South African Express Airways Annual Report 2008/09 briefing

Meeting report

South African Express Airways (SAX) Annual Report 2008/09 Briefing
Ms Lilian Boyle, Chairperson of South African Express Airways, and Ms Siza Mzimele, Chief Executive Officer, South African Express Airways, led the delegation presenting the Annual Report 2008/09 to the Committee.

Ms Mzimele told the Committee that the airline had done very well during the financial year ending 31 March 2009. The State Owned Enterprise (SOE) had a turnover of R1.86 billion and a net profit of R235.4 million, and operating profits had gone up by 8 %. The On Time Performance had improved by 3% to 83%.

South African Express Airways (SAX) revenue had doubled over the past five years leading to 2009. The staff demographics showed 46.23% Africans in the company, and 41.51% whites. Even though women led the company, most of its staff were predominantly male and it also had few disabled people working at for the airline. Ms Mzimele said that the airline had strategies in place to try address its shortfalls. There were positions for which disabled people were given more priority for when vacancies were available.

SAX was also successfully running a cadet programme which aimed at recruiting students who were good in Maths and Science, and also newly trained pilots who did not have enough hours to fly other commercial airlines. The programme made use of online applications.

Further details on the financial statements and other highlights were contained in the attached presentation document.

Discussion
The Chairperson asked how many flights South African Express Airways operated on weekends.

Ms Mzimele said that the she did not have the information at the moment, but that she could forward it to the Committee at a later stage.

The Chairperson said that Ms Mzimele was not giving the Committee the information at that moment because she knew that SAX was probably operating one flight per route on weekends.

Mr P Van Dalen (DA) referred the delegates to Page 63 of the financial report, and he asked what the sales to Denel and Eskom entailed, as they were described only as “sales to Denel and Eskom.

Ms Estel Welman, Executive Manager: Finance, South African Express Airways, replied that the sales related to normal ticket sales and the normal course of business.

Mr Van Dalen asked if it was true that SAX had received a cash injection or a bail out of R 445 million for recapitalisation. If that was true he wanted to know what the commission paid out was about and why was were hotel and accommodation expenses so high. He also noted that the amount that SA Express was spending on security was less than the amount spent on accommodation and hotels.

Ms Mzimele replied that the company's pilots were trained abroad and thus needed to stay in hotels during their training. They had to go for recurring training every single year, and could only attend this training abroad.

Mr Van Dalen said that there were training institutions in the country for pilots and that R38 million spent on training could have included both the training and the hotel accommodation locally, as the airline was not really operating internationally.

Ms Welman added that the amount paid out was not a bailout, but an overdraft and it had been settled. The reason that SAX took out an overdraft was because of the policies that existed at that time, which were from Transnet.

Mr Joachim Vermoolen, Aviation Specialist, Department of Public Enterprises, added that this was classed as a recapitalisation and not a bail out, and was done on normal investor principles. It was done to settle outstanding agreements. At the time that the financial statements were drawn there were still some outstanding conditions, but they had been met by the time the meeting was taking place. Government was going to get shares for the amount.

Dr G Koornhof (ANC) congratulated SA Express Airways on its excellent presentation. He attributed the success of the enterprise to the fact that it was run by women. He said that the Committee should probably recommend that women should run State-owned Enterprises. He noted that there was nothing negative in the report, and asked what challenges the company was dealing with.

The Chairperson concurred with Dr Koornhof, and expressed her appreciation for the report and the positive outcomes highlighted.

Ms G Borman (ANC) asked the delegation to explain the 67% load factor. She said that the fact that South African Express Airways did not hedge its fuel supplies was very clever, but she was not sure how one could gamble in a systematic way on fuel hedging.

Ms Mzimele replied that what she was saying was that in the previous year, the company's growth was much higher. That was why the presentation and the annual report had mentioned the 67% load factor. Load factors were calculated on the number of passengers over the number of seats. The number of seats grew in proportion with the growth of the market.

With regard to fuel hedging, there were a number of things that had to be taken into consideration. This was not limited to the price of fuel alone, as exchange rates, and portions of costs in dollars affected whether one should hedge or not. SA Express was not in the business of hedging.

Ms Borman referred to Page 67, point number 9, of the Annual Report, which spoke about employee costs in advance. She wanted to understand what the costs were.

Ms Wilman replied that SA Express had a policy to ensure retention and protect its investment on the training of technical staff members. The balance of R9 million would depreciate over the years that the staff were employed by SA Express.

Mr C Gololo (ANC) said some of SA Express targets were lagging behind compared to other industries. He thus wanted to know what strategic intervention measures were being taken by the State Owned Enterprise to address the employment equity shortfalls it faced. He also pointed out that there were not enough disabled employees in the Department.

