SAA Quarterly Report, with Deputy Minister

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Finance Standing Committee

07 June 2018
Chairperson: Mr Y Carrim (ANC)
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Meeting Summary

The Committee was briefed by the South African Airways (SAA) on its quarter four performance report in the presence of the Deputy Minister.

SAA Board Chairperson said liquidity and going-concern issues still persist. These issues continue to the extent that it was decided that an oversight committee, chaired by the Deputy Minister, should be formed. The oversight committee has had no less than six meetings at which it was looking at the liquidity, the sustainable financial structure of SAA and the process for looking for a strategic equity partner. SAA had serious traction in terms of the implementation of its long-term turnaround strategy, and green shoots were emerging. Despite all the challenges, the business of the airline was strong. Also, the issues raised by the auditor-general in the last financial statements were being addressed. He stressed that safety at SAA was sacrosanct and would not be compromised.

SAA CEO briefed the Committee on the airline's fourth quarter report. The going concern was a major challenge, as is financial stability. The fourth quarter was not a good quarter. The airline reported R1.2 billion more losses, bringing the net loss to R1.8 billion. The success of SAA’s turnaround strategy will come down to funding. SAA also faced revenue losses of R900 million, and rand strength accounted for R419 million of revenue losses. Costs incurred were more than budgeted for at R656 million. The higher costs incurred was attributed to not implementing strategy. At the centre of this issue was the going concern, as well as a lack of capacity: staff with the expertise to implement the strategy. SAA intended to break even by 2021, but much of this depended on strategy implementation and funding for working capital of R12.5 billion. As soon as funding is settled, the success of the strategy would be ensured. The oversight committee, consisting of Treasury officials and SAA board members, was looking at how to optimally combine shareholder capital, strategic equity partner and debt as part of its capital structure. It would also look at how to remove the obstacles to SAA becoming successful. It was envisaged that the work of the oversight committee would be finalised by September this year. He stressed that SAA needed funding for working capital in order to break even in 2021 as planned. The uncertainty over SAA's going-concern status had had a negative impact on its standing in the market. The "green shoots" mentioned by the board chairperson were coming through in the significant improvement in gross margins compared with last year. Average fares were also increasing, which meant SAA would be able to pay for itself on its domestic routes, which historically was not the case. There were also big improvements on the regional routes but there had not been enough rationalisation of the international routes for the results to have come through yet. Furthermore, talks were under way with trade unions on the rationalisation of the airline, with an emphasis on job preservation through outsourcing to soften the blow. However, the decision on rationalisation would depend on the finalisation of a clear operational structure that would determine the staff numbers required. Unless the cost base is addressed, SAA would not be successful.

The Deputy Minister of Finance said the going concern issue was paramount. Government was highly seized with merging its three airlines but there was a lot at stake regarding staff, the leasing of aircraft among other issues. However, at this stage, the primary objective was stabilisation of SAA in particular. Government was open to private participation in SOEs, instances of which would be individually assessed. The oversight committee was also looking into the airline’s liquidity challenges and the need for recapitalisation to fund its turnaround strategy. There was a big case for retaining the airline, and this had to be emphasised. He expressed commitment in ensuring the full implementation of the turnaround strategy.

Members said the new management and board inspired confidence. They asked for confirmation whether government policy was to partly privatise SAA. If that was the intention, when will it happen? Will SAA require a further bailout this year? If it was the case, how much and to what extent was government prepared to bail it out? They made reference to a decision by Cabinet that would see the integration of SA Express and SAA. It should be handled in a proper manner. It is a central issue which ought to be looked into given that the Committee had also expressed a view that SAA should move to back to the Portfolio Committee on Public Enterprises. The Ministries of Finance and Public Enterprises would have to appear before Parliament to brief the committees on the modalities and timelines for the consolidation. Political leadership must also give guidance.

Lastly, Mr Shivambu expressed his objection to a statement issued by the Committee following his remarks to Mr Momoniat. There was nothing wrong with him calling out the centrality of African leadership. He demanded that the Chairperson apologise to him for issuing statement. He denied questioning presence of Mr Momoniat based on race. The statement was ‘absolute nonsense’ as it implied he said someone could not speak before the Committee on the basis of their race. He submitted that the Committee withdraw the statement and apologise.

