SAA quarterly report, with Deputy Minister

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Finance Standing Committee

17 November 2015
Chairperson: Mr Y Carrim (ANC)
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Meeting Summary

The Committee met with SAA as a follow up to its 2 September meeting with the airline. SAA had been asked to prepare a response to a number questions raised in a letter from the Committee. In addition SAA had to respond to five matters: progress on the finalisation of the shareholder management compact ; key aspects of the compact especially on how performance would be judged; progress on the finalisation of the financial statements as well as the annual report and the implementation of the long term turnaround strategy.

SAA addressed topical issues first such as the Airbus aircraft swop deal; local and international funding of the deal; the removal of the acting CEO and the pilots vote of no confidence in the SAA board before dealing with the Committee’s questions grouped according to human resources; finance; commercial; shareholder and transformation; cargo and Mango; strategy and general.

Treasury spoke to the governance structures; the aircraft swop transaction; and SAA compliance with KPIs in the first and second quarters. The Deputy Minister of Finance also commented.

Members asked how long it would take to submit the 2014/15 annual report and the financial statements. What were the implications of awarding a catering contract to a foreign company? Regarding the Airbus deal, was it true that there were allegedly fake bank accounts in existence? If this was true then what were the implications for the aircraft deal? Why could the cadet scheme not be resuscitated and address the transformation of pilots at SAA as well? Members said the Director General of Treasury had warned of the consequences of the Airbus deal and how it related to the Public Finance Management Act (PFMA). Members noted the CFO had resigned that week because he had been unhappy with the interference in his work. Members pointed out the Airbus deal was a dollar denominated deal so there was no substance to SAA’s argument of local financing as against international financing. Why did the Emirates deal fall through at the last minute and who made the phone call to Paris?

Members said there was a need to address matters of governance as well as vacancies. The board should take responsibility for the advice given by management. Members asked whether SAA entered into discussions with Airbus before going to Treasury. If not, why? Why was a public statement given that it was going to change the deal? Why was the SAA board chairperson attacking the pilots? Members requested the Ernst and Young report to be forwarded to the Committee. Members said SAA was in crisis and the process to get rid of the board and get a new board must start. Members said all pending contracts should be frozen because the same wrong decision-making would inform these contracts.

Members questioned how SAA could become profitable in the absence of financial statements and the annual report. Members said no targets set by Treasury would be met if there was no stability at the entity.
They noted that according to the King guidelines on corporate governance if a non executive was doing the duties of an executive, then that person should lose the non executive position. Members said SAA was not a going concern, had been making losses over the last few years and its interest bill would get even higher. SAA had lost the equivalent of three Nkandlas in six months while South Africans needed housing and were in dire poverty. Members requested input on why some of the 51 KPIs were not met. Members asked Ms Myeni if she would do the right thing and resign. If not, could she explain why she did not want to resign.

Ms Myeni asked for seven days to respond to the question.

The Chairperson in wrapping up the meeting gave dates for the submission of the financial statements, annual report, the Ernst and Young report and the next meeting with SAA.

Meeting report

Ms Dudu Myeni, SAA Board Chairperson, said the presentation would start by addressing the topical issue of the Airbus aircraft swop deal.

Ms Yakhe Kwinana, SAA Audit and Risk Committee chairperson, said SAA was to receive ten A320 narrow body Airbus aircraft but wanted to swop that for four wide body A330 aircraft. Airbus would lease five A330 at $895 000 per aircraft per month for 12 years. SAA were negotiating to have the transaction moved from a purchase under the operating list to a purchase under the finance list, where SAA would have an asset after the 12 years and where the aircraft would appear on the balance sheet of SAA.

She said newspapers had been talking about the local and international funding of the deal. She said the aircraft needed to be funded locally and local banks as well as the PIC and the DBSA had expressed an appetite for the deal. The advantage of local funding would be that there would be no need to hedge the deal, otherwise SAA would need R2.6b for currency fluctuations. Another advantage was that there would be no freight delivery payments and no impairments because the market value was less than the contract amount. The swop deal was linked to the publication of the SAA financial statements and annual report. This had not been finalised because SAA needed a going concern guarantee.

