South African Airways (SAA) on its Annual Report 2015/16

Meeting report

The Chairperson began by stating that all questions that had been put to the board had been responded to. However, there had been representations from the Organisation for Undoing Tax Abuse (OUTA) which questioned the accuracy of the responses. The responses had been received from South African Airways (SAA) after they had sought an extension, and had thus been given to Members. Shortly thereafter, OUTA had written to state that they had a problem with the responses. Although the responses had not been tabled in the Committee, OUTA was in possession of them. This was not a crime, and perhaps one of the Members had given them to OUTA, but if such things happened, they should be done openly and transparently. There were only three logical explanations for how OUTA got hold of the responses -- someone within SAA had given it to them, or someone within Treasury, or a Member.

OUTA had requested to appear before the Committee, and after consultation with Adv Frank Jenkins, Senior Parliamentary Legal Advisor, the conclusion had been reached that if OUTA were invited, it would become a public hearing, and consequently other organisations would have to be invited to, like the unions, and other advocacy groups. The meeting was a follow-up meeting, and if Members wanted a public hearing, there was problem. He was of the opinion that it was not necessary.

SAA Annual Report

Ms Duduzile Myeni, SAA Board Chairperson, indicated that the meeting was a continuation. The prior questions had been responded to and the entity was open to answering questions that may emerge. There had been a great improvement which would be apparent during the presentation, although the issue would be the sustainability of the results. It was the nature of the sector that there were several areas where SAA had improved greatly, while several areas still needed more focus. The airline had operated the whole year without government guarantees, which was an unusual occurrence for SAA.

Overview of financial year

Mr Musa Zwane, Acting Chief Executive Officer (CEO): SAA, said the strengths of the organisation over the year had included its 0.3% contribution of the fiscus in respect of its supply chain and employees, its support of 84 000 jobs, awards, safety records and on-time departures. The cost compression programme had improved, compared to 2014/ 2015. Nonetheless, the challenges were external as well as internal. It had a weak capital base, as 60% of its costs were in dollars, while only 40% of revenue was in dollars, so there was a 20% gap which required good hedging strategies – which SAA was not very good at. Additionally, there was an over-supply of low cost carriers in the domestic industry, resulting in the suppression of margins, as reflected in the results. Commodity prices had declined in regional markets, also suppressing revenues. There was a problem of getting funds out of some countries, particularly Nigeria and Angola, and management was currently focusing on the problem.

The executive had taken time for introspection in order to check the position of SAA. Problems of leadership instability had been identified, resulting in a term called the “Hollywood of Kempton Park”, in that there were a number of acting positions in senior management ranks.

In addition to the over-supply in the domestic market, there had been a global shift in air traffic, with several consolidations taking place in the aviation industry and commoditisation of short-haul routes. African carriers were experiencing the lowest growth, the highest growth being experienced in North America. Although the world had shown improvement, Africa was lagging behind.  SAA had launched new routes, to Accra and Washington DC, as well as to Abuja, Nigeria. There had been a sustainable saving of R3.3 billion for the prior three years with the unit cost reduced from $7 to $ 5.74. The Airbus swap deal had been finalised, and SAA was also looking into ways to improve its revenue streams through ancillary revenues of about R100 million. For the first time there had been a positive operating profit before interest, tax, depreciation and amortisation. A number of awards had been won by the airline, but unfortunately revenues had not increased, which was a challenge to the executive. The major highlight of the year was the finalisation of the legacy aircraft transactions, which had been impacting negatively on income instatement.

The Chairperson asked SAA to elaborate on its turnaround strategy, and to provide an indication of the new plans that the SAA board had that were different from those of prior boards.

Quarter two performance

Ms Phumeza Nhantsi, Acting Chief Financial Officer (CFO) said that although there had been challenges with revenue, SAA had recorded earnings before interest and taxes (EBIT) of R206 million against a budget of R221 million. There had been a R1 billion revenue shortfall, the majority of it as a result of the domestic competition that had intensified.  There had been a 4% decline in passenger revenue which, when converted to numbers, was about 159 000 passengers. There had been a saving of R1 billion, which had been derived from many factors, mostly fuel and cost compression. SAA had budgeted for a loss of R61 million, and a loss of R765 million had been recorded as a result of interest repayments of about R288 million, which showed a heavy reliance on government guarantees.

