South African Airways (SAA) on Turnaround Strategy and performance

Meeting report

South African Airways (SAA): Long Term Turnaround Strategy briefing
Ms Dudu Myeni, Chairperson of the Board, SAA, indicated that a Long-Term Turnaround Strategy (LTTS) was implemented in April 2013 and this strategy was created to address the challenges that SAA was experiencing. The implementation of the LTTS slowed down in 2014 and the main challenges that were experienced then were mainly on the implementation, particularly the delay in cancellation of routes and new fleet and lack of equity injection. The 90 day plan paid more focus on the implementation of commercial and financial interventions, and SAA managed to achieve the cost reduction measures and the network remediation in Beijing, Mumbai and Abu Dhabi routes.

SAA had also managed to correct the governance defects, including the revision of the Memorandum of Incorporations (MoI) and the reviewing of the Materiality and Significance Framework. The LTTS had been refined with a focus on reviewing assumptions (such as the fuel price) and adjustments for current internal and competitive realities.

Ms Myeni stated that there were still certain areas that needed to be addressed and adjusted in the LTTS. These included:
- The Financial plan was adjusted, based on revised exchange rate and fuel price assumptions
- The Equity injection was no longer assumed
- A Headcount Rationalisation was included
- There was increased focus on implementation and performance management
- The Fleet and Network Plan was reviewed
- Provision was made for the current competitive landscape

The refinement was done in consultation with National Treasury (NT) as well as other government departments, but was ultimately approved by the SAA Board. She concluded that SAA needed to grow revenue and reduce costs in order to achieve long-term sustainability.
 
Mr Joshua du Plessis, Head of Department: Project Management Office, SAA, mentioned that the network plan was reviewed and refined based on current and forecast demands. According to an Oxford Economics Study, SAA’s operations had a positive impact on the Gross Domestic Product (GDP) of South Africa. The Fleet Plan was developed, based on the Network Plan, and the Fleet and Network Plans formed the basis of the strategy and were refined with the support of external specialists. SAA was planning to increase the revenue by right-sizing capacity and using correct brands in the different markets. The focus would also be on the SAA brand, on African growth and network optimisation and on growth in regional market, by redeploying SAA capacity from the domestic market. It was important to take into consideration that there was a potential for growth in the domestic market by using the low cost segment like Mango. The revenue forecasts were significantly affected by external factors like market and policy impacts.

Ms Yakhe Kwinana, Chairperson of Audit, SAA, stated that the focus on cost reduction should be looked at in the context that airline unit costs were permanently under pressure, especially with the “commoditisation” of the market. SAA had been driving a successful cost Compression Programme since 2013, with R2.2 billion savings achieved to date. SAA had also achieved a 17% reduction in non-fuel unit costs over the past three years and would continue its drive to achieve an additional 13% reduction in the next three years. She described some of the key focus points on cost reductions. These mainly included aircraft cost reduction, by negotiating on new leases and current lease extensions, and a people cost reduction prioritised on headcount rationalisation, which was still in progress. There had been a realisation of significant procurement contract savings and maintenance contract negotiations, and there had been improvement in aircraft utilisation. SAA was planning to save an additional R2 billion or more,  for the next three years, as part of its plan to convert the current Cost Compression Programme into a cost compression culture.

Ms Kwinana indicated that SAA had been operating in a difficult environment in the financial year ended on 31 March 2015. This year was marked by increased competition, revenue pressure (caused by Ebola and xenophobia) and the weakened currency, legacy impairments and financial costs. The challenges in the current financial year comprised of weakening currency, and the new immigration regulations that were likely to have unintended negative consequences, as well as intensified competition.

Although SAA was still making a loss, its year-to-date operating results had improved by 43% year on year. The revenue levels were 11% below the prior year, caused by a significant drop in average fares across the industry on the back of the lower oil price, competition and the operating environment. The operating cost was lower and well controlled as expenditure was 9% lower year on year, and this was again assisted by continued Cost Compression and lower Brent price. The interest charge had increased significantly, due to increased reliance on debt to meet working capital requirements.

