South African Express operational and financial performance progress report

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Public Enterprises

05 August 2015
Chairperson: Ms D Letsatsi-Duba (ANC)
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Meeting Summary

South African Express (SA Express) Airlines said that as at September 2014 SA Express was faced with issues around high costs, an ageing fleet and mounting pressure from its competitors; the new start up aircraft were putting unsustainable pressure on the airline due to their low costs. Some of the significant costs the airline was dealing with were fuel costs, labour, aircraft leases, and technical costs among others. Maintenance costs were also very high because the bulk of the airline’s spares were from overseas vendors. An older fleet was more costly to maintain. Various austerity measures were instituted to address these challenges, these included salary increase freezes, holding back bonuses, terminating some contracts and leases to save costs, selling and leasing SA Express aircraft to free cash and selling unused inventory to free cash held up in long-held spares.

With regard to improving SA Express’s operational performance, the airline would be acquiring new generation aircraft because the ageing fleet needed to be changed. The airline would also negotiate better terms with Bombardier to ensure the spares depot was geared to back maintenance properly with parts. Some of the targets achieved were:
- Reviewing its catering budget from around R4500 per month to around R2500 per month, saving the airline about R2 million
- Passenger in-handling was in sourced in Johannesburg saving the airline around R10.6 million
- Ground handling would also be changed to switchboard, seeing a 20% saving
- The airline managed to negotiate with Lufthansa on maintenance contracts which saved SA Express around R19 million in 2014
- The airline has reduced its debt by 33.6% between September 2014 and July 2015, the debt was reduced from R569 million to R378 million.

Another key achievement was that the 4th quarter 2014/15 saw a profit of R6 million for the airline. Moving forward the aim was to reach R60 million by the end of the 2015/16 financial year. Operating costs have been reduced by close to R90 million, an indication that the austerity measures are working. With regards to labour, the company has not declared any retrenchments. SA Express’s strategy was focusing on: improving revenue generation, reducing operating costs, ensuing skills were improved, addressing the ageing fleet and improving the utilization of the aircraft and improving corporate governance and internal controls. One of the main challenges faced by the airline was the rise in startup airlines because barriers to entry were so low. This had a negative impact on the airline’s profitability because it became difficult to compete with unsustainable prices.

Members suggested that the Department of Public Enterprises meet with the Department of Transport to address the issue of charter airlines. Members were pleased with the improvements the airlines has made, especially around cost saving mechanisms and improving operational efficiency. What was of concern was the airline’s funding options for acquiring a new fleet and whether a fair and transparent procurement process would be followed. The airline dismissed a rumor that South African Airways, Mango and SA Express would merge.
 

Meeting report

Chairperson’s opening remarks
The Chairperson said the Committee hoped to have a fruitful discussion with SA Express on its operational and financial performance. In the last meeting with the entity, a lot of concerns were raised about the company. He welcomed the newly appointed chairperson of the board.

Progress Report on Financial and Operational Performance – South African Express Airways
Mr George Mothema, SA Express Board Chairperson, thanked the Committee for the invitation. He indicated that he was a director on the previous board. When the board was reconstituted he was appointed as Chairperson for continuity. The board was looking forward to sharing information with the Committee.

Mr Inathi Ntshanga, SA Express Chief Executive Officer, indicated that as at September 2014 SA Express was faced with issues around high costs, an ageing fleet and mounting pressure from its competitors; the aircraft of the new start-ups were putting unsustainable pressure on the airline due to their low costs. Some of the significant costs the airline was dealing with were fuel costs, labour, aircraft leases, and technical costs among others. Maintenance costs were also very high because the bulk of the airline’s spares were from overseas vendors. An older fleet was more costly to maintain.

Some of the austerity measures taken for cost containment included:
- Labour restructuring such as reviewing salary framework
- Schedule optimization to match capacity demand
- Contract termination with certain suppliers to improve cost structure
- Engaging aircraft lessors to request lease reductions
- Sale and leaseback of SA Express owned aircraft to free cash
- Outsourcing the technical department
- Selling unused inventory to free cash locked up in long-held spares.

With regard to improving SA Express’s operational performance, the airline would be acquiring a new generation aircraft because the ageing fleet needed to be changed. The airline would also negotiate better terms with Bombardier to ensure the spares depot was geared to back maintenance properly with all parts. He said technicians would also be trained to improve the speed in which they identified and repaired defects, ground staff would also be trained to improve service. With regards to targets SA Express was committed to reviewing its catering budget, the airline has managed to reduce its catering bill from around R4500 per month to around R2500 per month, saving the airline about R2 million. Passenger in-handling was in sourced in Johannesburg, saving the airline around R10.6 million. SA Express wanted to negotiate its own contracts directly on fuel costs; the airline was still in the process of re procuring new contracts. Ground handling would also be changed to switchboard, seeing a 20% saving.

