South African Airways: Interrogation of 2012 Annual Report, in presence of Minister of Public Enterprises

Public Accounts (SCOPA)

28 May 2013
Chairperson: Mr T Godi (APC)
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Meeting Summary

South African Airways (SAA) appeared before the Committee to answer questions on its 2011/12 Annual Report and financial statements. The Minister of Public Enterprises was also present and answered some questions. At the outset, the Chairperson commented, with regret, that the delegation comprised all new faces since the last time it had appeared and said that the turnover of senior personnel was of concern.

Members firstly asked why the financial statements for the SAA subsidiaries - Mango Airlines, Air Chefs, SAA Technical, and South African Travel Centre – were not presented separately, but only in consolidated group form, since the Committee wanted a better individual picture of each subsidiary, cross-subsidisation, and performance, including profits or losses. This point was highlighted again later, when Members asked about the remuneration paid to board members, and questioned on which boards they served. It was agreed that this issue be recorded as a recommendation in the Committee’s report to Parliament and the Minister. Members sought clarity on the huge fluctuation of profits and losses, over and above what might be expected from the financial crisis, and questioned how and whether SAA did not budget for anticipated fuel and landing fee increases. They noted the comment that South Africa’s geographical position only posed additional challenges, that it used more fuel than European airlines, and the weaker currency exposed it to greater risk.

Members asked quite a number of questions relating to the activities of the former board, who had resigned en masse and with great and negative publicity, as well as the resignations of the former Chief Executive Officer and Chief Financial Officer. In particular, they enquired about the contracts for aircraft with negative financial connotations, the Airbus terms, and how many craft it leased. The Committee asked if SAA had, or would, consider Public Private Partnerships, interrogated the capitalisation challenges, and why these were not isolated much earlier, and asked what financial state it would be in without government support. Members were concerned about the large contingent liabilities, particularly those arising from pending legal actions, and sought clarity on the reasons for and status of the cases. They wanted to know the rationale for stopping the Durban – Cape Town route. They were concerned abut the irregular expenditure of R128 million and called for clarity on what it comprised and how it arose. They also expressed concern about the continuing baggage losses and how SAA intended to address it. Members were disappointed that the audit committee had not picked up on various issues of non-compliance, recommended that it take the example of the Department of Home Affairs, and wondered if lack of compliance arose through attempting to cut corners or costs. They were also concerned that SAA had only achieved 15 out of 29 pre-determined objectives, and asked what the turnaround strategy was addressing. The Chairperson wondered if over-pricing was not one of the major challenges. He commented favourably on the way that the Minister and Department of Public Enterprises had handled the mass board exit, and asked about any restrictions on board membership.  

Meeting report

Opening remarks
The Chairperson welcomed the Minister of Public Enterprises, Mr Malusi Gigaba.

He commented that the South African Airways (SAA) delegation comprised “all new faces” from the last time the entity appeared before the Committee. The turnover rate of senior personnel was most unfortunate at the entity and its status was of great concern, with many times when the group was in the news for “sinister” reasons. He pointed out that the reason for this meeting was to interrogate the issues of financial management and performance in the 2011/12 financial year, which would allow Members to understand better, and report to Parliament on, the challenges at SAA, as well as to allow SAA’s leadership to assist Members in how performance impacted on finances.

South African Airways (SAA) 2011/12 Annual Report and financial statements: Members’ questions
SAA subsidiaries’ financial statements
Mr N Singh (IFP) commented he did not have much confidence in South African Airways (SAA), especially after it cancelled direct flights between Cape Town and Durban., and asked if the delegates from SAA could reflect on that decision later, and indicate if this move had yielded better results.

Mr Singh sought clarity on the tabling of financial statements for the SAA subsidiaries - Mango Airlines, Air Chefs, SAA Technical, and South African Travel Centre. The annual report only contained financial statements for the group, and he therefore asked if the public and Parliament had access to the financial statements of the subsidiaries.

Mr Malusi Gigaba, Minister of Public Enterprises, replied that the financial statements contained in the Annual Report (AR) were consolidated statements, and that the group’s statements included the statements of subsidiaries.

The Chairperson asked if Mr Singh was suggesting that the financial statements of each of the subsidiaries should be made separately available in the AR.

