South African Express (SAX) Annual Report & cash crunch

This premium content has been made freely available

Public Enterprises

16 May 2018
Chairperson: Ms L Mnganga-Gcabashe (ANC)
Share this page:

Meeting Summary

Annual Reports 2016/17 

South African Express is experiencing a cash crunch and needed a capital injection from the national government. It was only presenting its 2016/17 Annual Report now as it was not able to satisfy the going concern requirements of the Auditor General. Expenses incurred by SAX were higher than its revenue. R42 million fruitless & wasteful expenditure was due to interest and penalties for late payments. Irregular expenditure was R408 million mainly due to employees not adhering to procurement processes and the use of expired contracts.

The key challenges for the year 2016/17 were:
- Civil Aviation Authority suspended the SAX Air Operator Certificate creating financial challenges for the airline
- Aircraft availability and reliability affected the airline’s performance and ability to respond to competition.
- SAX staff turnover for 2016/17 was 10.5%. SAX has not been able to replace critical skills at the same rate.
- There was high irregular expenditure mainly due to aircraft non-availability.

Members were concerned about future SAX performance if recapitalisation should happen. They asked about consequence management for executive and board members found wanting. They pointed to previous SAX CEOs who extracted funds from the company and there had been no consequences for them. They expressed concern about skills retention due to the high level of uncertainty about the airline’s future and asked what measures were taken to prevent people from leaving. Some Members urged the Committee Chairperson to meet with the Public Enterprises Minister about SAX. The Chairperson explained she had met with the Minister who said he was going to do an intervention, but still awaited the 2017/18 audit report from the Auditor General. The Chairperson said she would meet with the Minister again.

The Department of Public Enterprises (DPE) added that what had brought SAX to where it was today was governance challenges. Government had allowed SOEs to operate on their own without holding the boards and the executives accountable for their actions. If they were found wanting or caught up in corruption, ineffective action was taken and the person ran away with the money. DPE was looking to strengthen governance so that even if the person resigns, the person will not get away with it.

In his 15 May budget speech the day before, Minister Pravin Gordhan had said about SAX:
“South African Express ….objective is to increase the frequency of services on lower density routes which are not viable for large aircraft and expand air services on regional and secondary routes. The airline transported close to 300 000 passengers during 2016/17. As a result of resignations and suspensions, there are currently numerous vacancies at the airline. As a temporary stabilization measure, senior officials from the Department were seconded to South African Express, whilst the process of appointing a permanent CEO and CFO is underway. Simultaneously, I am reviewing the Board, with a view to strengthening its capacity. Reports of corruption at South African Express (which you all will have seen was covered by the media last week) are being reviewed.

In addition to addressing the governance and leadership challenges at the airline, government is working with South African Express to finalise a turnaround strategy to stabilise the company financially. The immediate steps that will be taken include rationalising routes to match capacity; improving cost-to-income ratios and consolidating operations with SAA.

Regrettably, extended mismanagement of the airline, means that it is likely to require a recapitalisation from government to strengthen its balance sheet, return it to solvency and improve its credit worthiness. The merger of state owned airlines will also receive attention soon. In the longer term, government will explore options for modernising the fleet and the possibility of introducing a strategic equity partner with the aim of reducing the burden they currently place on the fiscus and instilling a commercial mind-set into their operations”.

Meeting report

South African Express (SAX) Annual Report 2016/17
Mr Edwin Besa, SAX Acting CEO and General Manager, explained that the airline was unable to table the 2016/17 Annual Report to Parliament on 30 September 2017. This was because SAX was unable to submit its 2016/17 annual financial statements (AFS) on 31 July 2017 to the Auditor General. The airline was not able to satisfy the going concern requirements at the time the AFS were due.

During the year under review, the airline made losses and was unable to meet the shareholder compact targets mainly due to aircraft non-availability and unreliability. It incurred fruitless and wasteful expenditure of R42 million for interest and penalties from late payment of invoices. It incurred irregular expenditure of R408 million. This was mainly as a result of employees not adhering to procurement processes and/or the use of expired contracts.

