South African Airways Turnaround Strategy

NCOP Public Enterprises and Communication

18 February 2014
Chairperson: Ms M Themba (ANC, Mpumalanga)
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Meeting Summary

The Committee met with senior staff, the CEO and members of the board of South African Airways (SAA) to be briefed on progress of the airline’s Long Term Turnaround Strategy (LTTS). The comprehensive presentation by SAA looked at the overall strategy of the LTTS and its objectives. The said objectives of the strategy were for financial stability, customer service, performance excellence and consistent, efficient and effective operations with the overall aim of supporting SA’s national developmental agenda. The LTTS was built on three pillars, namely, group structure (long term), business units and subsidiaries (medium term) and network, alliance and fleet (short term). The presentation also addressed matters relating to the financial plan in terms of savings and challenges. The challenges were in relation to exchange rate volatility and the closing of certain routes notably, Beijing and Buenos Aires.

The Committee raised a number of important questions relating to the LTTS as to what improvements were being made for the reduction of loss, theft and destruction of luggage, the role of SAA in promoting the compliance and quality assurance of Mango, risk management, investigations currently into SAA, the acquisition of new aircraft and possible financial assistance between SAA, SA Express and Mango. Other concerns noted were related to the recruitment of the cadet programmes of women and people in remote, rural areas and the cancellation of certain routes and the emergence of new ones. 

Meeting report

After introductions the Chairperson remarked that it was long overdue to see South African Airways (SAA) before the Committee.

Gaining Altitude SAA’s Long Term Turnaround Strategy (LTTS) 

Ms Dudu Myeni, Chairperson, SAA, began by making some introductory comments on the implementation of the Long Term Turnaround Strategy (LTTS).When SAA had last appeared before the Committee in November 2012, there was a bit of turbulence and instability in the organisation and the airline did not have the CEO present today. SAA had continued to work diligently to face the real challenges facing the organisation.

Ms Myeni noted the oversight visit paid to SAA by the Portfolio Committee on Public Enterprises during which poignant observations were made pertaining to the LTTS. SAA had reviewed these observations and reviewed some of the principles underscoring the LTTS before today’s meeting. The organisation was now sure that the LTTS was the appropriate plan for SAA’s turnaround and to restore financial stability. The Strategy was given the nod by the world’s leading consultants and firms and was independently quality assured throughout the process. Despite this the airline remained under pressure and a rapid change was needed in the way business was done. The LTTS set an organisational direction which would lead to a change within SAA. All hands needed to be on deck for the successful implementation of the LTTS. During the formulation of this strategy, SAA employees were widely consulted and they were ready and willing to move ahead with implementation. Leadership was working tirelessly to ensure that every employee was fully aligned to the objectives of the LTTS to turn the airline around. For the strategy to succeed support was required from various stakeholders such as media, business and oversight institutions. SAA belonged to all. 

Mr Monwabisi Kalawe, CEO, SAA, turned his attention to the presentation by explaining what the airline’s overall strategy was. This included the objectives to support for SA’s national developmental agenda, to achieve and maintain commercial sustainability, to provide excellent customer service, to achieve consistent, efficient and effective operations and to foster performance excellence. This tied in with the airline’s vision of being Africa’s leading world-class airline.

In the achieving and maintaining of financial stability, the focus was on strengthening the balance sheet, cost management (including overheads), revenue management, cash management and subsidiaries. In the provision of customer service, the focus was on attractive value proposition, network optimisation (routes, brands, partnerships and alliances), customer service excellence and prompt recovery. There was also an emphasis on performance excellence through staff engagement, improved governance, performance management and benchmarking. With consistent, efficient and effective operations the focus was on safety, on-time performance, efficiency (fuel, productivity, sourcing and maintenance and fleet replacement and utilisation. In order to support SA’s national developmental agenda there needed to be a focus on transformation and job creation.

In terms of the long term turnaround strategy, the plan was built on three key pillars that supported strategic objectives. This reaffirmed the airline’s position as a responsible corporate citizen and its commitment to deliver sustainable value to the shareholder. In the long term there was a focus on group structure to divest in the South African Transport Conference (SATC), improve governance, to establish the South African Aviation Assets Group Holdings and group optimisation. In the medium term the focus was on business units and subsidiaries with the full cooperation of SAA Tech, Air Chefs, Voyager and Cargo and to optimise the operation performance of head office and all subsidiaries. In the short term the focus was on network, alliance and fleet to cease loss making “own-metal” services, alignment of airline brand and aircraft gauge to meet market demand, limit the domestic premium service on domestic routes and for Mango and South African Express (SAX) to play a greater role, to increase networks through code-share relationships and leverage Star Alliance membership and a wide-body fleet replacement plan.