Mr Singh replied this was indeed what he sought to establish, so the Committee could get a better picture of the performance of the whole group and each of its subsidiaries. Such statements would indicate the kind of cross subsidisation that took place. The non-availability of the financial statements for subsidiaries made it difficult to gauge if they made a profit or a loss, and if the Committee had known of this, it could have engaged on these points. He requested that separated financial statements should be made available in the future.

The Chairperson commented that this point could be noted as a recommendation in the Committee’s Report to Parliament and to the Minister. The Committee should be able to look at the performance of each subsidiary, as well as at the overall picture of the group.

The Minister replied that such a recommendation would be accepted. There was nothing in those statements that SAA or the Department wanted to hide from the Committee or from Parliament.

Mr Singh wanted to know what informed the change of the auditing firm that had been used in the past.

The Minister replied that, in line with best practices, the Department of Public Enterprises (DPE or the Department) used the principle of rotating auditors, similar to the approach that was used in the appointment of boards. Every five years, the auditors were changed, and this was the case with all other entities in the DPE portfolio. This was to curb the potential for bad practices to arise if the same auditors were kept longer than required, was curbed.

Mr Singh asked DPE was satisfied with the work the auditors conducted, but that the principle of rotation necessitated the change.

The Minister replied that the group was satisfied with the work the auditors had performed.

Mr Singh commented that the current auditors had expressed an opinion on the group financial statements. Whilst the group had done fairly well, there were particular areas that had been mentioned as shortcomings. There had been a change in SAA’s accounting policies and how financial figures were expressed in the statements. He sought clarity on how the fluctuation, from R799 million profit to a R1.3 billion loss, year to year, had occurred. Members were aware of the situation under which airlines generally operated, as well as the economic meltdown, but this large fluctuation needed further explanation.

Ms Dudu Myeni, Acting Chairperson, SAA Board, requested that the Chief Financial Officer (CFO) and the Chairperson of the Audit Committee respond.

The Chairperson interjected and said he hoped this was not how the Committee’s questions would be dealt with. In terms of the law, the Chairperson of the Board was the person who should be leading the accountability team. He had encountered numerous board chairpersons who came to Parliament to say nothing, but merely to delegate to other officials. This behaviour gave a wrong impression about the work done on these reports.

Mr Wolf Meyer, Chief Financial Officer, SAA, replied that the change in results was not due to the change in accounting policies. When the accounting policy was changed, SAA re-stated the comparative numbers as well. The main reason for the loss was the impact of the increase in the fuel prices. If that was eliminated, SAA would have made an operating profit in excess of R300 million. The fluctuations were also due to an increase in other costs, like regulated charges and airport charges.

Fuel cost challenge
Mr Singh asked if the group budgeted for possible increases of landing and parking fees, and commented that he would have thought that SAA would have received enough advance notice from other countries when there were pending increases.

Mr Nico Bezuidenhout, Acting Chief Executive Officer, SAA, replied that in general the global aviation industry showed losses of up to USD 30 billion in the previous year, as a result of the global financial meltdown. That impacted on both demand and cost increases. The 2010 FIFA World Cup (hosted in South Africa) helped SAA’s financial performance, with a temporary positive impact on the organisation.

The SAA group used forecasts from local and international economists when budgeting, and it had budgeted for fuel at a certain price level. When that was exceeded, there would be a demand fall-off in the market, due to the higher fuel prices. Fuel retailers would push up prices to recover for the fall-off, and this would impact on revenue.

SAA also took guidance on regulated charges such as airport and navigation charges, from regulators. It was a challenge when the prices were pushed up to accommodate for structural price increases, because demand remained in the same level. Aviation was a capital intensive business. It was impossible to decrease the output because of fixed capital expenses.

The Chairperson asked for the percentage of the fuel expenditure compared to the overall budget of the entity.

Mr Bezuidenhout replied that 25% of SAA’s cost base was constituted by fuel. South Africa’s geographic position made this particularly challenging for SAA, because it was far removed from the world, compared to the European airlines. SAA used more fuel than an average airline elsewhere, and was therefore more exposed to higher prices of fuel. In addition, because the oil was priced in US dollars, a weakened currency increased the airline’s exposure.

Mr Meyer commented that, in absolute terms, fuel costs went up by over R2.3 billion, and increases in the fuel levies could only bring in about R600 million. The net increase of fuel prices was thus in the region of R1.6 billion.

