South African Airways 2009/10 Annual Report

Meeting report

South African Airways (SAA) 2009/10 Annual Report briefing
Ms Siza Mzimela, Chief Executive Officer, South African Airways, said that the 2009/10 financial year was an exceptionally tough year for the airline industry worldwide. Although South African Airways (SAA) had been fortunate in not having to ground any of its aircraft, the travelling public had responded to the economic downturn by either reducing their travel, or moving from business to economy class. There was also a move from premium carriers to low-cost carriers.

In the last financial year, there was a 2.4% decrease in the number of passengers flown. The cargo flown had also decreased by 14%. Its Africa routes remained the most profitable market segment. Its total income for the year stood at R22.3 billion, down from R26.4 billion in the previous financial year. However, its operating costs also declined to R21 billion, down from R24.5 billion in the previous financial year. It had recorded a Group pre-tax profit of R596 million, as compared to from R424 million in 2008/09. There were also significant improvements in the areas of hedging loss, cash generated from operations, and equity. The Airbus 320 agreement had also been resolved. It had also noted an on-time performance of 85%.

Ms Veona Chaithram, Head of Department, SAA, said that the main reasons for the decrease in the airline’s total income were the 12% decrease in average passenger fare, the 2% decline in passenger numbers, and the strengthening of the Rand.  The subordinated loan from government, of R1.5 billion, was settled and this brought its equity position to R1.04 billion. It had another subordinated loan from government, of R1.3 billion. SAA’s cash position had decreased from R3.8 billion in 2008/09, to R3.4 billion in 2009/10.
 
Ms Mzimela continued that SAA had identified five primary objectives in this financial year. These included  generating sustainable earnings, restoring its balance sheet, providing a consistently high-quality service, becoming a performance-driven organisation and enhancing corporate governance. There were still some internal governance challenges. It would be taking a Group approach, by developing its group members (Airchefs, SAAT, Mango and SATC). The interventions were outlined in the presentation (see attached document).

Discussion
Mr P Van Dalen (DA) asked why, in its Annual Report, SAA had only listed those companies within its group which had recorded a profit.
 
Ms Mzimela answered that the figures reported on reflected the pre-tax profits for all its entities.

Dr G Koornhof (ANC) asked why the Annual Report had not listed SAA’s achievements and compared them to the targets set at the beginning of the financial year. This made it difficult to measure the progress.

Dr Koornhof asked what progress had been made in resolving the emphasis of matter that had been raised by the Auditor-General.

Dr Koornhof asked what the outcomes were of the critical issues facing the airline, as contained in the Annual Report, such as the Airbus A320 order, the FIFA World Cup pricing complaints, the litigation cases against SAA, and the breaches of the Public Finance Management Act (PFMA).

Ms Mzimela answered that pages 28 and 29 in the Annual Report did give a comparison of outcomes against indicators. Some progress had been made around the KPMG report. SAA was still awaiting feedback from the Competition Commission around some of the matters raised, including the FIFA World Cup ticket complaint. A lot of work had been done around adequate training so as to avoid any possible anti-competitive behaviour.

Ms Mzimela said that SAA had negotiated for twenty A320 aircraft for around the same price as the fifteen that had been negotiated previously. As a result of miscommunication, SAA had not been able to extricate itself from the previous contract. It had therefore seen the new negotiations as a strategy by which it could in fact benefit from the situation.

Ms G Borman (ANC) asked how SAA had managed to effectively negotiate for twenty of these aircraft for a similar price as had previously been agreed for fifteen.
 
Ms Mzimela answered that although these were tough negotiation, the favourable exchange rate at the time of the renegotiations had worked in favour of SAA.

Dr Koornhof noted that these aircraft would only be physically acquired in 2013, and wondered whether by then there was a risk that they would have been regarded as older models. He wondered if there was any option of upgrading.

Ms Mzmimela answered that this was factored into the renegotiations. The option of exchanging for later models within the same price range was allowed for.

