South African Airways (SAA) on its Quarter 1 performance, with Minister

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Finance Standing Committee

04 August 2017
Chairperson: Mr Y Carrim (ANC)
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Meeting Summary

The South African Airways (SAA) presented its quarterly report in the presence of the Minister of Finance, Mr Malusi Gigaba.

Minister Gigaba indicated that Mr Vuyani Jarana, an Executive at Vodacom, had been appointed as SAA CEO. The newly appointed CEO would need to be fully supported as he was not expected to singlehandedly turnaround the SAA. The appointment was only but one step in a stream of decisions to be taken. He expressed government’s commitment in addressing the challenges at SAA. He acknowledged that SAA was facing serious short to medium term financial challenges. The challenges that face SAA not only relate to revenue management but also include the need for IT systems revamp, internal governance processes, rationalising the incentive structure and productivity of pilots, route networks, and leadership strategy among other. However, addressing the liquidity challenges was imperative. Some of the financial interventions to be taken would be announced during the Medium Term Budget Policy Statement. Also, SAA had recently engaged Angola over the outstanding US$62 million debt being owed to SAA. A repayment plan had been effected and the funds would assist SAA in strengthening its cash balance.

SAA acknowledged that it was facing liquidity constraints among a multiplicity of challenges. The main thrust of its turnaround strategy was cash flow stabilisation, defending its catchment area, and rationalising the route network. SAA’s five year turnaround strategy was outlined. The strategy direction is centred on strategic context clarity, redefining its competitive advantage, articulating the strategic choices and operating model as well as optimising the airline group co-ordination. Liquidity and balance sheet restructuring is paramount. The liquidity and balance sheet initiatives were aimed at addressing the liquidity challenges facing the company and its weak financial position. The initiatives include: recapitalisation; cash management; renegotiating existing funding agreements; improving management of overheads; and implementation of a risk based budgeting process.

The corporate cost optimisation initiatives were expected to yield R10.1 billion over a five year period and these include: renegotiation of onerous agreements and return conditions on the freighters and wide-body aircraft leases; retiring excess capacity on wide-body aircraft; base maintenance process improvement; shifting sales to online channels; marketing spend optimisation among other initiatives. Other cost avoidance and saving initiatives include network changes with net benefit of R82 million against a budgeted annual amount of R193 million and no salary increases for management. Also, R2.2 billion of the R3 billion for recapitalisation had been received, and existing debt maturities have been renegotiated and extended to 30 September 2017. SAA was having engagements with lenders and the sum due in September was R6.9 billion. On whether the SAA would ever be profitable, the five year turnaround strategy entails detailed initiatives on cost saving and revenue targets on a quarterly basis. Losses would improve and the expectation based on forecasts was that it would start posting profits in financial year 2019/20.

SAA updated the Committee on ongoing forensic investigations. The Board mandated the chairperson of the audit and risk committee and the Chief Audit Executive to oversee the conclusion of the following: SAA and Edward Nathan Sonnenbergs Africa Attorneys, in respect of the forensic investigation into SAA’s losses; SAA and Ernst & Young in respect of their report on procurement and contracts management; SAA Technical and Open Waters Risk Solutions in respect of their report on procurement matters. The Board would provide a report to the shareholder representative when the reports are finalised.

Members asked if SAA would be able to service its debt upon maturity at the end of September. Emphasis was laid on honesty as the key to dealing with the challenges. They urged the Minister to monitor the institution closely and deal with corporate governance issues. Tender processes were very slow, resulting in additional costs. Members asked if people had been held accountable and charged. How many cases of fraud and corruption had been laid?  Was the Committee and Treasury confident the turnaround strategy would bring back SAA on its feet, and where would the money come from? Was the Board operating effectively as a team? There was need for an assurance that the Board would be effective moving forward, and not overstep its mandate in the process.

The Chairperson welcomed the candour with which the Minister made his input. There was a large degree of consensus about the situation in SAA. Foremost, the clear position was that SAA should not be privatised. The Committee was sceptical because of what it had been through, and wanted to see action and material improvements. He emphasised that the Board and executive committee had to be buttressed. He emphasised the need for Treasury to exercise far more effective oversight on SAA, without interfering unduly. The Committee felt Treasury was not doing enough in conducting its oversight role. 
 

