much by way of airline expertise to Sun Air, the company also has little to lose. With an investment cost of only R10, CIRC’s main worry is generating enough cash to pay for the airline’s operating costs and existing creditors. Thereafter, provided it can get enough people on the planes, Kirchner says it will be able to make a profit.
CIRC says it has no intention of effecting any changes to the current Sun Air management, staff and infrastructure, and will honour forward ticket sales and travel industry agreements made before the company's acquisition of Sun Air.
