South African Airways Quarterly Report; with Deputy Minister of Finance

Meeting report

Opening remarks
Mr Mondli Gungubele, Deputy Minister of Finance, said the new South African Airways (SAA) team sought to give an overview of the airline’s current situation. Efforts had been made to determine all factors that could have put SAA in its current position, and strategies going forward had been devised. It was comforting that the tough journey was being walked by people who had what it takes. Also, an oversight forum, convened by himself, had been established where both Treasury and SAA would engage on a regular basis.

Mr Johannes Magwaza, Chairman, SAA Board, appealed to the Committee not to venture into questions that may lead to the airline answering market sensitive information as this may impair its competitiveness. The board had identified various challenges since assuming its roles four months back. He admitted the airline has serious governance problems and a lack of capacity and skills. It found SAA with serious governance issues where the previous boards crossed the line in their duties venturing into day to day running of the company, thereby causing "confusion". The organisational culture was poor and employees did not always act in the best interests of the airline. SAA has had a culture of thinking "big daddy" (government) will bail it out when in trouble. Other issues related to the organisational culture was whereby people felt that someone owed them a living, and had no real understanding of the state of the airline. Previous turnaround strategies had potential but were not implemented due to a lack of capacity at an executive level. Unless the capital structure is urgently reviewed, the debt burden would continue to undermine turnaround efforts. He added that the airline was heading on the route of profitability. The airline has a solid board which fully understands the challenges, as does the chief executive. SAA was a good business but it needed hard work. The turnaround strategy is a j-curve which needed to go down before it moves back up. He added that the negative publicity was taken seriously but would not steer away the board from doing what is right. SAA would not allow negative publicity to deter them from navigating turbulent times. He pleaded for South Africans and the Deputy Minister of Finance to give SAA more time.

The Chairperson welcomed the remarks and said the Committee would get an opinion from the Parliamentary Legal Unit on how sensitive information could be managed. Parliament had a right to know but, in the same vein, there were also provisions almost bordering on the Official Secrets Act. This balance had to be properly managed. The Committee would explore the possibility of having a closed meeting to engage on the market sensitive information.

SAA quarterly report presentation
Mr Vuyani Jarana, CEO, SAA, said the airline plays an important role in the aviation market and the broader South African economy. SAA generated R31 billion worth of revenue in 2017, had 10 071 people under its employ, flew 64 aircrafts and contributed 0.3% to the country’s gross domestic product. In recent years SAA has experienced management turbulence, deteriorating results and increasing debt levels. A number of problems were inherited by the airline's new board and management, and these issues pose a challenge to its recovery path. Factors leading to underperformance included: lack of coherent, integrated strategies; overt focus on cost reduction without adequately addressing operating model constraints; limited commercial and business skills to drive revenue growth; reduced customer focus; inability to attract and retain best talent in the market; poor implementation driven by a lack of communication; and instability of management and breakdown of culture. Notably, the inability of management to implement integrated and coherent strategies has seen SAA significantly losing its market share to Gulf airlines such as Emirates, Turkish, and Qatar.

A number of quick wins had recently been implemented to arrest immediate losses and start to turn around performance. The measures entailed capacity redistribution and route optimisation such that unprofitable routes in West Africa, to London Heathrow and domestic transfers to Mango had been reviewed. While British Airways and Emirates were adding more flights on the London route, SAA was disadvantaged by its Star Alliance partnership and needed to study its chosen model and grow passenger numbers on that route. Virgin and British Airways were increasing Johannesburg to London flights because they have hubs in Europe. Overall, the adjustment of SAA schedule was geared towards increasing business and premium economy traffic, and reducing staff costs. SAA faces a number of liquidity challenges. As a form of mitigation and remedial action, the airline was in discussions with the shareholder on government guarantees, liquidity improvement and management, and freeing up blocked and restricted cash. SAA had also asked government to intervene to recoup cash locked in Angola and Zimbabwe.