The following were the key challenges for the year:
- Civil Aviation Authority (CAA) suspended the SAX Air Operator Certificate (AOC) creating perceptions and financial challenges for the airline
- Aircraft availability and reliability had been the biggest challenge affecting the airline’s performance and ability to respond to competition.
- SAX staff turnover for 2016/17 was 10.5% which was above industrial norm of 5-7%. At least 40 of these were pilots or certified technicians which are critical skills. SAX has not been able to replace these employees at the same rate.
- There was high irregular expenditure mainly due to aircraft non-availability.

Discussion
Ms G Nobanda (ANC) asked what SAX was doing about the high staff turnover. What can be changed so that people do not leave?

Ms Nobanda wondered why only the employees were being blamed for the bills not being paid on time. She asked SAX to explain why middle and top management were not blamed.

Ms Nobanda complained that there were too many delays associated with SAX. The North West government was paying to keep the airline in operation but the airline was still not delivering. She wondered if a capital injection from national government would make any difference.

Ms Nobanda pointed out that every time there was a crisis at SAX, it would present, to the Committee, its turnaround strategy and its consequence management. The Committee had been hearing these things since 2015. She asked why the Committee should believe there was going to be a change this time around.

Mr E Marais (DA) said that capital injection was essential to keep SAX afloat. Without the money to buy new aircraft or replace what was wrong with the old ones, the planes would always be delayed. This would result in dissatisfied customers going for alternative airlines. There are certain short routes that SAX airline serves best. It was hard to see how the company was going to keep afloat if it did not get the capital injection.

He requested that the Chairperson address this matter with the Minister. The Minister and National Treasury should see how they can help SAX. There are only two options: either they help or close the business.

Mr Marais said he understood why the SAX staff  were leaving the company. If there was something wrong in a company, financial wise, employees would jump to a different institution even for the same salary if they have an opportunity to do so. The problem was that there was too much uncertainty at SAX. Staff would move if they were not certain that there was a job for them in the long run.

Dr Z Luyenge (ANC) said that the notion of government investing in SAX was not something that required one to be philosophical or the bureaucrats to be technical. SAX as a government entity was never on an even basis since its inception. It was never provided with new fleet. Everything was third hand or fourth hand not even second hand goods. That was how SAX was established.

Dr Luyenge said that he had full confidence in the Minister, having heard his attitude towards SAX. The Minister said that he was going to improve the situation and he was going to address the merger of the state airlines. The ANC had the political responsibility to ensure that this airline remains in this very important business. There must be an ANC component championing that this should happen.

Mr N Singh (IFP) was glad that the ANC was making itself responsible for what was happening at SAX. The ruling party had to take responsibility for some of these things. However, he suggested that when a meeting was held with the Minister, it must be a subcommittee of the Portfolio Committee on Public Enterprises, rather than just the ANC component, that met with him about the way forward.

Mr Singh said that the present case of SAX was six of one and half a dozen of the other. He asked SAX to explain what assurances there were that once money was invested, there will be returns on those investments. The Committee had not been getting that assurance for many years. The Committee could not allow taxpayers’ money to be wasted as there would be almost R1 billion in guarantees.

Mr Singh said that the merger of state airlines or the finding of a private partner was the way to go. This is because the reputation of SAX had been destroyed. People would rather drive from East London to Cape Town than to get into one of those planes. It should not be that way.

From a risk point of view, Mr Singh asked SAX how close it was to these guarantees being recalled or cashed in. He asked for a breakdown of the SAX  routes that were non-profitable and if these were maintained because of political reasons. It was important for the routes to make business sense as a way of showing respect to tax payers who contribute and work very hard. Why were airlines in the private sector doing well such as Comair which was profitable and was buying new aircraft? Why was the case different for SAX?

Ms D Rantho (ANC) complained that the misuse of state resources had been going on for a long time. It was known for a fact that former SAX CEOs went out of their way to get money out of this airline and left it empty. None of those CEOs had been brought to book.

She wondered if SAX still had aeroplanes and requested the following schedule in writing:
- how many aircraft belong to SAX,
- how many are leased, how many of these are still working,
- how many of SAX planes are under maintenance and
- how much revenue was earned by SAX.

Ms Rantho suggested SAX should open new routes that will bring in money and close non-profitable routes.