With the group structure the achievements to date were as following- the corporate finance advisors (Bowman Gilfillan) had been appointed and were assisting with the divestment of STAC, a project plan had been created for approval by the LTTS board on the creation of the State Aviation Assets Group including the legislation that will b required and presented to the LTTS committee board and McKinsley had been appointed to an organisation redesign.

The achievements to date with the network, alliance and fleet were that Mango’s fleet had been increased from six to eight aircraft and more domestic flights were added to their schedule, SAA now codeshared on all Mango domestic routes, additional capacity had been deployed to Africa, some loss making routes, like Kigali, had been closed and more routes were scheduled to be closed including Buenos Aires, the West African location study had been finalised with Ghana and Senegal identified as the best locations while management was working on a better route to Beijing and additional code-shares were implemented. An important achievement here was also the wide-body replacement plan

Mr Kalawe moved onto the financial plan, noting the objectives of this plan included the containing of the current and untenable rate of cash burn and shareholder value depletion, to redress deficiencies in the group’s capital composition and to equip the group with an appropriate fleet as part of the wide body replacement scheme.

SAA had made a number of financial achievements in the first year of the LTTS such as the saving of R300 million from cost compression, R48 million had been saved by the closure of the Bujumbura/Kigali line, R256 million had been saved through improvements in domestic operations, R180 million had been saved from improvements in regional operations, R30 million had been saved through the Air Chefs improvement and R80 million had been saved through the re-negotiated codeshare, in this case with Qatar.

Mr Kalawe noted however there were financial challenges such as the R1 billion impact on income statements due to the exchange rate volatility and depreciation of the Rand, R309 million in losses because of the Beijing line but R86 million would be saved through the closure of the Buenos Aires line.

Discussion

Mr M Mlenzana (COPE) asked if the LTTS took care of a “serious wave of competition” which SAA was facing. Was customer care improvement taken care of? Was the loss and destruction of luggage taken care of? The SAA lounges, he said, were not comfortable. On the role of Mango, he asked if SAA was able to assess quality and have control over Mango. Many MPs flying from Cape Town to Durban were no longer using SAA but were flying Mango because of a “lack of quality”. He wanted an indication of the financial injection, in percentage form, by the shareholder over the past three years. Was this financial injection constant, increasing or decreasing? Did the LTTS take care of risk management?

 

Mr H Groenewald (DA, North West) was not happy with SAA at this stage and all the stories surrounding the airline were not good for the taxpayers, passengers and the global view of the country. He felt there was constantly talk of turnaround strategies whenever SAA appeared before the Committee and each year millions and millions was being committed. He asked what exactly was meant by financial stability in SAA as mentioned in the LTTS. He felt that no progress was made to better SAA in the long term.

Mr Groenewald further asked know how the quickly the implementation of the LTTS would occur and what had already been implemented at this stage and what was not. He said SAA as the national airline belonged to all and should be a global mirror of SA. Why were there problems with the basic tasks of revenue and cash collection at the airline? How many advisors was SAA making use of and for how long? These were the types of people which cost organisations millions of Rands and at some point they would have to do things on their own. How many investigations were there currently into SAA? What were the most important investigations at this stage and who handled them? He felt the problem was the lack of openness even though they were asking the Committee for support. 

Mr M Sibande (ANC, Mpumalanga) felt it was wrong to say nothing was happening in SAA as some problems were out of the organisation’s control like volatility of the petrol/oil price. On the skills development and recruitment, he asked that recruitment be geographically spread so this area needed improvement. He referred to the elite nature of the training of pilots for a group of white boys when even females were excluded. The Committee was very sensitive to issues of gender and race. He asked why agents were continually used. He questioned if SAA had risk management and if they did, who constituted this? What mechanisms were used to monitor the compliance of Mango? He asked about the financial and labour implications in the cancelling of certain routes. What was the relationship between SAA and its staff?

Mr M Jacobs (ANC, Free State) apologised for his late arrival. He was concerned about the need for bail-outs by most of SA’s parastatals. He raised the issue of luggage wrapping and the huge amounts of money spent by SAA on claims of which he was personally a victim. He was not happy with the pilot training and the slow pace of this training especially in representing the demographics of SA. He was concerned about the harassment of South Africans at local airports even Members who had diplomatic passports. He questioned what criteria were used when deciding to open new routes to other countries.