Ms Borman asked what SAA had spent on tickets for the World Cup. She further wondered if any had been purchased by SAA for its passengers, as all seemed related to apparel.

Ms Mzimela answered that it had spent R23 million on tickets and hospitality suites.

Ms Borman asked why all flights between Durban and Cape Town had been removed, and what cost factors had led to this decision.

Ms Mzimela noted that SAA had not been making money form this route, as there was no demand for business class seats. The removal of SAA’s aircraft from this unprofitable route allowed them to be used on other routes, where frequency could then be increased. She noted that SAA had lost in excess of R100 million a year on the Durban route.

Mr A Mokoena (ANC) asked whether there had been any resolution on the matter against the previous Chief Executive Officer.

Ms Mzimela answered that SAA was still awaiting the outcomes of the civil and criminal charges that had been lodged.

Mr Mokoena asked to what extent African airports had been upgraded in order to avoid the possibility of mid-air collisions.

Ms Mzimela said that although this always remained a challenge, she was confident that SAA had enough technology to avert these collisions.

Mr Mokoena asked by when it was expected that SAA would have repaid the government loan.

Ms Mzimela reported that SAA was working towards paying off this loan as soon as possible.

Mr M Sonto (ANC) asked what progress SAA had made in terms of employment equity.

Ms Mzimela answered that the challenges lay mostly in the pilot and technical areas. SAA had, however, re-introduced its Cadet Pilot Programme and had successfully been running a technical training programme, through which it had employed 200 people.

Ms T Mpshe, General Manager: Human Resources, SAA, added that the airline was aware of the need for transformation and was making progress in this regard, particularly through its internship and graduate programmes. At leadership level, 37% were African, Coloured or Indian (ACI) and 37% were female. The South African Air Force would, in addition, be supplying the airline with cadets who would become pilots with the airline. All of these were African, Coloured or Indian. Of the 15 pilots employed this year, seven were African, Coloured or Indian, while there were nine more pilots in these categories ready to be employed. There were also 200 apprentices in these categories.  

Mr Sonto asked how successful SAA had been in addressing the challenge of baggage-pilfering.

Ms Mzimela noted that the main challenge related to the number of players involved in the handling of baggage. However, SAA was working with the Airports Company of South Africa (ACSA) to address the issues, and was confident that it was addressing the problem effectively, as illustrated by the fact that there were virtually no cases of baggage theft during the World Cup.
 
Dr Koornhof said that the linkage to the strategic plan should be included in its Annual Report in future.

Ms Mzimela responded that it would do this in all future reports.

Mr L Greyling (ID) asked to what extent SAA had worked towards increasing the number of tourists visiting the country, especially through the possible reduction of passenger fares.

Ms Mzimela answered that this was a very important issue for the airline and it had, as a result, held discussions with the Department of Tourism around this issue. By serving as a carrier for 35% of the country’s visitors the airline was already playing a significant role. Its prices were also very competitive.
 
The Chairperson asked what its gearing ratio was, and how the strong rand was currently affecting SAA.

Ms Mzimela answered that its gearing ratio stood at 88%, and it therefore had a long way to go in this regard. The strong rand affected tourism figures, although, as most of its payments were made in US dollars, it reaped some benefit from this.

The Chairperson asked that the Committee should be provided with the airline’s equity profile.

Ms Borman asked whether SAA had filled its most strategic vacancies.

Ms Mzimela answered that most had been filled, and that all would be filled by the end of the year.

Mr Sonto asked whether it was a deliberate decision not to include greater detail around the KPMG report.

Ms Mzimela answered that this was a deliberate decision, as SAA had wanted to await the final outcomes of the investigations before revealing too much detail.

Dr Koornhof asked how much SAA had paid for consultants, whether this amount had increased or decreased over the current financial year, and whether the airline had seen any value for money from these services.

Ms Mzimela answered that the amounts paid for consultants were listed on page 54 of its Annual Report.
These amounts had decreased.

The meeting was adjourned.