Ms Rantho said that in the Budget Vote speech the previous day, the Minister had said no to capital injection. However, she hoped that the Portfolio Committee Chairperson would be able to change his mind.

She said that the Minister had developed distrust towards the senior executive of the state owned entities. It was them who made him be like that. If the Minister agrees to speak to Treasury and the capital injection is given, the Committee will need to receive a report every second week from SAX. If SAX were left alone for a quarter, the CEO may not be found. She agreed that there was a need to speak with the Minister one last time.

Ms Rantho asked if SAX interacted with Rand Merchant Bank (RMB) often. She asked if they were on a mission to take over the company. She asked SAX what procedures were in place for RMB not to take over the company.

The Chairperson said that she had already met with the Minister about a cash injection for SAX. The Minister understood the situation and he was working on it. However, he needed to get the audit report from the Auditor General first. He is eagerly awaiting the AG’s report.

The Chairperson said that the picture painted by the presentation and documentation was not good. It pointed to what the AG might state in the audit report looking at the history of the company’s irregular and fruitless expenditure. The presentation mentioned that SAX was instituting civil or criminal charges against perpetrators. This has been going on for a long time so the Committee would like a report at some stage on who SAX was pursuing and charging. She asked if there were any CEOs and CFOs being charged, if yes, how many? SAX had to report on how the cases were progressing.

The Chairperson said that it was unfortunate that the SAX Board Chairperson was not present. The chairperson had to account for the lack of board oversight when all these shenanigans were taking place at SAX. She was disappointed that the audit and risk management board committee chairperson was not present either. She understood that it might be costly for the entire board to come before the Committee. However, with the current state of SAX, she expected the Board Chairperson and the audit and risk management board committee chairperson to be present.

The Chairperson asked if monitoring and evaluation by the board was taking place. She asked SAX to explain the outcomes of evaluation and monitoring of the procurement and operational processes. She asked for the status on consequence management from management personnel who were at the operational centre of the airline.

The Chairperson said that the Committee would like to get feedback from the board on what they have done to ensure that the consequence management tool was being used against those who were not performing their duties in accordance with the Companies Act, PFMA and Treasury regulations. She asked if SAX had proper systems in place to deal with procurement according to the PFMA.

The Chairperson said she would have a follow-up meeting with the Minister as requested by the Committee. The challenge was that there should be value for money. If the Committee asked for a capital injection for SAX, the Committee should get a guarantee that it was not reinforcing maladministration, fraud or corruption.

The Chairperson told the Portfolio Committee that there could no longer be quarterly SOE meetings until the end of the financial year. The Committee cannot wait for a quarter for an entity to come before the Committee when there were so many challenges going on. It was to be either monthly or bimonthly.

Dr Luyenge asked if SAX had done a feasibility study for opening the Mthatha route: Mthatha-East London, Mthatha-Durban and Mthatha-Cape Town.

Responses
Mr Mpho Selepe, SAX Acting CFO, responded that SAX had lost many technicians from the technical department and many people in other functions. The reason was employees not knowing whether the airline would be there tomorrow or in years to come. So employees hedged the risk by leaving the company to avoid being in the company when it closes.

Secondly, when SAX received a government guarantee back in 2015, the conditions attached to it included that management would not get increases until the airline had turned around and started making a profit. However, that had not happened. New recruits get to a stage where they want to negotiate for a higher salary. However, they get to realise that there are no salary increases. Economically, they realised they were going backwards because of inflation and the VAT increase. SAX, therefore loses these technicians to Middle East, and some go to Safair which is a SAX competitor. The situation could be looked at in two ways. There were people who remained at SAX who had a passion for the company and were committed to the cause and there were those people who would stayed because they had nowhere to go. This lead to a situation where there is no balance in the performance within the organisation.

Mr Besa, SAX Acting CEO, added that the moratorium applied only to senior managers. It did not apply to lower level staff. What was happening was that lower level staff get salary increments and were now catching up with their bosses.

Mr Besa said that another problem was that there were no spares. Most of the technicians were just sitting because there was no work. Their profession required them to work for a certain number of hours to remain certified. Without the hours, it meant that they lose their certification. To avoid that, they leave and go to other airlines. Similarly with pilots, if they did not maintain a certain level of pilot hours, they lose their licence.