Financial results for 2015/2016.

The group had performed better at the EBIT level, in comparison with 2014/2015. Revenue was stagnant, growing by only 1%, the major influence being the over-supply of domestic low cost airlines. There had also been challenges in repatriating money from Angola, and as at October 2016, there had been $38 million outstanding.  AT the EBIT level, there had been a positive figure of R351 million as compared to the negative R2.4 billion recorded the previous year. The loss for the year was R1.5 billion, compared to R5.6 billion in 2014/2015. The income statement had been affected by R1.9 billion in impairments arising from the staggered arrival of six new Airbus A320s which, by the time they came into service, had a market value below the price paid for them. In 2014/2015 there had been a litigation provision that had resulted in an adjustment to the financial statements.

The revenue for 2015/2016 had amounted to R28.8 billion, which was an increase of 1% over the previous year. There had been a 3% increase in load factors, and average air fares were up by 2%. Ancillary revenues had also improved by 1%. Operating costs had decreased by 8%, despite 60% of operating costs being foreign exchange denominated and the rand weakening by 23%. However, operating costs were positively impacted by the results of the cost compression programme and the drop in the price of Brent crude oil. The operating costs covered fuel, employee expenses, aircraft maintenance, aircraft lease costs, navigation, landing and parking.  SAA had embarked on a Voluntary Severance Package (VSP) programme aimed at reducing employee costs by 2%. The process had been concluded in October 2015, so the full benefit would be reflected in the 2016/2017 financials.

Balance sheet

The net liability for 2015/2016 was R11 billion, which had a legacy history in terms of losses SAA had been making, thus eroding the equity. The liabilities were more than the assets, and in accounting terms, SAA was technically insolvent. However, commercially SAA was solvent, in that it was able to pay its debts when they were due and payable.

Turnaround strategy plan

Ms Myeni said a turnaround strategy committee had been established by the SAA board at the annual general meeting (AGM) in the presence of the Minister and Deputy Minister, where the expectations were clearly outlined. Currently, the committee was reviewing the turnaround strategy, and in November it had met three times.

Mr Peter Maluleka, SAA board member, confirmed that the committee that was reviewing the turnaround strategy, and was at the moment busy with consultations with various stakeholders. The committee on human resources had also started the process of identifying and appointing a full-time CEO and CFO. In addition, the social ethics governance committee was ensuring that there were clear and distinct roles for the board and management. For instance, the board would have no role as far as procurement was concerned. The board was of the opinion that in order to move forward, there should be certainty within SAA, so it was dealing with the issue of acting positions.

Mr Josua du Plessis, Acting Chief Strategy Officer (CSO): SAA, said that when implementing a strategy, it had to be continuous. The fact that SAA was operating in a difficult environment was not an excuse, but merely meant that there had to be adjustments. Therefore, it had been important to sit down and determine the way forward, and the executive committee had had intense sessions to do so. In the past few years there had been a massive decline in ticket fares, so it was looking into intensifying the current cost compression strategies.

Ms Myeni said that SAA had not done well on the key performance indicators as set out in the shareholders’ compact. It had performed below target, at 46%. SAA had taken a view that there had to be a review of the executive performance contracts so that they were aligned with what was expected of the board in terms of the key performance indicators (KPIs). The turnaround strategy had been developed internally by people who had been working at SAA for years. Where it was found that SAA was lagging behind, a 90-day plan had been developed which had been quite successful. Areas for improvement had been identified. For instance, in procurement there had been poor contract monitoring and enforcement. A thorough forensic investigation by Ernst and Young into procurement had found that there were shortcomings in the tender processes, with SAA extending contracts without doing market investigations. The investigation had also focused on losses, and for instance had found that there were ghost employees in Malaysia where SAA did not operate.

