Progress report and preliminary financial results: South African Airways briefing, with Deputy Minister present

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Finance Standing Committee

20 September 2016
Chairperson: Mr Y Carrim (ANC)
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Meeting Summary

The meeting involved a presentation by the board of South African Airways (SAA) to the Standing Committee on Finance (SCOF) followed by a question and response session including input from the National Treasury (NT). The presentation included a progress report and preliminary financial results for the 2014/2015 and 2015/2016 financial years.

Several board members of SAA were late to the meeting, including chairperson Dudu Myeni, deputy chairperson Tryphosa Ramano and fellow members of the board Swazi Tshabalala and Peter Tshisevhe. Chairperson Carrim noted the committee’s dissatisfaction with this absenteeism.

The Deputy Minister of Finance explained to the Standing Committee that the 2014/2015 financial statements were late because the board first needed to acquire financial support through a government guarantee of R4.7 billion. Securing the guarantee had allowed them to prepare the financial reports on a going-concern basis. In order to attain the guarantee, however, it was necessary to show that steps had been taken at SAA to improve governance and return the company to profitability. For this reason, 11 new non-executive directors were appointed to the board while cabinet also approved the reappointment of Chairperson Dudu Myeni.

In its presentation, SAA reported that it is an important contributor to the South African economy. It currently faces significant challenges due to a lack of capital, difficult market conditions and a lack of leadership stability. He added that negative attention in the press had had a harmful effect on SAA.

Cost compression and rationalization had helped SAA to save R2.2 billion between 2012 and 2015. SAA has improved its scheduling strategy, and has finalized the Airbus swap deal. The losses made by SAA were the result of tough competition from low-cost couriers, costly exchange rate depreciations, impairments on assets, and the effects of the Ebola virus. A factor that helped to lower costs was the decline in Brent crude oil prices by 34% over the 2015/2016 period. The loss in 2015/2016 is R1.4 billion overall, which is an improvement on the loss of R5.6 billion in 2014/2015. The improvement is in part due to the fact that there were no impairment costs this period, whereas there was an impairment of R1.2 billion in 2014/2015. As at the date of the meeting the 2015/2016 financial position indicates a net shortfall of R11 billion [liabilities in excess of assets]. In terms of performance indicators, performance declined in quarter one of 2016, with only 66% of targets being met.

Members of the DA were critical of Ms Dudu Myeni’s leadership and reappointment and described her leadership style as being typical of a warlord. Some Members from the majority party were more sympathetic to Ms Myeni, arguing that SAA has historic problems, that her appointment reflects the transformation agenda of the country, and that too much focus is being placed on blaming just one individual. The EFF objected to the notion of shifting the blame away from the individual to a broader group.

Several members criticised the financial management, pointing out that SAA was technically insolvent and that the financial statements were extremely overdue and of poor quality. The financial statements were missing several important features, were in contravention of the Public Finance Management Act and International Financial Reports Standards, and will likely be qualified when investigated by auditors due to these issues. They enquired as to how headcount reduction savings were achieved when the company also recorded hiring over 3000 additional staff across the period. Members were critical of SAA’s failure to manage exchange rate risks, negotiate contracts and generally run the business strategically. The DA made the case for the introduction of private equity, arguing that it is a flexible approach which has helped several companies to turn around and become successful in the past. The ANC and EFF were ideologically opposed to privatising SAA.

The Committee made the following resolutions:

  • The board will appoint an aviation expert
  • A reasonable deadline will be set by which the board must appoint a permanent CEO and CFO
  • The Shareholder Management Bill must be expedited
  • By Friday 30th September, the reports must be tabled through the PFMA process
  • By Monday 10th ­October, the board must have submitted its answers to members’ questions
  • The committee will subsequently meet with SAA once a quarter. The Director General, The Deputy Minister of Finance, the Chairperson and the Deputy-Chairperson of the board must be present. 

Meeting report

Opening Remarks
The Chairperson opened the meeting by requesting that members be thorough and serious, while also respectful in their questioning of National Treasury and SAA board members. He noted members’ concerns over the composition and competence of SAA’s board (the board). In terms of composition, it was his view that the board should at minimum have a chair, a deputy chair, at least one person with experience in the aviation industry, and probably a member with financial skills. He felt that he was not well-acquainted with the current members on the board. He noted that there was an overly-large representation of SAA at the meeting [approximately 8 delegates were present] as the norm is for around four delegates to be present.

The Chairperson asked Mr Mcebisi Jonas, Deputy Minister of Finance (DM), to explain the absence of SAA chairperson, Ms Dudu Myeni.

Mr Jonas explained that the board had just received a message from Ms Myeni explaining her lateness on account of a doctor’s appointment. He added that the deputy-chair of SAA was on her way but was also delayed

Mr Peter Maluleka, SAA Board member, then introduced himself and explained that several board members had not yet arrived.

The Chairperson Carrim noted that it was unacceptable that so many delegates were late. In particular he noted the Committee’s unhappiness about the lateness of chairperson Myeni.

Mr Jonas then introduced the SAA board members that were present, including: acting Chief Executive Officer (CEO) Musa Zwane, interim Chief Financial Officer (CFO) Phumeza Nhantsi and Deputy Director-General (DDG) Anthony Julies.

Remarks by Deputy Minister

Mr Jonas explained that Section 55 of the Public Finance Management Act (PFMA) requires that State-Owned Companies (SOCs) submit their audited financial statements to the executive authority within five months following the close of the financial year. Section 65 requires that the executive authority tables the annual financial statements in Parliament within a month of having received them. However, SAA has been unable to finalise the statements on the going-concerns basis without the support of going-concern guarantees. At the same time, it would not have been prudent for government to support SAA with guarantees without first taking steps to mitigate fiscal risk. SOCs and contingent-liability exposure to SOCs remained one of the key risks to the country’s fiscal framework. This is why it is an area that is closely monitored, including being monitored by ratings agencies.