Meeting report

The Chairperson indicated the meeting was a follow-up on the semi-aborted 27 June meeting.

Overview by the Minister of Finance
Minister Malusi Gigaba, in his opening remarks, noted that Mr Vuyani Jarana, an Executive at Vodacom, had been appointed as South African Airways (SAA) CEO. The newly appointed CEO would need to be fully supported as he was not expected to singlehandedly turnaround SAA. The appointment was only but one step in a stream of decisions to be taken. Also, filling up vacant managerial positions and acquisition of critical skills as well as streamlining the structure of the Executive Committee, as part of the corporate plan, was crucial. He expressed government’s commitment in addressing the challenges at SAA.

Minister Gigaba acknowledged that SAA was facing serious short to medium term financial challenges. The challenges facing SAA not only relate to revenue management but also include the need for IT systems revamp, internal governance processes, rationalising the incentive structure and productivity of pilots, route networks, and leadership strategy among other. However, addressing the liquidity challenges was imperative. Some of the financial interventions to be taken would be announced during the Medium Term Budget Policy Statement (MTBPS) presentation. He expressed confidence that an aggressive implementation of the turnaround strategy would address the challenges. Also, SAA had recently engaged Angola over the outstanding US$62 million debt being owed to SAA. A repayment plan had been effected and the funds would assist SAA in strengthening its cash balance.

South African Airways presentation
Ms Dudu Myeni, SAA Board Chairperson, said the Board concurred with the overview given by the Minister. The Board was closely monitoring the newly tailored turnaround strategy.

Mr Musa Zwane, Acting CEO, SAA, acknowledged that the entity was facing liquidity constraints among a multiplicity of challenges. The main thrust of SAA’s turnaround strategy was stabilising the cash flow, defending catchment area, and rationalising the route network. Addressing areas of revenue management was the focal point SAA is building from.  

He outlined SAA’s five year turnaround strategy. The strategy direction is centred on strategic context clarity, redefining SAA’s competitive advantage, articulating the strategic choice and operating model as well as optimising the airline group co-ordination. Liquidity and balance sheet restructuring is paramount.
The liquidity and balance sheet initiatives are aimed at addressing the liquidity challenges facing the company and its weak financial position. The initiatives include: recapitalisation; cash management spearheaded by a conservation office; renegotiating existing funding agreements; improving management of overheads; and implementation of a risk based budgeting process.

Network and revenue enhancement initiatives were forecasted to yield additional revenue of about R13.6 billion over a five year period. Initiatives include: network and schedule changes; hub bypass; step-up acceptance; pricing segmentation; seat spoilage mitigation; targeted demand steering; fare class optimisation; leveraging Star Alliance and codeshare partnerships. A Cash Conservation Office had been implemented with cost avoidance of about R35 million per month. Also, R2.2 billion of the R3 billion for recapitalisation had been received and existing debt maturities have been renegotiated and extended to 30 September 2017.

The corporate cost optimisation initiatives were expected to yield R10.1 billion over the five year period and these include: renegotiation of onerous agreements and return conditions on the freighters and wide-body aircraft leases; retiring excess capacity on wide-body aircraft; base maintenance process improvement; shifting sales to online channels; marketing spend optimisation among other initiatives. Other cost avoidance and saving initiatives include network changes with net benefit of R82 million against a budgeted annual amount of R193 million and no salary increases for management.

Mr Zwane emphasised that the turnaround strategy was dynamic and would be constantly reviewed. Also, the executive committee had agreed on a 5% salary cut as a symbolic response to the financial challenges. The executive committee was clear about the challenges bedevilling SAA and would support the new CEO in bringing it back on its feet.

