South African Express Airways 2013/14 Annual Report & 2014/5 performance targets; Committee Report on DPE Budget

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Public Enterprises

13 May 2015
Chairperson: Ms D Letsatsi-Duba (ANC)
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Meeting Summary

The South African Express Airways (SAX) gave a briefing on its 2013/14 Annual Report and on the company’s performance targets for 2014/15. The financial statements for SAX were tabled late due to financial troubles. With the help of the Department of Public Enterprises and the National Treasury, SAX was able to get guarantees in March 2015 to satisfy its auditors that it was a going concern and allow finalisation of its 2013/14 financial statements. It had a R206m net loss compared to R62m net loss in 2012/13. SAX assured the Committee that this was a one-time occurrence and it would not be repeated. DPE and National Treasury were imposing strict conditions on SAX to ensure that the company was not wasting money.

SAX had two mandates; a developmental mandate which was about opening up space within the aviation industry for previously disadvantaged groups as well as to connect small towns which were not economically viable. SAX was founded in April 1994 and it was a regional airline with small aircraft. SAX’s turnover has been growing at an average of 13% per year, and the company has seen a "tremendous growth" over the last 10 years. SAX has been in aviation as a feeder airline to the South African Airways (SAA) for 21 years, with 24 regional aircraft. The company had a turnover of about R2.1 billion in 2014. SAX employed 1 188 people and supported the creation of around 8 000 indirect jobs. The company was the most transformed commercial airline in the country with a 68% black representation, 38% female component with over 20%  black pilots and 61% black technicians.

Some of the challenges facing the aviation industry and SAX were:
• Reduced profit margins
• Reduced passenger demand
• Increased airport charges
• Reduced fleet reliability
• High labour costs
• Strong 1st world currencies
• Increased operating and fuel costs.

Some of the highlights however included increased yields from customers which meant that customers were willing to pay higher prices, increased asset utilization and increased seat kilometres. Some of SAX’s interventions were to review the company’s business model, terminate routes which were not making profits (six routes had been terminated), reducing the schedule to relieve pressure on operations, minimise salary increases and review SAA’s costs of services and other service providers. The company had a "20/20 Vision" to turn the company around, this was comprised of optimized extensive networks, the right fleet for the right region, supporting joint ventures to diversify revenue stream, leading transformation in the aviation industry, incubator for training for the industry, securing adequate funding with sustainable cashflow, collaborating with SAA and Star Alliances and being a single feeder as a regional airline.

Members asked the following questions: what guarantee was there that the financial troubles would not repeat themselves in the coming financial years? Why was SAX not first looking internally for skills before recruiting from outside? What plans were in place to ensure that the matters raised by the Auditor-General were attended to? How long would it take for SAX to receive an unqualified report? Could SAX speak about performance bonuses for the year under review; how were they handled, especially in light of the audit outcomes? With regard to the interventions; what were the implications of reviewing contracts, were legal challenges not a factor to consider? What plans were there to upgrade SAX’s ageing fleet, where there plans in place for new procurement, was the DPE involved? How much was SAX spending on its ageing fleet? What examples could SAX give of the 8000 indirect jobs?
 

Meeting report

South African Express Airways on 2013/14 Annual Report & 2014/5 performance targets
Ms Bridgette Ssamula, SAX Acting Chairperson, indicated that the financial statements for SAX were tabled late. The reason for this was that the financials were a growing concern. With the help of the Department of Public Enterprises (DPE) and National Treasury, SAX was able to get guarantees in March. She said some of the issues which SAX was grappling with came from the systemic issues of the 2010/11 financial statements.

Mr Inati Ntshanga, SAX Chief Executive Officer, reiterated that the annual report was a late submission and the Minister had come to Parliament to table the reasons for the delay. SAX had two mandates: a developmental mandate which was about opening up space within the aviation industry for previously disadvantaged groups as well as to connect small towns which were not economically viable. He explained that SAX was founded in April 1994 and it was a regional airline with small aircraft. SAX turnover has been growing at an average of 13% per year, and the company has seen a tremendous growth over the last 10 years. SAX has been in aviation as a feeder airline to South African Airways (SAA) for 21 years, with 24 regional aircraft. The company had a turnover of about R2.1 billion in 2014.