Mr Jonas continued. Government has indicated that entities receiving support are required to demonstrate sound business plans, improved governance, and a strategy to address inefficiencies. It was thus necessary as a first-step for a full board to be appointed. As of 1 September 2016, 11 new non-executive directors were appointed to the board. Cabinet approved that the chairperson (Myeni) be reappointed for a period of one-year, for purposes of continuity. Minister of Finance Pravin Gordhan had met with the new board on 9 September 2016. The Minister underlined that the primary focus of the board is to return the airline to financial stability. The airline’s current strategic plan indicates that SAA is expected to return to profitability by 2020/2021. This will be achieved through cost containment strategies, better fleet planning and a focus on profitable routes while closing down non-profitable routes. The strategy will need to better differentiate the airline, enabling it to profitably meet consumer needs. The Minister tasked the board with appointing a permanent CEO and CFO and other key executives in consultation with the Minister.

Mr Jonas discussed the guarantees granted to SAA. The board had a role in ensuring that SAA acquired funding to meet liquidity requirements. It was on this basis that a further R4.7 billion going concern guarantee was approved. The steps outlined for the board served as the conditions of the guarantee. The guarantee allowed the board to finalise 2014/2015 financial statements as well as to prepare preliminary 2015/2016 reports for tabling in Parliament. Both sets of financial statements were approved at a meeting on Sunday and are now being prepared for submission to the Minister. NT expected that the Minister will be in a position to table the 2014/2015 reports on Thursday and the 2015/2016 annual financial statements before the 30 September 2016 deadline prescribed in the PFMA.

Mr Jonas explained that the financial statements to be presented in the meeting were a draft version. Technical issues identified by the auditors had resulted in material changes in the financial performance and the financial position of SAA, as will be explained. Despite the negative response, it was necessary for NT to grant the going-concern guarantee to SAA as not doing so would have imposed systemic risk to all SOCs in the country, also threatening rating-agencies positions.

At this point Deputy Chairperson Tryphosa Ramano (SAA) arrived along with fellow members of the board, Mr Swazi Tshabalala and Mr Peter Tshisevhe.

Briefing by South African Airways - Presentation to the Standing Committee on Finance
Acting CEO of SAA Musa Zwane gave the presentation of behalf of the SAA.

Mr Zwane began with a contextualization of the presentation. He noted that the 2014/2015 results represent SAA’s performance of two years prior and long before the new board was elected. The 2015/2016 financials were more relevant to the discussion, and were approved following the board meeting last Sunday. The board is confident that SAA will “find direction” and positive strides have been taken since 2015. The new board has been appointed and sub-committees have been established to ensure proper governance. The cost compression strategy is yielding positive results.  

Mr Zwane provided an overview of the situation at SAA. He suggested that SAA is a significant contributor to South Africa’s economy, contributing roughly 3% to the fiscus. It provided 33 000 jobs, and carried more than 50% of all cargo that crossed South Africa’s borders. SAA had a large training programme, procured locally and had taken steps to protect the environment. SAA is working to increase regional integration and ensure schedule alignment.

Mr Zwane discussed the challenges currently faced. The first is a weak capital base, which SAA aimed to mitigate through debt consolidation and a strategic focus on becoming cash-positive. He noted that pressures on revenues are being felt by airlines across Africa due to poor market conditions.

Mr Zwane then focused on leadership instability and developments within SAA’s executive. Sylvain Bosc [previously chief commercial officer] was found not-guilty by chairperson Myeni but the case was placed on review and is currently in the labour court. Previous General Manager of Human Resources, Thuli Mpshe’s case was supposed to be heard two weeks ago but was postponed. Chief Procurement Officer, Masimba Dahwa’s case was heard and finalised and he has left SAA. A hearing was held for suspended treasurer Cynthia Stimpel and it is currently at the Commission for Conciliation, Mediation and Arbitration (CCMA), where it is under review. The sub-committees that will be established by the board will hopefully be able appoint persons capable of filling these open positions. In addition to this list, Mr Wolf Meyer resigned from the CFO position in November 2015.

Mr Zwane spoke about the negative effect that bad press has had on SAA. He felt that the company should focus on “taking the airline away from the media”. When the airline is not spoken about every day, staff are better able to focus on performance. Over the six months when the media was relatively quiet, the airline managed to produce better results. SAA will focus less on appearing in front of the media.

Ms Phumeza Nhantsi, Interim CFO, SAA, took over the presentation to discuss highlights from the 2014/2015 financial results. She noted the following successes over the period:

  • Costing savings targets were realized through the cost compression programme, which saved R2.2 billion between 2012-2015.
  • Two loss-making routes were closed, being the routes to Beijing and Mumbai.
  • A route was opened between Ghana and Washington DC.

Ms Nhantsi discussed performance over the 2014/2015 period. Over the year the airline managed to save R1.1 billion through cost compression. The company also underwent rationalisation through a headcount reduction. This was achieved without retrenchments: 906 members of staff left the company through voluntary severance packages and natural attrition. The costs incurred through the programme amounted to approximately R250 million.

Ms Nhantsi discussed performance over the 2015/2016 period. SAA succeeded in finalising the Airbus swap deal. Ancillary revenue was increased through targeted initiatives. The loss-making route to Abu Dhani was closed in March 2016. Overall an operating profit was recorded before interest, tax, depreciation and amortisation costs.

Ms Nhantsi provided a high-level overview of financial performance in 2016. Revenue challenges prevailed due to a competitive environment, especially driven by low-cost carriers. Revenues achieved were below budget. Another problem is exchange rate exposure: as much as 60% of operating expenses are foreign-currency denominated. On the other hand, only 40% of revenue is foreign-currency denominated. Although operating costs were below budget and below the level of the previous year, this result was primarily driven by a decrease in Brent Crude Oil price, which was 45% down compared to 2015. Rand depreciation drove up expenses over the period.

