South African Airways on its Annual Report 2011/12

Meeting report

Ms Duduzile Myeni, Acting Chairperson, South African Airways (SAA), said that the Committee had visited SAA in November 2012. The Board had felt it prudent to involve more executive members in this meeting. There had been much speculation about leadership in SAA in the media, as well as on the profitability of the airline. The Board was committed to its task, and had confidence in all its staff. The Board was newly elected. It intended to continue to respond with diligence and flexibility to the needs of the region. It was committed to working with all stakeholders. The task team had done a lot of work, strongly backed by the Board and the shareholder representative. The Ministerial Task Team was busy formulating a long-term turnaround strategy.

Ms Myeni said that there were detailed plans for the stabilisation and growth of SAA over a twenty year horizon. The skies had never been clearer for this critical initiative. All Board members were hard at work on the instructions of the shareholder representative, and led the turnaround strategy. Living up to the promises would not be easy, but the Board had no illusions. The task could be achieved with enough determination, which the Board and executives had. They were looking at other models to ensure success. The strategy should be presented at the end of March 2013. The success of the strategy would depend on organisations such as business, the media and Parliament. Constructive criticism was welcomed but there should not be knee-jerk reactions.

Ms Myeni said that in the past, strategies had been developed but had been parked in the shade. Eight strategies had been devised by consultants only to be shelved. The current Board had revisited all of these and were confident of success with the latest attempt. This strategy was developed and owned by SAA's own people and was at the cutting edge. Elements of the strategy would be made public after it was submitted to the Minister. She implored members to do their work with passion.

Mr Wolf Meyer, Chief Financial Officer: SAA, presented the independent audit report. The report for the 2011/12 financial year (FY) was unqualified, but that was to be expected from a company such as SAA. There were two emphases of matter. The first was on the restatement of corresponding figures in accordance with international standards and the Public Finances Management Act (PFMA). The second dealt with irregular expenditure. Questions had been raised over the revaluation of land and buildings, the even spread of maintenance costs, the spreading of costs for the power by hour programme, and Voyager programme revenue. The cumulative effect of this irregular expenditure was R3 million over the FY, and over time amounted to R2.5 billion.

Mr Meyer said that R128 million had been spent in an irregular manner, but no losses had been concerned. These had been issues of non-compliance. Contracts had not been renewed timeously. Internal controls had now been put in place. R4 million had been lost to fruitless and wasteful expenditure. These were due to inherent costs and SAA had no control over these items. The airline had been forced to pay R1 million as a tax penalty to the State of Virginia over the non-compliance of a fuel supplier. Losses due to criminal activity had been R28 000. In all cases, disciplinary action had been taken and the perpetrators dismissed.

Mr Meyer said that only 52% of the key performance indicators (KPIs) had been achieved. Most of the fourteen of those which had not been achieved were financial. The debt equity ratio was problematic. Seven were due to costs and the difficult operating environment, one due to cash and equity problems, and six due to the operational environment. He assured the Committee that the new strategy would address the KPIs. No significant deficiencies had been identified in internal controls.

Mr Meyer said that the Audit Committee was satisfied that the internal controls and financial reports were adequate. A concern had been expressed that SAA was under-capitalised

Mr Meyer then presented the Annual Financial Statements (AFS). At the 2011 Annual General Meeting (AGM) the outlook had been gloomy. Low growth was predicted together with high fuel prices. There was increased competition from Middle East carriers. New routes had to be implemented. The global market was volatile. There was lower demand for both passenger and cargo services. Margins were thin.

Mr Meyer said that the price of crude oil had risen to $110 per barrel. Fuel increases had a significant effect on the airline's costs. Global players continued to focus on Africa as a growth area. SAA had embarked on a cost compression programme that had saved R1 billion in operational expenses. SAA had launched 25 cost-saving projects.

Mr Meyer said that SAA contributed R8.6 billion to the gross domestic product (GDP). The tourists brought into the country contributed R11 billion. The sector accounted for 35 000 jobs and had provided R1.3 billion in tax revenue. The Mango fleet had been expanded from four to six aircraft. The SAA Flight Academy had been launched. SAA had won the Skytrax Award for the best airline in Africa for the tenth successive year.