Discussions
Ms T Tobias (ANC) appreciated the presence of the Minister and the full SAA Board. Negotiations with Angola towards recouping the aforesaid debt was good news. She expressed disappointment with the Acting CEO’s presentation. She made reference to a discrepancy on some revenue figures as reported during a previous engagement. SAA needed to be frank and open. It was not convincing why space is being given to other flights through route rationalisation. SAA should be working on utilising existing opportunities and expansion. She asked if SAA would be able to service its debt upon maturity at the end of September. She emphasised that honesty was key in dealing with the challenges. She urged the Minister to monitor the institution closely and deal with corporate governance issues. 

Mr A Lees (DA) commented that invoking Section 16 of the Public Finance Management Act (PFMA), whereas the initial indication and assurance was on the contrary, was a blow to the integrity of the National Treasury. Only three days before the SAA bailout, Treasury had failed to indicate to the Committee that there was no rollover of loans and SAA had to be bailed out. This was a clear case of misrepresentation and treating Members with disdain. Corporate governance was a serious challenge. He cited cases of procurements being made on a quotation basis rather than through tender processes. Also, tender processes were very slow resulting in additional costs. 38 contracts had been investigated and red flags were raised. He asked if people had been held accountable and charged. How many cases of fraud and corruption had been laid?  He asked the Minister to inform the Committee who would replace Ms Myeni upon expiry of her tenure in September. The appointment of Mr Jarana was a welcome development as he has a good track record. If afforded the requisite support, the new CEO would do a good job. He noted with gratitude the voluntary 5% executive committee salary cut. It was a token gesture but showed commitment. He revealed that Ms Myeni had called on his cell phone accusing him of spying on her. Ms Myeni had threatened that her husband would sue him. He asked for an apology from Ms Myeni.

Mr D Hanekom (ANC) commented that the newly appointed CEO was highly competent but would need solid backing from the Board. The turnaround strategy should ensure that the SAA would not continue to be a burden on the taxpayer. He asked when SAA would resume being a going concern. Was the Committee and Treasury confident the turnaround strategy would bring back SAA on its feet, and where would the money come from?
Was the Board operating effectively as a team? Was the Board Chairperson attending all meetings and giving strategic direction? There was need for an assurance that the Board would be effective moving forward, and not overstep its mandate in the process. With all the allegations that have cost the country this much, who was being held accountable?

Ms D Mahlangu (ANC) said the CEO appointment was good news as it was long overdue. The overarching theme of the turnaround strategy was financial sustainability. She asked if the Minister believed financial sustainability would ever be realised. She pointed out the need for an operational framework to speak to the identified turnaround strategy, thereby enabling the Committee to monitor implementation of same. 

The Chairperson said if the allegations by Mr Lees were true, then Ms Myeni would have to respond. He felt the Member should have raised the issue with him before the meeting. He asked for the Parliamentary Legal Advisor’s guidance.

Ms P Kekana (ANC) indicated that progress at SAA has been slow. The Committee would want to see action and implementation of interventions. She emphasised that if some Board members felt they could not serve SAA in that capacity, they would need to make way for other people. She was worried about outstanding investigations not being resolved. She felt there was little sense of urgency in dealing with challenges.

Mr F Shivambu (EFF) commented on the allegations levelled against Ms Myeni by Mr Lees. In terms of the Powers, Privileges and Immunities of Parliament and Provincial Legislators Act, it is not permissible for a Member to be intimidated on the basis of issues that arose in Parliament. The matter should be acted upon as Members had freedom of expression enshrined in the Constitution. Delinquency was not permissible. He asked for assurance that Ms Myeni’s tenure at SAA would end in September as publicly communicated. The crisis of leadership at SAA was mostly centred on the Board Chair. 

Ms S Shope- Sithole (ANC) said the Auditor-General had pointed out compliance and consequence management challenges in most state-owned entities. She cautioned that privatisation was not the way to go. Also, removing the rot in Treasury would partly address the woes of SAA. Culprits had to be identified and should be dealt with.

The Minister replied that such challenges had to be dealt with as a matter of principle. SAA would be turned around, not privatised. Wrongdoers will be held accountable.