Ms Myeni concluded by saying that SAA was still facing challenges, as indicated in the presentation and these included weakened currency, intensified competition in the industry and unintended consequences of the immigration and visa regulations, current capital structure and leadership instability. However, there was also a good story to be told, and this included the fact that SAA has been rated as the best full service airline in Africa, whilst Mango had been rated as the best Low Cost Carrier (LCC). There had been an optimisation of network and fleet, a cost compression culture has been embedded, and operating performance was improving.  The LTTS was refined and its implementation still continued, in a quest to ensure that SAA was able to operate sustainably.
 
Discussion  
Mr D Maynier (DA) welcomed the presentation on the SAA corporate strategy. One of the main issues that came out strongly was leadership instability and it seemed that the Chairperson of the Board was “ground-zero” on the leadership at SAA. He suggested that it would be in the public interest and in the interests of SAA for the Chairperson to resign. He wanted to know if the Chairperson was willing to announce her resignation today, as he asserted that all the challenges at SAA emanated from leadership instability. He asked if there was a process under way to recruit a permanent Chief Executive Officer (CEO) who had experience and expertise in the airline industry, so as to be able to turn SAA around.

Mr Maynier wanted to know more about the Emirates deal. It was in the public domain that in June 2015, there was a deal on the streamlining of routes terminated, although it could have contributed R1.7 billion to the revenue of SAA. It was alleged that the Chairperson of the Board received a call from President Zuma and then instructed the Acting Chief Executive Officer (CEO), Ms Thuli Mpshe, to terminate the deal hours before it was due to be signed. Everyone wanted to know whether what had been alleged, in the public domain, was indeed correct, and if it was correct, then the Committee should know about the reasons for the termination of the deal. 

Mr A Lees (DA) wanted to know about the financial plan on the turnaround strategy, with specific time lines. All the plans included the financial plan for the generation of the profit. The high cost of bringing the aircraft conditions up to scratch after the end of the aircraft life needed to be explained. He wanted to know more about the financial impact of the new visa regulations on the operation of SAA, and how large this problem was likely to be.

Ms P Kekana (ANC) welcomed the presentation and highlighted that the Committee needed to base every argument on solid facts and not on rumours and media tabloids, especially in relation to the Emirates deal. The cost-cutting measures seemed to focus on factors that largely contributed to the losses, including the retrenchment of personnel or workers, but did not seem to pay sufficient attention to the smaller points, like the value for money on the outsourcing of food and beverages, especially wine and bottles of water. It was important to check if there was a shareholder compact at SAA and whether this shareholder compact was carefully monitored. There was a growing concern about the fact that most of the officials at SAA were in acting positions. She pointed out that an ailing institution like SAA needed to have permanent officials to rectify the problem of leadership instability.

Ms Kekana said that it was evident that Mango was becoming profitable at the expense of SAA, especially on the route between Cape Town and eThekwini, and there was a general feeling that SAA could also become profitable in this route. It was impressive to hear that SAA was planning a route to the African continent but it was not clear at the moment on how this vision could be realised in order to increase the revenue. She suggested that the Committee should have a meeting with the Minister of Finance, together with the Board of SAA, on the issue of the shareholder compact and stable leadership, so that the institution could be able to operate sustainably.
 
Ms T Tobias (ANC) mentioned that the main difficulty about governing was the need to prioritise  implementation. Others could question what had been implemented, and it was possible to encounter problems during the implementation. Members' questions were directed to trying to assist SAA in unlocking the crippling challenges, and it would not be helpful to pretend that there were no challenges in the institution at the moment. She wanted to know if SAA had negotiated the fuel price with its supplier as the fluctuation of fuel price was likely to impact on the expenditure of the institution. It was impossible for SAA to rely on the NT for the equity injection, in order to be operational, as the institution needed to do its own projections even before the equity injection and work out how to survive in times of limited injections. It must draw a financial plan in the event of economic meltdown.
 