Ms Mzimele replied that the first thing that was done by SA Express to try and improve the statistics was to identify areas where people with disability could work in the company. SAX would then draft internal policies that made it a priority to get disabled people in those posts. However, there were some positions that could however not be filled by disabled people.

Mr Gololo wanted to know how SA Express dealt with safety matters when it had hearing impaired individuals on board. He pointed out that most of the cabin crew members could not understand sign language.

Ms Mzimele agreed that the issue of people who could not hear was a challenge. There were some airlines that had run into trouble for having turned away disabled people if they were not accompanied by someone to assist them. There were requirements saying that if a person could not see or hear, that person had to be accompanied by someone who would be able to assist them in case of an emergency.

Mr Gololo asked if the airline was experiencing instances of luggage pilferage, and, if so, how had it dealt with these incidents. He pointed out that South African Airways had a lot of problems with pilferage.

Ms Mzimele replied that every airline experienced baggage theft. However there was a decline at South African Express in the number of bags that had been stolen. The airline had identified on which routes there was a high degree of pilferage, and had assessed that most pilferage took place when people had connecting flights. However, SA Express had taken steps to lessen this by having its own staff monitor the luggage lines.

Dr M Mangena (AZAPO) said that he was impressed with the presentation and SA Express's annual report, which was of a standard not often found in the public sector. He asked what challenges the Department was dealing with as it was flying in the African continent, and noted that when an airline sought to fly to many countries, they usually wanted something in return.

Ms Mzimele replied that it was difficult for the airline to venture into the continent of Africa, because of bilateral agreements. There were instances where the carrier from the other country was unable to fly into South Africa, and thus the country would in turn refuse entry to South Africa. Some portions of the continent did not have national carriers, so the only way to get into some African countries was by getting into partnerships with the local people. That was the route that SA Express was trying to pursue.

Mr Vermoolen added that there was an airline strategy run by the Department of Transport, as well as an African strategy being run by the Department of Public Enterprises. The strategy by the Department of Transport regulated economic matters and flights. The strategy related to domestic matters as opposed to international matters. In the domestic regulations there was some freedom for operators to determine how they operated. As far as the international regulations were concerned, there were conventions concluded, and the current ones dated back to after the Second World War. The relevant convention stipulated that each country had sovereignty over its airspace. When operating an international service, there had to be agreements in place with other countries. In Africa, most of the routes were covered by bilateral agreements, and that implied that the authorities had to meet and agree on the terms of operation, especially the economic terms. The second issue covered by these bilateral agreement would be the level of capacity required by the airline. That affected profits, since too much capacity would result in everyone making a loss. Lower volume flights were able to operate more frequently. There was a better match of size of the equipment. Large airlines made greater losses than low volume airlines, when going into the Continent, as there were not many airline passengers in Africa.

The opportunity for South African Airlines has been limited. SADC countries were moving towards the liberations of airspace. Countries were trying to protect their own airlines. South African Express was developing partnerships with other airlines in the continent, based in those African states.

Dr Mangena asked what was the difference between SA Express and SA Airlink, and asked if SAX had agreements with the SA Airlink.

Ms Mzimele said the difference between SAX and SA Airlink was that SA Airlink was privately owned, including part-ownership by Nedbank, while SAA and SAX were State Owned Enterprises.

Dr Mangena asked how difficult it was for SAX to retain skilled staff members, as there were many other companies that were unable to do so.

Mr George Mothema, Company Secretary, SAX, replied that it was difficult for the company to retain staff, but the Remuneration and Human Resource Committee had decided to put together a long term incentive plan, in order to try and have a three year retention programme.

Mr M Nhanha (COPE) told the delegates from SAX that he had been born and brought up in a rural area and, like many other rural children, had not learned to swim. The criteria that SAX had for its crew members included that they must be able to swim. He felt that this discriminated against people from rural areas, and wanted to know what specifically was being done to ensure that people from rural areas were able to apply for cabin crew jobs. South African Airways, when asked the same question, said that this was a safety requirement.

Ms Mzimele said that at SA Express, all cabin crew members had to be able to swim. This was a safety requirement. Cabin attendants were not just employed to serve food, but were also safety officers. Cabin crew members had to be able to get people out of aircrafts, in cases of emergency, as safely as possible. If the aircraft had to land over water, they had to assist passengers, and it would be a problem if they could not swim.

Mr Nhanha said that his question was not whether swimming was a safety requirement or not, as it had been confirmed that it was a safety requirement. His question was what could be done to ensure that people who had never learned to swim would not be discriminated against.

Mr S Pillay (ANC) added that if a person had other talents and the airline saw that these would benefit the airline, then the person must be given a chance to learn how to swim, if she or he had passed in other areas of the selection process.

The Chairperson added that she was once employed for a post that required a driver’s licence, and, although she did not have one at the time, the department employing her had given her three months to obtain one, and provided her with the resources to do so.