Mr Mcebisi Jonas, Deputy Finance Minister, added that SAA had been given a short term loan by the National Treasury (NT). One of the issues was dealing with the airline’s liquidity challenges, and NT was working with them, as well as reviewing the turnaround strategy. It had recommended that SAA address the appointment of competent staff as an immediate intervention.

Discussion

Ms D Mahlangu (ANC) said that the improvement of SAA had to be acknowledged, as there had been a huge loss of R4 billion in one financial year. She asked whether the improvements would be sustainable. What changes did the board intend making with the KPIs? Did SAA have an internal audit unit, and was it functional? The audit report had indicated wasteful and fruitless expenditure due to criminal conduct of about R5.9 million, and she enquired whether any action had been taken. There were penalties of R26.9 million at South African Airways Technicians (SAAT) due to the Tax Administration Act, as well as R8.2 million due to late payment, which she said was due to negligence, thus costing the company money. At prior meetings the Committee had raised the issue of acting executives, so SAA had to make a commitment in that regard.

Ms T Tobias (ANC) said that the purpose of oversight was to make the institutions better, and not to act as a punitive measure. Cost containment should not be the basis of revenue collection. There was a need to enter into the African market and generate more revenue. She had not been impressed by Mr Du Plessis’ presentation as a strategist, in that the main issue had been whether SAA had cost-cutting strategies. There had to be transformation in SAA, particularly among the pilots.

Mr D Maynier (DA) asked about Ms Myeni’s letter addressed to him on 19 October 2016 giving the reasons why she would not resign as SAA Chairperson. It was common knowledge, contrary to what was in the letter, that the shareholder represented by NT did not want Ms Myeni to continue serving as the Chairperson -- “the last thing on earth that the NT wanted” -- and yet she had been reappointed. The question was, how was Ms Myeni reappointed?

Ms Tobias raised a point of order on the grounds that there was a new board present, and Mr Maynier for the third meeting kept asking the same questions to Ms Myeni.

The Chairperson indicated that the point raised by Ms Tobias was not a point of order. He pleaded with Mr Maynier to ask something new which was related to the newly appointed Board.

Mr Jonas said that the important factor was the final decision was taken by the Cabinet, which had come to the conclusion that the board would be constituted as such, and that the appointment had been made with the intention of continuity.

Mr Maynier responded that the Deputy Minister had given an answer to a question that he had not asked. He said Ms Myeni had stated she had nothing to do with the appointment, and then the shareholder had appointed her. He asked whether she had been in contact with the President, or anyone close to the President or Cabinet member, in order to lobby for her appointment. The shareholder and the Committee had been concerned about the fact that it appeared that the Chairperson involved herself in “executive functions” of SAA, and he asked her to commit herself to not involving herself in executive functions in future. In the letter, there had been reference to two investigations into the financial losses at SAA, as well as procurement, and he asked if SAA would provide copies to the Committee. He enquired whether the Chairperson had played a direct or indirect role in the “Hands Off Dudu” campaign, as well as the subsequent leaks about the pilots’ union at SAA. The letter had been an exercise in blame shifting, and he asked whether the Chairperson took responsibility at SAA for the loss of R7 billion over the last two financial years.

Mr S Buthelezi (ANC) agreed with Mr Maynier that SAA should furnish the reports on the financial losses and procurement. He asked whether the impairment of R1.9 billion was a once-off. As 60% of the costs were foreign currency denominated, he asked for the specific figure of revenue that was involved. He said that he would focus on SAA’s subsidiaries of. The SAA City Centre travel agency had recorded a decrease in revenue, from R17 million to R8 million, resulting in loss of about R977 000, and he asked about the problems that the subsidiary was facing, as well as the role of the subsidiary in the bigger scheme of SAA. Air Chefs’ total assets and revenue had decreased, resulting in a loss of R12.7 million, which indicated it was a problem. SAA Technical’s financial statement for 2015/2016 had not been done, and he suspected that the subsidiary ran at a loss as well, so he asked why the current financial statements were not submitted. Mango was low cost airline, and had moved from a profitability of about R38 million to a loss of about R36 million in one year, which equated to a 200% deterioration, which was a great concern. Much had been said about the “evergreen contracts” of pilots, and he enquired about the salient features of the contracts. He remarked that transformation had not been sufficient at SAA, particularly among the pilots, and black economic empowerment (BEE) was not an option for state-owned entities. He asked SAA to provide specifics on dealing with the problem. The statement that the board could not get involved in procurement was not correct, in that boards had the responsibility for setting up the policies. Lastly, he asked why SAA did not cover some routes in the country, such as between Durban and Cape Town.