Ms Tobias thought that the reduction in the outsourcing of food and beverages would be likely not to have a major impact on the institution, but the Committee should be provided with the financial expenditure on that aspect. There should be a marketing strategy that would entice the consumers to choose SAA out of other airlines, including having a stable clientele. It was absurd that British Airways was not just running international flights but also local flights, whilst the same could not be said about SAA in Britain. It was still unclear how South Africa came to enter into such nonsensical agreements that sought to undermine the operation of local airlines, as the country was losing the market share. The issue of visa regulations was a new phenomenon and she questioned whether it could really be having a major impact on SAA, as the institution had already been losing billions in the past financial years. She pointed out that the presentation was silent on the marketing strategy to be used by SAA. The reality was that the institution was losing money and its customers. It was impressive to see that Mango was offering free wifi, but the downside was that no food was included in the fare.
 
Mr D Van Rooyen (ANC) also welcomed the presentation that had been made by SAA and then asked about the impact of the equity injection on the balance sheet of the institution, and the adequacy of the stop-gap measures that had been implemented, especially in ensuring that the turnaround envisaged was in fact realised. In a simplistic form, his question was asking if it was possible for SAA to be turned around without the equity injection from government. The presentation was particularly silent on the cost that had been incurred as a result of not partaking in non-commercial activities. He requested information on compliance to Broad-Based Black Economic Empowerment (B-BBEE) and how the issue of the transformation package was realised within SAA.
 
Mr F Shivambu (EFF) asked about the number of personnel who were likely to be retrenched because of the cost-containment measures that had been introduced. It would be important for the Committee to get clear information on the content of the Emirates deal, and the reason for its termination, as the presentation was disappointingly silent on the matter. He wanted to know if there was any truth to the story that SAA was selling its cargo to Bidvest and if there was a possible retrenchment in this section as well. The Committee needed to know about the internal procurement policy of SAA, as most of the goods and services that were utilised in the flights were imported from Denmark, and the priority of SAA should be to source those services inside the country. The presentation should have provided a breakdown of the information on the black industrialists that were doing business with SAA, and the possibility of availing opportunities to women-owned corporations or those with disabilities. It might be true that there were challenges of weakened currency, visa regulations and external matters that could be taken into consideration. However, there were also internal factors, including the fact that the Chairperson of the Board of SAA was too powerful and was capable of firing and hiring anyone as if SAA was a private company. This was the person who was supposed to be held accountable for the leadership instability in the institution. It seemed that the Members of the ANC wanted to defend the institution, despite evidence that it was ailing.
      
Dr M Khoza (DA) doubted if the leadership and management of the SAA was aware of the magnitude of the problem at SAA, and said that the turnaround strategy was unlikely to succeed without identifying the root causes of all the challenges that had been identified. The presentation was not clear as to exactly how the current turnaround strategy was different from the previous turnaround strategies that had been implemented in the past. The presentation should have provided a hierarchy of the cost-drivers in SAA so that Members could really understand the intensity of the problem. It would have been useful if Members were provided with at least five key root causes of the problems at SAA and the strategy in place to address those specific challenges. SAA was operating in a highly competitive environment and therefore it was imperative for the Committee to know about the areas that needed to be prioritised ,so as to maximise on profit. It was really disappointing to see that the presentation largely focused on the symptoms and not the real causes, and the turnaround strategy usually comes after realisation that the institution was operating at a loss.
   
Ms D Mahlangu (ANC) mentioned that perhaps part of the reasons why SAA leadership seemed to be oblivious to the magnitude of the problem in the institution was because there was a guarantee from government that SAA would be bailed out. The issue of leadership instability was the main problem that needed to be addressed. The current Board was an interim one and the National Treasury needed to do the honourable thing and appoint competent and experienced people who would take the institution forward. She wanted to know if there was a strategy in place to execute the cost-cutting measures that had been implemented in the context of possible job losses. SAA was operating in a highly competitive environment and it was impossible to only rely on loyalty of consumers in order to generate sustainable profit. It was high time that the Board looked at things that had been done by other profitable airlines like Mango. There was a general sense that the Board was less worried about the problems in SAA, despite the fact that it mentioned that there would be a reduction on the cost; but there should be a focus on the improvement of the quality of service that is offered to its consumers.