Mr Meyer told the Committee that revenue had increased by 6.1% in the FY under consideration.  Controllable costs had increased by 5%. This excluded fuel, maintenance and airport taxes. A gain of R935 million had been made on property. SAA's shareholder had provided a guarantee of R5 billion. The mechanics of this guaranteed was much misunderstood. R1.5 billion would be used to raise working capital. The balance would be used to counter identified risks. The allocation was conditional. SAA would have to report on the use of any money from this guarantee, which could only be done with the approval of the Minister of Finance. A turnaround plan had to be put in place. R1.2 million was still available.

Mr Meyer said that revenue had increased by 6% to R23.8 billion. There had been a 12% increase in other sources of income. While fuel levies had been put in place to counter the effects of the fuel price increases, they did not cover all the costs.

Mr Meyer continued that operational costs had increased by 6%. The fuel price had increased by 36%, and fuel was 33% of all operational expenditure. The price was still increasing. Employee remuneration had increased by R294 million, an increase of 7%. This included an adjustment to the pension fund. An accounting fund entry had been made. The real increase in salaries was only 4%. Total costs were R 25.2 billion, including fuel (R8.3 billion), employees (R4.7 billion), maintenance (R1.7 billion), lease agreements (R1.8 billion), navigation, landing and parking fees (R1.5 billion).

Mr Meyer told Members that the cost of aircraft maintenance had increased by 32%. Foreign exchange considerations on leased aircraft had played a major role in this increase. If this aspect were to be excluded, then maintenance costs had in fact decreased by 1%. The cost of aircraft leases had increased. Navigation, landing and parking fees had increased by 18% after the Airports Company of South Africa (ACSA) had imposed a 34% increase in the previous year.

Mr Meyer revealed that SAA had posted an operational loss of R1.3 billion of the 2011/12 FY, that after it had recorded a profit of R1 billion in the previous FY. However, if one discounted the increased fuel costs, they had in fact made a profit of R326 million. SAA was still following a hedging policy on fuel, but had adopted a more conservative approach. Previously a minimum level had been set, but the policy had since changed to sticking to a maximum of 75%.

Mr Meyer said that SAA had not thought it worthwhile to challenge the tax penalty imposed on it in the United States.

Mr Meyer said that the cash reserves had decreased by 4%. a loan was in place. There were not many changes to the previous FY. Cash reserves had been depleted from R2.2 billion to a position where they had an overdraft of R33 million.

Mr Nico Bezuidenhout, Acting Chief Executive Officer (CEO), SAA, said that the airline connected six continents and thirty countries. It employed 11 000 people and served 43 destinations. During the 2011/12 FY it had carried 8.5 million passengers and transported 140 thousand tonnes of cargo.

Mr Bezuidenhout said that SAA supported the objectives of the developmental state. It had been tasked to create new air links, such as the route to Beijing. Five African destinations had also been added to the network. It maintained a substantial domestic profile, together with its partners. It supported transformation as a company.

Mr Bezuidenhout said that there were serious financial and environmental challenges. It had to face global forces. Currency exchange rates and fuel prices were volatile. There was increased competition. The policy landscape was challenging. It was a capital-intensive landscape. The geographical facts meant that SAA had to fly longer routes. The country had close ties to the European economy. A strong capital base was needed. Fuel efficient aircraft were needed.

Mr Bezuidenhout said that maintenance and labour costs were high. SAA had created 140 additional jobs during the FY in question. Transformation was going well. The morale of the staff was improving. Labour laws were followed closely. The airline had no obligation to recognise any particular trade union.

Mr Bezuidenhout said that SAA had reduced its fleet slightly from 54 to 53 aircraft. It had carried 8.5 million passengers during the year, a growth of 11%. Baggage pilfering remained a concern, but the rate had been cut by two thirds. There were now only 0.29 cases per thousand passengers. This compared favourably to the best rates in the world.