Ms Mzimele told the Committee that SAA Express did give candidates who excelled in other areas during the selection process a chance to learn to swim, and were encouraged to do so. Swimming was just one of the criteria used, but was not an exclusive requirement. However the airline did not pay their costs of learning.

The Chairperson recommended that the airline should pay the cost.

Ms Mzimele replied that SAX would look into the issue.

Mr Nhanha noted that the SAX training budget was around R38 million for training. He asked how much of it was used in the past financial year, and in what areas.

Ms Mzimele said that a large portion of the training budget went to technical training, because the bulk of the people employed in the company were operational staff, and were required to go for annual training. Another portion of the training was the Cadet Programme. When the Cadet Programme was started by South African Airways, SAX was simply assisting, but when SAA terminated this programme SAX had taken it over.

 Mr Nhanha asked how young people in rural areas could access application forms for the South African Express Pilot Cadet Programme.

Ms Mzimele said that the application was online, and forms could be accessed from the website.

The Chairperson responded that people in rural areas did not have access to the internet. There were no internet cafes in the rural areas.

Ms Mzimele said that SAX also did road shows to encourage people to join the Pilot Cadet Programme. The road shows were in the areas where the airline flew, such as Bloemfontein and Kimberley.

The Chairperson countered that Kimberley and Bloemfontein were partly urban, and asked what was being done for people in deep rural communities, who also had a right to compete for jobs in the airline, even if the airline did not fly to those areas.

Ms Mzimele said that it was clear that SAX was not doing enough. She accepted that Bloemfontein and Kimberley were not rural areas. However, many of the youngsters there were not even aware of the careers with the airline and had never flown.

Dr Pillay said that, as a State Owned Enterprise, South African Express had a different mandate from other airlines. If it was similar to other airlines, then he would have no argument against the privatisation of the airline, and he noted that the Democratic Alliance was already calling for its privatization. However, he felt that since children in rural communities did not even know what a pilot was, SAX had to get into those communities, not merely advertise online or limit itself to urban areas.

Mr Vermoolen said that the airline had only been transferred to government for year, as it was previously part of Transnet. There was a shareholders' compact concluded between the Department of Public Enterprises and South African Express. It had some elements of the social mandate of the airline, however that mandate had to be renegotiated each year.

Dr Pillay asked how SAX fitted in with the general transport plan of the country. He noted that with SAA and Mango, which was an SAA subsidiary, there was a lot of duplication between the airlines.

Ms Mzimele replied that SAA was a mainline carrier, and Mango was a low cost carrier, and operated in routes where there was a market for this. SAX was a regional carrier and stayed away from the main routes. It focused on bringing in traffic from the secondary routes into the main hub. Mango did not do what SA Express did and neither did SAX do what SAA did. There were some routes where all the State-Owned airlines were found, but even here, there were differences in the manner in which the airlines provided their services.

The Chairperson said that a debate would be raised the following year, which would look at the merger of South African Airways and SAX, because both airlines were owned by the State. 

Dr Pillay said that he ran an extended learning programme, which focused on maths and science and two of his students, both females, had applied to become pilots. Apparently there was a height restriction because the airline pilot seats could not be adjusted. That disadvantaged the two girls, as they were less than 1.6 m tall.

Dr Pillay asked why turnover rates were only taken from flights from OR Tambo Airport, despite the fact that the airline flew from other airports also. 

The Chairperson said that although the financial statements were in order, she was not fully happy with the report. SAX had not hedged its fuel costs, although SAA had done that, and had made better profits. Both companies were State-owned and thus had to establish a relationship and make some decisions jointly. SAA’s On Time Performance was much better than that of SAX.

Ms Mzimele replied that the relationship between SAA, Airlink and SAX was an alliance relationship. An alliance relationship was exactly what SAA had with the Star Alliance. SAA was a partner to a bigger group. The companies were separate even though SAA and SAX had the same shareholder. She added that because the same shareholder owned them, there were things that the companies worked on together.

Ms Mzimele added that the reason that SAA’s On Time Performance was better was because they were running different operations. SAA had a combination of both domestic and international flights. On international flights it was possible to make up time. The difference would have been interesting if SAA gave the Committee information only about domestic On Time Performance.

The Chairperson asked if SAX had compared itself to other airlines internationally, who operated like itself.

Ms Mzimele said that when SAX was compared to other airlines, it was also necessary to look at the airports from which they operated. Most regional airlines did not operate from the main airports such as OR Tambo International. If the airline operated out of a smaller airport, there would be less reasons for it to be late. OR Tambo was a very busy airport. On Time Performance was affected by many factors such as air traffic. The location of the airport also had an effect on the On Time Performance.