The Chairperson appreciated that there was an overwhelming consensus from Members on the number of challenges that had been mentioned today around SAA. It was indeed correct that the leadership and the Board of SAA seemed to be unaware of the gravity of the challenges at SAA and this was the matter that needed to be addressed. It was completely unacceptable for Members to be briefed on the turnaround strategy without any mention on the difference between the previous and the current turnaround strategies, to be able to see what relationships or differences there were between these strategies. He supported the suggestion to write to the Minister of Finance on the  finalisation of the shareholder compact, as the shareholder compact was used to evaluate the progress that had been made by an entity.  It would be impossible to evaluate the performance of SAA without the strategic plan and Annul Performance Plan (APP) of the previous financial year.

The Chairperson wanted to make it clear that it was not possible to blame the current leadership for the problems that had been created by the previous Board members, and government and Parliament needed to take some measure of responsibility, especially on the failure to carry out the oversight role effectively. The Committee would need to know about the progress that had been made on the Shareholder Management Bill, to define the respective roles of Parliament and the Executive of the State-Owned Entities (SOEs), as it was difficult to exercise an effective oversight at SAA at the moment. The Board was certainly not properly prepared for its appearance before the Committee today. Some of the questions that had been asked by Members should have been addressed in the presentation itself and it was irrelevant whether those questions came from the media or the public domain. He agreed that it was indeed absurd that British Airways was not just operating international flights but also local flights but the same could not be said about SAA operating locally in Britain. It was still unclear how South Africa had got itself into such agreements that sought to undermine the operation of local airlines, as the country was losing a market share.

The Chairperson said that Mango had been a remarkable success and part of the reason for this was not because this was a low cost carrier, but because of the way the carrier was managed and governed. He suggested that Members of Parliament (MPs) needed to use Mango as part of the cost-cutting measures that had been introduced by NT. The issue of visa regulations was indeed very recent and therefore it was unlikely to have had a significant financial impact on SAA, and Members had correctly pointed out that the institution had been operating at a loss even before the introduction of the visa regulations. The statistics that had been released by the Department of Tourism (DoT) pointed out that tourist arrivals in the country were higher than the previous year.

Ms Myeni assured Members that the Board was concerned about what was happening at SAA and the presentation was based on the instruction that had been provided by the Committee as to what matters should be covered, including those that were in the public domain or media. There was a general understanding of the fact that SAA was operating under a competitive environment. She wanted to correct the statement that the current Board was an interim board, for this was a Board that was taking decisions with the understanding that there were responsibilities to be executed. There were capable individuals within the Board and it did have the potential to execute the mandate of SAA, although there was still a search for scarce skills. The turnaround strategy was developed by the leadership of SAA in consultation with the Board. The diagnostic review that was done by the Department of Public Enterprises (DPE) focused on leadership issues, historical agreements that were signed in the past and other factors that that were crippling the institution.

Ms Myeni indicated that SAA was paying almost R2 billion per annum for the salaries of the pilots and this was part of the agreements that the Board was trying its utmost to unbundle, as they were crippling the operation of the institution. However, it was almost impossible for the Board to try to review those agreements, as they were private arrangements. It must be pointed out that SAA had a non-Executive Board, meaning the Board met four times a year and also met from time to time when there were committee meetings. The delegation was to management, to run the business. The airline had always been bailed out by government, through cash injections, and the institution was dealing with a depleted balance sheet which remained the major concern of the Board.

Ms Myeni highlighted that the decisions that had been taken by the previous Board had an impact on the operation of the airline and these were some of the issues that the current Board also needed to deal with moving forward. The SAA used to own two aircraft but in 2001, the previous Board took the decision to sell those aircraft and then leased them back to SAA, in order to generate more revenue and this was still one of those decisions that were affecting the current Board. It was clear that this decision had a crippling impact on the airline, as it has already been indicated that one of the major cost drivers at SAA was the leasing of the aircraft, more so since this was paid in a foreign currency and the market fluctuation was impacting badly on the operation of the institution. The majority of the challenges at SAA were legacy issues and it would be unfair to blame the current Board for the decisions and agreements that had been taken and ratified by the previous Board. The Board had sat down and applied its mind and decided to negotiate with the aircraft leasing company, owned by South African companies, and the Board had already started negotiations in order to ensure that SAA operated in a sustainable manner.
 