Mr A Lees (DA) remarked that there had been a lot of discussion on profitable routes and cost containment measures. He referred to a memo from NT that determined that SAA would need a guarantee of R7 billion. It had then organised a guarantee of R4.7 billion, and he asked why NT had decided that the going concern would require R4.7 billion. The response in the letter had mentioned that the Ernst and Young report was a draft report, and had been submitted to the board in June 2016. However, SAA had issued a press statement on 8 December 2015 that the report had been submitted to the board, and consideration of it was taking place. He raised concern that six months had gone by and the report had not been seen by the executive committee, and asked for copies of the report. Furthermore, it had been two and half months since the board had been appointed, and one of the requirements put to the board had been to take action over the suspended officials who were costing SAA millions. He asked whether they had been reviewed and if so, the action taken.

On the Airbus deal, the answer placed before the Committee had been that the risks of leasing from outside companies was the exchange rate fluctuations, and even if aircraft were leased from local institutions, the local institutions inflated the leasing costs. Essentially the answer was that from an exchange rate point of view, there was no difference between leasing from a foreign company and a local company. In the S54 application to the Minister -- Mr Nene at the time -- a great deal was made about savings, which read that a total amount of $644 million was involved, and an estimated R2.6 billion in currency hedging was likely to be incurred if the current lease was implemented. However, if this was compared to a local lease, with zero hedging costs, it would have resulted in the saving of an estimated R2.6 billion on day one. He was concerned that the submission to Mr Nene had been that local hedging costs were zero, whereas the answers to the questions by the Committee had indicated that either way there would be costs. He was of the view that someone had misrepresented the situation.

Mr F Shivambu (EFF) said one of the weaknesses identified was leadership instability, and although the new board had been appointed, the leadership instability had not been resolved. In the responses to questions, it had been indicated that the turnaround strategy had been approved by Cabinet, yet during the meeting Mr Maluleka had said that they were still busy with consultations, thus indicating that there was no proper reference to what had to be done. The NT had issued a press statement on 9 September that had 11 conditions with which SAA had to comply in order to receive the guarantees. These had included, among other issues, that the airline must be returned to financial stability, as well as the appointment of a CEO and CFO. SAA was a huge institution that had to be taken seriously, therefore the positions had to be filled, and he enquired about the timeline SAA had for the appointment of executives.  He further enquired about the number of times the new board had met and the specific issues dealt with during the meetings. The trend that was happening before the new board was appointed was repeating itself, where there was a dominant person -- Ms Myeni. There was no need to egg walk around the fact that she had been appointed as the Chairperson through nepotism. She also held the chairperson’s post in the Jacob Zuma Foundation, and was incompetent there as well.

Ms Tobias raised a point of order on the grounds that the Committee could not entertain matters that could not be justified.

Mr Shivambu responded that the Companies Act and the King Reports ultimately held individuals accountable for the activities they engaged in in a company, and it was appalling that individuals could not be held accountable for their actions. The letter written by the Chairperson to Mr Maynier indicated that she was incompetent, and she should be advised to resign from SAA.

The Chairperson clarified that Mr Shivambu had the right to say what he was saying and could not be stopped.  He ruled that questions had to relate to leadership beyond what had been previously covered.

Ms Tobias responded that her intention was not stop Mr Shivambu from asking questions, but when he said that the Chairperson was appointed by the Jacob Zuma Foundation, the Committee was not involved.