Mr Selepe said that there was a challenge in training low level employees to occupy superior positions. As mentioned earlier, the low-level staff salary increases ended up overtaking the supervisor salary. As a result, it was hard to get junior staff, who had the potential, to take up higher positions. They refused such opportunities because there no point in occupying a higher-level position if their salaries were going to remain constant.

Mr Selepe said that the timely payment of bills was a struggle SAX faced daily. Aircraft availability and reliability was a sore point as SAX may start with 12 aeroplanes on a given day but end up with only 10 planes able to fly. SAX loses revenue but one still has fixed costs to pay. Due to this, SAX faces serious liquidity challenges. SAX needed to identify the critical supplier that needed to be paid so that the aircraft could be in the sky. There was also the need to ensure that SAX on-time performance (OTP) improved because if the OTP is high, its aircraft leave within the scheduled time and there would be frequent turnarounds.

Expenses incurred by SAX were higher than the revenues brought in. This was illustrated by its EBITDA – the operating profit. Another challenge with non-payment of bills is interrupted flights. When a flight is cancelled for three or four hours without being corrected, one needs to book the passengers into hotels, shuttle them to and from the hotel and provide meals. SAX would thus incur three unplanned expenses and lost revenue plus the lease expenses, which are the fixed costs that SAX must take care of. As a way of mitigating payment of bills, SAX enters into payment plans with suppliers. Fortunately, the relationship between SAX and its suppliers was quite good. The suppliers usually understood when SAX was prevented from sticking to its payment plan.

Mr Selepe said that due to the cash crunch, no specific money could be allocated to the North West flight route. The route was new, so the North West subsidy was to cover the set-up costs to start the route. SAX entered into an agreement with the North West government but unfortunately, this is when SAX started having challenges with aeroplanes. The North West government was giving money to the airline so it could fix the aeroplanes and fly. SAX was flying the 50-seater CRJ200 to North West. However, due to the short distance for the CRJ200, SAX found that it incurred a lot of expenses. SAX then got into an agreement with a charter company flying 30-seater Embraer 120s aeroplanes which SAX used on that route since last year.

Reliability had been good last year but because SAX aeroplanes were unreliable, one Embraer was taken off that route and used to service the Johannesburg-Durban route so SAX can meet its schedule. In a situation where SAX could not carry passengers, it asked other airlines on the same route to help and there were special agreements between airlines.

Mr Besa added that the subsidy was helping with mitigating the losses that SAX incurs on the North West route. As it is a new route, the number of passengers was insufficient for SAX to break even or make money on it, so SAX got the subsidy from North West government which really assists the airline. However, with the rest of the airline, there were still challenges with aircraft availability and reliability. So despite the subsidy, SAX still needed recapitalisation for it to be sustainable.

On consequence management, Mr Besa replied that SAX was acting against managers found to be wanting and that was why a number of executives had since left the airline. SAX currently had about 11 out of 13 executives in Exco who are in acting positions. That is because most of the managers when they see that action is being taken, they decide to resign. As suggested, SAX would return to the Committee to give a report on consequence management.

Mr Selepe said that the airline would be able to return to profitability. The plan for the recapitalisation was that once the funds were there, SAX was going to get people who are trained to occupy critical positions. There were about 41 vacancies within Technical. Once these vacancies are filled, the airline will have the assurance that all aeroplanes will be maintained as needed and so they will not be grounded. SAX would ensure that there is a return on investment. The injection will enable SAX to get skilled employees in these critical positions and this would result in maintenance being done as frequently as possible.

Mr Besa replied that the shareholder had asked SAX to demonstrate that with recapitalisation, SAX would be able to run on its own and not ask for more money within a few years. From a financial point of view, SAX had demonstrated that should funding be received, SAX would be sustainable over a long period. From a developmental point of view, the airline could start new routes that other airlines did not consider. SAX develops those routes as part of its mandate but then other airlines come in and compete. Sometimes SAX has to leave and the competitors take over the routes. However, without SAX developing the market for the route, none of the private airlines would consider those routes.