Ms Myeni assured Members that SAA was paying its bills without any default and the airline was paying one of the highest land costs on a monthly basis, a good premium for the Air Traffic Control (ATC), and was servicing all the debts, under these difficult conditions. The Board would still require the Committee to discuss the State Aviation Policy Framework, especially on the next engagement that was suggested by Members. The whole State Aviation Policy Framework came about when the Board was developing the turnaround strategy. This was to address the fact that government departments were operating in isolation of each other. The visa regulations, the landing fees, the fact that the Department of Transport (DoT) was able to offer licenses to the competing airlines, and bad landing slots, and support to Brazil Russia India China and South Africa (BRICS) were all challenges that could be addressed through cooperation between government departments.

Ms Myeni indicated that SAA would be doing its business in an unusual way. In regard to the analysis on the Beijing-China route, it was discovered that the airline was losing R30 million per month. There should be a requirement to undertake an approval process. South Africa benefited immensely from the Beijing-China route, especially on tourism, and there were many investors from China, therefore the route had a developmental agenda for South Africa, but not as substantial a benefit on the operation of the airline. The Board had requested that the airline needed to also get a share of the benefits from the route, as the country had made more than R90 billion in terms of development and tourism. SAA was not only operating to be profitable but in order to be able to break down all the boundaries that were hampering the development of the institution, in order to facilitate tourism and development for South Africa.

In regard to the impact of the new regulations, Ms Myeni noted that SAA has denied seats to about 400 people in August who were departing from the country, because of the new visa regulations but the amount that was lost by SAA on the visa regulations was unknown at the moment. There were other airlines who owned airports, and other airlines that co-owned jet fuel plants, and others had tax leases. SAA was contributing about R9 billion to the country’s GDP but still paid over R6 billion to the Receiver of Revenue without any default.

Mr Maynier interrupted at this point and questioned whether Ms Myeni was answering questions asked by the Committee. Members had asked specific questions and they were expecting specific answers.

The Chairperson indicated that the Chairperson of the Board was at this point giving an overview of the questions and concerns that had been raised by Members, and all the questions that had been asked would be responded to, as this was an obligation.

Ms Myeni continued that the Board was cognisant of the fact that the issues in the public domain needed to be attended to. The changing of leadership was likely to impact on the turnaround strategy that had been implemented and the challenge had always been on the implementation of the turnaround strategy. The current Board had taken into consideration  all the previous turnaround strategies that had been implemented and had taken into account all the relevant matters which could be used in the new turnaround strategy. The new turnaround strategy was done in consultation with the stakeholders of SAA, and there had been a workshop as part of being inclusive. The Board received the proposal of Emirates airline in January 2015 and the management was running the whole process. It must be appreciated that SAA already had a relationship with Emirates. The Board had raised a concern about the fact that the Emirates deal fell within the own space that was delegated to Emirates, but this was to ensure that there are all the approval processes that are entered into.
 
Mr Maynier wanted to know if the Chairperson did receive a call from President Zuma and then instructed the Acting CEO, Ms Thuli Mpshe, to terminate the deal hours before it was due to be signed, as had been alleged in the media.

Ms Kekana interrupted and stated that this was not a commission of inquiry and therefore it was improper to reduce the engagement to statements based on rumours.

Dr Khoza asked whether the question that had been asked by Mr Maynier had any relevance to the agenda that was being discussed today. The understanding was that the Committee was focused on the turnaround strategy of SAA.

Ms Tobias corrected that the executive was supposed to respond to all the questions that would be asked by Members, and it was irrelevant whether they were directed to what was on the agenda or not.

Ms Myeni responded that in relation to the question on the Emirates deal, there was sensitivity on the deal, especially when taking into consideration of the Memorandum of Understanding (MoU). She suggested that the Committee could be briefed, in the next engagement, on the details that emerged from the deal. The Board and Management were aligned in terms of what benefit could be derived from the deal by signing the MoU, and on the need to scrutinise how the deal could assist in the operation of SAA under the current ailing environment. The issue of jet fuel was one of the cost drivers and it was a concern for the Board to realise that SAA was paying a high amount on jet fuel but it was difficult for the Board to negotiate these prices as they were regulated. It was often very difficult to introduce new ways of doing things in the industry, and this was where the name-calling from the media and the general public emanated, especially in regard to the introduction of unpopular decisions.