On maintenance contracts, the airline has managed to negotiate with Lufthansa which saved SA Express around R19 million in 2014. The airline was in negotiations with Bombardier and other service providers to buy SA Express spares. On lease costs, SA Express was existing from one of its contracts where the aircraft which was being leased from a company in Britain was being removed from the fleet, saving the airline about R10 million. With regards to the schedule, SA Express was looking to save around R179 million per year, a continuous process going forward. In 2014, the airline saved over R200 million on about. Currently the airline’s labour bill was sitting at about R590 million. Since April 2015/16 SA Express has been in negotiation with its employees to see if they would not take salary freezes for about one year, saving the company around R40 billion. The passenger service charge, which was at R127 per passenger would be reduced to about R20 per passenger. He indicated that there were other savings which would materialize along the way.

Mr Ntshanga indicated that the airline has reduced its debt by 33.6% between September 2014 and July 2015, the debt was reduced from R569 million to R378 million. The 4th Quarter was profitable, with the airline seeing a profit of about R6 million. Operating costs have been turned down by close to R90 million, an indication that the austerity measures were working. With regards to labour, the company has not declared any retrenchments; the airline was looking at various ways of becoming profitable without taking away any jobs. Labour was the very last option to consider if the airline still remained unprofitable. However the airline has not been paying out any bonuses and management has not been taking any salary increases; these were also part of the guarantee conditions. SA Express was still committed to meeting its target of reaching a R60 million profit by the end of the 2015/16 financial year.

SA Express’s strategy was focusing on; improving revenue generation, reducing operating costs, ensuing skills were improved, addressing the ageing fleet and improving the utilization of the aircraft and improving corporate governance and internal controls. He indicated however that there were still a lot of challenges within the industry, such as the rise in new startup airlines. An airline was very expensive to maintain and SA Express was pleasing with the Department of Public Enterprises to hold all airlines, especially the start up airlines to the same conditions as SA Express. Barriers to entry were too low.

Mr Mothema said from the board’s perspective the issue of discipline around austerity measures was very important, as a result the board has requested that management provide the key financial performance of the business on a monthly basis. Because the board was not involved in the everyday running of the business, mechanisms for conducting regular oversight needed to be created. The last quarter of the year was more profitable, indicating that the cost containment measures implemented by the business were starting to show. The board would continue to monitor all the cost containment measures. The issue of labour was critical, when the business was not performing employees still remained loyal to the business. Therefore management needed to continually look at ways for the business to be profitable without the possibility of retrenchments.

Discussion:
Ms N Mazzone (DA) congratulated the board on the work it has been doing in turning around the business. She said the bombardiers were ageing and many of the airlines were not using them anymore because they were too costly to maintain. How was the airline handling this? She said the fact that chartered airlines were not being held to the same standard needed to be addressed and the Committee needed to engage both the Portfolio Committee on Transport together with the Department of Transport to address this. This was not a fair practice. All airlines needed to be held to the same standard for fair competition. South Africa had an impeccable safety record and this should not be compromised; all airlines needed to be held to these safety standards.

She agreed that due to the nature of the business, profits ranged based on the season among other factors. However there have been a lot of concerns about the impact the new visa regulations have had on tourism; has the airlines experienced any negative impact as a result of these new regulations? She said it was good practice that labour relations were being handled well and she was looking forward to the next meeting with SA Express.

Mr E Marais (DA) said the cuts in costs, such as not paying out bonuses and halting staff increases were very positive measures. This was a strong message which the airline was communicating; has the idea of holding a media statement to inform the public about such measures not been considered? Did SA Express liaise with the Department of Transport to assess what new routes could be ventured into? He said there were rumors going around that South African Airways (SAA) and Mango wanted to incorporate SA Express with them; was there any truth to this? He said the target to make R60 million in profits before the end of the financial year was a very positive one; he proposed that the Committee meet with the airline again before the end of March 2016 to assess where it could assist the airline in achieving this target.

Mr R Tseli (ANC) congratulated SA Express on a very good strategy. Has the shareholder been approached to discuss any further funding options? He asked that the slide on targets which was not included in the presentation be made available to the Committee. What progress has been made in dealing with some of the issues which were outlined during the audit outcomes? He said during a oversight visit to the airlines in 2014 many of the frontline staff did not know about the operations of the company because there was no clear communication between management and staff; has this been addressed? With regard to the austerity measures, was the termination of contracts not a risky option?

Ms G Nobanda (ANC) asked about the bonus cuts; who were these aimed at, were they for all staff or just for the executive?

Mr K Morapela (EFF) said with the renewal of the ageing fleet there would be a procurement process which would be followed for tender bids; what measures have been taken to ensure that proper procures were followed? The many state owned entities who were committing serious blunders in this regard was seriously alarming.