She then spoke to PFMA transgressions. This was one of the issues the pilots had talked about.  The board had decided to find out what had caused the losses and Ernst and Young had been commissioned. Their report identified major irregular transactions. According to Section 51, appropriate disciplinary steps needed to be taken against the officials involved. Ernst and Young had reported major accounts for services without proper accounting. One of them was the opening of the Abu Dhabi route. The Board had been misled by many of the figures presented by management. The executives knew that the route would never make a profit and misled the Board. To date, losses on the route were R30m per month for nine months, a total of R270m.

On the removal of the acting CEO after four months, Ms Kwinana said Ms Thuli Mpshe had been the General Manager: Human Resources previously. There had been many HR issues and therefore these areas needed to be sorted out.

Mr Musa Zwane, Acting SAA CEO, said he would talk about the pilots. He made the point that SAA needed to engage with all stakeholders of SAA. It had heard from the pilots' grievances but also had to take into account other SAA stakeholders such as the cabin crew represented by the SACCA union and by SATAWU who represented the technical division, who had issues around racism and discrimination. He said management had to engage with all stakeholders and could not elevate one group above the other.

He provided the responses to the questions posed by the Committee. The questions had been grouped by SAA around human resources; finance; commercial; shareholder and transformation; cargo and Mango; strategy and general (see document).

He said interviews for the position of CEO were taking place and a short list had been sent to the Ministry and SAA was awaiting feedback. The process to replace the CFO had started. By the following week a person in an acting position would be in place. A challenge was that a commercial general manager was currently on special leave. A commercial general manager was necessary especially in light of the Abu Dhabi issue.

SAA had reduced staff by 484. The process was ongoing and positions had been frozen. The increase in headcount was because it had absorbed approximately 400 contract workers into the staff.

He said the long term turnaround strategy and the 90 day plan indicated the company would be turned around in three years and be profitable in five years. He said SAA had not received cash injections, it had received loan guarantees but these generated interest costs.

He said SAA did not do non commercial activities that were not prescribed.

He said SAA had an ageing aircraft fleet, a weak balance sheet, a weak currency, legacy transactions and staff costs were all internal factors impacting on SAA.

On what the root causes of the crises were, some issues had already been mentioned such as the ageing aircraft fleet. Mitigating steps were being taken as part of the long term turnaround strategy.

On an investigation into a tender for a Boeing 737 freighter, he said there was an investigation which found that the integrity of the tender process had not been compromised.

On the question about visa regulations, he said while one could not blame visa regulations for financial losses because the visa regulations were relatively new, SAA had however seen a drop in the number of adults travelling with children. The previous year the figure was 50 000 and it dropped to 29 000 this year, almost half the previous year’s figure. One could not say there was a direct correlation between the figures but the visa regulations was a contributing factor to the drop in numbers.

Mr Zwane said there was no plan to cancel Mango’s Johannesburg - Durban route. Ethiopia Airlines was backed by the state and there was a way to control the introduction of new airlines in its market. The Emirates was the longest standing code-share partner of SAA. The board had always been in support of the Emirates deal and were instigating the deal to get clarity on some issues the board was not clear about and would then have discussions with Emirates on enriching the code-share agreement.

On broad based economic transformation, he said SAA had engaged with communities to encourage participation in procurement spend as currently only four per cent was being spent in this category. There were more opportunities available. SAA aimed to increase the number to at least 30% in a few months. There were 29 black owned companies and SAA wanted that number to increase.

The shareholder compact had been signed with the ministry.

SAA Cargo was not being sold to Bidvest. There had been an issue on a contract granted to a foreign company but that had now been withdrawn and SAA subsidiary Air Chefs was providing that service.

Deputy Minister of Finance, Mr Mcebisi Jonas, said regarding the governance structures, that the current interim board would remain until a new board was in place.

He said the swop transaction was a significant factor in calculating the amount of support that SAA would require to make it a going concern. Treasury had to apply itself because the Minister gave final approval if there were material changes to the structure of the original transaction. The Minister raised two issues for consideration. The first was that if the structure of the transaction was changed it should not compromise SAA’s financial position and secondly what was the risk of other consequences if one moved away from the contract. Treasury had received SAA’s application and Treasury’s fiscal liability committee was looking at the technical assessment of the application.