Ms Nhantsi went into the detail of the financial results and discussed the 2014/2015 year. The approved company records indicated a loss of R5.6 billion. This was worrying especially compared to the 2013/2014 loss at R2.6 billion. There were particular key factors contributing to this loss. Importantly, there was an impairment posted of around R1.9 billion. The impairment contained two elements: firstly, the impairment of A320 200 aircraft. In 2002 SAA bought 20 A320 200 aircraft. Ten of these were delivered and these are the aircraft that were impaired. The purchase contract came with escalation clauses where [price] escalation occurs on a yearly basis. By the time the aircraft were delivered their market value was less than the price paid which is reflected in the impaired cost. The decision to swap these A320’s (bought in 2002) for A330’s was taken by shareholders and the board; is a good one from a business perspective. As a result, there are no further impairments on the 2015/2016 schedule – the last came with the final delivery of six aircraft. [It is unclear what the second part of the impartment was].

Ms Nhantsi discussed costs and noticed an increase of 6% from R30 billion to R32 billion. There are two key aspects driving this. Firstly, the weakening of the Rand by 10% over 2014/2015 drove up operating costs. The drop in brent crude oil again helped to negate this. Total income in 2013/2014 was R30.2 million, and in 2014/2015 it declined to R30.1 million. As mentioned, revenue has been flat due to tough competition in the market and particularly low-cost couriers. Regionally the airline has been affected by the Ebola virus which caused a reduction of passenger numbers. The estimated cost of the Ebola outbreak to the airline is roughly R500 million.

Ms Nhansti then discussed the 2015/2016 results. The approved figures for 2015/2016 reflect a loss of R1.4 billion which is an improvement. Revenue is still suppressed by competition. The swap deal has caused an improvement as SAA is no longer recording impairment costs. Finance costs have increased due to the heavy reliance on guarantees. Operating costs have been driven by two main factors. Firstly, costs have been reduced by the brent crude oil price decrease of by 34% over the period. However, the currency weakening of 26% in 2015/2016 caused an increase in costs.

Ms Nhansti then discussed the Statement of Financial Position.  She reiterated that the SAA could not finalise its financial statements for 2014/2015 without guarantee support from shareholders. She did not discuss the balance sheet but the presentation indicated the following line-times for the 2015/2016 year:

  • Total Non-Current Assets                        R7.0 billion
  • Total Current Assets                              R9.7 billion
    • Cash and Cash Equivalents        R2.3 billion
    • Other Current Assets                 R7.3 billion
  • Total Non-Current Liabilities                    R9.7 billion
    • Long-Term Loans                       R6.5 billion
    • Other Non-Current Liabilities       R3.2 billion
  • Total Current Liabilities                           R18 billion
  • Net Assets                                            (R11 Billion)

Ms Nhansti moved on to discuss the highlights from Quarter 1 of the 2016/2017 reporting period. Cost compression is ongoing in 2016 and roughly R181 million had already been saved. Route schedule optimization remained a focal area. In particular, the frequency of flights between Libreville and Cotonou, and between Brazaville and Pointe Noire have increase from twice to three times per week. Neither route include a night-stop as of 2016.

Ms Nhansti then discussed SAA’s quarterly performance information. She noted that seasonally the first quarter is never the strongest. According to the Shareholder Compact indicators, SAA saw a performance decline, with only 66% of targets being met. The targets not met fell within the following categories: Financial Sustainability, Consistent and Efficient Operations, and Performance Excellence. Revenue increased by 7% but still remained 10% below the level budgeted for. Operating costs increased by 10% (largely due to currency depreciation) but were less than budgeted by 7% due to the fuel price decline.

Mr S Buthelezi (ANC) had several questions for SAA. Firstly, he requested a description of the SAA fleet. How many aircraft are currently owned and how many are being leased? How is leasing affecting the financial statements? Secondly, it was mentioned that the SAA has gone to the financial markets looking to raise around R15 billion. Why was this such an amount being sought, what is the airline trying to achieve and is this not in violation of PFMA or other legislation?

Mr Buthelezi sought more detail on the cost saving, and whether such significant savings had not in some or another way compromised maintenance standards and aircraft quality. Regarding the decrease in operating costs, he posited that most of the improvement came from the unexpected decrease in the price of Brent Crude Oil, which is really nothing to commend the SAA for.

Mr Buthelezi was concerned by the high turnover rate of senior management in SAA. Why is this the case, and how does SAA plan to prevent this going forward? He mentioned that evergreen contracts can become a large cost factor. Would the CEO provide details on the evergreen contracts of the SAA and what is being done to manage their costs? Lastly, the presentation mentioned competition as a factor that is curtailing revenues, but competition exists across the world where other airlines remain profitable. Why should SAA be different?

Ms D Mahlangu (ANC) stated that according to forensic reports a major issue has been supply chain and contract management. Why is this a problem and why does this problem reoccur? There are clear guidelines for SAA in terms of its corporate governance. She urged that this question be answered at some point within a fixed timeframe if it can not be answered in today’s meeting. Ms Mahlangu wanted to know why certain Key Performance Indicators (KPIs) were not achieved. SAA should have an effective performance management plan. There is a belief that the board has been involved in the management operations of the airlines at certain stages; if this is true, what interventions took place, and have they yielded any results? The company is supposed to be organized such that the board and management each have their own separate management.

Ms Mahlangu seconded Mr Buthelezi’s points regarding SAA’s leadership instability, stressing that it is crucial for a companies’ success. She added that the mitigation measure mentioned in the slide – that the new board mandate is to fill key vacancies as soon as possible – is too vague and needs an attached timeframe. The acting CEO should specify how long this process will take.

Mr D Maynier (DA) stated that in his view Ms Dudu Myeni is “ground zero” for the problems at SAA. She behaved more like a “warlord” than a chairperson. For this reason, it would have been agreeable for her to be present at the meeting to hear his complaints. When chairperson Myeni wrote to the Committee in 2015 providing reasons why she would not resign, she mentioned that she serves at the pleasure of the government represented by the SAA shareholder, which is the Minister of Finance. He asked the Deputy Minister to confirm if the Minister had in fact opposed the reappointment of Ms Myeni as chairperson. Further, could he explain why the Minister opposed this, and given this fact, how it is that Myeni has been reappointed as chairperson regardless? It is his view that the Deputy Minister and most members of the public would agree that this is not in the best interest of the airline.