Mr Maynier said that the questions raised by himself and Mr Shivambu were entirely reasonable. The questions about the Chairperson had arisen from the previous meeting, after which she had then written the letter, so it was therefore reasonable to ask questions based on the letter. He asserted that the ANC was trying to prevent hard questions being put to Ms Menyi.

Mr Shivambu said that he had gone through the whole document, where Ms Myeni had indicated that she blamed the problems of SAA to what happened 18 years ago. He believed that “Dudu Myeni was the biggest cause of the crisis in SAA”.

Ms Tobias (ANC) interjected and indicated that Mr Shivambu was out of order, and had no right to call her “Dudu Myeni”.

The Chairperson agreed with Ms Tobias, and added that she could be be called either the Chairperson or Ms Myeni.

Mr Shivambu responded that he was part of the Committee that had drafted the rules and there was no rule that supported what the Chairperson had just mentioned.

The Chairperson asked Adv Jenkins for guidance.

Adv Jenkins clarified that the rule of “Honourable Member/Mr/Ms” applied to Members of Parliament, but there was no rule on how witnesses appearing before Parliament should be addressed.

Mr Shivambu continued that at the moment the Committee was dealing with a state-owned entity that was being run down by an incompetent Chairperson called Dudu Myeni. The ANC did not benefit from it, nor did the entire country. He proposed that the Committee put forward a resolution recommending to the appointing authority that Dudu Myeni step down as the Chairperson of the board, and that the remaining members of the board take forward the NT’s conditions. The conditions for stabilising SAA would not be fulfilled if the current Chairperson continued to bully the board members -- for instance, the previous board members had been told to hand in the notes made after a meeting because she was the Chairperson of the Jacob Zuma Foundation.

Dr M Khoza (ANC) said that the ANC had to find a way to change the narrative of state-owned entities (SOEs), which was to the effect that they created grounds for ideological persuasions that were pro-privatisation. Therefore it was important to deal with the structural challenges at SAA. She agreed with other Members on the filling of key vacancies, as they should be implementing the turnaround strategies. There should be a move away from the personification of the SOEs, in that it fed into the narrative of the opposition, which would target on specific individuals, focus on their weaknesses and not take into consideration anything good about the institutions. In the 2007/2008 financial year, SAA had had four pillars of a turnaround strategy. Ms Myeni had also indicated that there were historical constraints, and she was not getting a sense that SAA was not addressing the historical constraints. She enquired about aircraft leasing and asked what the cheaper options were. In the context of the long term strategy, if leasing was a drain on the company, the issue had to be addressed. Structural changes, as well as the profitability of SAA, were not being addressed. She cautioned that while issues of transformation had to be addressed, one had to be careful not to imply that the plan was to get rid of the current pilots, as one had to balance the issue of safety. Lastly, she emphasised that SAA had to start making profit.

Ms Tobias raised a concern that SAA was not audited by the Auditor-General, and was using Price WaterhouseCoopers, which was more expensive.

The Chairperson said that the turnaround strategy should be implemented. He was of the opinion that there had been some marginal improvement. OUTA had indicated that SAA had misrepresented information, and he asked SAA to respond to the issue. While recognising that the SAA Chairperson exercised a preponderance of importance on the board, the Committee had no power to prescribe who should hold the position of Chairperson. He suggested that at the following meeting, SAA should make a presentation on its progress. The Committee had to find a more focused and strategic way to engage with SOEs, instead of asking a thousand questions. He agreed with Dr Khoza that there were two narratives, namely, that SOEs can never function and that blacks can not govern. However, the way SAA had been managed in the past fed into these narratives. He suggested that SAA should make a presentation on the rationalisation of its technical services. He felt it was utterly outrageous that only 2% went to historically disadvantaged people, so the turnaround strategy ought to include transformation.

