South African Airways 2012/13 Annual Report

Meeting report

The Chairperson welcomed all to the meeting and said that South African Airways (SAA) would make a presentation on its annual report and financial statements. After introductions, he invited the SAA board to make its presentation.

Briefing by South African Airways
Mr Monwabisi Kalawe, Chief Executive Officer (CEO), SAA, introduced the presentation. He said that most of the presentation would be done by the Chief Financial Officer (CFO), Mr Wolf Meyer.

Mr Meyer started by first highlighting SAA’s successes during 2013. This included how SAA had contributed R8.6 billion to South Africa’s Gross Domestic Product (GDP); the compilation of SAA’s first comprehensive and holistic Long-Term Turn-Around Strategy (LTTS); the introduction of three new African routes; and an overall 12% sales revenue increase.

SAA had obtained an unqualified audit opinion from an independent auditor. There had been reports of irregular or fruitless and wasteful expenditure regarding ground handling and office rental contracts at outstations, air chefs, and fraud. However remedial action was being taken to combat irregular or fruitless and wasteful expenditure, and this had resulted in a 14% reduction in the cost of sales. A separate audit committee report had revealed that SAA’s overall control environment had continued to improve, and was effective. However, this report also noted areas of concern regarding air chefs.

SAA’s income statement revealed that the company had recorded an after-tax loss of R1 168m for the 2012/2013 financial year. SAA had a 14% increase in revenue for the financial year when compared to the 2011/2012 financial year. Mr Meyer attributed the loss suffered to such factors as a 15% increase in fuel costs, a 3% increase in employee expenses, a 33% increase in aircraft maintenance, a 17% increase in aircraft lease costs, an 18% increase in navigation, landing and parking fees, and a 6% increase in other operating expenses.

On the consideration of the financial position of SAA, Mr Meyer said that the entity was being run without capital reserves. He further reported that, regarding the cash flow, R208 million had been spent on the repayment of long-term loans, and that cash flow had also been directed at capital expenditure.

Discussion
The Chairperson said that the weak balance sheet which had SAA presented was worrying.  SAA’s financial situation would have to be changed so that the National Treasury did not have to be relied on to bail the business out. He also alluded to the LTTS, which had been announced in April of 2013, and said that it appeared that not much had been done with the roll-out of the strategy. He asked whether SAA would be able to achieve the goals in the LTTS.   The Committee would have to pay more attention to oversight regarding the roll-out of the LTTS on a quarterly basis, to ensure that the work was being done.

Ms G Borman (ANC) congratulated SAA on its successes, but said that there existed areas of concern. She alluded to the LTTS being a comprehensive plan and asked whether SAA could assure the Committee that it would achieve its goals.  When would SAA have an idea on its recapitalisation, and when would that information be made available to the Committee?  Referring to the financial report, she asked what was meant by the R5 billion financial guarantee being perfunctory.  On the audit report, she asked whether the Committee could be assured that SAA’s measures to correct irregular or fruitless and wasteful expenditure would be implemented.

Ms C Pilane-Majake (ANC) said SAA’s finances were not looking good, but she also appreciated that SAA was a well-run airline.  The issue of finance would have to be looked at, as SAA was a business, and the business would have to look to its LTTS.  SAA needed to look at its structure and consider which level of employment consumed the most funds. Cost compression would have to be considered, to ensure few job losses at the lower level.   SAA’s situation required a balance between cost savings and ensuring that the business was run efficiently.

Ms N Michaels (DA) made reference to the fact that Mango Airline’s financial expenses were presented separately from SAA’s.  If it was a successful business of SAA, the Committee would have to see its financial reports as well.  It was unacceptable that SAA was being bailed out by the government. She asked how the bail-out money was being spent.  The Committee had received an executive version of the LTTS strategy, and she requested that the Committee receive information on what was being done to implement it.  The LTTS required targets and goals which SAA should strive to achieve.

Ms Michael raised a concern regarding political interference in SAA’s routing, and wanted SAA to respond on the matter. She asked that with the increase in fuel and competition, and the weakening Rand, whether SAA saw a way out of its predicament, or whether it would be requesting future bail-outs from the state. She also alluded to the Minister of Public Enterprises’ statement that SAA would not be recapitalising its fleet, and asked for information regarding the SAA Airbus fleet. Finally, owing to reports she had received regarding baggage and baggage damage, she asked for a baggage repair and replacement report from SAA.