Treasury had identified 51 KPIs arising out of the shareholders compact. Of the 30 applicable for the first quarter, SAA had delivered on 10. Eight were still to be determined and 12 were not met. Of the 45 KPIs applicable for the second quarter, 24 were met, three were yet to be determined and 18 were not met.

He said it was important to apply the letter of the law and to take an institutional view on some of the issues as there had been a focus on individuals. Treasury had set up processes to look at the performance of SAA.

Discussion
Mr D van Rooyen (ANC) asked how long it would take to publish the annual report and the financial statements because the Committee needed these documents.

What were the implications of awarding a catering contract to a foreign company, which decision was later reversed. He said most countries did not allow foreign carriers to operate in their domestic airspace.
On the Airbus deal, he said there were allegedly fake bank accounts in existence. If this was true then what were the implications for the aircraft deal. On the pilots at SAA, he said there had been a cadet scheme which had come to a halt. Why could this not be resuscitated and address the transformation of pilots at SAA as well. He welcomed the broad engagement with all stakeholders. He said the failure of transformation at SAA was because of the legacy of corruption.

Ms N Michaels (DA) said the Director General of Treasury had warned of the consequences of the Airbus deal and how it related to the PFMA. On 1 March there had been negotiations by Treasury to save SAA R1.5b. She said the CFO had resigned because he had been unhappy with the interference in his work. The Airbus deal was a dollar denominated deal so there was no substance to SAA’s argument of local financing as against international financing. She said the board was imploding. On the Emirates deal, the deal was on the verge of being closed when a midnight call to Paris scuppered the deal The Committee had a right to know the truth. Why did the deal fall through and who made the phone call?

Ms T Tobias (ANC) offered her congratulations on the extension of the tenure of the board, however if Treasury was involved in the operations of the entity then it suggested that there were challenges. There was a need to address governance, vacancies and a need to submit the financial statements and annual report. The board should take responsibility for the advice given by management. She suggested that the new shareholder compact be signed and that the financial statements and annual report be published before the end of January. The entity should follow the law and the PFMA.

Deputy Minister Jonas said he could outline the benefits of the original swop. A decision was taken by Treasury in response to a SAA Board request and this was approved in July. Secondly, Treasury was following the letter of the law for the current application. The SAA board had taken no decision, it had applied to the Ministry where the application was being processed and no decision had been taken by Treasury yet. The matter was therefore ongoing with no decision by Treasury because it was still with the asset and liability unit of Treasury. On the implications of infringing the PFMA, at the moment it was not correct to say that there was anything illegal. Treasury was looking at the matter from a business decision point of view. If there was any infringement, Treasury would be the first to act.

On the question whether a foreign catering company took over from Air Chefs, Ms Myeni said it had not been a good decision and SAA needed to look at the service provided. SAA had raised the matter after two days of operation and the contract with the German company had been cancelled within the seven day window period after the signing of the contract.

On the open skies matter, 80 years ago SAA had not faced the competition that it faced currently. The matter required policy discussion because the national carrier needed to be protected.

On corruption, there should be a unified front to fight corruption across all spectrums. SAA had commissioned an investigation to find out where money was being lost. Sometimes it appeared to her as if corruption had a colour when one looked at the allegations made.

On the Emirates deal, Ms Myeni did not know the cash injection from that deal. The code sharing deal with Emirates would have benefited Emirates because airlines had their eyes on Africa for growth in air traffic. There had been slow movement by SAA executives to look at an Africa growth strategy. If SAA had done the Emirates deal it would have been swallowed up. She did not want SAA to be given away.

On the pilots issue, she said that when she had been appointed the Chief Pilot had retired. She thought that this would be an opportunity for a black pilot to become the Chief Pilot. Ultimately a compromise had been reached and the Chief Pilots post had been split in two, that of flight operations manager and a ceremonial post. There were only 10 black captains of which two were Indian. She said that it appeared as if there was no faith in black pilots. The South African Pilots Association (SAPA), as a union, had been engaged by the Board.

In the South African Cabin Crew Association (SACCA), the cabin crew union, there was also the suggestion that change was resisted. SACCA was important. If SACCA went on strike there would be no flights, so the Board was taking the matter very seriously and were engaging with them.