Mr Maynier observed that a key component of cost compression has been headcount reduction. However, the figures are astounding: between 2010 and 2015 SAA employed 3442 additional staff members. If one looks at the previous two years, SAA only reduced headcount by 15. How is it possible that so many additional staff were employed when the airline was making significant losses? Why has there been no serious effort to reduce headcount and save on the now R5.68 billion loss?

Ms N Mokgosi (EFF) stressed that SAA will have to exercise fiscal prudence, and questioned to what extent this can be achieved when the company is still without a permanent CEO. How can you turn around an ailing business without such a key individual? Does this not constitute a violation of fiscal prudence? She commented on the CEO’s remarks about the media acting as a distraction to the work of SAA, pointing out that bad press would not exist if there were no grounds to the accusations. The press is an important way in which the public as well as the committee learns about the SAA.

Ms Mokgosi continued, explaining that events have led her to believe that SAA does not understand the international monetary framework in which it operates. For example, in 2011 to 2015, R3 billion was lost due to currency fluctuation. Why does SAA not have a strategy for managing such a predictable risk? It is not a solution to simply blame the weakening of the rand – rational management would anticipate these challenges. It is a clear fact that the monetary system of South Africa is open and susceptible to speculative attacks.

Ms Mokgosi felt that while airlines are consolidating in most parts of the world, SAA is not liberalising or consolidating its business which speaks to a problem of the business model. For example, British Airways manages to provide a better servicing of the route from Durban to Cape Town than SAA does. She urged that these problems in the business model explain the operating losses. She wanted SAA to detail exactly how it is going to address its operating losses. If these problems are not curtailed, they will swell going forward. The operating loss is already R1.5 billion this year and it is frightening to consider what is going to happen in the future.

Ms P Kekana (ANC) added that there is a need for stability both on the board and in terms of the company’s management. She pointed out that the new board is only two weeks old and thus can not yet be held accountable. The presentation noted that there is significant foreign currency denomination, causing exchange rate exposure.

Ms Kekana was interested to know if the leasing of aircraft from outside of RSA is worth this risk, and whether leasing agreements with foreign companies are sustainable. She urged that it is not feasible for the institution to continually rely on shareholder support for fiscal stimulus.

Ms Kekana raised the issue of transformation. She noted that only 2% of SAA’s procurement came from black-owned business. Of the R24 billion rand spent on, what are the top five companies benefitting from this business? Please provide a breakdown of employment in terms of position, race and pay, as well as potentially considering gender and disability, so that the Committee can observe the transformation path of SAA.

Lastly, Ms Kekana asked NT to explain what happened to the Shareholder Management Bill? This Bill intended to assist government in setting up a framework for interaction between SOE’s and government as a shareholder, which would have addressed many of the salient issues in today’s meeting as well as problems within the SAA.

Mr A Lees (DA) commiserated with the new board given the challenge it faced, and stated that he too felt they would meet leadership typical of a “warlord”. He pointed out to the Chairperson and the Minister that the allegations of the previous CFO were correct in that SAA is technically insolvent and therefore that further trading constituted reckless trading as per Section 22 of the Companies Act. He wanted to know if the Minister was going to appoint a committee of inquiry to see whether or not MsMyeni and some or all of the directors at the time should be held personally liable for violating the Companies Act. SAA remained in business only on the basis of some R19 billion in guarantees from government and taxpayers. The “tight” revenues observed in the presentation are largely if not wholly a result of the inactive operations department set up under Mr Bosc.

Mr Lees pointed out that the annual report as tabled was not final; this was illustrated by the sudden changes apparent since the preliminary report received on 15 September. In the previous report the loss was R4.67 billion but it has now jumped to R5.64 billion. This represented an additional R950 million in losses.

Mr Lees discussed the leadership of Ms Myeni. The purchase of new aircraft from Airbus has been mired by controversy around Myeni’s attempt to introduce African finance into the deal, which was soundly rejected by Airbus. This meddling in the executive functions of SAA by Ms Myeni without a mandate from the board was reckless and brought SAA to the brink of liquidation. Finance Minister Nene was forced to intervene at the last minute to force an agreement with Airbus in order to try and save SAA, and this action clearly cost him his job. Ms Myeni then sought to raise R16 billion to refinance the debt book using so-called “boutique” financiers BnP Capital. She then tried to get a bankrupt SAA to pay “one-man show’” BnP [it is a private company with few shareholders] a cancellation fee of R49.9 million. As of 31 March 2015 SAA had liabilities that exceeded assets by R8.29 billion and this figure now reached R9.24 billion. It is expected to stand at R10.96 billion by end of 2016. The company is bankrupt.

Mr Lees pointed out that there has been an exceptionally high number of senior members suspended or resigned, including: (all former) CEO Monwabisi Kalawe, Chief Commercial Officer, Sylvain Bosc (CCO), CFO Cynthia Stimpel [at the time her position was actually called treasurer], CFO Wolfl Meyer, and General Manager of Human Resources, Thuli Mpshe. Minister Gordhan had asked the board to review all current suspensions, yet today the committee learns that additional legal action is being taken against a suspended member. How is possible that SAA can take a decision of their own disciplinary committee on review? Will the board comply with the condition laid down on 13 September by Minister Gordhan instructing the board to review all suspensions of employees to see if they are justified? If so, how will this review be conducted so as to be independent and impartial?

Mr Lees commented that auditors have raised technical difficulties in the 2014/2015 Annual Report at the 11th hour. As such the committee could not be sure that the report was final. He asked acting CEO Zwane if he agreed that SAA was technically insolvent and that it would have faced liquidation if not for the guarantee. Mr Lees also wanted further information on whether forensic investigations were made into tender irregularities and if so what the results were. According to the presentation, technical details were raised by the auditors - what were these technical details and who are the experts from which advice is being solicited? 

