SA Express on its 2009/10 Annual Report

Meeting report

The Chairperson congratulated Mr Inati Ntshanga for his appointment as South African Express Airline’s new Chief Executive Officer on 1 September 2010. She congratulated the SA Express Board of Directors for appointing the new CEO so speedily.

SA Express Annual Report Briefing
Ms Lilian Boyle, Chairperson: SA Express, said that it had been a good year for the entity, but a bad year for the aviation industry in general. SA Express also had a busy year even though its passenger numbers were down. The entity’s highlights included the re-branding of their aircraft and uniforms. It helped SA Express to distance itself from South African Airways (SAA) and proved it was a separate entity. They launched Congo Express, which really only got off the ground in February 2010. This was a little later than the entity expected. SA Express also managed to obtain a net profit of R250 million. However, included in the R250 million was a once-off R163 million boost due to a change in the accounting treatment of “rotable spares” in accordance with the International Financial Reporting Standards (IFRS) as advised by the auditors. This did not constitute as sustainable earnings going forward. But SA Express was pleased to have been profitable relative to its competitors in Africa. Some of the lowlights included not being able to secure the route rights to Maun in Botswana, facing a considerable increase in competition on some of the entity’s good routes such as Gaborone and Bloemfontein, the Congo Express launch delayed by six months, and the pressure of scarce resources for the technical side of the sector. The year so far was proving very difficult because economic recovery had been a little “wobbly” and there was still very little improvement in passenger volume and demand. During the FIFA World Cup, SA Express had to transport all the teams around the country. This was quite successful. One of the key issues in general included on-time performance. This was a major focus for the SA Express. SA Express was also going to be focusing on the renewal of their fleets and building Congo Express and its profitability. SA Express still faced even more competition on many of its routes and would be re-evaluating some of its less profitable routes.

Mr Ntshanga briefed Members on the 2009/10 Annual Report and financial results. The reports showed that global international scheduled passenger traffic declined by 3.1% in 2009 compared with 2008. International traffic dropped by 3.9% while domestic traffic fell by 1.8%. A moderate recovery was expected for 2010 with a 3.3% traffic growth forecast. Industry revenues were expected to increase by $22 billion to $478 billion in 2010. Passenger demand was expected to grow by 4.5% in 2010. All regions except Africa would see an improvement in the next financial year. African carriers would deliver a loss of $100 million in 2010.

SA Express was pleased to announce that it remained profitable despite the harsh economic and operating climate. SA Express made a net profit of R250 million and their Debt-to-Equity ratio decreased to 41% in the current year, reflecting the reduction in total liabilities. However, their revenue growth decreased by 0.5%, while their growth in passenger numbers declined by 5.4%. It received a passenger load factor of 62%. SA Express also experienced a 0.8% increase for total expenses. Their operating profit decreased by 4.3% compared to the prior period and net profit after tax increased by 10%. Total assets increased by 16% and equity increased by 27%, while liabilities decreased by 5%. Despite the global pressure on the economy and airlines in general, the Net Profit margin of SA Express increased to 14% from 13% the previous year. The return on assets decreased by 1% to 14% in the current financial period.

In terms of the employment profile, the total number of employees was 931, where 40% were white and 60% were black. Of the total number of employees, 38% were female and 62% were male. There were 14 executive members of the staff. 64.2% were male while 35.8% were female. SA Express was also involved in cadet training or pilots. 100% of these cadets were black. When compared with industry targets, it showed that SA Express was right on track. Its numbers for black employees in senior management, black women in senior management, and black pilots were all above industry targets. The only issue was the matter of employing more disabled persons, which SA Express was working on.

Some of the airline’s highlights included winning the 2009 Airline Reliability Performance Award from Bombardier, winning the 2009 Regional Airline of the Year award by the African Airlines Association, carrying all domestic flights during the FIFA World Cup and launching Congo Express Airlines. However, SA Express was still faced with challenges such as the potential second economic downturn with passenger numbers remaining low, fuel price fluctuation and exchange rate fluctuation.  

Discussion
The Chairperson addressed SA Express’ employee profile. She said that the figures for black employees were inaccurate as it included the figures for Indian and Coloured employees as well. She asked SA Express to disaggregate the figures and to send them to the Committee.

Ms G Borman (ANC) asked the entity to explain the once-off amount of R163 million that was included in the R250 net profit amount. She wondered if the SA Express’ efforts to expand into Africa ever caused conflict with the SAA. How did it affect their business?

Ms Este Welman, Executive Manager: Finance for SA Express, replied that the amount of R163 million was the total amount for rotable spares, which had been treated as inventory at first but were reclassified as assets and included in the net profit.

Ms Boyle answered that SA Express was very much in cooperation with the SAA.

Mr Ntshanga added that SA Express was a feeder airline while SAA was an intercontinental airline. They would continue to focus on being a feeder airline instead of looking at long distance travelling. That was SAA’s role. There were other areas that SA Express would work on with SAA. However, it would not discuss with SAA matters such as pricing or any other issue that was detrimental to the passengers.