She gave a commitment to finalise the financial statements and annual report by the end of January 2016.

On the CFO’s resignation, she had given him 110% support. When Ms Kwinana had said his contract should not be renewed, she had argued for him to remain.

Ms Kwinana said SAA was not withdrawing the swop deal but it was replacing the foreign listing company with a local listing company. On Ms Michaels comments on the dollar denominated loan, one needed to take into account the time value of money and so $500m would become $640m over time. The R1.6b of savings was a pre-delivery payment which got refunded.

Ms Kwinana said the CFO’s contract expired 31 July. She had written a letter against the renewal of his contract which included a number of reasons it should not be renewed. One of them was the Abu Dhabi route financials which had misled the Board, as had previously been explained. Another was that an audit found that in the SAA branch in Sao Paolo, Brazil, money that was supposed to have been deposited into the SAA bank account was not accounted for. The challenges of SAA and the fact that some KPIs had not been met had been looked at. These were all around financial matters.

Mr Zwane said the Board needs to look at the training of cadet pilots. The SAA had won best line maintenance awards and the cabin crew had won international customer service awards.

Mr A Lees (DA) asked what the role of Ms Myeni, who acted as if she was the CEO. Did SAA enter into discussions with Airbus before going to Treasury? If not, why? Why was a public statement given that it was going to change the deal? He asked why Ms Myeni was attacking the pilots. If she wanted the pilots to be happy she should not be making such statements against the pilots. On the Ernst and Young report on irregularities, he asked whether it was true that the deal did not work because of the onerous code-share deal with Etihad Airlines. On the transformation of the pilot corps of SAA, Ms Myeni’s comment that there appeared to be no faith in black pilots was a racist statement. He would like a copy of the Ernst and Young report to be forwarded to the Committee. He asked if Treasury accepted the statement by SAA that it would only be profitable in five years time. A letter from Treasury to SAA said the resolution to set aside 30% of SAA’s procurement for blacks was “not supported”. The investigation into the Boeing contract found nothing untoward and he would like a copy of that report.

Mr F Shivambu (EFF) said the pilots and cabin crew were not happy with the board. The airline was in a financial crisis. The board was chopping and changing management. The board was misled by its own executive into making expensive decisions. He questioned what kind of board it was and queried what role the risk committee took. The board had to take responsibility. It could not be expected that the current acting CEO would achieve the 30% of SAA procurement from black suppliers. Even on food procurement on domestic flights, the food was made in Denmark. The SAA risk committee chairperson had said SAA should not keep its CFO, yet Ms Myeni had thought it fit to give the CFO 110% support. SAA was in crisis and the process to get rid of the board and get a new board must start. All pending contracts should be frozen because the same wrong decision-making would inform these contracts and SAA would be grounded and everybody would have to take the bus to get to their destination.

Mr N Kwankwa (UDM) said the problems of SAA were a reflection of government because ultimately it was the oversight body for SAA. Was there an indication for the year that SAA would become profitable (referring to Mr Lees’ statement.) How could this be possible in the absence of financial statements and annual reports? What would the impact of capital injections be on SAA? Ms Myeni had implied that there had been an element of resistance to change and transformation. He hoped that the ceremonial position had not been given to the black person. On visa regulations, he would have expected trend analysis to have been presented to support SAA’s argument that visa regulations had an impact on the airlines sales. No targets set by Treasury would be met if there was no stability at the entity.

Mr B Topham (DA) said he wanted to make clear that there was no foreign airline operating in South Africa. Speaking about Ms Kwinana, he said that according to the King guidelines on corporate governance if a non executive was doing the duties of an executive, then that person should lose the non executive position and Ms Kwinana would be out of a job. There were many red flags waving for SAA. On the financial plan, that the corporate plan was wrong and old, being more than six months old and not including the visa issue. There was disagreement with the shareholder on how to finance aircraft. He did some rough calculations and the plane swop deal from the Airbus A320 ($70m) to the A330 ($260m) would make a big difference in the contract price. SAA was not a going concern, had been making losses over the last few years and its interest bill would get even higher. He could not believe that the board expected the Committee to believe that SAA would be profitable in five years. SAA had lost the equivalent of three Nkandlas in six months while South Africans needed housing and were in dire poverty.