Mr Lees observed that the report [2014/2015] as it stands is preliminary and is missing key elements, including the auditor’s report and the financial statements of SAA subsidiaries, which are required per Section 55 (c) of the PFMA.  He noted that the Minister had set up a second meeting on 20 November. He asked the Deputy Minister to confirm that the finalised annual reports and the financial statements for subsidiaries would be tabled, along with a copy of the shareholder compact, an evaluation of the board as referred to in page 62 of the preliminary report, as well as the benchmarking exercises referred to in page 55. In addition, can he confirm that the financial statements of subsidiaries will be included in the 2015/2016 reports to be tabled in that same meeting?

Mr F Shivambu (EFF) noted that the Committee had been concerned about SAA’s liquidation and the composition and competence of the board, and had tabled the matter for debate with two members of the previous board. Soon after the debate an entirely new board was appointed, although Ms Myeni remained at the helm. This reappointment was a significant concern of the Committee. However, the Minister of Finance assured us that the new board is going to competently turn SAA around. Given this background, Mr Shivambu asked the board to explain what it plans to do differently than in the past five years under Ms Myeni. She had taken senseless positions on many critical issues and had misled the board. What has the new board done to ensure that the previous drama will not reoccur?  Currently, there is no one on the board in a permanent position: positions are all described as ‘acting’ or ‘interim’. What are you doing about this? When are non-actors going to be appointed?

Mr Shivambu commented that he is suspicious of the acting CEO Mr Zwane. In the last meeting where Zwane appeared, he said that the board had committed to improving the diversification of the suppliers’ base with a target of 30% [black owned]. He wanted to know what had been done since this commitment to achieve this goal. He commented that it is inappropriate to say that one has been distracted by the media.

Mr Shivambu stated that the board urgently needs to attend to the competence of the executives of the company. “Even with the madness of Myeni, some of the calamities that have defined SAA would have been avoided by a competent board”. There is evidence of Ms Myeni interfering with procurement processes and lining up her friends and family to benefit from procurement. She has given illegal instructions to procurement officers. The new board needs to be fully aware of Ms Myeni’s behavior and the incompetence of other managers, including those that are following incorrect or illegal instructions. The board is probably not fully informed, for example, of the details of the deal made with BnP capital and what the process by which this contract was formed.

Mr Shivambu stressed again that if the board is competent as the Committee has been assured, then members should be able to explain in some fashion what they plan to do to solve SAA’s problems.

Mr B Topham (DA) commented that it is 18 months after the close of the financial year and the Committee has only today been furnished with a draft of financial reports, which is completely unacceptable. In addition, the draft contains no audit report.

Mr Topham argued that the audit report will be qualified for 2015. This is because the going-concern basic applies for 12 months into the future. Seeing as it is 18 months later, a new financial year has started and any guarantees issued will thus have been after 12 months. The auditors had an obligation to issue and audit report after commencing an audit within a reasonable period of time. Therefore, whether it is officially qualified or not, for all practical purposed the reports can be considered qualified. It is further his opinion that they do not comply with International Financial Reports Standards (IFRS).

Mr Topham had clarifying questions. Looking at the cash flow statements, SAA is both technically and commercially insolvent. If it weren’t for monopolistic position of SAA the company would not still be trading. It is a serious issue that 18 months later we do not have audited statements – JSE listed companies are expected to issue audited reports within three months. The situation is completely unacceptable. The treasury was essentially forced to issue the guarantee, and given the situation the conditions that they have managed to attach are actually commendable.

Mr Topham noted that the report does not include a plan for fuel expenses. Fuel and maintenance are the two most important costs for an airline – these seem to be out of the control of SAA. As it stands, 36% of total revenue is going to the fuel bill in 2015. What is the plan here? It is his presumption that the decision to buy narrow-bodied planes [the A320s] was based on the rationale that this would save fuel but where is the documentation of this decision and the savings realized? Furthermore, when new planes have been purchased, one shouldn’t see an increase in maintenance costs but rather a decrease. So there is something seriously wrong in the maintenance department. In the reports, R3.6 billion was spend on maintenance in 2015 while R2.2 billion was simultaneously spent on new acquisitions

Mr Topham pointed out that there is no segment report – line items are not split up sufficiently as in the IFRS framework. He added that SAA is always in the press for good reason, as statements are late and the board is being litigated. In addition to a lack of the segment report, the financials mention nothing of contingent liabilities and litigation costs. These are serious and material shortfalls. The note on page 127 of the preliminary report on going concern is incorrect. Another observation is that SAA’s training costs are extremely high. Again the reports do not provide split information. Staff poaching is the event where expensively trained pilots are hired by other companies after being trained by SAA. Does this occur and if so to what extent?

Mr Topham observed the impairment costs of R1.8 billion and R1.6 billion. These figures are a direct result of a bad decision made by the board. It is the result of a bad structuring of the acquisition deal. This is exacerbated by the exchange rate deprecation, but seeing as aircrafts are always denominated in dollars this was predictable. Whoever negotiated this expenditure was extremely negligent and there should be recourse for this behavior. The expenditure is fruitless and wasteful. Has the current board made an assessment on this and will they take action?

Ms T Tobias (ANC) noted that looking at the history of SOE’s in South Africa and the context of the company would be useful to the discussion. It would help in understand the role that the company should be playing. She added that the President of the Republic has recently highlighted the need for increased investment by government and transformation within Eskom and SAA. The Deputy Minister of Finance (Jonas) previously tabled a 90-day action plan for the turnaround strategy of SAA. That action plan implemented was clear and included the Long-Term Turnaround Strategy (LTTS). She asked if this LTTS has been implemented.

Ms Tobias focused on the year-to-date financial performance. In the corporate environment one cannot have a proper discussion about a firm if they can not present their financial reports. The performance determines a companies’ ability to continue and to lead. SAA can not blame a tough competitive environment; in the corporate world you are removed if you can not perform. The company needs to be flexible and innovative in order to compete with other companies and win routes.

Ms Tobias commented on the need for a separation of powers. The Committee can not be expected to take over the decision-making responsibilities of the board; the Committee’s mandate is an overseeing role. Similarly, SAA must separate board oversight of the company from operational activities. The board is not qualified to actively manage an airline. What is the relationship between the board and management within SAA?

