Samoa Airways' financial distress revealed
The financial troubles facing Samoa Airways have been laid bare in a new report revealing its accumulated losses top $64 million while “the [future] viability of the company” is in question.
The information is contained in the company’s annual report for 2018-19, which was obtained by the Weekend Observer and does not yet account for the impact of the coronavirus on the business.
The former Chief Executive Officer Fauo’o Fatu Tielu expressed concern that the “company is technically bankrupt”, in response to questions from the Samoa Observer.
“The proof is that its equity is a negative figure of $11,258,751 meaning the shareholder, which is the Government of Samoa, owns nothing of the airline but owes that amount of $11,258,751 to creditors, suppliers and lenders to the airline.
“I would be very worried if I [was] one of them.”
Fauo’o is running as an election candidate for the newly formed Fa'atuatua I le Atua Samoa ua Tasi (F.A.S.T.) party.
The annual report for the year ending June 2019 echoes similar concerns about the ongoing viability of the business as a “going concern” (or a company with the resources needed to continue operating).
“The [airline’s] total liabilities exceeded its total assets by $11,258,751. The conditions indicate the existence of material uncertainty, which may cast significant doubt about the company's ability to continue as a going concern,” Jaslyn T. Mariner-Leota, the Assistant Controller and Auditor-General writes in a report written on 28 October 2019.
The document reveals for the first time that the company was leasing its aircraft from Malaysian headquartered Malindo Airlines for the rate of USD$1.47 million per month early last year.
(The lease was extended for another six months to 28 February 2020 at a discounted base rate of $3.28 million tala (USD$1.31) on 1 September 2019).
The “wet lease” with Malindo was terminated in March. The airline says it is in the process of negotiating a new lease with a company based in Holland.
“During the financial year ended 30 June 2019 the company has experienced operating losses of $24.1 [million],” the report states.
That compares to losses of approximately $15 million the year prior.
The company’s “working capital” or the excess of assets over current liabilities also registers a negative figure of $8.9 million, further suggesting the company is in financial trouble.
The company’s troubles are stated plainly in a summary of the businesses’ financial position:
“The viability of the company and its ability to continue as a going concern is dependent upon the company being successful in its continuing efforts in growing its revenue based and/or accessing additional sources of capital and/or selling assets,” the report states.
“As a result there is uncertainty whether the company will continue.”
The report was released just months before the global COVID-19 pandemic brought international air travel all but to a halt entirely and resulted in a closure of Samoa’s borders.
The report does note, however, that the company’s directors are optimistic about the company’s future prospects.
The Samoa Observer sent questions to the Government Press Secretariat and a Samoa Airways spokesman on Thursday and Friday asking if the company was at risk of bankruptcy or no longer operating as a viable business.
Those questions were not met with a reply.
But the company’s Chief Executive Officer, Seiuli Alvin Tuala, is quoted in the report as having an optimistic outlook about the company’s future.
“I am determined to continue working with the Polynesian Team to drive the company to ensure that it will return to profitability with positive results as we move forward to the future,” Seiuli is quoted as saying in the report.
Seiuli and the board highlighted the unusual business conditions in which the airline was operating during the year concerned, following the grounding of the Boeing 737 MAX, shortly before the company was due to take receipt of a model.
That forced the company into a costly and hasty “wet lease” with Malindo.
Seiuli noted in the report to strengthen the balance Sheet a further loan was secured from the Unit Trust of Samoa for $15 million in May 2019.
“The total loan from UTOS is $30 million of which only $20,000,000 has been drawn down and $5 million was then drawn down in July,” the Chief Executive Officer said.
Seiuli further noted the financial performance of Samoa Airways for the Financial Year concerned had not met budgetary expectations due to weak sales.
“In addition, costs have increased due to the global grounding of the 737 MAX, and these increased costs, coupled with weaker than anticipated sales, have led to a difficult trading year for Samoa Airways,” the report notes.
“[The airline’s management], though, has a focused strategy on building revenues to increase sales through its Revenue Recovery Strategy.
“The implementation of this strategy has already seen significant benefits and increases in forward sales. We will continue to increase the sales by focusing on the multiple market segments and working with wholesalers and trade partners backed by preferred agreements with key trade partners.”
Fauo’o, by contrast, pointed to the reports repeated mention of concerns relating to the ability of the business to continue operating.
"There is uncertainty whether the company will continue as a going concern and, therefore, whether it will realise its assets and settle its liability and commitments in the normal course of business,” the report states.
“Growing the company's revenue base will be a huge challenge for [Samoa Airways] because it is relying only on lower airfares,” Fauo’o said.
“Flights reliability will be a more important factor and you cannot achieve that with only one aircraft.”
Fauo’o said that these poor business conditions would be “where the shareholder will step in and help, using whatever means it is available to it including borrowing from other government organisations and will eventually bankrupt our country”.
But the report notes that the company and its directors take a much more optimistic view and presume that the business’ prospects will improve and they make their forecasts on the basis that the company will continue as a viable business into the future.
“The Directors believe that the company will be successful in the above matters and, accordingly, have assessed the prospects of the Company over the medium term in the context of its current operating performance, the principal risks facing the business and its internal business plan for the next ﬁve years together with the Government of Samoa support,” the report said.
“Having considered the above factors, the Directors have concluded that it is appropriate to adopt the going concern basis (presumption of future viability) of accounting in preparing the financial statements.”
The company’s total deficit carried forward is, according to the report, $64,856, 969 million.
“This is the accumulated earnings of the company since its inception. So it is the sum of all net losses and net profits of past years up to the current year,” Fauo’o said.
“When I left the company during the year ending 30 June 2014, this figure stood at $30,992,085. So it has grown by $33,864,884 (or more than 109%) in five years and $24,155,705 or more than 71% of this increase happened only during the current year ending 30 June 2019,” he said.