Ms Myeni added that SAA was operating in the same competitive space as other airlines like Mango but the institution continued to operate at a loss, and this was the major concern from the Board. It was indeed a concern that British Airways was allowed to operate in local flights but the same could not be said about SAA in Britain, and this was where the Department of Transport needed to introduce regulations which would protect the local airlines.

The Board was not aware of the story that SAA had sold any cargo to Bidvest, as this was part of the management function. SAA did have a shareholder compact and the management had provided its view of the impact on the matter as well as the comments, and the NT would be getting the shareholder compact before the end of this week. There was no way that the institution could operate without the shareholder compact. SAA would be receiving cash injection of R8.5 billion and this would assist in ensuring that the airline was able to operate in a fair environment and profitable way.

The information on the sponsoring of events like festivals, rugby and soccer tournaments was within the knowledge of management and not the Board, but it was important to highlight that SAA was no longer sponsoring soccer and rugby tournaments or the Jazz Festivals, as this was part of the cost containment measures. The cost containment measures that had been implemented by the Board were not focused on the retrenchment of personnel, but on trying to ensure that SAA was able to operate in a sustainable manner.

Ms Kwinana responded that the Board was happy that Mango was part of SAA and was doing very well and this could be attributed to favourable conditions, like the fact that Mango was partly subsidised by SAA. There were also contracts between SAA and Mango which were favourable to Mango. The question that still needed to be answered was whether Mango could be able to operate independently without SAA, especially when considering all the favourable contracts and subsidies. The Board was not complaining about the fact that Mango was doing well as it was a shareholder of SAA.

She noted that the delegation was responsible for the procurement process of food and beverages and there was a catering tender that was awarded to a German company. The procurement process for awarding the tender for food was focused on prices and other technicalities.

Mr Shivambu expressed a concern that SAA had awarded a catering tender to a German company as the tender was supposed to have been awarded to a local company.
 
Dr Masimba Dahwa, Chief Procurement Officer, SAA, responded that due process was followed in the awarding of the tender for food to be served on the airline and there were various issues that were looked at which informed the decision to award the tender to a German company.

The Chairperson requested the Board to be clear and precise on the response in regard to the question on the catering tender, that was alleged to have been awarded to a German company.

Dr Dahwa replied that the Board started by putting together a business case, which is the main driver of any procurement process. Procurement came right at the end of the process. The Board followed the due process until the tender was awarded to a German company, as the tender did not favour its own subsidiaries. The contract for the catering was worth R85 million.

Ms Myeni clarified that the tender that had been awarded to the Germany Company was not taking away the services from SA Chefs, as this company still continued to provide catering services to SAA, on board and on flight. This new tender was a single one, that was confined to servicing the lounge in ORT International Airport.

Mr N Nkwankwa (UDM) indicated that most of the questions that had been asked by Members were asked also during the previous engagement and the Committee was provided with the same responses. It was completely unacceptable for South Africans to agree to the suggestion that there were no South African companies that could have been awarded the tender for food.

The Chairperson agreed that it was indeed correct that some of the questions that had been asked by Members were asked before, when SAA was under the scrutiny of the Portfolio Committee on Public Enterprises. The Board of SAA was still providing the same responses. The Committee would like to meet with the Minister of Finance, the Portfolio Committee on Transport and Public Enterprises in the next engagement with SAA, in order to discuss issues that had been raised by the Board. The Committee would also like to see the shareholder compact that had been signed, before the next engagement. The Board would be given all the questions that still required clarity from Members and these should be responded to in writing. He concluded that the reason the Presidency had moved SAA from being overseen by the Department of Public Enterprises to being overseen by the NT was to ensure that NT could exercise an effective oversight role. However, this was not happening at the moment.

The meeting was adjourned.