The Chairperson welcomed the candour with which the Minister made his input. There was a large degree of consensus about the situation at SAA. Foremost, the clear position was that SAA should not be privatised. He noted marginal coherence in the presented strategic plans. He asked what had improved. The Committee was sceptical because of what it had been through; the Committee wanted to see action and material improvements. He emphasised that the Board and executive committee had to be buttressed. The Committee suggested there be a fraction of people with aviation experience sitting on the SAA Board. Also, market sensitivity should not be used as an excuse not to respond to simple and basic questions from Members. He emphasised the need for Treasury to exercise far more effective oversight on SAA, without interfering unduly. The Committee felt Treasury was not doing enough in conducting its oversight role. 

The Minister, in response, expressed gratitude over the overwhelming support afforded by the Committee on appointment of the CEO. The newly appointed CEO had applied for the job, and was not enticed. The CEO expressed commitment in taking SAA forward. Everything would be done to ensure the CEO succeeds. He pointed out the need to expedite the consolidation of SAA’s aviation assets, to enable the effective rationalisation of routes and other measures. Strengthening the balance sheet and stopping leakages was of paramount importance. SAA and Treasury were in discussion with the lenders on existing debt reaching maturity in September. They are working hard to ensure challenges faced in June were not repeated.

The Minister agreed Treasury should be the focal point in addressing the challenges facing SAA, as the representative of government and the major shareholder. Treasury was meeting SAA weekly as part of efforts to intensify oversight. He agreed that invoking Section 16 of the PFMA was not what Treasury would have wanted. It found itself in a situation whereby, having exhausted all other options, at the very last moment the decision had to be made. Resorting to bailouts was not going to be the mode of operation going forward. He emphasised that strengthening governance mechanisms in all state-owned entities was crucial.

On who would replace Ms Myeni as Board Chair after her tenure ends in September, the Minister said Treasury was not in a position to make any announcement. The position would be communicated in due course.

On holding individuals at SAA accountable, the Minister said forensic reports were making suggestions on who should be held accountable. When the reports are finalised, Treasury would expect criminal prosecutions. He pointed out that SAA should not blame its challenges on the global recession as it affected every airline. Revenue and contract management as well as internal controls should be dealt with so that SAA becomes a going concern again. On whether SAA would be bailed out again; there is no way money would be given to the SAA for free- recapitalisation has tight conditions. Throwing money into a bottomless pit would not happen. The airline has the potential to be financially sustainable and a recapitalisation plan would be announced in due course.

SAA financial performance report presentation
Ms Phumeza Nhantsi, Interim Chief Financial Officer, SAA, explained that the entity was having engagements with lenders and the sum due in September was R6.9 billion. On whether SAA would ever be profitable, the five year turnaround strategy entails detailed initiatives on cost saving and revenue targets on a quarterly basis. Losses would improve and the expectation based on forecasts was SAA would start posting profits in financial year 2019/20.

Ms Nhantsi took the Committee through SAA’s financial performance report. SAA recorded a year-to-date net loss, before depreciation and impairments, of R620 million; R45 million (7%) lower than prior year loss but R464 million (>100%) higher than budget. While operating costs were R358 million (4%) lower than budget, revenue was R795 million (10%) below budget, thereby significantly impacting the Group’s bottom line. Year-to-date net finance costs and preference dividends of R412 million were 3% ahead of budget and 35% ahead of financial year 2016 as a result of greater reliance on debt finance to fund the Group’s operating activities. While the shortfall of revenue touches on most areas of the business, the largest portion related to the SAA passenger business. Passenger revenue was negatively impacted by lower demand as well as lower average fares. The greatest shortfalls were reflected in the domestic and regional markets. Also, the Group incurred a net hedging loss of R17 million and a net foreign translation loss of R106 million.

Ms Nhantsi updated the Committee on forensic investigations. The Board mandated the chairperson of the audit and risk committee and the Chief Audit Executive to oversee the conclusion of the following: SAA and Edward Nathan Sonnenbergs Africa Attorneys, in respect of the forensic investigation into SAA’s losses; SAA and Ernst & Young in respect of their report on procurement and contracts management; SAA Technical and Open Waters Risk Solutions in respect of their report on procurement matters. The Board would provide a report to the shareholder representative when the reports are finalised.