Ms Tobias seconded Mr Topham in that split-item reports are necessary to understand what is driving the financials of the company, particularly regarding contingent liabilities and revenue items. The role of NT in overseeing SAA has been given by Parliament and is important. NT needs to consider whether the actions of SAA are contributing sufficiently to GDP growth. It would be better if the reports could have been read outside of the meeting.

Ms Tobias agreed with Ms Kekana’s comments in that the transformation agenda is lagging for blacks and women. SAA needs to focus on the development agenda undertaken by the company. The organization needs to make economic decision and stay afloat if it is going to meet its agenda.

 [At this point of the meeting, being approximately 11:45 am, SAA chairperson Dudu Myeni arrived]. 

Ms Tobias suggested that the Committee meet with SAA on a quarterly basis given how high the stakes are in the survival of SAA. The government has previously decided that both the state and the private sector must play a role in investment in the airline industry – the country is not ready to privatise. The private sector will always want the government to divest. 

Ms Tobias suggested that members should not overly focus the blame for SAA’s problems on a particular individual. She also took exception to the use of the term “warlord” suggesting that it is too strong. While she agreed with some of the issues raised by Mr Maynier, she observed that the African National Congress (ANC) has taken SAA’s board to account. However, she added that a balance is necessary as the transformation agenda remains important. This is especially true given the very steep learning curve in these positions.

Ms Tobias commented that the high turnover of board members is undesirable. Again, government is not ready to privatise and remains committed to the transformation agenda. She agreed with Mr Shivambu that the media can not be blamed for any of the problems in SAA.

Ms N Mazzone (DA) inquired as to the position of the Committee and the SAA board on the question of gaining equity partners. Privatisation is not a one-size fits all programme; there are many option available to SAA. Privatisation would not require reinventing the wheel. Companies have turned around very successfully by bringing in private equity partners.

Ms Mazonne maintained her personal view that Ms Myeni’s reneging on the Emirates equity deal amounted to sabotage of the South African economy. The chairperson of an SOE should not have the ability to cause such a devastating effect on the economy. Months of negotiation went into what could have been a lucrative deal supporting SAA in the economic field at a crucial time. As of today, Parliament still did not have information on why the deal failed on the infamous “night in Paris”. As a result of such decisions is that it is now increasingly difficult to build a trust relationship with an equity partner. She added that the reason SAA is always in the media because recent events at the SAA have read like a soap opera. “It is not a good soap opera – it is a scary soap opera”.

Ms Mazzone asked the CEO for an update on the situation with the Pilots Association. In 2015 the association brought a motion of no-confidence in the SAA board. Notably, this was followed soon by several allegations levelled against senior pilots, all of whom have since been cleared of the allegations. No public statement has been made by the board regarding this development. These pilots are men and women who have served the country with distinction; she personally has full confidence in the country’s pilots and takes pride in our pilot-base. It is her belief that it is these pilots that give South Africans the faith to fly SAA when it is in such economic turmoil. It is notable that the board is so quick to bring a report against a pilot but at the same time very slow to subsequently bring a clearing report.

Ms Mazzone commented on US Dollar/ Rand exchange rate fluctuations. Recently, airlines across the world have seen growth in incomes from dropping fuel prices. She wanted to know exactly how much of SAA’s revenue is received in USD. It is stated at 35%-40% of income, so how did this influence income statements?

The Chairperson commented that there is a lack of pride in the airline which represents the Nation. He reminded members that it is both the board and the finance ministry that is answerable to Parliament. It is both the entity and the shareholder department in government that are responsible. Further, there is a broad division of responsibility between Parliament, the executive, the SAA board, trade unions, SAA management and general government. With regards to the board, he seconded Mr Shivambu’s question: what is this board going to do differently?

The Chairperson agreed with Ms Tobias in that the committee should meet with SAA quarterly. In his view, SAA should be moved to back Public Enterprises instead of operating under Treasury. The Committee is not aviation experts and has enough to deal with already.

The Chairperson then clarified points from the discussion so far. Firstly, the financial statements were interim statements and therefore were not expected to be complete. However, the issues to do with them that Mr Topham and Ms Tobias raised were correct. It was pleasing that the board had met to substantiate the reports. The reports should be completed by the following Friday [30th September. This request was tacitly agreed to by the board who did not object when given the opportunity].

Discussion of the Structure of the Rest of the Meeting
The Chairperson raised for discussion the structure of the rest of the meeting given the limited time and the large number of unstructured questions that had been asked. The Committee would have a better means of understanding the situation when more substantial 2015/2016 reports are provided in the next meeting. By then the issues raised with regards to the statements must have been addressed by the board. He added that the Committee must decide a deadline by which SAA positions are filled permanently. The Committee must also decide on deadlines for the other actions it requires of the board.

Ms Tobias added that further detail should be provided on the cost compression strategy in the next meeting. She suggested that the most immediate questions should be answered by the board today, while the more technical questions could be covered at a later stage. 

Mr Maynier wanted the Deputy Minister to answer his previous question regarding the reappointment of Ms Myeni. He did not want this question to be avoided.

The Chairperson commented that cabinet took the reappointment decision and that the Deputy Minister can not do much about it from outside of the cabinet, although he is free to respond.

Mr Buthelezi noted that the most important questions of the day can be organised into the following categories: shareholder issues, governance on the board, the preparation and issuing of financial statements, and the issue of transformation.

Mr Shivambu wanted to end this discussion so the board had time to respond.

The Chairperson Carrim responded that it was not possible for them to respond to roughly 100 or more questions, and that this is why the committee is trying to guide the direction of the rest of the meeting. 

Response to Members Questions by SAA Board Members and NT Delegates
Mr Jonas responded to members’ questions. He will deal with select issues that have been raised before allowing the board to respond. He proposed that written responses be used to answer whatever questions can not be covered.

Mr Jonas commented that SEOs are often overloaded with objectives. NT has taken the view that the current challenge for SAA is financial sustainability. The immediate responsibility of the board is therefore in bringing the airline back to solvency. This is their most important priority.  

NT is open to considering private equity. The stance at present, however, is that it is necessary to first improve the financial position and strategy of the airline. There is no opposition to private equity in principle, but the view is that a significant change towards private participation could cause serious problems given the current situation. It is not an ideological but a pragmatic concern.

In response to Mr Maynier, Mr Jonas stated that the company has a board that is responsible for the performance of SAA – one should not be too focused on the individual and how individuals are appointed. There is a process undertaken in cabinet through which the board is appointed. From Treasury there is confidence that the new board is capable of taking the company forward. This includes Ms Myeni as chairperson and Tryphosa Ramano as deputy chair.

The Chairperson asked if an aviation expert currently sits on the SAA board.

Mr Jonas admitted that there is no aviation expert currently on the board although NT is looking for one.

The Committee agreed that the board should appoint a technical expert in the aviation industry within a reasonable timeframe.

Mr Maynier expressed his dissatisfaction in that his question about the reappointment of Ms Myeni had not been answered.

Ms Mokgosi wanted the absence of stable top-management must be spoken to in the response. She felt that the appointment of executive management is a serious issue that must be addressed.

Mr Jonas responded that the board understands the view that stability is important. This is why the appointment of full-time executive management is a principal responsibility of the board. 

The Chairperson stated that the Committee would decide on a deadline by which these appointments must take place. This deadline will be expressed to the board in writing.

Mr Jonas continued, explaining that there will be an approval process by which the airline will consider the terms and conditions of potential loans. With regard to the Shareholder Management Bill, there is ongoing process in the Department of Public Enterprises to create the legal framework for the Bill, which would create overarching legislation that applies to all SOEs.

The Chairperson said that the Committee would write to NT and the Department of Public Enterprises to request that the Bill be expedited.

Mr Jonas responded to Mr Lees saying that the NT will try to prepare the documents requested by the next meeting.

Ms T Ramano, Director, SAA, took over to answer questions on behalf of SAA. She explained that the new board has only existed for two weeks. The board is aware of its responsibilities with regards to the PFMA, the Companies Act and the shareholder compact. The key priority given to the board by the Minister is financial suitability. In response to this, the board met with auditors and appointed an interim finance committee to look into financial sustainability. It was within those deliberations that the finalised numbers were arrived at. So the financials are finalised and just need to be signed off by the auditors.

Ms Ramano addressed the issue of liquidity and SAA’s technical insolvency. The board has formed committees of governance, being: the auditing and risk committee, the finance and investment committee, the social and ethics committee, the human resources and nominations committee, and the turnaround strategy committee. These consist of members with relevant experience, who will help the board to deliver on its mandate.

Mr Zwane qualified his previous remarks stating that he did not mean that the board was distracted from their work by the media, but simply that they would prefer to spend less time responding to the media. Responding to Mr Buthelezi, he asserted that SAA will not compromise on maintenance standards and that cost compression has not affected the quality of the service.

The Chairperson stated that SAA and its board would appear less in the media if they had less internal issues. He also mused that he was personally tired of being approached by the media to answer questions relating to SAA. He agreed with Mr Maynier that the hiring of 3426 additional staff [this figure differs slightly from the figure Maynier reported] was undue given the financial situation. He agreed with Ms Tobias that the board should produce a report on the cost compression programme.

Mr Zwane requested that he respond to the issue of the hiring of additional staff by written response.

In response to Mr Buthelezi’s supposition, Ms Ramano explained that cost containment savings were achieved not through the windfall from lower fuel prices but from renegotiations on lease rentals and renegotiations with suppliers to reduce rates. So these are sustainable savings. The board will produce more detailed information on SAA’s operating costs including SAA’s top five suppliers. She added that 75% of costs are made up of fuel, maintenance costs, lease expenses and wages. She confirmed that the financial statements will comply with IFRS when they are released. The will include a segmented report and the proper reporting of contingency liabilities.

Ms Ramano mentioned technical issues and confirmed the R950 million increase in losses that Mr Lees had observed. The change is not due to the auditors but due to accounting standards. There was a delay in finalising the 2014/2015 numbers, and standards regulate that one must include all new information that comes to light between year-end and the date at which the financial statements are finally signed. In this period, pending litigation went to court. The estimates for the costs of this litigation were adjusted upwards and the new provision included in the more recent figures.

The Chairperson instructed that the board would within a reasonable time following the upcoming meeting on the 7th, furnish the Committee with a written reply to all questions raised. The Committee would meet with SAA as soon as possible after the Medium-Term Budget Policy Statement is finished. By next Friday [30th] the appropriate annual reports should be tabled.

Mr Shivambu felt that private equity in the SAA space is a dangerous option. Africa’s most successful airline, Ethiopia Airways, is bigger than SAA and is fully state-owned. Emirates is owned and controlled by government. In a private arrangement, when there is a crisis the supply of the service is brought into danger. Therefore, how to fix SAA within the state-owned framework is the discussion that must be had. The majority of companies that are liquidated are private companies. There should be no consideration of private equity, but this is ultimately an ideological question.

Mr Maynier asked Ms Myeni whether, in light of preliminary report tabled in the presentation today, she still maintains that it is in the best interest of SAA for her not to resign. If she holds this belief, could she please explain why she does? Further, given the fact that the Minister of Finance, who represents the shareholder, appears to have opposed her appointment, did she at any time discuss her reappointment with President Jacob Zuma. If so, what are the particulars of that conversation?

Ms Mokgosi spoke on the point Mr Shivambu alluded to about fixing SAA within a public arrangement. She highlighted that productivity is necessary and can exist in SOEs. She requested disclosure of all legal liabilities within SAA, including the R1.2 billion owed due to the findings of the Competition Tribunal.  She wanted full disclosure on all existing and potential legal liabilities.

The Chairperson added that it is wasteful how much state money is being used to pay for court cases, especially those started by SOE boards, which lose these cases frequently. If a board member initiates a case that is lost, it would be appropriate for them to pay from their own pocket.