The Committee resolved to issue a new statement, which would reaffirm the previous statement. It would, however, be amended to note that the other reason for Mr Shivambu objecting to Momoniat’s presence was that he allegedly undermined African leadership.

Meeting report

The Chairperson welcomed everyone and indicated that permission had been obtained from the Office of the Speaker to close the meeting if SAA wanted to discuss market-sensitive issues. However, the more transparency, the better. Only in exceptional circumstances would meetings be held in private.

Opening remarks by South African Airways (SAA) Board Chairperson

Mr Johannes Magwaza, SAA Board Chairperson, acknowledged the position of the Committee in relation to dealing with market sensitive information. Liquidity and going-concern issues still persist. These issues continue to the extent that it was decided that an oversight committee, chaired by the Deputy Minister, should be formed. The oversight committee has had no less than six meetings at which it was looking at the liquidity, the sustainable financial structure of SAA and the process for looking for a strategic equity partner. SAA had serious traction in terms of the implementation of its long-term turnaround strategy, and green shoots were emerging. Despite all the challenges, the business of the airline was strong. Also, the issues raised by the Auditor-General in the last financial statements were being addressed. He stressed that safety at SAA was sacrosanct and would not be compromised.

SAA presentation

Mr Vuyani Jarana, CEO, SAA, briefed the Committee on the airline's fourth quarter report. The going concern was a major challenge, as is financial stability. The fourth quarter was not a good quarter. The airline reported R1.2 billion more losses, bringing the net loss to R1.8 billion. The success of SAA’s turnaround strategy will come down to funding. SAA also faced revenue losses of R900 million, and rand strength accounted for R419 million of revenue losses. Costs incurred were more than budgeted for at R656 million. The higher costs incurred was attributed to not implementing strategy. At the centre of this issue was the going concern, as well as a lack of capacity: staff with the expertise to implement the strategy. SAA intended to break even by 2021, but much of this depended on strategy implementation and funding for working capital of R12.5 billion. As soon as funding is settled, the success of the strategy would be ensured. If it is delayed, even with the best resolve to execute the strategy, the market will move in the opposite way. He understood the importance of transparency, in terms of reports submitted to the Committee, but media reports that follow may have the impact of undermining strategy in an unprecedented way because of market sentiment. Market sentiment is very critical.

Mr Jarana said the oversight committee, consisting of Treasury officials and SAA board members, was looking at how to optimally combine shareholder capital, strategic equity partner and debt as part of its capital structure. It would also look at how to remove the obstacles to SAA becoming successful. It was envisaged that the work of the oversight committee would be finalised by September this year. He stressed that SAA needed funding for working capital in order to break even in 2021 as planned. The uncertainty over SAA's going-concern status had had a negative impact on its standing in the market. The "green shoots" mentioned by the board chairperson were coming through in the significant improvement in gross margins compared with last year. Average fares were also increasing, which meant SAA would be able to pay for itself on its domestic routes, which historically was not the case. There were also big improvements on the regional routes but there had not been enough rationalisation of the international routes for the results to have come through yet. Furthermore, talks were under way with trade unions on the rationalisation of the airline, with an emphasis on job preservation through outsourcing to soften the blow. However, the decision on rationalisation would depend on the finalisation of a clear operational structure that would determine the staff numbers required. Unless the cost base is addressed, SAA would not be successful.

Discussion

The Chairperson said the Committee believed SAA should be moved back to the Portfolio Committee on Public Enterprises, where it belongs. The challenges at SAA were mainly about strategy and did require relevant expertise. He made reference to talks about the rationalisation of SAA and SA Express. How would that be possible when oversight on the two was conducted by separate parliamentary committees? He asked the Deputy Minister to get back to the Committee after conferring with the Minister on this.

Mr D Maynier (DA) said the new management and board inspired confidence. He asked for confirmation whether government policy was to partly privatise SAA. If that was the intention, when will it happen? Will SAA require a further bailout this year? If it was the case, how much and to what extent was government prepared to bail it out? Did the Deputy Minister approve the commitment letter, and was it approved by Cabinet? Does the base case, as part of the turnaround strategy, have to be revised given the changes in the economic environment? Does Treasury have a contingency plan in the event that SAA is put into business rescue? He asked for a breakdown of remuneration packages of the new personnel at SAA.