Mr Jarana emphasised the need for a complete overhaul of SAA’s operating model and structure, to build a fit for the future airline capable of operating on a financially sustainable basis. SAA’s current operating model required a complete overhaul to bring greater profit and loss accountability and place customer experience at the centre of all it does. Consequently, an operating model had been developed and approved by the Board. Services of an expert organisational design firm would be procured to support SAA executive to design a fit-for-the future airline based on the approved operating model. The successful firm will design an optimal organisational structure for SAA and support management with related processes. In addition to filling of key executive roles, there is a need to reinforce them with capacity to be able to implement the strategy. The airline would be making temporary appointments at the executive level in the coming weeks to boost its skills capacity.

Ms Nona Sonjani, Acting CFO, SAA, highlighted the airline’s financial position. Revenue for the nine months to end-December was R22.2 billion; 4% lower than the budgeted R23.3 billion. Operating costs of R23.8 billion were marginally higher than the previous period. Passenger numbers declined over the nine-month period and the average fare was lower due to increased competition and negative sentiment. International sales had declined by 9% (R816 million), regional sales by 2% (R91 million) and domestic sales by 16% (R617 million). However, Mango and the cargo operations had produced a positive result. The results included the effect of the strengthening of the rand‚ which added R578 million to costs. Maintenance costs were 19% (R580 million) above budget‚ energy costs were 3% (R173 million) above budget and labour costs 2% (R79 million) above budget.
The airline made a R3.7 billion loss during the year under review‚ 71% higher than the budgeted R2.2 billion loss. This was driven by lower revenue and higher operating costs due mainly to higher fuel costs. Year-to-date costs were R561 million above budget. Also, the airline was forecasting a loss of R4.8 billion for 2017-18 as well as in the 2018-19 financial year but sees a sharp improvement in the 2019-20 financial year as the effects of its long-term turnaround strategy kick in.

Mr Jarana said the three-year recovery plan was expected to see SAA yielding profits in three years’ time. If plans were adhered to SAA should break even by 2020 and foresees a return to profitability in 2021. For now, the biggest risk was how quickly to get skills at SAA to implement its strategy. Measures included engaging labour around state of the airline and possible restructuring and renegotiating terms with key suppliers.

Mr Jarana gave an update on various investigations commissioned by the previous board. The new board had finalised, approved the reports and handed them over to management to address. The CEO of SAA Technical, and the chief financial officer had been suspended pending investigations. A law firm has been retained to support management in handling all these investigations in a fair and transparent manner. He pointed out that the annual general meeting was to be held on March 29 and the financial report would be tabled in Parliament in April.

Discussion
Mr F Shivambu (EFF) welcomed the suspension of CEO of SAA Technical, Mr Musa Zwane, and the chief financial officer, Ms Phumeza Nhantsi. He asked about the progress in roping in a strategic equity partner. SAA should be transformed into a profitable business and a strategic partner could get a stake of no more than 15%. He wanted to know the international benchmark for ratio of worker to aircraft as SAA has 64 aircrafts and 10 071 employees, making it an average 157 employees per aircraft. He was not convinced that rationalisation of SAA routes would lead to cost cutting. Also, government was not consistent in terms of what was to be done to turnaround SAA. Treasury should present a clear strategy as to how SAA could be turned into a profitable state-owned enterprise.

Mr A Lees (DA) said the only way to help and save jobs in SAA was to privatise the airline, as it is in an unofficial "business rescue mode". Hard decisions had to be taken. The only thing that could save SAA was further guarantees, people willing to lend or a bailout. He was not sure how this was going to pan out. Also, if the Committee was to do its job effectively, it had to get the necessary information. He asked for an indication as to what had triggered the suspension of the two aforesaid executives on 15 March.