Ms S Nkomo (IFP) said it appeared that there was confusion about the roles that board members had to play. On the Abu Dhabi route issue, while the board was pointing fingers at the management team, it also pointed back to the risk and audit committee of the board. What verification of the information process had been put in place? It was a disgrace that the financial statements and the annual report were not published and they needed to be completed. On the visa issue, everybody was hiding behind it. She wanted to know who Air Chefs was? She asked for input on why some of the 51 KPIs were not met.

Mr D Maynier (DA) asked Ms Myeni if she would do the right thing and resign. If not, could she explain why she did not want to resign?

Ms Michaels said it cost R7b to keep SAA alive.

Mr Shivambu said SAA was in a crisis and Ms Myeni should step down. Other board members appeared intimidated. An incapable person had been sourced to run the entity, but that this should not be used to open the doors to the privatisation of the airline because of its logistics role and because it should play a developmental role.

Ms D Mahlangu (ANC) said the Committee needed to provide solutions on the pilots and for all other groups and the Committee needed to agree on a process to resolve this. Did SAA foresee any retrenchments happening?

On the fake bank accounts question posed by Mr Van Rooyen, Ms Myeni said that it was far from the truth and a case was now pending. On negotiations with Airbus, SAA had not negotiated with Airbus. It was a 2002 deal which had been renegotiated over the years including by Mr Khaya Ngqula, a previous CEO. It had been proper to renegotiate because of the improved fuel efficiency of the A330. SAA believed in transformation. She confirmed that a black person had been given the ceremonial post. She was not suggesting that there was no progress.

Ms Myeni said that the CFO’s contract included a six month notice period. The board had raised non compliance with the PFMA by the CFO. If it wanted to end the CFO’s contract at its termination date, then it had to give notice six months prior to the end of the contract period.

Ms Kwinana said the 30% procurement to be set aside for black small and medium enterprises and cooperatives arose from the State of the Nation Address (SONA) by the President. After the Budget speech, SAA had request guidance but did not receive a practice note from Treasury.

The Chairperson said referring to legislation was not an answer.

Mr Zwane, Acting CEO, said the 4% participation by Previously Disadvantaged Individuals was a legacy issue and he withdrew this statement. He said that the retrenchments process had been completed under Section 189A.

Deputy Minister Jonas said state policy had to be careful in that the approach could sometimes be conflictual. He was aware that there were urgent matters such as the A320/330 deal. In law the Minister had 30 days to respond and he would respond within the following two weeks. Treasury was analysing the impact of a decision. If Treasury did not agree to the SAA request, then the matter would revert back to the current situation. He hoped that the Financial and Fiscal Commission (FFC) would be making a recommendation to the Minister.

On the finalisation of the financial statements and the annual report, he said that Treasury was firm on maintaining its fiscal stance. It had consistently maintained the alignment of growth and spending.

There was too much focus on the individual and there should be more focus on the institution. To date there had been no transgression of any law.

On the 30% set aside for black procurement, the Deputy Minister said that the comment had to be put into the context of the whole speech where at the end of the President’s speech, he had said that the 30% applied only to specific categories.

Mr Maynier reiterated his question whether Ms Myeni would resign.

Ms Myeni asked the Chairperson that she be given seven days to respond to the question.

Mr Maynier asked why she needed the seven days.

The Chairperson said that SAA was not above the law and the PFMA had to be applied. SAA had to handle its public relations better. By 15 January 2016, the financial statements and annual report had to be tabled and a progress report had to be submitted by 15 December. He asked whether the new board appointments could be made soon. The Ernst and Young report had to be submitted to the Committee within seven days. While there was a shareholder compact, there was a gap between what was requested of SAA and what SAA delivered. The board should indicate if it felt that the compact was too ambitious. It was not fair to make the board shoulder the blame for what was a historical legacy. The board must be very clear on what transformation was. The fact that there were so few black pilots was unacceptable. He got the impression that SAA was under financial and administrative management by Treasury. When staff kept on changing it was a reflection on leadership and the vacancies had to be filled soonest. The Committee would meet with SAA at the end of January or February.

Meeting adjourned.

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