SAX employed 1188 people and supported the creation of around 8 000 indirect jobs. The company was the most transformed commercial airline in the country with 68% black representation, 38% female component with over 20% black pilots and 61% black technicians. The 2013/14 shareholder’s compact contained 39 indicators, SAX achieved 28 of 39 indicators. However the company experienced challenges with achieving its financial targets due to highly competitive trading conditions which affected operational profits especially because the airline was under-capaitalised and operating with an ageing fleet. SAX’s shareholder compact was measured against strategic deliverables, operational performance, social impact, economic impact and energy efficiency.

Some of the challenges facing the aviation industry and SAX were:
• Reduced profit margins
• Reduced passenger demand
• Increased airport charges
• Reduced fleet reliability
• High labour costs
• Strong 1st world currencies
• Increased operating and fuel costs.

Some of the highlights however included increased yields from customers (which meant that customers were willing to pay higher prices), increased asset utilization and increased seat kilometres. An austerity measures update was provided. Some of SAX’s interventions were to review the company’s business model, terminate routes which were not making profits (six routes had been terminated), reducing the schedule to relieve pressure on operations, minimising salary increases and reviewing SAA’s costs of services and other service providers. Some labour cost reductions have also been implemented and these included freezing of recruitment, removing of vacancies where necessary and restructuring certain functions. He explained that the company would continue to address its ageing fleet and infrastructure, corporate governance and controls and the reputation of the company. Addressing these issues would improve the company’s financial stability.

Mr Mark Shelley, Chief Financial Officer, SAX , explained that for the 2013/14 financial year SAX had a reported revenue of over R 2.5 billion and a net loss of about R 206 million. A 11% financial increase however had been experienced. On the other hand, the airline lost 3% of its passengers and cargo was reduced by 13% from the previous year due to contracting challenges and ground transportation competition.  He explained that SA Express has discontinued certain non profitable routes, rationalised its network, and has implemented a reduced schedule to optimise passenger load factors and enhance asset utilization. The key issues with the balance sheet were: undercapitalization, high investment in inventories which tied up cash flow, continued erosion of equity and higher than acceptable gearing and debt levels.

Mr Ntshanga gave an overview of the company’s 20/20 Vision, which was comprised of optimized extensive networks, the right fleet for the right region, supporting joint ventures to diversify revenue stream, leading transformation in the aviation industry, incubator for training for the industry, securing adequate funding with sustainable cashflow, collaborating with SAA and Star Alliances and being a single feeder as a regional airline.

Ms Ssamula said SAX was an entity where it could easily be detected where things started going wrong; it was during the restatement of the 2010/11 financials where SAX’s assets had to be impaired at an amount which was a lot less than SAX had on its books. The equity of the business was then substantially eroded and with that the airline was left with a very weak balance sheet. The business model of a regional aircraft which could not make money at 40% low factor was a good business model but SAX was grappling with internal control issues which were systemic and needed to be cleared up. SAX was working with the Auditor General to clear up all opening balances and closing balance issues and getting to a point where SAX was not making any losses.

SAX was an airline which was based and built on a sound business model and some of the endemic issues it found with the business were around clearing up the asset register and internal controls and getting in people who understood the business. SAX within its corporate strategy had a plan to look into a clean audit, this remains a work in progress. Aircraft were also getting old and SAX was spending more money to look after them, SAX owned four aircraft and was leasing 20 and this was killing the company’s cashflow. She said even though SAA was SAX’s sister airline, these were two very different airlines. SAX was also aware of increased competition as many of the airlines were realizing that the routes which SAX was using were operating well and competing airlines were now getting their airlines to operate these routes as well. Market share was therefore being split.

Discussion
Ms D Letsatsi-Duba (ANC) said competition would always be there in any business, it was up to the leadership of that institution to ensure that they always rise above competition.

Mr K Morapela (EFF) said the explanation around the delay of the annual report for 2013/14 was not convincing; what guarantee was there that this would not repeat itself in the coming financial years? When the Committee did an oversight visit last year, one concern was that of labour disputes between managers and workers at SAX such as not recruiting from within. Why was SAX not first looking internally for skills before recruiting from outside? Another concern was that of a lack of spares in the technical unit, workers were waiting for spares and this affected their ability to do their work optimally. He asked about SAX’s score card; what has been done to empower and develop previously marginalized groups. The Committee was looking for clear targets which could be measured and monitored.