Mr Singh asked if the possible increases had been factored into the current budget.

Mr Bezuidenhout replied that they had, and this was done every year. This formed an important part of re-engineering SAA’s business, and was why it was important to start looking at more fuel-efficient, long range fleet aircraft. SAA could not manage the absolute price of fuel, but could attempt to manage the volumes of fuel it utilised.

Old contracts and aircraft leases
Mr Singh wanted to know how many aircraft the entity owned, and asked for more detail on the terms of agreements for those that were leased.

Mr Meyer replied that, out of 59 aircrafts that SAA used, it owned seven, and the rest were leased.

Mr Singh asked if the board and senior management who had left the entity had signed long term contracts that currently impacted on the operations of SAA. If so, he wanted details of those contracts, and what type of impact they had had.

Mr Bezuidenhout replied that there were some agreements that were historic in nature. The typical one was the SAA AC20 fleet acquisition, a 2002 contract for procurement of 15 aircraft. With successive management, the nature of that transaction had changed. SAA would now start receiving the aircrafts from next month, going through to 2017. The aircraft were procured at a rate of about 10% to 15% above market cost. There were committed transactions, on which the entity would only now start receiving delivery. Another contract was entered into in 1999, where the aircraft purchased were not fuel-efficient.

Mr Singh asked if it was fair to conclude that some of the contracts would continue to have a negative impact, despite SAA expecting to receive some more fuel-efficient stock.

Mr Bezuidenhout replied that this was indeed correct, but steps were being taken to mitigate the impact of the historic contracts.

Mr Singh requested that he elaborate on those steps. He asked how the new fleet would impact on the group’s finances in the future.

The Chairperson asked for an explanation on the rationale of procuring at 10% to 15% above market rates.

Mr Bezuidenhout replied that the contract was entered into in 2002, and delivery was to happen around 2006. The delivery was postponed until about 2013. There were escalation clauses in the contract, but also a new generation aircraft was introduced, and the market value of the old fleet had reduced. There was thus a gap between the contracted price, and the current market price, by the time of delivery, due to escalations and postponement.

The Chairperson interjected to ask why there were delays in delivery of the fleet.

Mr Bezuidenhout replied that when SAA was separated from Transnet in 2005, Transnet was of the understanding it had terminated the contract. The supplier sought recourse, and the transaction had to be upheld. This period also coincided with SAA cash flow challenges. However, SAA aimed to use its bargaining power to try and reverse the delivery of the outstanding aircrafts.

Mr Singh asked if it was fair to conclude that lack of vision, poor management and previous boards’ failure to oversee this matter properly would have a negative impact for the group as it moved forward.

Mr Bezuidenhout responded that it would be fair and confirmed that there was a residual impact of the decisions taken at the time.

Mr Singh commented that daily management by the new incoming board, and Departmental oversight, would hopefully ensure quality management of the entity. It was preferable that incumbent management did not point fingers at predecessors.

Capitalisation challenge
Mr Singh asked if SAA would ever want to consider public private partnerships (PPPs), whilst bearing in mind the fuel price hikes, and if there were in fact any such arrangements that the airline was contemplating.  He also wanted to know what financial state SAA would have found itself in, had it not been receiving financial support from government.

The Minister replied that when SAA was removed from the Transnet group, it was not adequately capitalised, and the country had to live with the consequences of that now. Had SAA received adequate capitalisation from the onset, it would have been in a different situation. The company had “hobbled from one mess to the next”, requiring assistance regularly. It had looked into this point during the turnaround strategy considerations. Now was the right time to reverse the capitalisation challenge. The challenges could not be adequately addressed if the entity was not correctly capitalised. The main issues for SAA were capitalisation, and good management to run the company and ensure things were changed at corporate level.

The Chairperson asked how the under-capitalisation of SAA could not have been highlighted, many years ago. When this Committee first engaged the then-leadership of the entity, the CEO at that time had indicated that the only solution was to run SAA like a private business, and that had been the core issue identified in that meeting. He was glad the Minister had raised the issue of good management, as he fully agreed that capitalisation of the entity would not make any difference if there was no strong management.