SAX had demonstrated to the shareholder that it will continue to train pilots to ensure SAX transforms the industry and that is something that the private sector did not consider. In terms of return on investment, SAX had demonstrated what it would do should it be recapitalised.

Mr Besa that if SAX is not recapitalised but it continues operating with insufficient revenue to cover costs, then it will get a point where SAX will be unable to pay back its bank loans and the banks will ask government to pay the loans it has guaranteed. So that is the risk that SAX will continue to face should it not be recapitalised.
 
Currently most of the SAX routes are not profitable because of the inefficiencies that SAX faces. A lot of flights are cancelled and when cancelled, the passengers are put on another airline or are put up at a hotel. When one adds that all up, it becomes difficult to be profitable. But if recapitalised, then there will be reliable aeroplanes and SAX will start seeing profitability on the routes. Until that is done, most routes will not be profitable.

On Mthatha routes, Mr Selepe replied that investigations had been done and there was a project to fly from Johannesburg to Mthatha. But on the verge of putting on the flights to Mthatha, there was the CAA. So, the project was abandoned. He said SAX will revisit that and engage CAA in that regard.

Mr Selepe said that SAX will share the route profitability with the committee because the numbers were available. This would enable the committee to see for itself which routes were profitable and SAX will explain how it allocates costs.

Mr Selepe said that the maintenance of profitable routes and the closing those that are not and opening new routes will be a project that will be shared with the Department and the Portfolio Committee. The challenge with the routes was that you may have a route that is profitable at a variable cost level but when you come to fixed costs the route may not be profitable.

Mr Besa said that the challenge was that now, SAX had only about eight or ten aircrafts on a day that SAX was able to operate. SAX has a fleet of 22 and it must pay leases on most of them except for those aircrafts owned by SAX

He said that if the schedule was reduced to operating only those aircrafts that are running now, it means SAX will be not able to cover its costs of operations because of the other fixed costs incurred. That will mean that SAX will continue bleeding and loose more cash and every time the money that is available will become small to the extent that the suppliers cannot be paid for their supplies. SAX may end up in a situation where it may not even be able to pay salaries if it continued for a longer period without addressing the situation. So It is something that can be done for two to three weeks but over time, SAX would not be able to continue operating. So it is a challenge that SAX needs to get recapitalisation to address the aircraft which is on the ground.

Mr Besa said that the private sector could do well when compared to the public sector. The factor that needs to be considered is that state-owned airlines carry a developmental mandate which the private sector do not. Due to the PFMA, SAX cannot move as quickly as the private sector. If the private sector decides that they need a new aircraft, it is a quick decision whereas for SAX there was a long process involving Treasury to approve this.

He admitted that some things SAX could do better but it was important to keep in mind that SAX carried a developmental mandate which puts on a burden. For example, to buy new aircraft, SAX still had to comply with NIPP requirements meaning that if anything is bought for more than $10 million outside the country, then the supplier should at least use 30% of the cost to carry out developmental objectives in the country which is not the case with the private sector. So that does not put the two sectors on a level playing field.

Mr Selepe said that RMB may not be in position to “hijack the company” swiftly and own it. The interest RMB has in the airline is about the level of exposure it has. RMB has given SAX an overdraft of R160 million which is covered by the government guarantee. There is also a guarantee of R123 million that covers the nine aeroplanes leased to SAX. There is no maintenance reserve. That guarantee was not for aeroplane maintenance, it was only to hedge their risk.

Mr Lebohang Ntwampe, DPE Deputy Director General: Transport Enterprises, said that what brought SAX to where it was today was governance challenges. Government allowed the entities to operate on their own without holding the boards and the executives accountable for the actions they were taking. As a result, even if they were found wanting or they were caught up in fraud, misconduct or corruption, ineffective action was taken such as suspension and the person ran away with the money. That is not allowed. The Department was looking at how to strengthen governance so that even if the person resigns, it does not mean that the person will get away with it.

The meeting was adjourned.

Download as PDF

You can download this page as a PDF using your browser's print functionality. Click on the "Print" button below and select the "PDF" option under destinations/printers.

See detailed instructions for your browser here.

Share this page: