South African Airways Restructuring for 2000 & beyond: briefing

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Public Enterprises

08 February 2000
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Meeting report

PORTFOLIO COMMITTEE ON PUBLIC ENTERPRISES
8 February 2000
SAA RESTRUCTURING FOR 2000 and BEYOND

Chairperson: Mr S Belot (ANC)

SUMMARY
The committee listened to the presentation of Transnet MD Saki Makhozoma and SAA CEO Coleman Andrews concerning the restructuring of South African Airways focusing on the progress made since Andrews assumed his position in 1998, and future plans.

MINUTES
Mr Saki Makozoma made a few introductory comments, briefly noting the history of Transnet, the recent change in focus, emphasizing "airline specific" management as opposed to the prior "cross-pollination" which saw policies and personnel from other Transnet functions (such as rail and dock operations) influencing the running of South African Airways. He also noted that past practices had led to various policy anomalies, for example, the application of certain labor rules to airline operations, which may not be suitable in an industry which operates in the context of global competition.

Mr Coleman Andrews prefaced his presentation by noting that it would identify what was wrong with SAA when he took over 18 months ago, what the situation is currently, and where he hoped to take the company in future, adding that he thought that the airline had progressed 30-35% of the way, but that it would take another 2-3 years to reach the target of being one of the top airlines in the world. The presentation was as follows:

SAA "Fatal Flaws"—1998
I.Strategy
--Flawed revenue management model
--Uncompetitive pricing
--Flawed route network
--No fleet equipment strategy
--Limited global alliances

II.Operations
--Excessive domestic costs
--Low crew productivity (more working hours needed)
--Uneven service (bad on time record, though good safety levels)

III.Organization and Culture
--Inaction
--Defensive
--Self serving
--Inward focus
--Pockets of corruption

Solutions: New Management's "Programme for Winning"
I.Improved Customer Service
Emphasis on on-time performance has been rewarded: as recognized last year by SAA being one of seven finalists for OAG's "Airline of the Year" Award, and being highly rated by Conde Nast traveller magazine in both the "long haul" and "leisure" categories.

II.Powerful Alliances
Previously only 70 international destinations were served via partners, but with new "starburst"/"hub and spoke" system with new partners, including Delta via Atlanta rather than American via Miami, 503 are served. There are also plans to expand the network to open up travel within Africa.

III.Substantial Cost Reductions
Achieved via limited retrenchments, overhead reductions, route elimination, productivity enhancement, and the significant reduction of employee "AWOL" days and internal corruption (which was identified as a major problem, and one that while reduced remains a point of emphasis).

HOWEVER, current increased fuel costs of approx. R500M, and costs of complying with the Basic Conditions of Employment Act (approx. R165M) are serious problems. On the latter, Andrews noted that the application of all provisions of the BCEA to an airline operation is unrealisitic and impractical in the context of competitive global industry standards.

IV.Fleet Upgrade
An updated, modern fleet, with more uniformity of equipment (as opposed to the current eclectic array of hardware, which is costly to operate and maintain) will lead to lower costs, and to more productive crew and mechanical staff performance. Both Airbus and Boeing equipment is being considered for future acquisition.

V.Dramatic Revenue Management Gains
VI.New First and Business Class Service
The business traveller is a key to revenue enhancement, and all aspects of service (particularly scheduling and on-time performance) must be geared to meeting this traveller's requirements, and to winning back market share lost through previous poor performance.

SAA's Turnaround Since 1998
In addition to the improvements noted above, Andrews noted that:
I. Passenger counts have averaged a 16% increase, as opposed to an 11% decrease in the prior comparable period.

II.In the first six months of the new team's stewardship, operating margins improved from a R106M deficit to a R101M gain.

III. In June 1998 SAA's equity value was R1.5B, and a year later, after Swissair's purchase of a 20% stake, was R6.9B. This "value creation" under the new management team obviously benefits the SA government, which still owns an 80% stake in SAA.

IV. Even in a difficult market environment, given recent oil price increases to over $28 per barrel (from $9 in 1998), for Financial Year 2000 SAA projects a R573M operating profit, as opposed to a R130M loss for the prior year.