Mr Sibande noted the allegations that SAA had outsourced the luggage handlers to a private company. He urged that this task not be outsourced as since it had been there appeared to be an increase in the number of people attempting to bring drugs into SA – he asked SAA to check these numbers. He was worried about voyager miles which although was a good system for incentivising, it needed to be improved especially with the changing of flights. He would then rather forfeit the voyager miles.

The Chairperson noticed there was no reference to the acquisition of a new airbus to SAA and she wanted to hear more about this as it was a key to the success of the LTTS from a financial perspective. On the issue of voyager miles, she noted not all MPs were treated the same – those who had been Members for longer were treated better than those who came later yet all Members travelled at the same time. Looking at recruitment, she asked how SAA advertised to ensure that young women and men in the remote parts of the country were taken on board.

Ms Myeni pointed out, for accuracy, that Airbus was a company and reference should instead be made to aircrafts so as not to think that SAA was aligned to Airbus. On recruitment, she indicated this was close to the hearts of the board, and SAA now had the first black chief pilot in 80 years. The board was working hard to save costs and for the first time in the history of the airline, consultants were not used to develop this strategy which meant a saving of R30 - 60 million. However the strategy was validated by a consultant but at a very minimal cost. The board had issued a moratorium on the use of consultants and vacancies where motivation was needed for outside employment. Mango was SAA’s low-cost carrier, to serve the middle income and lower end, and SAA was a shareholder of Mango. The cancellation of the Durban – Cape Town route was under re-consideration and talks were under way between the CEO and leadership in KwaZulu-Natal. The airline constantly needed to look at non-profit making routes and currently lots of issues were under review.

Mr Kalawe spoke to the issue of bail outs noting that financial assistance from government was in the form of guarantees which was different from capital injection. In the past, SAA was financially assisted through loans which came with heavy interest. When SAA approached government for capital injection, the reason was just to close a gap created when SAA was taken out of Transnet and every company at some stage approached the shareholder for help with the balance sheet which was more relevant in the case of SAA which had inherited a balance sheet which was under-capitalised. He could not provide the Committee with share numbers and ratios as this would compromise private discussions between the Department of Public Enterprises (DPE) and National Treasury. On profitability and timelines, detailed numbers were not shared as they had already been made known at the 2012/13 at SAAs Annual General Meeting (AGM) and so were publically available. The numbers for 2013/14 could not be revealed publicly as the financial year was not yet through. This was protocol to be followed.  With the luggage handlers, he had to choose from a list of pre-approved service providers. Between check-in and when the bag was collected at the airport on the conveyer belt the luggage was not in the responsibility of SAA but in the luggage handlers. It was also the responsibility of the luggage handlers to ensure their staff underwent the proper security clearance. To support the process, SAA had employed additional security personnel for the protection of bags as well as the process to wrap baggage. On the acquisition of new aircraft, pressure was being placed on Airbus to fast track the delivery of these planes so that SAA could forge ahead with their expansion into African programmes in support of the LTTS. Most of the long routes were profit-losing routes because the larger body planes with two aisles were gas guzzlers. Because of this these planes were being replaced and the potential supplier would either be between Airbus and Boeing. For the acquisition of these planes, SAA would be required to go through a clean and open process to elect a service provider. On the issue of risk, the board had created a sub-committee to deal with audit and risk. There was also a department focusing on risk and compliance, an internal audit unit and a risk framework to allow management to constantly review risk in the business as part of a standard risk management approach found in listed companies. All the relevant systems and functions were in order. There were a number of pockets of excellence not spoken about in the public domain such as that SAA had one of the best safety units in the world and had been voted Africa’s best airline for 11 years but this was not celebrated. A new service standard framework had been set to monitor staff which would take time but they were receiving attention.