Mr Bezuidenhout said that sustainability remained the key. The airline had an impeccable safety record. They were acutely aware of the need to co-exist with other investors. SAA was now an integrated group, including Mango as a low cost carrier, SAA Technical, which was Africa's leading maintenance provider, and Air Chefs, which had a 50% market share. All catering services faced challenges, and food wastage did occur.

Mr Bezuidenhout said that the question was how to integrate the state's aviation assets better.  Some progress had been achieved. SAA had received top marks for both performance and safety. Its governance structure was maturing. A zero tolerance approach was being taken on misconduct. It took a tough stance on fruitless and wasteful expenditure. SAA was a South African company that supported social responsibility initiatives.

Mr Bezuidenhout said that when an entity lost R28 billion over several years, it could not be sustainable. He could not deny that the airline was in a poor financial situation, but they must move forward. A holistic approach was being taken to restructuring and re-engineering. There would be no holy cows when the turnaround strategy was implemented. There had to be a balance between social objectives and financial sustainability.

Discussion
The Chairperson said that the people of the country needed to hope in the governance and leadership of SAA.

Ms G Borman (ANC) thanked SAA for the honest presentation. They had gone through rocky times. There was a need to fix the airline's image. It was a pity that most of the negative critics had not had the opportunity to read the Annual Report (AR). She sensed the passion of the executive and Board members. She asked if the R28 000 lost in criminal activities had been recovered. SAA's cargo operations appeared to very successful, showing a net profit of 8%. However, the KPI on operational efficiency in cargo operations had not been achieved. This was strange. It seemed from the attendance register at Board meetings that attendance had been poor and that there were no controls. Not many meetings had been held. Mr Laubscher had only attended three of the five Board meetings and four of the eight audit committee meetings. Ms Myeni had only attended two Board meetings and two of the four remuneration committee meetings.

Mr K Dikobo (AZAPO) said that false hope must be avoided. He had been optimistic at the last meeting with SAA, but this feeling was fading. He was happy with the position of SAA as the state carrier. He could not understand why management was saying that the airline was under-capitalised. The shareholder had been very generous. SAA should now be self-reliant without further bail-outs. The 32% increase in maintenance costs was too high. He asked if this was a sign that the fleet was too old. He asked how SAA's costs compared to those of other airlines. Irregular expenditure was described as unavoidable with baggage theft a factor. He asked if the public must simply accept this behaviour as a fact of life. He would not agree to that.  It was reported that there were no deficiencies in the internal controls, and yet there had been R128 million in irregular expenditure. Somewhere the rules were being broken and there must be a problem. He asked how the company could function under the leadership of an “Acting acting CEO”.

Dr G Koornhof (ANC) noted the size of the SAA delegation, and found that it was a pity that the boardroom had been so empty when the Committee had visited SAA in 2012. A report had been submitted to Parliament on that issue. The implementation of the turnaround strategy would be a problem. He asked why Members should believe SAA now. It was a tough business. He agreed with Mr Dikobo's comments on irregular expenditure, and quoted from Treasury regulations. There was a duty of reasonable care, and management must not be in denial. The 48% failure rate in terms of KPIs was not good enough. He asked what management was doing to ensure a 100% achievement rate. The fundamental problem was the weak capital base, and he asked when this would be remedied. He saw five challenges, namely leadership instability, failings of corporate governance, lack of financial performance, operational effectiveness and performance of SAA's subsidiaries.

Ms C September (ANC) wanted an explanation on why Mango's finances were not part of the SAA report. She found it unacceptable that the turnaround strategy was not yet in place. The Committee had been told the previous year that this was in place, now a new strategy was being drafted. There was a need for accountability. She asked what had happened since the Committee's last meeting with SAA. The submission of the AFS was already outside the normal parameter, although she noted that SAA had been given permission by the Speaker. The presentation was all about history and did not assist Members. SAA must report on its ongoing plans. She wanted an explanation on how the same person could serve as both Chairperson of the Board and CEO. She applauded the suspension of Acting CEO, Mr Vuyusile Kona, who should not have been appointed in the first place. SAA must unpack the economic fundamentals. There was a need to see the plan and the alternatives.