The Board had completed the process for the appointment of the Chief Executive Officer and Chief Restructuring Officer. A process to appoint the Chief Commercial Officer has been initiated.

Discussion
Mr Lees said the cash flow analysis was noted but the question was the position of SAA in the current climate. Was it able to pay its suppliers on time? Were salaries going to be paid? He reiterated the Committee’s commitment to saving SAA. The Committee would not want lenders to institute liquidation procedures against SAA. He deplored the abandonment of lucrative routes such as the Mumbai route.

Mr Zwane replied the decision to pull out of the Mumbai route was taken by the previous CEO in 2015. The idea was to work with Etihad airline. However, the partnership was terminated and SAA was reviewing the decision as part of its turnaround strategy.

Ms Tobias commented on cost optimisation. Presented figures had not changed that much since previous engagements and more had to be done.

Mr Shivambu said the Committee and Minister should assure the autonomy of the newly appointed CEO. The CEO was at liberty to redefine the presented turnaround strategy as he deemed fit. There must not be an impression that Parliament has approved interventions presented by the current board and management. He stated his lack of faith in the current administration.

The Chairperson sought clarity on whether SAA would be able to pay salaries. He cautioned against the misrepresentation of facts as it was against the rules of Parliament. SAA should be as open and transparent as it should be.

Ms Nhantsi reiterated the serious liquidity challenges SAA was facing. However, it was making arrangements with suppliers and honouring its obligations. SAA would be able to pay salaries.

The Chairperson pointed out claims and counterclaims of corruption in the public domain. What was being done? Have the claims been reported to the South African Police Service and National Prosecuting Authority?

Ms Myeni replied that corruption at SAA was being dealt with. The Board is committed to consequence management and was not going to tolerate corruption. Due process would be followed.

The Chairperson suggested that the issue of corruption be kept on the agenda for discussion during SAA’s next appearance. Various ways and means of dealing with corruption needed to be devised. 

Adv. Frank Jenkins, Senior Parliamentary Legal Advisor, advised on how the Committee could handle allegations levelled against Ms Myeni by Mr Lees. The Powers, Privileges and Immunities of Parliament and Provincial Legislators Act prohibits a person from improperly interfering with the performance and functions of a Member. However, there is no stipulated provision to deal with the particular case. The understanding was that the incident happened outside the Committee. However, it attracts the attention of the Committee as it was allegedly in relation to what Mr Lees had said in a Committee meeting. The understanding was Ms Myeni threatened getting her husband to sue Mr Lees in relation to what was said in the Committee. The Constitution creates civil immunity for Members on issues said and produced within the functions of the Committee- to improperly interfere means to unlawfully interfere. However, threatening to take a person to court was not necessarily unlawful. Therefore, it would be up to Mr Lees to decide whether to report the matter to law enforcers. In relation to Parliament, the matter pertains to governance. In summary, the Committee was not in a position to direct Ms Myeni to apologise; it was up to her.  The allegation was a governance issue as Members cannot and should not feel threatened in the process of carrying out functions required of them. The Committee could not enforce anything, but can make recommendations.

The Chairperson said Ms Myeni had the right of reply which she could choose to exercise. It might be the case that the Member misunderstood her. However, it could not be allowed that members of the public or from state owned entities can intimidate Members in the process of carrying out their functions.

Ms Myeni said the incident should be put into context. She had called Mr Lees in relation to what the latter had said during a National Assembly session, not Committee meeting. Mr Lees was on record saying Ms Myeni had spent a night at the presidential suite of the Oyster Box hotel, at a cost of R50 000 per night. Mr Lees alleged she was using SAA funds to finance same.  The audio clip was circulating on social media. Her husband was not pleased and advised her to talk to Mr Lees before he could confront him ‘man-to-man’ to find out what Mr Lees wanted from his family. It was a personal issue.

The Chairperson suggested the matter be left in abeyance. He would confirm with the Speaker’s Office on due process to be followed. It was reasonable to conclude that people had a right to their private lives. He suggested Ms Myeni and Mr Lees sort the matter out at a personal level, failure to which the matter could be referred to the Chairperson for further referral.

The meeting was adjourned.

 

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