The Minister replied that government had at one stage attempted an equity partnership with Swissair, but it had not worked, and government ended up having to revert to full ownership of SAA. He commented that it really made little difference whether an airline was privately or publicly owned, as the essence was that all commercial enterprises needed to be run as such. It might have been that the former CEO had been trying to articulate that the dual mandates of State Owned Enterprises (SOEs) should not apply to SAA, but even this would have been an anomaly. The “dual mandate” referred to the commercial and developmental mandates that any state entity should have, and the two mandates should reinforce one another. However, SAA was not, at the moment, looking at any option that would include a PPP.

Mr Singh said government needed to be alert at all times, and ensure the entity was sustainable. The public should not be given the idea that whenever SAA was in trouble, Government was there to bail it out. The Committee needed to allay the fears of the public, and reassure them that good management would prevail. He urged that there must be good policies for the future.

Contingent liabilities
Mr Singh sought clarity on contingent liabilities, and asked about the extent of the possible liabilities that SAA might face as a result of actions taken against it by other airline companies. The group was currently defending three actions brought by Comair and the litigators of Nationwide, arising from findings by the Competition Tribunal in relation to SAA’s agreements with various travel agents.

Ms Myeni replied that there were some historical issues, that some matters relating to Comair and had been dealt with and closed, but there was still one matter, presently sub judice, between SAA and Comair.

Mr Singh asked for specific details on the nature of the issues.

The Chairperson clarified that what the Committee needed to know was the nature of the claims, and what the closed matters had been about. They also needed to know if there had been any contraventions of legislation by SAA, and, if so, why.

Ms Myeni replied that one matter was a pending arbitration matter, involving The claims were estimated at R120 million and it was due to be heard on 20 June. SAA had been advised that it had strong prospects of success in the case, including on alleged infringement of the trade mark. Legal costs and exposure to date had not yet been determined, but external assistance had been received from Leshaba and Moodley Associates.

The Chairperson interjected and requested that the items listed on page 99 of the AR should be clarified. They related to Air Cargo, Far East Asia, and FIFA 2010 World Cup. He wanted to know what they involved and how they had been settled.

Mr Singh also sought clarity on the Competition Commission matter involving SAA. All this had to do with contingent liabilities and unforeseen and unquantifiable exposure.

Mr Beduizenhout replied that the matter with was a specific matter, and it was anticipated that the chances of success were good. The 2010 FIFA matter related to a complaint brought before the Competition Commission, on possible price collusion between British Airways,, Mango, and SAA. That case had not been concluded and it had stalled. No collusion had been found so far, and Mango had never been involved in any price fixing prior to the World Cup.

The matter relating to Comair was brought in 2002 and again in 2005. It was alleged that SAA used its market power to exert pressure on travel agencies to get beneficial treatment and sales above other competitors. A ruling was made, but this was followed by a civil claim by Comair. The claim for the first period was R120 million, and for the second period was R400 million. The second claim continued to be defended in court.

Durban-Cape Town route
Mr Singh called for clarity pertaining to the Durban-Cape Town route that he had mentioned earlier.

Mr Bezuidenhout replied that the reasons for withdrawing SAA services on the route were straight forward commercial considerations. The route was traditionally a leisure route, which only carried two business-class passengers per flight. There was little demand and this route generated losses for the group over five years, of about R120 to R150 million a year. A decision was taken to use Mango to service that route, and it was now the single most profitable route, as the cost structure of Mango matched the market demand.

Irregular expenditure
Mr Singh commented that although the auditors had said irregular expenditure had been fully disclosed in the Directors’ report, the Committee was concerned about the figure - R128 million. A well resourced entity such as SAA should not be registering any kind of irregular expenditure. He called for an explanation.

Mr Bezuidenhout replied that irregular and wasteful expenditure was not tolerated at SAA. The R128 million was irregular expenditure, but this had caused no loss to the company. It related to contract management, where contracts were not extended within the correct time period, or where service provisioning had commenced without the contract being in place for a period of time. This was still not acceptable. In the current year there was a 77% reduction on this type of irregular expenditure. Progress had been made to correct the situation, as new contract registers had been implemented and electronically monitoring systems had also been implemented.