Mr Jonas said that the NT shared the same concerns as the Committee with regard to the functioning of the board. Subsequent to the establishment of the new board there had been two meetings with the NT, and after the first meeting a detailed letter was sent to the board listing what they had to do. At the second meeting the board had presented a report on the issues addressed. He said that the board was functioning very well, and was structured and focused. He proposed that a report be put together on what it had done to date so as to assure Members that it was functioning well. The process of filling vacant posts would be complete by the end of February at the latest, on condition that suitable candidates were found. The long term turnaround strategy was there, and the Board had been instructed to review the plan and submit the revised turnaround work to the NT in February. 

The position of the NT was that the immediate focus of the board was to demonstrate that the airline could be brought to stability. If the airline was not brought to financial stability, transformation would not be possible. The Cabinet had adopted a private sector participation strategy, and within the context of the plan there had to be mechanisms to ensure that revenue and skills were brought into the airline. Recapitalisation of the airline had to be off balance sheet, therefore one had to look at the airline as well as the assets within the system.

Mr Maluleka said that the human resources committee had had discussions with two companies that would assist with the recruitment plan which would be put to the Board, and then the process of advertisements would begin. The instruction to the board had been that the turnaround strategy plan should be validated, and the Board was currently busy with this.

Ms Nhantsi said the focus at the moment was on increasing revenue while taking into cognisance that costs could not be cut further to increase profitability sustainably. The impairment of R1.9 billion had been a once-off in 2014/2015, and a decision had been taken to swap the A320s with A330s, which had got rid of the impairments. The SAA’s internal treasury report reflected that the company needed R7 billion, whereas the NT had decided on R4.7 billion. The report stated that the makeup of the R7 billion was R4.5 billion maturing between now and March. The R4.5 billion was already backed by government guarantees, so when SAA required refinancing, new guarantees were not needed. Of the R4.7 billion that had been received in September, only R2.5 billion had been utilised as working capital, so the R4.7 billion would be sufficient for the upcoming twelve months.

She said management had not misrepresented information to the Committee. BNP Paribas had been appointed on 11 March 2016 as transaction advisor to SAA. At the time it was appointed, it had a valid Financial Services Board (FSB) certificate. The mandate of the transaction advisors excluded the sourcing of funds due to events that had occurred, and the scope of BNP was increased. In the process of due diligence, it had been discovered that its FSB licence had been suspended on 6 April. The appointment had then been terminated in July.

Ms Myeni said that decisions taken 18 years ago had weakened the SAA balance sheet. She said she was not distancing herself from the problems of SAA, and accepting the position of Chairperson also meant accepting SAA’s challenges. If measures were not taken against anyone who did not perform, the company was “doomed,” but on the other hand, if action was taken, it was criticised by the Committee. There was institutionalised corruption at SAA, and if anyone was interested on knowing the persons involved, they should call and ask her. She challenged Mr Shivambu to take her to court for the allegations he had put on the table, such as the bullying of people at SAA and the jet fuel tender. She was an experienced director, and had never signed anything to do with procurement.

She said her CV spoke for itself, and was based on experience. For example, when she had served at ABSA and a Department of Trade and Industry subsidiary in KwaZulu-Natal, the President had had no hand in the appointments. The swap deal had been her idea so that the impairments would be averted, but when it had been proposed, it had been become a “corrupt Airbus deal” involving “cronies of Myeni.” It had been suggested that the Public Finance Management Act (PFMA) be reviewed for guidance, as they were not politicians. She had never interacted with the Guptas, and did not get involved with tenders. She assured the Members that the airline was in safe hands, and the Ernst and Young report would be submitted to the Committee.

Mr Shivambu remarked that the 2% contribution to transformation was due to the incompetence of the SAA Chairperson.

The Chairperson urged Mr Shivambu to stop his comments. Persons who appeared before the Committee could not misrepresent information and the question asked by Mr Lees had to be responded to.

Mr Shivambu asked the SAA Chairperson to respond on 2% transformation and institutionalised corruption.

The Chairperson mentioned that questions would be sent in writing to SAA.

Ms Myeni said that in future, SAA would be audited by the Auditor General.

The meeting was adjourned.