Ms Kekana agreed that there should be consequences for such fruitless expenditure. She echoed the view of previous ANC members, in that focus should not be overly placed on one individual, as part of SAA’s problems are historic.

Mr Shivambu interjected at this point, stressing that the notion of shifting blame away from individuals and towards a collective group is wrong if there is an individual, in this case Dudu Myeni, who is to blame.

Before he could continue, the Chairperson cut him off, explaining that Mr Shivambu had already had his turn to speak and as such did not have the right to speak.

Mr Buthelezi stressed that if so much of SAA’s operating cost was driven by exchange rate fluctuations, why does SAA not have an exchange rate hedging strategy? Secondly, there is no mutual exclusivity between economic inclusion and performance – it should not be framed as a competing priority.

Ms Tobias wanted to know how the R5 billion guarantee that has been granted would be utilised. She also wanted to know if SAA is adhering to the King Code of Governance Principles. The principles are clear on the separation of powers. The Committee also needs to consider the fact that the adjusted financial statements represent factors that are not related to performance.

Mr Lees wanted to check that his understanding was correct in that the R950 million adjustment is a provision for competition challenges with competitors Nationwide and Comair. An investigation should be undertaken to determine whether what had been done by the previous board and the board chair constituted reckless trading and a violation of Section 77-3. If so there should surely be consequences.

Ms Antonia Manamela, Committee Researcher, mentioned that an important contributor to the revenue base is revenue from regional business. Are there plans to develop a regional hub other than Johannesburg by which SAA can service other African countries?

Mr Jonas agreed with Mr Shivambu in that the private-public question regarding equity is an ideological one. This should be an open debate and not one in which a particular view is precluded. NT position is that the board must have a strategy that drives stabilisation and brings the airline to solvency. This could include recapitalisation and private equity. In any case, there is already private participation in the sense that SAA relies heavily on private borrowing. It is an ideological block that keeps private equity off the agenda.

Mr Jonas stressed that transformation is still a pervasive objective, but that the company will fail if governance is flawed. At present, any action done with regard to SAA must be aligned with the imperative of creating financial sustainability. As mention, transformation and productivity are not mutual exclusive and can occur together; however, if the company fails the transformation agenda will be lost entirely. A lack of sustainability also harms SAA as risk premiums go up when borrowing from the private sector.

Mr Jonas repeated that governance is therefore the most important underlying challenge.  He cautioned with a sense of foreboding that SAA and the NT needs to rearrange and improve institutions in order to cure escalating debt “before someone else does so for us”. In particular, the IMF or another international organisation will respond to the debt and “it won’t be nice.

Ms Nhantsi responded to Mr Lees explaining that the R950 million loss does relate to the anti-competitive cases as well as to other accounting adjustments. So it is not only the anti-competitiveness case. Further details will be provided at a later stage.

Ms Myeni apologized for her lateness stating that she had been sick and had to visit the doctor in the morning. “I think something happened at night – either I ate something that is not correct, or whatever the reason”. She thanked the Committee for being understanding and noted that she had missed many of their questions while she was not present. It would be most proper for her to look at the questions asked as taken down by the SAA delegates, and to make her input in the report that will be sent in writing to the Committee.

Ms Myeni repeated the point previously made by Mr Shivambu that there are cases of successful airlines that are state-owned and operated, such as Ethiopian Airlines.  She stated that the framework needs to include full support from the country in question. In Ethiopia for example, non-Ethiopian airlines are legally not allowed to service interior routes. A lack of such support explains the shrinking market share of SAA.  

In response to Mr Maynier, Ms Myeni stated that she already responded to the same question in the previous sitting. At the time she had responded to the question comprehensively in writing, and promised to do so again. She did not appoint herself, and that the appointment of the board is a cabinet decision. She would elaborate on these points in her written response.

Ms Myeni thanked the new board of SAA, explaining that since their appointment, the load has been taken off the longer-standing members’ shoulders. The previous three-member board was thin and had to sit on all board committees, which sit monthly or bimonthly. Therefore, these members were seen very regularly. A quick process has been undergone to appoint the new board committees, and in this regard it is going to be a better board and a better airline. She thanked the Deputy Minister for his support.

The Chairperson summarised the events of the meeting. SAA should be a point of national pride and is somewhat disappointing. There is debate of whether or not there should be any private participation; the majority party’s opinion is that it should not be privatised while the DA wants to privatise. Financial stability is the major challenge, but it can not be addressed separately from structural issues. The shareholder compact should be arranged. There should also be a coherent turnaround strategy. When SAA returns in November, the Committee would like to see a clear strategy that answers the important question of what this board plans to do differently. On the issue of transformation, he added that a balance is necessary, but that transformation is a crucial outcome of government policy. He repeated Mr Jonas’ notion, in that if government doesn’t create transformation in a strategic way, “someone else will eventually do it for us”, and it probably won’t be orderly or strategic.

The Chairperson added that it is both SAA and NT that is answerable to Parliament and the Committee. The Committee does not want the chairperson or the board members interfering with the management of the company. Such behavior is against obligations mandated by the Companies Act, corporate governance norms, and so on. The Department of Public Enterprise and NT have a duty to monitor and evaluate the board without unduly interfering in their space. That is why the Shareholder Management Bill is so important. SAA is not a private sector company and the Department is for now the shareholder and therefore the custodians of the people’s entity.  

The Chairperson concluded with following instructions to the board, which had to be followed provided they fell within the SCOF’s authority to instruct the board (to be determined by a legal expert):

  1. The board will appoint an aviation expert
  2. A reasonable deadline will be set by which the board must appoint a permanent CEO and CFO
  3. The Shareholder Management Bill must be expedited
  4. By Friday 30 September, the reports must be tabled through the PFMA process
  5. By Monday 10 October, the board must have submitted its answers to Members’ questions
  6. The Committee will subsequently meet with SAA once a quarter. The Director General, The Deputy Minister of Finance, the Chairperson and the Deputy-Chairperson of the board must be present.

The meeting was adjourned. 

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