Baggage loss
Mr Singh sought clarity on what SAA was doing about baggage claims, especially since they resulted in wasteful expenditure. Quite often, there were claims that the entity was tightening up, but there were continuing reports of theft of and from people’s luggage. He pointed out that it would result in bad branding for the country if international visitors continually lost their bags. He asked why this happened and what would be done to reduce it.

Mr Bezuidenhout replied that all airlines, worldwide, faced challenges around baggage loses. The industry operated in a world dominated by social ills, criminality and syndicates. The value chain in terms of baggage handling traversed the airlines, Airports Company South Africa (ACSA) and the third party. In the last twelve months SAA had re-engineered its processes around baggage handling. “Project Zero” was launched, with the aim of reducing baggage pilferage, and to address routing and theft. South Africa compared well with the rest of the world on ratio of loss per 1 000 bags. SAA had also implemented rigid service level agreements with suppliers, and that would allow the company to recoup the cost of lost items. However, most importantly, SAA had managed to reduce the number of incidents.

Ms Yakhe Kwinana, SAA Audit Committee Chairperson, said an amount of R3 million was recorded, under fruitless expenditure, as a result of baggage claims. The total fruitless expenditure figure was R4 million, but R3 million of it was from pilferage. This year’s figures, although not yet audited, indicated that this amount had been reduced to R195 000 for the financial year ended 31 March 2013. SAA was still unhappy with this amount, as it went against the ideals of Project Zero, but it was an improvement. Other controls, such as enhanced automation, had also been introduced.

She added that as well as controls put in place to counter financial management transgressions, a Public Finance Management Act (PFMA) compliance checklist had been introduced. There was also PFMA induction and training for staff, to ensure they knew the Act. Furthermore, a contracts monitoring system was being implemented, as well as a checklist that took care of expiring contracts. This item resulted in irregular expenditure being reduced in the year under review.

Board resignations
Mr Singh sought clarity on the reasons for the resignation of the former Chief Financial Officer (CFO), and asked also whether, since the resignation, there had been improvements or changes.  

Mr Bezuidenhout replied that the reasons for the resignation related to interpersonal conflict with the then-CEO and management. There were no other deeper underlying reasons. There had been an improvement in the control environment since the former CFO left.

Mr Singh asked what impact the mass board resignations had on the entity.

The Minister replied that the board resignations had no impact on functioning of corporate governance, because new board members were soon appointed. He explained that on the Friday of the mass resignations, DPE had gone to Cabinet to get approval to change the Board. Members of the Board somehow got this information and decided to resign instead of waiting for the Annual General Meeting (AGM), where they would have been changed. The majority of the board members were not going to be re-appointed. He suggested that the action was akin to players abandoning a game before the referee blew the final whistle, but assured the Committee that it had created no vacuum. However, it did impact on SAA’s reputation, which was of concern, given the challenges the company went through, the uncertainty as to how future board members would react when approached to serve on the board, and how staff viewed the resignations.

The board members action was unprecedented, particularly since an email notifying all staff of the board’s intentions was sent before the shareholder was informed. There was a concern that the action would destabilise staff, but it did not. DPE moved swiftly to clear the air, staff were given reassurances, and management was assured that a new board would soon be in place. At the operational level, therefore, he reiterated that the resignation had no impact, but there was some from the point of view of how South Africans viewed the airline. There was no chaos, and DPE was in full control. It was expected that there would be a turbulent period, given that the resigning members campaigned in the media. There were important lessons learned, however, on how to engage with any similar future occurrences.

Compliance matters
Mr R Ainslie (ANC) commented he was very impressed at the responses so far, which had adequately addressed the questions. His questions were more to seek clarity.

Mr Ainslie indicated that he had been disappointed with the findings of the audit committee, found on page 59 of the AR. The audit committee seemed to emphasise its role as overseeing irregular expenditure. However, he asked how it viewed its role in relation to internal controls when it came to ensuring adherence to laws and regulations, nationally and internationally, and why it was not ensuring full compliance.

Ms Kwinana replied that the audit committee also looked at laws and regulations as part of its functions. It was an oversight in the part of the committee not to mention that in the AR, but such information would be included in future.

Mr Ainslie commented that such information would be useful to the Committee. He recommended that the SAA audit committee should look at the example of the audit committee report for the Department of Home Affairs (DHA). That audit committee was the main strength of that department, which had resulted in fairly clean audits for the DHA. He said this Committee was anxious to ensure that audit committees of departments did not become their weakness. He wondered if the internal audit challenges listed in the report were a result of lack of internal controls.