Andrews went on to note that pursuit of the goal of building "a team oriented culture with greater inclusion of previously disadvantaged individuals" continues. This is to be achieved via a combination of:
--Setting an example at the top (senior management, which has been revamped since 1998, is now much more representative, a point stressed by Andrews, along with the need to continue to have senior in-house international airline expertise)
--Learning and applying lessons gleaned from observing, among other things, how other international professional business organizations function
--Training (including from alliance partners, particularly Swissair and Delta, whose receptivity to cooperating in this effort was a major factor in the decisions to form the alliances), including an emphasis on "mentoring"
programs within the company, giving new talent the benefit of others' experience
--Identifying talent from both within SAA and elsewhere in SA
--Retaining such talent once identified and trained

In conclusion Andrews remarked that while there remains much work to be done, the "death spiral" that SAA was in before the new team's arrival has been reversed, and that tangible progress has been made.

Mr Makozoma then noted 5 points for the committee's consideration in making policy affecting SAA:
-- The need to balance an "open skies" policy with "managed capacity" tenets
-- In the latter realm, to look at the benefits of allowing international flights to pick up domestic passengers on local segments, which would result in better asset utilization and cost savings
-- The need to realign the relationship of the airports authority company with SAA to a more symbiotic one, with the Airports Company of South Africa becoming more helpful in facilitating increased traffic rather than a hindrance (for example, with its unreasonable fuel surcharges)
-- The need for a more accommodative policy to facilitate the financing of the revamping of the SAA fleet. This is imperative to the success of the overall plan described by Andrews, and would be aided by the creation of favorable tax mechanisms in the acquisition context, and "a better commercial environment" generally.

He also noted that the committee can help SAA in bringing about realization of the vision of Johannesburg International Airport as a major international hub by working with other committees and at the administrative level. In conclusion he asked that the committee not treat SAA as "government's stepchild."

Comments
The Chair then opened the floor for comments and questions, which included the following:
In response to a question from Mr. Mkhize (ANC), Andrews noted that standardization of the fleet was essential to the running of an efficient, profitable operation. Along with this, there must be increased utilization of the fleet, for example having long haul planes fly 18-21 hours daily rather than spending long periods sitting idle. He also indicated that smaller planes were needed on domestic routes in order to increase operational frequency and efficiency, observing that "shuttle service" between Jo'burg, Cape Town and Durban was an ultimate operational goal.

In reply to a query from Ms Taljaard (DP), Andrews noted that SAA was prepared to respond aggressively to any pending or future matters being considered by the Competition Commission. Regarding another of her questions, Andrews noted that Delta was a more enthusiastic alliance partner than American had been, and that in addition to opening up more destinations, Delta provided greater cost-cutting potential. On another point, he added that he will continue to stress the importance of creating a "zero tolerance" of corruption culture at SAA (and noted progress made thus far in minimizing cargo pilferage).

Mr Vincent Smith (ANC) then observed that perhaps talented individuals trained by SAA could eventually be a great force in other SA companies. In response to his question, Mr Makozoma noted that full compliance with the Basic Conditions of Employment Act was very costly, and that exemptions were needed to fit SAA's operational reality. At the same time, he also noted that safety standards are subject to international rules, and that SAA is and will be in full compliance with those regardless of the application of the Basic Conditions of Employment Act .

Regarding Mr Smith's question about the relationship between SAA corporate management and Transnet, Mr Makozoma stated that there must be a balance between running SAA as a private business and being accountable to Parliament, as too much public disclosure could put the airline at a competitive disadvantage; this is a different issue from scrutinizing Transnet. Broad policy consultation would seem appropriate, but on airline operational matters the professionals must be left to do their jobs. It was also noted that in terms of SAA decision-making, Swissair has certain rights as a result of its interest in the company.

Another member then queried why SAA cabin announcements were only made in English and Afrikaans. Mr Makozoma's response was that "depoliticization" of language is a national issue and not one that SAA can resolve, though it will continue to try to deal with it sensitively.

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