South African Airways: Minister speaks on its turnaround strategy; Committee Report on Medupi Coal Power Station oversight visit

Meeting report

Briefing
Mr Malusi Gigaba, Minister of Public Enterprises, said that being aware of the sensitivity and gravity of the situation of SAA, where its AGM had been postponed three times last year because of its financial statements not being finalised, the resignation of the previous Board of Directors and the awarding of a stringent government guarantee to SAA.

Mr Monwabisi Kalawe had been appointed as the new CEO since the first of June. A new Board had been appointed in October 2012 with their key objectives being the development of a long-term turnaround strategy for the company; that the airline be stabilised and be driven by profitability not constant financial support; that the business model be reviewed; that a profitable financial plan and profitable route network be developed; that a fleet replacement strategy be developed; that a revenue and cost management plan be developed; that the airline focus on Africa.

A strategy task team, comprising SAA, SAX and the Department, had been established. This team had placed an emphasis on the management of high cost structures and improving yield. The team had developed a short term (18 month) and a long-term strategy. The priorities of which were to review the loss making long haul network. The focus would be on the domestic and regional network as it was the most profitable. The team would now turn to the implementation of the strategy. The long-term turnaround strategy (LTTS) would now be included in the shareholders compact. Quarterly bilateral meetings between the Director General and the CEO of SAA would be instituted. SAA, MANGO and SAX would operate under one holding company. SAA had embarked on a fleet replacement program for its narrow-bodied fleet. It wanted to operate under a holistic and coordinated aviation policy as was instituted in other countries like UAE, Kenya and Ethiopia. There would be a roll out of HR interventions. It was engaged with the Treasury to ensure that funds were available. The Department had started research on developing a regulatory framework that would ensure that all government paid travel had to fly SAA similar to a scheme operating in the USA. SAA had requested government input on the key Mumbai and Beijing routes. Government should identify all strategic routes irrespective whether they were profitable or not. Capital expenditure requirements were being reviewed with Treasury. The airlines governance structures and management were stable.

Ms Dudusile Myeni, Chair of SAA’s Board, said there would be an office to monitor the implementation of the LTTS.

Mr Monwabisi Kalawe, SAA’s Chief Executive, said there had been extensive engagement with staff, SAX and the Department in the development of the strategy and the strategy had to find a balance between commercial and priority needs.  The strategy was developed using a proven strategy development framework. The strategy benchmarked the latest thinking in aviation circles and had been validated by expert external consultants to world-class outcomes. The strategy encompassed planning for a 20-year period with a stakeholder focus and a transparent governance framework. In the short term the airline would move speedily to get some quick wins and develop momentum.

In assessing the company, he said the strength of the airline was its strong brand with a good safety record and world-class operations and strong African footprint. Its weaknesses were its high cost base, the liberalisation and consolidation within the aviation market and the shift in global air traffic. Most of the international routes were loss making. The domestic market was profitable but they were finding that passengers in this market were becoming price sensitive. Geographically SAA was far from the major air traffic routes. Amongst staff there were cultural differences resulting in a lack of accountability, poor decision-making and a poor implementation record with none of the previous nine strategies having been implemented. There was a lack of a holistic coordinated aviation policy for the country. Human Capital needed to be rebuilt as the company had suffered losses of personnel when people had left the company.

The LTTS included five new strategic objectives. In supporting the National Development Plan, SAA had commissioned research on the company’s impact on the economy. This showed that it supported 35000 jobs and a further 44000 jobs in the tourism sector and accounted for R8.6b (0.3% of the GDP of South Africa). It acknowledged that its transformation profile was an area which needed to be focussed on. The second objective was to develop commercial sustainability. It was in discussions with the Department and Treasury in reviewing the financial model and its financial requirements. The third objective was providing excellent customer services with a new customer service experience framework being implemented and Voyager undergoing changes. The fourth objective was consistent efficient effective operations. Initiatives were under way to improve productivity and recruitment. The fifth objective was performance excellence through driving a program of accountability.

It wanted to change the structure of the organisation and create a new holding company for SAA, Mango and SAX which would force integration and accountability and allow for an integrated route network.