Ms Kwinana replied although she would not claim that internal controls at SAA were perfect, there were processes to ensure that weaknesses were prevented, and, where this was not possible, at least such weaknesses should be detected.

The Chairperson commented that the various claims and penalties against SAA created an impression of an airline that operated like a buccaneer, and that was indicative of non-compliance.

Mr Ainslie asked if SAA lacked capacity when it came to monitoring international legislation, policies, and regulations.

The Chairperson commented it would be interesting to find out whether non-compliance was an attempt to cut corners or costs. He asked if lack of compliance was not part of the area of oversight for the audit committee.

Ms Kwinana replied that it should be studied during oversight. Quarterly reports were received on foreign issues that the entity had to take care of, including safety and security. It must be noted that SAA was not included in the prosecutions following the close of investigations on prior issues.

Mr Ainslie commented that the entity was still suspect. He felt that the audit committee was doing well in monitoring irregular expenditure. It was also important that the audit committee empowered itself in that it improved its ability to monitor international developments, and that it did not fall short against international law.

Directors’ fees
Dr D George (DA) sought clarity on the fees paid to the board of directors, especially to Mr Daka, who collected well over R800 000 for attending nine meetings.

Ms Kwinana replied that Mr Daka was also the Chairperson of SAA Technical.

Dr George asked if that meant Mr Daka performed duties other than those that were reported.

Ms Kwinana replied that remuneration depended on the committees and subsidiaries that the board members sat on. The chairpersons of those boards were paid more than other members, and she noted also that Mr Daka was the chairperson of the Procurement Committee. All these positions contributed to him earning much more than other members.

Dr George asked where that was indicated in the report.

Ms Kwinana added that board members were paid a retainer, whether they attended the meetings or not.

Dr George commented that the figure still appeared too large.

Ms Kwinana replied that Mr Daka would have attended some other committee meetings.

Dr George asked where, in the AR, that would be indicated.

Ms Kwinana replied that it would be reflected in the annual reports of the subsidiaries.

The Chairperson interjected and said this took the Committee back to where it had started, when the need to have details about the subsidiaries was highlighted. Had this been included, the information would have been to hand.

Dr George commented it was of enormous concern if a member of the audit committee was paid almost R100 000 for a meeting.

The Minister commented that the new remuneration standards that had been developed would address the anomaly. Fees would no longer be based on committee work, but overall board attendance. DPE tried to ensure that it did not end up with anomalies like this that ended up with board members being paid more than they deserved.

General items
Dr George commented that the clarity provided by SAA at this meeting was welcome. However, the nature of the payments was concerning, particularly when compared, say, to what mine workers were paid.

Dr George noted that he had information about an R8 million claim against SAA, by a certain S Watson, which arose during the 2011/12 year, but which was not referred to at all under the contingent liabilities. He questioned why.

Mr Meyer replied that SAA was aware of the case, and were guided by legal Counsel as to what the possible legal outcome would be. The claim was baseless, but provision had been made, in the balance sheet, should SAA have to pay.

Dr P Rabie (DA) commented that he agreed with a sentiment expressed by the Minister that taxpayers should not be burdened by the operating expenses of entities. He sought clarity on the pending delivery of the airbuses, to be delivered in 2014. He asked when SAA had agreed to this contract, and how far the negotiations were, and commented that it would not be fair for the tax payer to foot the bill.

Mr Bezuidenhout replied that the first of the AC20 aircraft would be delivered on 18 June, and the second in July 2013. Another two would be delivered later in the year, and then the remaining 15 aircraft would be delivered in stages through to the end of 2017. Finances for the aircraft were in place.

Mr Meyer said the financing of the first ten had been finalised. The entity had opted for an operating lease, and did not have to pay out a large lump sum, which would not, in any event, have been possible given its present financial state.

Mr S Mfundisi (UCDP) commented that SAA had achieved only 15 out of 29 predetermined objectives in this financial year. This was “mediocre” for an entity of SAA’s size. He asked how this would be addressed and corrected in the future.