Mr N Kwankwa (UDM) said SAA’s presentation was more comprehensive than before and this gave confidence. The previous board's presentations were thin and embarrassing. He commented that the rationalisation of routes had to be looked into from a more holistic perspective. Also, the quality of service on board SAA flights had to be bettered. Losing market to Gulf airlines could largely be attributed to the quality of services being offered. He suggested a closed meeting to dissect sensitive information.

Ms G Ngwenya (DA) was interested in finding out the key assumptions underpinning the latest turnaround strategy along with the risk profile of the assumptions – the likelihood of risks materialising was important to know. 

The Chairperson believed it was a severe indictment of government and the ANC that challenges at SAA were allowed to fester unabated. He asked what lessons had government learnt from these recent experiences. What was government going to do to prevent this from happening again? What had prevailed for the past years was completely unacceptable. It was important to remember accountability was to Parliament. Also, the Committee believed SAA should go back to where it belonged: to the Portfolio Committee on Public Enterprises. He pointed out the need for clear motivations as to why some routes were being dropped when there was need for more interconnectivity within the African continent and beyond. There was need to strike a balance and the general consensus was that SAA should not be privatised. Also, parliamentarians must commit as far as possible to fly with SAA and Mango. He agreed that the board and management’s task was herculean. Members might have to consider having the first two hours of its next meeting with SAA open and then the rest of the meeting closed. The Committee would have to apply to the Speaker before then. 
           
Mr Magwaza appreciated Members’ comments. He expressed views that there is a business case for SAA. SAA is a solid business. The right things being done, the right capital structure being there, and tackling the problems, the organisation has a good future going forward. SAA had a serious problem of governance. Previously, there was a lack of cohesion at board level that undermined the implementation of strategy. In the current conjuncture, there was a serious and dangerous lack of capacity at the executive and leadership level at SAA. This has delayed the implementation of strategies. He added that there was a lack of critical skills in the form of commercial or supply chain management skills, which put SAA on a route to disaster. Revenue management at the airline is particularly poor and the airline’s bad public image is also affecting its ability to attract much-needed critical skills. On the recent suspensions, he assured that the matters were being dealt with. However, he could not speak on the suspended SAA executives or why they have been suspended as there was going to be a proper process where they will be found guilty or not-guilty. He would not want to pre-empt the outcome of the process.
 
Mr Martin Kingston, SAA Board Member, said there was no way investors could buy into a black hole thus prospects of a strategic equity partner would only be considered when SAA starts operating on a sustainable and viable basis. Until then it would have to exist by continual engagements with its current lenders and suppliers as well as government. The current board and management was still paying for the sins of its forbearers and SAA was haemorrhaging customers at the moment, and the worst thing that could be done would be to alienate the existing customers. Ultimately, constraints had to be removed to ensure viability and profitability.

Mr Jarana said SAA needed to be rebased as an attractive employer, given its poor reputation in the public. He explained that it was difficult to attract top skills at the airline which was why the executive committee was populated with acting people. Interim executives had been appointed as the search for permanent employees continues. The task at SAA required people who have “seen the movie” and do not still need to learn. Appointments should be done well, and done once, to avoid restructuring in the future. Negative sentiment has also been the reason behind the airline’s underperformance in the past year. The negative public sentiment surrounding SAA was making it increasingly difficult to obtain credit and sell tickets. Every time South Africans say publicly that SAA was dying it had a drag effect. It takes SAA three to six months before it could convince agents that it is still standing and can operate. He added that SAA’s operating model will start being "commercial" with profits being "on top of the head" without compromising other aspects of the business. The banks have closed off its credit lines, but working capital is needed to effect a turnaround. The board and management was working around the clock to build a strategy to make the business profitable and the banks interested again. Also, the need to ensure competitive standards in-flight was well-understood.

The Chairperson said there was no reason why, given the pool of resources in South Africa, and in cooperation with everyone, SAA challenges could not be addressed. He appreciated the honesty and openness with which the SAA management and executive articulated issues. He wished them well going forward.

The meeting was adjourned.