Mr R Tseli (ANC) commended the company for the 20% black pilots it had. However the Auditor General had given SAX a qualified report. What plans were in place to ensure that the matters raised by the Auditor-General were attended to? How long would it take for SAX to receive an unqualified report? Could SAX share information on performance bonuses for the year under review; how were they handled, especially in light of the audit outcome? He referred to the Committee oversight visit in 2014 and agreed with the sentiments that labour was one of the big concerns. He asked about the R206 million net loss for 2013/14 as compared to the R 62 million net loss for 2012/13, what was the difference between these and what led to them? This was very worrisome. With regard to the interventions; what were the implications of reviewing contracts, were legal challenges not a factor to consider? About the non payment of creditors, which led to high interest rates; what led to this? On competition challenges, he said SAA also reported to the DPE, why was SAX not learning from SAA’s best practice, especially around financial management?

Mr E Marais (DA) said the problems came when the Department of Transport broke away to make a Department of Public Enterprises; SAA and SAX were undercapitalized. He argued that for SAX to be competitive the airline needed to have a new fleet because the maintenance costs were too high.

Ms N Mazzone (DA) indicated that the Democratic Alliance held its elective congress the past weekend in Port Elizabeth and almost all of the delegates flew in and out of the airport using SAX. However most had a disturbing experiences with the flights having problems with tires, others “belly landing” and flights being delayed by over six hours because most of the airplanes were defective. Such incidents led to customers questioning skills and the technical capacities within SAX. During major events, airlines such as SAA and SAX should cater for the high demand by putting in extra flights on that route - that made logical commercial sense. SAX did not have enough planes to transport people to and from Port Elizabeth and this was a huge inconvenience, with people opting to take other airlines. SAX had a technical fleet in Cape Town but spares needed to be made easily available where needed. SAX’s reputation was at stake. She argued that as a Member of the Committee she felt very responsible for the success of the airline, SAX had the country’s name attached to it and it had to be properly managed.

She asked about SAX’s balance sheet and referred to the continual bailouts; what was the actual financial situation at SAX, where SAX’s balance sheets amalgamated with those of SAA or was SAX reporting as a separate entity from SAA? She said there was a ongoing case about anti competitive behavior, yet SAX was receiving bailouts from government whereas other entities which were not making a profit would have been closed down, was this not a form of anti competitive behavior? SAX was continually being bailed out yet prices remained very high. With regards to SAX exploring international routes, she said international routes should be done by SAA and SAX should remain on regional routes. Was it not possible for SAX to reach an agreement with SAA that more regional routes be opened up for SAX?

Ms P Van Damme (DA) asked how much was SAX spending on its ageing fleet, what were the exact figures? With regard to competitive trading conditions she said SAX was a business operating in a market which was no longer viable, what was the point of SAX continuing to exist when the company was not performing? Should SAX not be removed from the market?

Ms D Rantho (ANC) asked if SAX had a dedicated person or unit to look into the concerns and recommendations made in the Auditor-General’s audit report. Did SAX have an internal audit advisor? SAX has only been in operation for 20 years; where did the company see itself five years from now? Was it possible that the airline would close down because it was not progressing? Would the company still be needing bailouts from government years from now? Did SAX have qualified and experienced personnel as part of its team and was any training made available to existing staff? She indicated that there were allegations that the East London airport which made use of SAX was not operating optimally and there were allegations that some customers were not paying for their flights, was SAX aware of that? What examples could SAX give to the Committee of the 8000 indirect jobs the company created?

She noted SAX said it faced reduced profitability, was this because the airline was losing passengers or had the number of flights been reduced? One of the interventions taken by SAX was to minimize salary increases; were these for executives or where they across the board? Why was the 20/20 Vision not divided according to timelines?

Ms Letsatsi-Duba asked about the procurement of new fleet for SAX and SAA, how far was this? According to the company’s 20/20 Vision SAX wanted to establish itself as the 'right flight for the region'; what did this mean? Would SAX solely rely on the DPE to get new fleet? Issues of safety were a serious priority.

Ms Ssamula responded to the questions around the delay in tabling the 2013/14 Annual Report, saying that SAX carried out an exercise about the fact that cashflow issues were hindering SAX’s ability to pay its debtors on time, this exercise was based on basic financial principles and methodology. SAX then appealed to the shareholder who facilitated with the National Treasury to facilitate the process of preparing financial statements and getting a government guarantee. The business was mandated and enabled by an Act of Parliament. The late tabling of the financial statements had been a growing concern within SAX.

On the questions around management and labour, she conceded that labour was an area which SAX was continually grappling with. As a developmental state organ it was not a choice to lose jobs in order to save costs. SAX was working towards ensuring that the business was sustainable. For example the salary increase freezes were for management and not for ordinary workers. No decisions about people losing their jobs were taken without the shareholder and the Board being consulted. There have been no performance bonuses for the entity in the last three years. What SAX did through the shareholder compact, was to look at what could be done in the short term for performance of the entity. At a Board and management level what SAX had started to do was to introduce performance scorecards for the various audit findings. The scorecards were closely linked to employee bonuses.