Mr Bezuidenhout replied that when it came to predetermined objectives, it was important to note that SAA had moved out of its phase of self-denial. A number of steps had been instituted, including the turnaround strategy. However, he stressed that the turnaround strategy was not a substitute for good management. In the 2012/13 year the company was reporting over R1 billion rand in cost compensation service.

He reiterated that SAA’s challenges had included its high cost base and inadequate capital infrastructure. SAA did not benefit from the east-west flying, and the aircrafts were used much less productively than in other countries. In addition, in South Africa, the labour agreements were fairly restrictive and required right-sizing. All these factors contributed to making SAA cost-inefficient. The company was now focussed on changing how it did business, and it had, as a result, generated R1.2 billion savings in the last 12 months.

The Chairperson asked if over-pricing by SAA was not one of the challenges when it came to revenue generation and the business in general. He cited a story of a foreign national who wanted to fly SAA to the United States, but decided against it when this airline had charged R4 000 more than its competitors.

Mr Bezuidenhout replied that pricing was convoluted and complex. The entity had a management team in place that worked on pricing. The team had to extract the maximum they could, on a given day. Load factors had shown improvements in the current year, and that implied that SAA was achieving some form of equilibrium between supply and demand. SAA did not engage in silly behaviour, and “short-termism” of cutting prices, thinking it would retain customers. SAA tried to stop some practices that made no sense. As far as possible, the entity tried to re-engineer its business without impacting on the customer base. Benefits filtered through to the subsidiaries.

Closing remarks
The Chairperson commented favourably on the way that the Minister had dealt with the matter of the previous board, who had left in a “spectacular manner” that did not cast any positive light on SAA. There remained question marks, in the minds of many, as to what could have happened. That board had also taken over from another board that itself did not leave covered in glory, so it was even more worrying that the later board replicated the former board’s behaviour. He also called into question the effectiveness of some board members who served on numerous other boards, and wondered if SAA had considered placing any restrictions on the number of boards in which one of their members could serve, to ensure that they were more effective in carrying out their work in SAA.

The Chairperson noted that another apparently linked matter was the resignation of the former CEO, and her performance. He asked that the minister also provide more information on the former CEO’s resignation.

The Minister said that DPE tried to impose conditions and targets in all the state owned companies with regard to irregular, fruitless and wasteful expenditure. SAA was very strict when it came to safety standards. The entity wanted to improve on things like baggage handling, to a point where no customer could claim to have lost luggage. With the new turnaround strategy, SAA looked to address the issue of optimising value on the aviation capital assets. The entity would strengthen its work here, as it had far reaching implications for the aviation assets of the state. In the past the lack of clear strategy resulted in duplication among own airlines, and the turnaround strategy was focussed on reversing that. SA Express had also been asked to develop its own turnaround strategy that would address all gaps that currently existed.

The Minister added that DPE would change the structure of ownership on all the assets, with a view to avoiding a situation where entities existed independently from one another. In terms of the government shareholder model, they should be part of a single structure. The turnaround strategy was a 20-year strategy that contained short and medium-term objectives. There were urgent issues facing SAA that the turnaround strategy had to address. He supported SAA, as it not only added tremendous value to the national pride, but also contributed to the Gross Domestic Product.

Mr Gigaba explained that the former CEO, Ms Sizakele Mzimela, resigned soon after the mass resignations by the board. She had served SAA quite well, and DPE regretted losing her services. The new CEO would start on 01 June, and would be the custodian of the turnaround strategy. The previous board was constituted with skilled South Africans and had achieved a lot. It served the country well, and if any of those members were required back in any capacity, DPE would not hesitate to request that.

He commented on the restrictions on board membership, explaining that the rules that had been drafted stipulated that no board member would be allowed to serve on more than four boards. It was easy to comply with that. Rotation of boards should be natural, and it was not desirable to have board members serve two consecutive terms of three-year periods. Many companies demanded a lot of attention. Board members were retired once their abilities appeared overstretched.

Finally, the Minister noted that the questions regarding internal controls were important, and this matter received high priority in the Chairpersons’ Forum, where DPE met chairpersons and CEOs of the SOEs twice a year. Active shareholding was worth pursuing, especially in a country where companies could contribute so much. SOEs, and their budgets, were geared towards a particular direction that was meant to enhance industrialisation and foster transformation. He was confident that “SAA would come right” and DPE was focussed on achieving that task.

The meeting was adjourned.


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