Mr Andile Khumalo, Non-Executive Director, SAA, highlighted that a large part of the LTTS referred to the “whole of state approach”. Many issues and positions taken in and around the country had a number of unintended consequences on the business model of SAA such as fifth freedom rights and rights for other airlines to fly domestically. SAA could not fly domestically in SA yet other airlines were allowed to fly domestically in SA. For this the country needed a more streamlined approach. All such matters affected the competitive landscape and the ability for SAA to compete. Mango was a 100% subsidiary of SAA and given how the markets had moved globally, if SAA did not have this low-cost carrier, the current situation of the airline would have been much worse. Looking at the control of Mango, he said there were strict restrictions applied by the Competition Commission. One of the restrictions was to restrict the influence and control that SAA, as a very player in the market, had over Mango as a new player in the market. This meant there were different levels of relationships between the two airlines. Because of these restrictions and the arms-length relationship, SAA did not have mechanisms to check that Mango was delivering or performing. Having said this, SAA still had a responsibility to ensure Mango delivered a good service and a number of SAA board members sat on the board of Mango which allowed for issues to be conveyed to management. He would take up the issues on the Durban – Cape Town raised by Members to Mango management. The current board of SAA had a clear mandate prescribed by the DPE Minister about 16 months ago in which the SAA board delivered a LTTS by March 2014 and they were now busy with implementation which the Minister wanted to see. A lot of the strategy needed support from both Committees and shareholders in order to deliver.

Mr Kalawe turned to lounges noting there was a project to revamp the SAA lounges from the second half of the year. With vacancies and staff walkouts, most positions which had been vacant when he began as CEO were now filled.

Ms Kgomotso Modise, DDG: Transport, DPE, noted that SAA received an unqualified audit opinion which meant there were financial challenges with respect to profitability. With investigations, it was not uncommon for a business as big as SAA with a turnover as big as R30 million to have investigations. The investigations ranged from tender to voyager irregularities. The process followed was for the whistle blower to be reviewed by the head of internal audit and risk and the head of security to check if there was merit in what was to be reported and then a decision could be taken to investigate further. There were many investigations and being under investigation the matters could not be named.

Mr Kalawe remarked on provincial recruitment noting the advert for the cadet pilot scheme was in national newspapers with responses received form young people all over the country. It could be that some of the newspapers did not reach all over the country but management would look into this. He thought about approaching the South African Broadcasting Commission (SABC) to see if SAA could use their platform to reach the areas without access to newspapers. SAA’s manager of media relations, Mr Tlali Tlali, ran an awareness programme which raised awareness amongst youth in remote areas into the area of aviation. More investment and effort was needed to drive this programme further.

On the question of recruitment, Ms Modise added that there were a number of ways in which DPE supported SAA and all other parastatals with their initiatives. The Deputy Minister had a focused youth development programme where he visited very rural and remote areas in all provinces to promote recruitment in the aviation industry. These programmes were aimed at developing and assisting youth with regard to employment. Taking into account the 80 years of SAA, there would be an increase in initiatives to increase recruitment of youths in the aviation industry. 

The Chairperson requested that the details of the programmes be sent to Members so that they could join in on activities and for further promotion.

Mr Groenewald was confused about the Mango issue and its relationship with SAA. He was happy with the cadet programme. He heard rumours about the borrowing of money from SA Express- was this true and if so how much money was borrowed?

Mr Sibande was still concerned about the sidelining of those in the rural areas with the cadet programmes.

Ms Myeni noted some of the questions of Members as food for thought for the board such as the in-sourcing of baggage handlers. Mango was a subsidiary of SAA and SAA was not giving the airline money as they were profitable and doing well even though they used the second-hand planes of SAA using the same jet fuel and unprofitable routes. The history of SAA had left the board in the position they were in now.

Ms Modise added to the issue of recapitalisation. Cabinet was formally looking into the issue and had recognised that SAA was under-capitalised. 

Mr Khumalo stated that Mango was a 100% subsidiary of SAA which meant it was wholly owned. Mango, however, had its own management structure with a CEO, CFO, board and audit committee to avoid anti-competitive behaviour. SAA‘s management team could not fix the problem of the poor quality of the Durban – Cape Town route but he would raise the issue with Mango. The service of SAA as a full premium brand was very different to the service of Mango as a low-cost airline- one bought sandwiches on the one and got eggs and bacon on the other.

Mr Wolf Meyer, CFO, SAA, confirmed there were no loans or financial assistance from SAA to its subsidiary Mango but Mango had sufficient cash reserves. The relationship between SAA and SA Express was of a trade nature. SAA procured fuel and other services on behalf of SA Express and also collected revenue of their behalf. At the end of the month there was an invoice on behalf of SA Express with normal commercial terms and there was no financial assistance.

Mr Kalawe noted Mango was not for low-income earners but those who were price sensitive. The low-cost carriers became popular following the recession which caused many to downgrade from first and business class and also by employers encouraging people to save costs by flying low-cost airlines like Mango. This was also happening in Europe particularly in Spain.

The Chairperson noted this was not the end of communication between SAA and the Committee. 

The meeting was adjourned.  

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