Mr E Marias (DA) asked SAA when its new generation aicraft would come in, and whether the new routes implemented in 2013 were profitable.

In response, Mr Kalawe reminded the Committee that SAA had two mandates. The first mandate was to be commercially responsible, and the second mandate was geared towards the development of South African tourism. In response to the issue raised by Ms Borman, he said that SAA had acquire two fuel efficient planes, and that more of these planes would arrive throughout the year.  In terms of cost compression. SAA had made huge savings in the market of the weaker Rand.   Regarding irregular or fruitless and wasteful expenditure at air chefs, Mr Kalawe said that there had been a new CEO and CFO in the department of air chefs, which had brought more discipline to their procurement operations.

Mr Meyer said that SAA had achieved in cost compression in its previous financial year by means of weight reduction in planes, to save fuel.  On the matter of the Airbus legacy, he said that the contracts which SAA entered into for the Airbuses had escalation clauses. This meant that when SAA took delivery of an Airbus, there would be costs to incur.  Issues of profitability would depend on when the new aircraft would come in, and that the routes which may run at a loss may not need to be closed when the new aircraft came into action.

National Treasury had worked on the matter of recapitalisation with SAA, and he hoped the matter would have been resolved already. He underscoring the fact that the government was committed to its airline, and that the LTTS and SAA deserved the support of the government and South Africans.  There would have to be renewed support for the airline to help it to compete within the country.  Many state factors would impact on SAA when improving on its financial sustainability, but its private sector competitors had no need to deal with the bureaucracy of being a state-owned enterprise.  National Treasury was aware that SAA required support for its financial stability, and Mr Meyer expressed his confidence that a solution would be found in that regard.

Mr Kalawe added that SAA had set in place governance structures to ensure the effective implementation of the LTTS strategy. These structure set milestone for goals to be reached.   As a state-owned enterprise, SAA had a duty to make jobs sustainable.  While revenue may have increased, more needed to be done to fill key positions within SAA.

Mr Kalawe said that separate financial documents for Mango Airlines could be made available after consultation with the SAA legal department. This would be done to ensure that the requested financial statements were made available in a safe and legally compliant manner. He told the Committee that when SAA was made separate from Transnet, it was not properly capitalised, and that the efforts of SAA had been to deal with that issue. He acknowledged that SAA’s capital assistance was derived from South African tax payers. In this regard, SAA and the Department of Public Enterprises worked as a team, and SAA was not being manipulated.

Regarding the issue of baggage, Mr Kalawe reported that three to four years ago, one out of 1 000 bags would be pilfered. Since then, there had been an improvement to two bags out of 10 000.  The Committee would be provided with information in that regard.

Mr A Mokoena (ANC) said it was the Committee’s job to help SAA, and he was encouraged by the passion and determination of the SAA board.   Previous boards had been unaccountable and unresponsive.  As SAA was a business, the Committee should accept that profit would not always be derived from the business’s operations, and he attributed SAA’s success to its developmental agenda. He wished the board good luck and added that the Committee would assist it with its LTTS as well.

Mr C Gololo (ANC) requested clarity on how SAA was tight on cash. He also said that Broad-Based Black Economic Empowerment (BBBEE) had not been mentioned in the SAA report.   How much money had been spent in the previous financial year on BBBEE procurement?  On the issue of in-sourcing on engine maintenance, Mr Gololo asked whether there had been sourcing of these skills within the state and whether there had been positive results from such sourcing.

Ms Pilane-Majake stated the SAA’s strategy should always cater for a developmental agenda. She asked what SAA’s plans were to make the business grow.  She suggested that future presentations to the Committee should make reference to the history of SAA, so as to provide the Committee with context.

Mr Kalawe stated that SAA possessed the capacity to become a powerful airline.   The issue of recapitalisation would be addressed, and that a report on BBBEE would be compiled and sent to the Department of Public Enterprise.

Mr Meyer responded to the issue regarding engine maintenance by stating that SAA Technical was profitable, and that the improvement of engine maintenance capacity was an important part of third party revenue. SAA Technical would be a means of increasing third party business.   SAA would be increasing its fleet in order to compete with other airlines.

The Chairperson said, as the out-going Committee, that the Committee would always be there to support SAA, even though the faces would change. The Chairperson congratulated SAA for its award as the best airline in Africa, and all applauded the achievement. He expressed his best wishes to the chairperson of SAA and thanked the Members for their engagement.

The meeting was adjourned.