Mr M Sonto (ANC) pointed out that it was not a clean audit report. The presence of irregular expenditure showed that there was still work to be done. He asked if SAA was responsible for the baggage of its passengers. If a third party fulfilled this function then it should not be SAA's problem. He asked what was being done. He noted how British Airways operated on South African domestic routes and asked if SAA had the same access to the internal markets in countries such as China and the United States.

Ms N Michael (DA) said that there was a lack of stability in the Board. There were several new faces, and she asked if there would be several more when they next met with the committee. She asked when acting positions would be filled. This was worrying. Members were extremely patriotic and this led to sometimes emotional criticism. On the eve of the recent African Cup of Nations (AFCON), SAA had to take an emergency loan to stay airborne. She asked if there was a chance that the airline would be grounded. The airline had benefited from a R5 billion guarantee. She asked how much more was needed to balance the books. Staff costs were high. SAA pilots were reported to be the highest paid, and the airline had the highest ratio of staff to aircraft. She asked what the position was on the renegotiation of the Airbus contract.

Mr C Gololo (ANC) said that nine turnaround strategies were now in place. He asked if these would be blended into a single policy or the same long one would be used. He asked how many baggage claims had been paid, and what the highest pay-out was. He asked if the new routes into Africa were profitably. He assumed that the increase in the size of the Mango fleet indicated profitability. He asked what the overall performance was.

Mr E Marais (DA) noted that only 3-5% of seats were allocated to Voyager programme members. This might deter customers. Staff expenses were too high compared to other carriers. He would like to see a balance sheet for ACSA. Their turnover must be huge given the amounts paid by SAA alone. He agreed that more fuel efficient aircraft were needed for the airline to move forward.

Mr M Nhanha (COPE) noted that some of his colleagues were shocked at the appointment of the former Acting CEO. The Directors had noted this in their report. Ms Myeni was now the Acting Chairperson of the Board despite attending only two of the five Board meetings during the FY. Many of the teams in the AFCON had complained about the state of the pitch at Mbombela. Nigeria had complained once and then gotten on with the job. SAA was producing many old excuses. He asked what was being done to remedy the situation. They should not be 'cry babies'. The achievement of KPI's was a dismal failure. Executives at SAA were paid more than Members of Parliament. He asked if their bonuses would be paid despite the financial failures during the year. There seemed to be a vendetta against a former CEO in Mr Khaya Ngqula. The costs of the case were greater than the amount which might be recovered.

Ms Myeni replied that Members should look at her attendance record in previous years. During the FY under consideration she had been seriously ill, and had been placed on sick leave for six months. Whereas the Board normally met only four to six times a year, in the current year they had met fifteen times already. This showed the seriousness they felt. She fully supported the executive. Members should not expect too much detail on the turnaround strategy just yet. Some issues still needed to be raised with the Director-General (DG).

Mr A Khumalo, Non Executive Director, SAA, led the committee in charge of the turnaround strategy. The Board had asked the Minister to act on the appointment of the CEO. The long-term turnaround strategy (LTTS) committee had been set up. He wished to dispel a misunderstanding. None of the nine earlier strategies was holistic, and he quoted a number of the strategies which had been focused on specific aspects. The committee had been working almost every weekend on developing the LTTS.

Adv Lindiwe Nkosi-Thomas, Litigation Committee, SAA, said that the CEO had resigned on 1 October 2012.  A quick replacement was needed. The shareholder had said that the functions of CEO and Chairperson could be combined as an interim measure, but would eventually be split. The Board had instigated a committee to look into the conduct of the Acting CEO, Mr Kona, and had taken decisive action on their findings. The position of CEO was advertised on 20 January 2013. While there were several applications, there had also been some head-hunting. A wide search had been conducted. A short list had been identified, and would be presented to the Board on 22 February. The appointment should be made by the end of March 2013.

Ms September asked if Parliament had been misled over the holistic nature of previous turnaround strategies.

Mr Khumalo said that the new Board had assessed that the previous strategies had not been holistic, with the possible exception of one conducted some six years previously.

Dr Koornhof said that the nine turnaround strategies had been presented to Parliament, but not one had been implemented.

The Chairperson said that SAA was not denying the existence of these strategies. What they were telling the Committee was that there had been something lacking in the previous approaches. He did not want to harp on this issue too much.