She said the statement she made on competition was not an excuse for how the business was performing and that was not the intention of the statement. SAX was in a condition where it was ill prepared for the level of competition it was experiencing. The airline industry was closely linked to economic growth and numbers have partly gone down because people were not flying anymore, people only flew when there was a need to. It was impossible to think SAX could growth its GDP by 10% when the economy of the country was only growing by 2%. She said SAX did not compete with SAA; SAX was the feeder to SAA. The competition which was a cause for concern was around the fact that the market share was really slow to grow. SAX had a responsibility to balance the governance components with the commercial components of the business. DPE and National Treasury were in fact imposing strict conditions on SAX to ensure that the company was not wasting money.

With regards to how SAX was managing its reputation, she said SAX was working very closely with the Civil Aviation Authority to ensure that all safety measures were in check. SAX also had a technical team in place. SAX was working very hard in trying to balance training people and recruiting people with aviation experience. Succession planning was in place through a rigorous performance management process.

Mr Ntshanga commented that SAX’s strategic role was to be profitable and there are various initiatives in place already. SAX was therefore not expecting to deliver late annual financial statements again due to it not being a going concern. With regard to labour, SAX’s process was to first look internally when looking to hire before bringing in people from the outside. However there were certain skills which SAX went outside to recruit such as those in finance. He said the lack of spares was a real issue and SAX was committed to ensuring that labour does its job well, but the shortages were as a result of cash flow issues and also because of long lead times from suppliers. SAX’s plan on Broad Based Black Economic Empowerment (BBBEE) was to be at level 1 or level 2.He assured Members that SAX was committed to transformation, both as an entity and as individuals.

He said SAX was committed to ensuring that by 2016 the company received an unqualified audit opinion. With regard to performance bonuses, he said SAX executives have not even been receiving salary increases and SAX was committed to continuing with this practice for the coming financial year as well. SAX was also committed to improving the number of female employees within the company, aviation was a highly male dominated industry. On whether SAX was learning from SAA, he said SAX and SAA did a lot of things together such as purchases and sharing systems. He said it was critical that SAX have a stable executive in management, especially those responsible for finances. SAX flew regionally and did not fly long routes. He said maintenance was around 10 -15% of the company’s turnover and SAX was committed to bring this down.

Mr Ntshanga indicated that SAX did have a finance team responsible for addressing the Auditor-General’s findings. He said SAX has outsourced all its services to East London and the system would not allow any passenger to fly without having purchased a ticket. Salaries were around 20% of the company’s turnover. He said the bulk of the cost cutting with labour was with top management. The SAX 20/20 timelines have not been included in the presentation but they were contained in the corporate plan. With regard to the fleet, SAX has not procured any new aircraft; this was a discussion which has been started with the DPE.

Mr Shelley responded to the concern around the significant net losses. What the company experienced in the financial year under review was one time write offs of maintenance reserves where maintenance was never required, this accounted for the R68 million net loss. SAX also incurred a tax receivable where the company had to do a tax refund of R34 million. On increased borrowing, he explained that due to cashflow constraints SAX had an increase in long term loans from Nedbank which made up R100 million and these pushed up costs.

Mr Ntshanga responded to the question around where the company saw itself in the next five years, he said SAX was committed to being profitable and there was a lot of work the company was doing in being efficient.

Ms Kgomotso Modise, Deputy Director-General: Transport Enterprises, DPE said the procurement of a new fleet was the responsibility of SAX and not of DPE.

Chairperson Letsatsi-Duba thanked the officials from SAX for the presentation and Members of the public and media who were present in the meeting for their attendance.

Committee Report on DPE Budget Vote Report
Ms Letsatsi-Duba indicated that the DPE debate on its budget vote was scheduled for 14 May 2015. The intention of the debate was to ensure budget is interrogated to see whether it was aligned with government objectives and plans.

The Committee Secretary on Public Enterprises read out the report.

Ms Rantho moved for the adoption of the report with the correction of few spelling errors.

Ms Mazzone asked that it be noted that the Democratic Alliance’s reserves its right because report has not been discussed in caucus.

Mr Tseli seconded the adoption.

Chairperson note the Democratic Alliance’s reservation

The meeting was adjourned. 

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