Supporting processes to bridge the gap between strategy and implementing was amongst others, the development of human capital, marketing brand standardisation with respect to marketing within a new holding company and procurement compliance. The financial plan was achievable if the issue of recapitalising the company was resolved. It would be meeting with the Department and Treasury and use the LTTS, as it was designed to transition SAA into a sustainable business model.

He said according to a Harvard business review, a successful change program comprised ten elements and SAA would be focusing on two of these in particular, namely effective rapid implementation and that the implementation be highly visible to all stakeholders. A Governance framework was in place with a dedicated LTTS office to monitor implementation and providing quarterly report updates. There had been some quick gains with the signing of code sharing agreements with Etihad and TAM airlines and with Mango flying to a new destination, Dar es Salaam. The company was targeting R100m of cost savings.

In conclusion he highlighted the key elements of the strategy; recapitalisation of the company as a high priority, a review of the route network and on loss making routes; refleeting to mitigate against high fuel costs; targeting growth into Africa; driving cost savings; developing a group holding structure for synergies.
 
Discussion
Dr G Koornhof (ANC) said he welcomed the cutting of loss making routes. They needed to be eliminated as SAA would have to carry their costs. He asked whether the three entities SAA, Mango and SAX would be generating their own individual financial statements since it was envisaged that the three would be housed under a single holding company. How would the key weakness of SAA, its weak capital base and balance sheet be addressed? How was the filling of key posts, Head of Legal and Head of Commercial being addressed? Who would be overseeing the implementation of the turnaround program? How would a new fleet be financed?

Ms G Borman (ANC) asked what made this strategy different to the other nine strategies that had not been implemented. When would the Committee get the plans and targets? When would the office which would monitor the implementation of the LTTS be set up?

Ms N Michael (DA) asked what the costs for the use of consultants in developing the LTTS were. Would the three entities under one holding company now only need one board? What was the status of the Airbus contracts and what did it cost? What actions had been taken to prevent strikes occurring? How many staff would be cut? What routes were loss making and what were profitable? How many of the 18/19 initiatives that had been started had been successful?

Mr E Marais (DA) wanted an update on the fuel efficiency of the new aircraft SAA would acquire.

Mr Kalawe said he was comfortable with the dual mandate.

The grouping of the airline companies still needed to be implemented and the shareholders and legal advisors still had to be consulted. They were targeting early 2014 as an implementation date.

He said the uniqueness of the LTTS was that it was in a sense owned by the people working at SAA. The Board had created a LTTS subcommittee which had crafted the strategy and would monitor it. It was unlike the other nine plans in that it had an implementation plan in place. Implementation had been built into the performance contracts of management and into the corporate annual performance plan as well as into the Shareholders Compact.

The new fleet of aircraft would comprise some of the acquisitions of narrow-bodied planes being received currently through to 2017.

Regarding the comment that the SAA staffs was top heavy, he said he had approved a bench marking exercise which would point out where high costs were emanating from.

Regarding the weak capital base, he said they were currently in discussions with the Department and the National Treasury. He said there had to be an LTTS in place for funds to be made available.

Regarding the cost of consultants, he said he did not have the numbers immediately available but they could be sent to the Committee. The LTTS had been developed by the Board and the management of SAA. Respected external organisations were only used as consultants to validate certain aspects of the strategy.

Mr Tshediso Matona, Director-General of the Department, said the question of whether there would now be only one board was an issue that still needed to be developed.

Mr Kalawe said that management would identify the loss making routes. These would be circulated and routes that were essential for the economy would be kept while the rest would be cut. SAA was in discussion with the Department and other departments and would disclose what routes would be cut after the decisions had been made and the shareholders had been informed.

There had been two strikes at SAA, with one at the technical division. Both strikes had been resolved with a minimum disruption to passengers. He said there was still a need for more engagement and communication with staff.

Mr Matona said it had asked SAA to break down its plan into targets so that these could be incorporated into the shareholders compact as specific deliverables and be used to monitor implementation.

The capital base of SAA was weak and this structural challenge needed to be addressed. The LTTS had given the Department a framework to take decisions regarding the financial requirements of the airline.

Committee Report on Oversight Visit to Medupi Power Station
The Committee adopted the report on the oversight visit to Medupi Power Station.
 
The meeting was adjourned.