Ms Myeni said that the Board had decided to revisit each of the previous strategies and extract what information was relevant. The new document must talk to current challenges.

Ms Yakhe Kwinana, Audit Committee, SAA, said that the statements of the three subsidiaries had been incorporated into the SAA AFS. The separate information for Mango, SAA Technical and Air Chefs could be provided on request. There was no deficiency in internal controls. The controls were in place to detect misconduct. If they were not there, it would not have possible to report on irregular expenditure. Baggage theft was unavoidable. A company had been appointed to handle baggage, but there were weaknesses in the contract. A project had been put in place to review the contract. Legal processes were in place to recover the R28 000. A cost benefit analysis would be done to determine if the cost of recovery would exceed the possible recovery. She felt that it had been a clean audit. The Board did not want to have even Emphases of Matter recorded. A project was in place to ensure that all issues raised by external audit had been attended to.

Mr Bezuidenhout said that the R3 million recorded as baggage losses included visa infringements. The documents of travellers to South Africa were checked before they were allowed to embarked, but they often destroyed their documents in flight with the intention of claiming asylum. If their claim was rejected, the carrier was obliged to return them to their point of departure at the carrier's expense. Charges were levied against the baggage handling service provider for sub-standard service. These amounted to up to R100 000 per month. This arrangement was applicable to all service providers according to the current approach.

Mr Bezuidenhout said that the salaries of pilots compared well to leading carriers. It was a challenge to retain them. There was a high labour ball. The airline was top heavy and a right-sizing procedure was needed. The comparison of 11 000 employees to 53 aircraft amounted to a ratio of just below 200:1. Airlines differed. For Mango, the ratio was less than 100:1, but there were different considerations for long and short haul airlines. He preferred to work on the ratio of passengers to employees. In the case of Mango, this ratio was 4 000:1 based on annual passenger figures.

Mr Bezuidenhout added that an interim cost compression project had led to savings of approximately R1 billion. These savings must be substantial. Some re-engineering was needed. Substantial changes had been made to the structure of SAA but more must be made. The LTTS would ensure sustainability. Management realised that there could be no government bail-outs. Strategies needed to be developed to curb expenses, and these needed to be implemented.

Mr Bezuidenhout said that enough money had been spent on developing these strategies. Skills had been brought in where needed. Capabilities were being built. Commitments needed to be linked to KPIs. SAA was exposed to aircraft and fuel costs. It was not an industry for 'sissies'. The geography could not be changed.

Mr Bezuidenhout said that the route network needed to reflect trade and tourism patterns. The right tools were needed for the job. The fleet would have to change. Investments such as aircraft had to be safeguarded. The route network would have to be re-assessed. No airline had shrunk to make a profit. Growth was the only option.

Mr Bezuidenhout conceded that it would be easier to turn the reputation around that the company itself. There were positive stories to be told such as safety and operational efficiency. Stronger governance was needed. There was a well-developed whistle-blower process in place.

Mr Bezuidenhout said that SAA had done well despite the instability in leadership. Transformation and employee development had been successful despite still not being at an optimal level, such as the lack of a proper succession plan. There was not enough depth in the organisation. An investment in skills development was needed. In order to compete globally, adequate resources were needed. Key positions would be filled shortly.

Mr Meyer added that the R28 000 was regarded as a loss, but in each case disciplinary action had been taken. On the cargo KPI, one reflected efficiency and the other profitability. The accounting policy for maintenance had changed. Provision was made for foreign exchange fluctuations.

Mr Meyer said that cash flow had to be managed carefully. In December there had been an estimate that more cash would be needed, and SAA had gone to the bank to plan for the problem. Bad publicity had resulted. Negotiations with Airbus were well advanced. Three final tenders for finance had been invited. There had been engagement with the Euro Credit Agency. The first delivery was expected in June 2013

Mr Bezuidenhout said that Mango had returned profits in three of its five full years of operation, and he was confident that there would be another profit returned in the FY ending March 2013. He acknowledged the value of Voyager programme members. Only a small number of the members actively took advantage of the benefits. Often there was a larger demand for reclaims at peak times such as Easter. British Airways operated on South African domestic routes as part of a franchise agreement. SAA did not have rights to domestic traffic in China or other countries. It was difficult to compare SAA to a company such as Ethiopian Airways, which was also a flag carrier but had no domestic competition. Costs of maintenance were being contained due to a cost-cutting programme.