Ms D Rantho (ANC) referred to the pressure experienced by SA Express as a result of the new startup airlines; what impact did these airlines pulling out of the industry when they have failed have on SA Express?

Chairperson Letsatsi-Duba said during the last meeting with the airlines Members raised concerns about the lack of spare units in-house; has this been resolved? She said there seemed to be unhealthy competition between Mango, SAA and SA Express; has the shareholder been approached to intervene?

Mr Mothema responded to the rumors around SAA, Mango and SA Express and said the matter was a shareholder matter, and SA Express would continue to operate with from a commercial relationship perspective. Whether or not the entities would be incorporated was still a rumor which the shareholder would need to respond to. With regard to funding for the new fleet, he said SA Express has mandated management with re-transferring of the balance sheet. The board could therefore not provide the Committee with any information on what the funding options were yet.

Mr Ntshanga responded to the question on the bombardiers, SA Express used aircraft from all airlines. He said there has been a decline in passengers, however as much as this could be partly due to the new visa regulations, there were other reasons for the decline, for example the new airlines who came into the market have also taken up capacity. He said the airline had a very good relationship with the Department of Tourism; SA Express for example was part of the ‘short left’ campaign. He said there have been less Chinese visitors coming into the country but once again, there could be a number of reasons for this. On the question around frontline staff, he said the biggest problem was communication and SA Express had recently appointed an internal communications specialist who would try and improve the company’s communication. SA Express was also working with unions in resolving any conflict.

He reassured Members that no contracts would be terminated prematurely. Labour was also involved to ensure that unnecessary strikes were avoided. He said the airlines would ensure that the necessary procedure was followed during the procurement process. On the issue of startup airlines, he explained that when the airlines entered the market they set unsustainable prices pushing other airlines out of the market. This affected profitability of other airlines. With regard to the question around spares, he said the airline was addressing this together with Bombardier who opened up a plant in Lanseria where SA Express could source some spares from. He said SA Express was working with the help of the shareholder to streamline airlines and to properly align strategies for the benefit of the passengers. SA Express was negotiating all its contracts, including those for the suppliers and manufacturers of spares. Bonuses have not been paid out to any employee. SA Express had an employee management system which paid out bonuses when the company performed well, if not, no bonuses would be paid out. SA Express has not been paying out bonuses for the last five years. However other incentives were made available to employees, such as long service awards among other things.

Chairperson Letsatsi-Duba said it was very interesting to hear about SA Express’s employee management system which paid out bonuses only when the company performed well, unlike the built-in remuneration packages which other companies used to pay out bonuses whether the company was performing or not. She congratulated the airline for the salary freezes as cost containing measures.

Mr Marais asked whether SA Express has explored the possibility of opening up a route from Johannesburg to Mauritius during the times when SAA was not flying. There could be a market here for SA Express to explore.

Mr Tseli said during the last meeting the Committee requested an executive summary on the shareholder complex; when could the Committee expect this?

Mr Morapela asked about the austerity measures of freezing salary increases; how were the workers handling this and what other incentives were there for employees?

Chairperson asked whether the funding model has been submitted to the shareholder.

Mr Ntshanga responded to the Johannesburg to Mauritius suggestion and said SA Express airlines did not have the “legs” to fly a four hour flight, and it was over the ocean which was a problem. The funding model which the airline spoke about the last time had to do with the sustainability funding model; it deals with the austerity measures from a funding perspective. The submission of a funding model to the Department of Public Enterprises and National Treasury was for when they were considering funding for the financial year and not for the fleet.  He said the airline has asked staff to not take salary increases for the year, reducing the airline’s salary bill by R40 million. SA Express did not pay low salaries to its employees, the airline paid salaries higher than the benchmark.

Ms Kgomotso Modise, Deputy Director General: Transport, Department of Public Enterprises, said the request for the Department of Public Enterprises to engage with the Department of Transport on charter airlines would be considered. She said the unhealthy competition between the three airlines was of great concern to government, the Department together with National Treasury has therefore formed a inter-departmental task team led by the inter-ministerial committee which would work with the airlines assisting with the turnaround. Government has realised that leaving the issues up to the airlines to resolve among themselves was not very useful, especially where one party benefited from another. The task team reported to the departments on a monthly basis, and the issue of unhealthy competition was of utmost importance to the Department of Public Enterprises. It was however important that the decisions were recently taken, and discussions between the airlines were still underway. The executive summary of the shareholder complex would be presented when the Department presents to the Committee on performance of all State Owned Companies. On the merger of SA Express, Mango and SAA, she said she would not be able to respond to a rumor.

Chairperson Letsatsi-Duba said the issue of the shareholder has been of serious concern to the Committee because it affects Members in doing their oversight work well. She urged the Department to provide the Committee with the information in three weeks.

The Committee minutes dated 17 June 2015 were adopted without amendment.

The meeting was adjourned.

 

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