Dr G Koornhof (ANC) thanked the SA Express for a very neat Annual Report. He noted that they ran a very “lean and mean” operation, which was good because an entity needed to be lean in the current economic climate, and they had to be mean in such a competitive environment. He congratulated the SA Express for having a clean audit. It was a pleasure to look at such an excellent Annual Report. Page 55 of the Annual Report showed that KPMG performed four audit reviews for the entity. He asked if SA Express had received value for money from these reviews. He also noted that page 83 showed that the entity spent a substantial amount of money on external auditors. Was there value for money? Page 57 of the Report looked at the Board’s Key Performance Indicators (KPIs) and page 49 focused on the entity’s short term and long terms goals. Was this SA Express’ way to measure itself against its performance targets?

Ms Boyle replied that SA Express outsourced the internal audit function to KPMG and in general they were pleased with the work of both the internal and external auditors.

Mr Ntshanga added that both the internal and external auditors played a major function within SA Express. The increase in the amount paid to the external auditors was due to the acquisition of Congo Express and the auditing of areas that were not audited before. 

Ms Boyle answered that the short and long term goals of SA Express were given in the Shareholders Compact. They were also seen as the performance targets and were measured against the Board’s KPIs.

Mr K Dikobo (AZAPO) noted that almost all of the Board’s subcommittee’s were made up of only board members. He asked why it had not included other stakeholders in the subcommittees. SA Express had failed to secure the route rights to Maun in Botswana and he asked them to explain what had happened. SA Express’ passenger load factor was at 62%. At what point was the entity able to break even?

Ms Boyle explained that the law stated that the sub-committee meetings had to be attended by board members, especially non-executive members.

Mr Ntshanga replied that SA Express had failed to acquire the route rights to Maun because they had changed their minds and decided to keep the route locally owned.

Mr Ntshanga answered that 62% was a profitable passenger load number. It was difficult to determine what the breakeven number was, as it depended on a number of factors such as departure times for flights, the day of the flight and the routes. 

Mr P van Dalen (DA) asked how much the previous CEO, Ms Siza Mzimela, had to repay to SA Express when she left before her contract had expired - given that she was promised monetary benefits. 

Ms Boyle explained that executives were rewarded in line with the inflation rate. The long term incentive scheme was a rolling three year plan. Ms Mzimela did not have to repay any money to SA Express because she did not fulfill the three-year plan and therefore, did not receive much of the benefits.

Mr van Dalen noted that the page 59 of the Annual Report showed that Ms Mzimela received R1 357 899 as part of a long term incentive during 2010.

Ms Welman answered that the amount was owed to Ms Mzimela from the previous financial year. The amount was due to be paid on 31 March 2010.  

Mr M Nhanha (COPE) commended the SA Express for a very good presentation and Annual Report. The Report showed that serious work was being done by the Board and executives. He wondered how many of the cadets that were being trained in Port Alfred were from the rural areas in Eastern Cape. He asked if Congo Express was wholly South African owned or only part owned.

Mr Ntshanga addressed the question on the cadets, saying he would send the Committee the information, as he did not have it at hand.

Mr Wesley Hermanus, General Manager: Human Resources for SA Express, added that he did not have the exact figures but the cadets were recruited from throughout the country.

Mr Ntshanga informed the Committee that SA Express owned 51% of Congo Express Airlines; however, SA Express was in the process of taking over a greater share of the entity. 

Mr M Nonkonyana (ANC) asked SA Express what it was doing to help Dinaledi schools as all State Owned Entities (SOEs) were supposed to play a role in at least one province. He also asked the entity to update them on any improvements made on the matter of stolen luggage.

Ms Boyle apologised for being ignorant of the Dinaledi project. The SA Express would look into the matter.

Mr Ntshanga addressed the question on stolen luggage, saying that SA Express had improved on the matter considerably. A few people had been employed to stand at the chutes in the basements were the luggage was taken. SA Express has seen huge declines in the number of luggage thefts and they were saving a lot on claims.

Mr M Sonto (ANC) asked what the passenger decline was attributed to. He noted that during the FIFA World Cup, a flighty carrying the Brazilian team was delayed because one of the employees refused to fill the plane’s fuel tank. He asked SA Express to expand on this.

Mr Ntshanga replied that the passenger decline experienced by SA Express was considerably small compared to the rest of Africa. This was due to a natural decline caused by the recession.

He addressed the matter of the employee that refused to fill the airplane tank. He said that he should not be commenting on it because it was still an internal matter. It could possibly have been due to an argument that the man was having with the pilot. They did not know if the matter had anything to do with the employee not liking the Brazilian team. The case was being handled by the Airports Company South Africa (ACSA). They would resolve the matter.

Mr Nhanha asked how much it had cost to re-brand the airline.

Mr Ntshanga answered that the costs were not high because they did not change their branding that much.

Ms Boyle added that the cost of re-branding amounted to approximately R1.6 million. 

Mr A Mokoena (ANC) asked if there were any litigation cases pending agaist the SA Express.

Ms Tshavhungwe Mamphiswana, Executive Manager: Legal Services in SA Express, replied that there were a few cases but they were all insignificant.

Mr van Dalen said that he had worked out that the former CEO had received a 15% increase. SA Express had said that they only ever gave inflation-related bonus increases.

Ms Boyle explained that Ms Mzimela’s remuneration was made up of her salary as well as short term bonuses and pension pay outs. 

Mr C Gololo (ANC), who was acting chairperson as Ms Mentor had had to leave the meeting, thanked the entity for a good presentation and Annual Report. He asked SA Express to forward information about the former CEO’s salary, their Dinaledi school initiatives, and the disaggregation of employee information to the Committee as soon as possible.

The meeting was adjourned.