Mr Musa Zwane, CEO, SAA Technical, said that the technical operation had been loss-making but was now profitable. R64 million had been realised in the first year of Project Thrust, and a profit of R160 million was expected in the current FY. The five year target was to quadruple profits. The strategy here was delivering.

Mr Meyer said that if there had been a problem with the internal controls, there would have been an impact on operations. Problems had been identified by the internal controls. The cash flow was now in place.

Mr Tshediso Matona, Director General: Department of Public Enterprises (DPE), said that events at SAA in the previous five months reflected a number of unfortunate co-incidences. The global pressures should not be underestimated. Strong entrepreneurial acumen was needed. Certain matters had concerned the shareholder for some time. Minister Gigaba had held deeply critical conversations on a number of matters.

Mr Matona said that the leadership had been discussed at length. The DPE felt that the discussion needed to go deeper and research had been done. The McDonald study had been revealing. The research had shown something was wrong. There was no long term vision. There was a chance now for a thorough review. There had been a painstaking agreement on the guarantee.

Mr Matona said that there had been drama after the resignations from the Board late in 2012. Leadership was a big issue. There was a question on how effectively plans would be implemented. The combination of the roles of Chairperson and CEO had been an attempt by the shareholder to fill the vacuum that had been created. The decision had not been taken lightly and was only seen as an interim measure. This did happen in the private sector and he quoted examples from Eskom and Transnet. It was a chance.

Mr Matona said that the DPE was investigating the conduct of Mr Kona. The appointment had been made on a judgement call but there had been a flaw. It was urgent to appoint a permanent CEO. DPE was looking to draw from the expertise available. The pattern of government hand-outs had to be stopped. He understood the impatience of the nation. The process of appointing a new CEO was moving ahead quickly.

Mr Z Sithole, SAA, said that the KPMG report had been implemented by the previous Board. Certain findings had been made. The Board was legally obliged to take action. The cost benefit analysis on recovering money was being conducted. The Board was satisfied that the project legal costs did not exceed the recovery.

Mr Nhanha said that the issue had been raised by the previous Board. They felt that the cost benefit was not the issue, but rather the principle of recovering money illegally taken. They had resolved to pursue the matter regardless of the cost.

Mr Marais compared the outrageous increase of ACSA tariffs to that of Eskom.

Ms Borman said that airport and other taxes imposed on 'free' Voyager flights often meant that it was cheaper to buy a full ticket on one of the budget airlines.

Ms Michael said that one way to regain the trust of the public would be to display complete transparency. Information was coming through leaks. She asked if Mr Kona was on full pay while suspended.

Dr Koornhof referred to the AFS. He asked why the financial statements for Mango were not indicated. He felt that there should be cost breakdowns for SAA's domestic, regional and long-haul operations.

Mr Nhanha repeated his question on bonuses.

Mr Bezuidenhout said that ACSA charged a lot for maintaining world-class structures. They did seem to be making better profits than others. Time had been lost in the past in implementing turnaround strategies. The current process had started on 7 January 2013. He could not quantify the figures to restore a positive balance, but there was agreement on the measures needed. SAA could not ask the shareholder to finance operational expenditure. More certainty would be given by the LTTS. There had been a process of wide consultation and there had also been a research phase. The socio-economic role of the airline had to be considered. It was currently playing different roles.

Mr Bezuidenhout said that in the case of the Mango AFS, competitors were asking for a higher level of disclosure than they themselves were prepared to make. Mango had never been regarded as a subsidiary entity. Mango had been profitable for four out of six years and would likely be so again in the current FY.

Mr Bezuidenhout said that no company should bay bonuses if it had been making a loss.