The Chairperson asked if the two companies had assessed the extent at which they were subsidising the costs of SA Airlink, at the expense of the South African taxpayer.

Ms Mzimele replied that using the same system was part of the benefits of being in an alliance. However everybody paid for the usage of the system. Even though SA Express was in an alliance with SAA, it paid SAA fully for the use of their system, and so did SA Airlink. When SAA invested in a system, it was aware that the costs would be minimised because the two other companies would also pay for the usage of that system. She did not believe that SAA was subsidising SA Airlink.

The Chairperson said she was not happy with the demographics composure of SAA Express airways staff members. The total of African employees in the company was 46% and whites were 41 %. That was too close, if compared to the overall demographics of South Africa.

The Chairperson said since SAX was recruiting the best maths and science students in South Africa, she would like to hear what the company was contributing to ensure that schools in the country developed better maths and science learners, especially those that were in rural areas and townships. As much as the company was doing well financially, she reiterated that she was not happy with its staff demographics nor with the role it was playing in addressing the inequalities of South Africa.

The Chairperson said she usually connected from Johannesburg to Kimberley and used SA Express. The company's trolleys were made in another country. She had also noticed something similar with the Department of Education, as most of stationery they supplied to its schools was made in other countries. Those types of resources could surely be made in South Africa as the materials were available locally. She asked why SAX was not activating the economy by ensuring that those trolleys were manufactured in South Africa.

Ms Mzimele replied that her company did not buy the trolleys. However, the company was very specific in terms of its procurement processes. Even though the trolleys were not made in South Africa, SAX ensured that the supplier was in partnership with a local person or company. She accepted, however, that the Department could also play a role in encouraging trolleys to be manufactured locally. 

The Chairperson added that she was also not happy with the industry players against whom SAX was comparing its performance levels. The Committee would call SAX back again to ask questions about its employee profiles.

Ms Mzimele said that SAX welcomed the point raised by the Chairperson.

Mr M Nhanha (COPE) said that either SAA or SAX had mentioned some time ago that a number of pilots were approaching pensionable age and that there were sufficient qualified or potential pilots to take over. However, this Annual Report stated that pilots were a scarce skill. He asked whether SAX would be able to meet the demand and need for the number of pilots.

Ms Mzimele replied that SAX was not facing problems with pilots wanting to retire. Most of those joining SAX were young, and many in fact moved on to SAA in order to fly their big jets and airbuses. SAX also lost some of its pilots to the international market and bigger carriers. However, it also benefited from pilots who wanted to move from smaller airlines.

Mr Nhanha asked how SAX included money spent on the loyalty programme in the report.

Ms Mzimele replied that SA Express did not own a loyalty programme, and this belonged to SAA. People did earn airmiles when flying with SAX, but this worked on an “earn and burn” programme, whereby the miles could be earned and burned on either airline.

Mr Nhanha said there was a saying that “if something moves or flies, do not buy it, but lease it”. He asked how many aircraft SAX owned, and how many were leased.

Ms Mzimele replied that SAX owned thirteen aircraft and leased ten.

The Chairperson asked the age of the aircrafts, in terms of miles or distance travelled.

Ms Mzimele said on average the airlines were 7.7 years old. Airlines did not work on miles, but on cycles. The cycles were not directly linked to how old an aircraft was, because an aircraft could be ten years old but have a few cycles. Each part on an aircraft had its own lifetime, which is why there were different categorisations for each service level. Every number of hours a certain part had to be removed or an engine overhauled.

Dr Pillay said that he was worried to see someone like Mr Stavros Nicolo on the board of SAX, as he did not have any qualification relating to the industry or aviation, but was a pharmacist. He also noted that another board member, Mr Glen van Heerden, came from the car hire industry and there might be a conflict of interests. He asked how the Department would appoint people to the Board.

 Mr Vermoolen replied that the Department of Public Enterprises felt that the board was balanced and strong. Mr Stavros Nicolo was viewed as a businessman, rather than a pharmacist. Mr Glen van Heerden had already retired from the car industry and added value to the board. However the Department could brief the Committee at another meeting about the strategy adopted to appoint members to the Board.

Dr Pillay asked SAX to explain its plans for the 2010 World Cup.

Ms Mzimele said that the airline understood that in order to prepare for the World Cup, it had to add capacity into the market. It was also going to maintain the routes currently being flown. There was a possibility of entering partnerships with some of the other African carriers, and SAX was also going to lease some more carriers during the World Cup. The airline was not going to increase fares but would be using the tools that it was currently using.

Mr Gololo asked the SAX to explain its procurement strategy and to say how it complied with Black Economic Empowerment principles

Ms Mzimele said that SAX was doing a lot on the procurement side and was creating opportunities, but she would put a report together for the Committee on the matter.

The Chairperson thanked SAX for the good results.

The meeting was adjourned.