Ms T Tobias (ANC) was impressed by the presentation. She asked for a comparison between actual net losses in the current year and that of the previous year.

Mr W Wessels (FF+) noted a positive in the quarterly report; an increase in cargo volumes. Was it that the airline was more profitable on the cargo rather than passenger side of its business? Was it a service or reliability problem? Was the reliability of flights being addressed? On bailouts, the problem was that a lot of the issues came up over long periods and the position was not significantly improving.

Mr N Nhleko (ANC) asked what informed the variances on the key assumptions and initiatives (page 9 of the presentation). He believed the Committee should evaluate the extent and level of performance by SAA whereas the issue of bailouts be left to Treasury.

The Chairperson said the quality of the presentation was a huge leap forward. The presentation was clear and a breath of fresh air. It was not just about what SAA says but also about the confidence it inspires in Members. He asked what was holding up the disposal of wide body aircrafts. Why would the oversight forum lapse so soon, in September? Was there some specific reason for that? As long as the majority stake at SAA is owned by the State, it would remain a state-owned enterprise (SOE) even if strategic equity partners are roped in. Although the majority still maintain that SAA should remain as an SOE, this did not mean it should continue draining the fiscus. The airline had to deliver on both developmental and commercial objectives. It is a difficult call but it had to be done. Also, was anyone willing to acquire equity at this stage given the challenges confronting the airline?

Mr F Shivambu (EFF) made reference to a decision by Cabinet that would see the integration of SA Express and SAA. It should be handled in a proper manner. It is a central issue which ought to be looked into given that the Committee had also expressed a view that SAA should move back to the Portfolio Committee on Public Enterprises. The Ministries of Finance and Public Enterprises would have to appear before Parliament to brief the committees on the modalities and timelines for the consolidation. Political leadership must also give guidance.

Mr Jarana, in response, reiterated that the corporate plan submitted to Treasury showed there was historic debt of R9.2 billion which must be managed, in addition to R12.5 billion working capital which was required. Given certain assumptions, SAA could break even in three years' time. However, as SAA stood today, its revenue could not cover the cost gap. The airline was not in a position to pay off its debt – the principal and interest amounts. The airline was relying on funding, through either a shareholder capital call, or a strategic equity partner contribution. He added that SAA can be fixed, if the right skills were brought in, but it needs funding.

Responding to the question about business rescue as an option for the airline, he likened it to boxing – where in round six of 12 rounds, the boxer has to stop for a five-second break. This would be an opportunity to tell creditors to hold off, and get a business rescue practitioner to come in and draw up a plan and strategy. This plan would still require funding. He doubted there was going to be a business practitioner who comes tomorrow to provide a new plan which was different to what the board and management had done. Furthermore, the airline had already spoken to creditors and lenders to extend payment deadlines. An important thing to realise was that SAA is backed by government guarantee, if business rescue is implemented, that could trigger the release of the guarantee. This would have consequences not only for SAA but the country. In addition, global markets do not consider business rescue favourably.

Mr Jarana also spoke on the lack of leadership stability at the airline, and said it was looking for permanent executives – people willing to leave their comfortable jobs to address the challenges in turning around the airline. SAA will not achieve success unless it has competent management in all aspects of the business. The airline needs to be capacitated as it is depleted of skills. He lamented that those with aviation skills had left to work for other airlines. Management was trying to source skills locally and globally to transform the airline and bring SAA back to its feet. The SAA brand, currently, was not as marketable as it was in the past. People see risks in working for SAA. He added that it takes a lot of encouragement to persuade people to join. He expressed bullishness about SAA, and commitment to execute the turnaround strategy.

Mr Jarana said the oversight committee was looking at how to optimally combine shareholder capital, a strategic equity partner and debt as part of SAA’s capital structure. It is envisaged that the work of the oversight committee will be finalised by September or October 2018. There were two schools of thought about the introduction of a strategic equity partner into SAA. The one was to build up the airline until it was positioned for growth and attractive to investors. The second was to acknowledge that the airline was under pressure and needed capital, and that it should go to the market to see if there was a suitor willing to go through the process of transforming and cleaning up the business. The board and management would have to walk through the processes and find the optimal way. The danger of going too quickly was when there is no uptake- then it could be catastrophic and damaging in the long term. However, SAA does not have the luxury of time, so it would probably go ahead and test the market based on the guidance from the shareholder. He believed the government as shareholder would make pronouncements soon on a roadmap for the introduction of strategic equity partners.