Ms Thuli Mpshe, General Manager, Human Resources, SAA, said that the remuneration policy only made provision for bonuses if profits had been generated and KPIs achieved.  She confirmed that no bonuses had been paid in 2011/12. Mr Kona had been suspended with pay in terms of the Labour Act.

Adv Nkosi-Thomas said that there had been no leaks on the decision to suspend Mr Kona. The shareholder had been advised immediately.

Mr Gololo asked if it was better to lease or buy aircraft.

Ms Michael said that the media had reported on Air Chefs no longer donating surplus food to charity because of a dispute with the union over distribution. She asked how further waste could be avoided.

Ms September asked if there was any current legislations that impacted negatively on SAA. The Competition Commission had made rulings against SAA. She accepted that the state had an obligation to provide financial support for the national carrier. This was part of the developmental state concept.

Dr Koornhof asked what the relationship with the New Age newspaper was, and other publications. He understood that Business Day newspapers were sold at a loss.

Ms Borman said that in a climate of poverty, it was a wretched situation that so much edible food was being dumped. There could be all the turnaround strategies in the world, but if the right people were not in place then the organisation could not succeed.

Mr Matona said that it was not a case of poor decisions in appointing officials, but rather a matter of judgement.

Mr Nhanha noted that SAA had won the Skytrax award for nine successive years. He asked when SAA would no longer be the elephant in a small room and compete with world players. He raised an issue of language on the Beijing route. Chinese passengers had been treated appallingly by cabin crew.

Mr Marais queried the decision not to award bonuses in the FY under consideration. He asked if this had been applied to staff at all levels.

Ms Alison Crooks, CEO, Air Chefs, said that Air Chefs had a very active relation with the unions. There had been no discussion on the disposal of unused food. This was distributed to selected children's homes in Cape Town and Johannesburg. Food was dumped as a last recourse. Preparation of meals started 72 hours before the flight. A strict quality process was followed.

Ms Crooks said that where there were excess meals provided, they would be loaded onto a following flight. If this was not possible, they would be made available to the staff canteen, and failing that they would be given to the homes. Any unused food on incoming international flights was destroyed in accordance with directives issued by the Minister of Agriculture. Attempts were made to recycling what catering items could be safely re-used.

Ms Crooks said that Air Chefs was looking to make savings where possible. Some R23 million was spent on food purchases daily, and there were loopholes that could be exploited by corrupt staff. Strict controls were in place, and where staff were suspected of fraud, they had been arrested and charged with criminal offences.

Mr Sithole said that risk exposure was monitored at every meeting of the Audit Committee. There had been an unhappy past with the Competition Commission. SAA was happy to report that most matters had been settled. Impediments had been put in the way, as SAA and Mango could have benefitted from bulk purchases of fuel in terms of economies of scale. The SAA group was a single economic entity, but the relationship between the two airlines remained a troublesome issue. SAA was looking to consolidate all government aviation assets.

Mr Matona said that SAA had finally got the message that it could not violate competition legislation. This needed to be embedded in all state owned entities. Airport taxes were the subject of regulation. The legislative environment should be reviewed. All of the organs of state should support SAA.

Mr Bezuidenhout said that the relationship with the New Age was not different to any other media house. SAA paid R2.31 per copy of the newspaper as opposed to a cover price of R3.50. The general approach was that SAA should not pay for newspapers, as distributing them on board aircraft gave the newspaper exposure. SAA advertised in a number of publications, including the New Age. Bonuses had not been paid at any staff level.

Mr Meyer said that it was that the question of leasing or buying depended on the airline's appetite for risk. There was a higher risk to the residual value of wide body aircraft. The rules had been changed, and now all leased aircraft were reflected on the capacity sheet. There were capital and tax considerations in choosing the best option.

Ms Mpshe acknowledged the challenges regarding language barriers. Announcements were made in two languages on international flights in the interests of safety. SAA had searched for and employed a number of Mandarin Chinese speakers, and ensured that on every flight there were at least two crew who could speak the relevant language.

The Chairperson said that Members had raised concerns over the leadership of SAA. Government could not take chances with the airline. The right people needed to be in place. The turnaround strategy would not work if the right people were not in place. Ongoing engagement was needed with the Board and Executive.

The meeting was adjourned.