Mr Magwaza said the SAA board was far down the line in its readiness to engage with Treasury through the oversight committee on the different modalities that a strategic equity partner could be introduced. The State would have to decide how much of SAA it was prepared to sell. A question that would have to be settled was whether it would be possible to sell more than 25% of SOEs to foreign players, and how this would affect the process of securing a strategic equity partner. The board was not in support of selling off the airline as it believed there is a role that SAA can play and should play in the economy of South Africa.

Mr Magwaza was reluctant to reveal salaries of top executives as requested by Mr Maynier, owing to market sensitivity. Employment contracts are signed by individuals with the express commitment that they would not be revealed in public.

Mr Maynier disagreed and noted that information on remuneration packages was disclosed in annual reports anyway.

The Chairperson ruled that lawyers will engage on whether remuneration packages for SAA executives could be shared with the Committee.

Mr Mondli Gungubele, Deputy Minister of Finance, said the going concern issue was paramount. Government was highly seized with merging its three airlines but there was a lot at stake regarding staff, the leasing of aircraft among other issues. However, at this stage, the primary objective was stabilisation of SAA in particular. Government was open to private participation in SOEs, instances of which would be individually assessed. The oversight committee was also looking into the airline’s liquidity challenges and the need for recapitalisation to fund its turnaround strategy. There was a big case for retaining the airline, and this had to be emphasised. He expressed commitment in ensuring the full implementation of the turnaround strategy.

Objections by Mr Shivambu

Mr Shivambu expressed his objection to a statement issued by the Committee following his remarks to Mr Momoniat. There was nothing wrong with him calling out the centrality of African leadership. He demanded that the Chairperson apologise to him for issuing statement. He denied questioning presence of Mr Momoniat based on race. He added the Committee's statement was "nonsensical". The statement was ‘absolute nonsense’ as it implied he said someone could not speak before the Committee on the basis of their race. He submitted that the Committee withdraw the statement and apologise. He never said anywhere that the guy must not speak because he is Indian. There was nothing wrong with critiquing the undermining of African leadership.

The Chairperson noted that nowhere in the statement did the Committee indicate Mr Shivambu would not let anyone speak because he or she were Indian. That would mean Pravin Gordhan could not speak because he is Indian. No one said that.

Ms Tobias said the Committee could not remain silent on personal attacks on people. It must follow the rules of Parliament. Also, the Committee did not want anyone, whether ‘white, green or blue’ to undermine African leadership. She questioned Mr Shivambu for bringing racial classification into the meeting. She also requested Mr Shivambu to bring evidence to support his assertion that Mr Momoniat was undermining African leadership.

Mr Shivambu believed he had the right to freedom of expression. The Committee was jumping to conclusions that he racially profiled. He maintained it was a fact that Mr Momoniat has been undermining leadership and operating in a silo. The Director-General and other officials had confirmed to him that on certain issues Mr Momoniat does not represent the view of Treasury. He also wanted Treasury to hold a briefing on its demographic representation at management level.

The Chairperson said there was no malice intended. He had received seven requests for interviews following the incident, to which he was not comfortable to do. He answered one call and did a short interview. He told Mr Shivambu to report him to the House, because this was an attack on his integrity. He would resign if recordings of the incident show that he misrepresented the Committee in the statement and in interviews.

Mr Maynier said Mr Shivambu’s statements were grossly misplaced and went against his oath of non-racialism.

Ms Tobias said Mr Maynier had no moral authority on this issue and should thus not comment on it.

Ms D Mahlangu (ANC) agreed.

The Chairperson said the Committee could not withdraw the statement but could qualify it. He proposed that the Committee issue a new statement, which would reaffirm the previous statement. It would, however, be amended to note that the other reason for Mr Shivambu objecting to Momoniat’s presence was that he allegedly undermined African leadership.

Members agreed.

The meeting was adjourned.

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