SA Express on the airline’s financial challenges, fleet maintenance & turn-around strategy

NCOP Public Enterprises and Communication

11 September 2019
Chairperson: Mr T Matibe (ANC; Limpopo)
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Meeting Summary

The Committee was briefed by the South African Express (SAX) delegation on the airline’s financial challenges, fleet maintenance and the implementation of the airline’s turnaround strategy. Members heard that the new Board had found many problems within the entity. These included the mismanagement of finances, a weak balance sheet, ongoing litigations, long outstanding debts, monthly cash-burn, frozen credit lines and liquidity issues. Members were disappointed to hear that staff morale was quite low and some workers were not sufficiently trained to handle certain crises; corruption generally had had a major impact on the public aviation sector and, broadly, on state entities. Added to this there was no accountability. These challenges hindered profitability and widened the gap between SAX’s revenue and operational expenditure.

Members asked how many aircrafts SAX owned and how many they were leasing; who was responsible for the leased aircrafts; what are the maintenance costs associated with these aircrafts; if the entity was carrying out consequence management on the reported corruption cases; if there were any measures taken to recover the money lost through the unscrupulous activities; what was the cause for its Board Members, audit committees and accounting officers all failing to deal with corruption practices that had compromised the airline by disregarding procurement regulations in irregular and wasteful expenditure; if the airline would be relaunched in Mafikeng; how far the entity was in its turnaround strategy and what challenges had they faced doing so; and how the entity was going to ensure 100% safety of its aircrafts given its liquidity problems.

Members stated that SAX was a typical example of a state-owned entity (SOE) that had been subjected to state capture. It went from being an exemplary SOE to being in shambles, within a period of nine years and asked if it was viable for SAX to reintegrate with SAA and Mango. The Committee felt that although the JHB to George and JHB to Richard’s Bay routes were not profitable, they were of a strategic nature and thus had considerable upside. They asked what impact of closing down these routes would have on tourism and on the national economy.

Members said that it did not make sense for SAX to always pride itself about its cadet training programme but then when came to Parliament and complained about not having enough women of colour participating in the programme; this was SAX’s responsibility. Members asked how the programme lost track of its skilled cadets yet the taxpayers’ money was used to train them. Members questioned if the SAX had already received the R300 million in recapitalisation funds from the NT and how it would be utilised to improve the entity. The Committee pointed out that that the entity could not function with optimal efficacy and efficiency with its current vacancy rate on key portfolios and emphasised that there should be a timeframe within which they can all be finalised. Members said that it was expected that the aviation experience of the current Board members should be clearly indicated, much like the experience of the Executives were as that inexperience was part of the causes of the problems that the entity was facing. Members reminded that entity that it still had a challenge of submitting its financial statements to Parliament.

The Committee expressed the commitment to continue to support the entity maximally exercising its oversight duty to restore its dignity and elevate it to greater heights.

 

Meeting report

Opening remarks by the Chairperson
The Chairperson welcomed the Members, the Department of Public Enterprises (DPE) and the South African Express (SAX) delegation present at the meeting. He then asked all attendants to introduce themselves and their portfolios. For future reference, he asked the SAX delegation to include, in their presentation, updates on the status of the SAX in the different provinces within the constituencies represented by the different Members given that the Members were part of the NCOP.

Briefing by the South African Express (SAX)
Dr Thabi Leoka, Acting Chairperson, SAX Board, indicated that the current SAX Board was appointed on 22 May 2017; the same day the airline was grounded. This meant that the SAX’s operating certificate was revoked while its maintenance organisation and its aviation training organisation were also banned. The new Board thus reacted swiftly and managed to restore the airline’s operation by 26 August 2017. She added that 11 out of 22 aircraft were currently active.

Dr Leoka said that the new Board found many problems within the entity. These included the mismanagement of finances – a weak balance sheet; there were also ongoing litigations, long outstanding debts, monthly cash-burn, frozen credit lines and liquidity issues. Staff morale was quite low and some workers were not sufficiently trained to handle certain crises.  At the time, corruption generally had major impact on the public aviation sector and, broadly, on state entities; there was no accountability. A challenge was that the culprits could not be terminated immediately because there would legal processes that had to be followed before that decision and these came at a cost that had to be borne by the entity. Those who would be provisionally suspended would still receive their salaries. These challenges hindered profitability and widened the gap between SAX’s revenue and operational expenditure. The lack of adequate fiscal support also forced the entity to try and produce results under financial constraints.

Dr Leoka claimed that the Board, together with the Executive, had done well thus far; revenues were showing an upward trend monthly. The Board formulated and adopted a turnaround strategy called GPOCH, which was based on the principles of Governance, Profitability, Operational Efficiency, Customer Value and Human Capital. These spoke to what would be the entity’s top priorities henceforth. She said that the Board was committed to improve the state of the entity.

Ms Siza Mzimela, Interim Chief Executive Officer, SAX, said that fixing governance was not limited to appointing or terminating personnel, it was also about ensuring compliance with the South African Civil Aviation Authority (SACAA) and International Air Transport Association (IATA). She indicated that the entity had just undergone the yearly renewal process of its compliance certificates with these institutions, in May 2019, but was still finalising a few audit problems with IATA. Also, there were numerous review and amendment processes done on critical policies and procedures in order to address the shortfalls that led to corruption. Some of these policies had been written in such a way that they facilitated the abuse of resources, corruption and acts that resulted in commercial agreements that were unsustainable for the organisation.

Ms Mzimela indicated that domestically, the airline operated from OR Tambo International airport (ORTIA) and Cape Town bases. It included routes between Johannesburg (JHB) and Bloemfontein (Bloem), JHB and Kimberley (KIM), JHB and Mthatha; as well as a triangular service between JHB, Port Elizabeth (PE) and Durban (DBN). Additionally, it was serving regional routes to Botswana, Namibia and the Democratic Republic of Congo (DRC) from the bases; SAX was awaiting approval from the Department of Transport (DoT) to approve flights to further destinations. When the airline was reinstated, the entity had to carefully choose its routes in order to optimise its profits. This was also caused by the fact that while it was grounded, new competitors, who had several low-cost carriers with more flight seats, joined the market. Being a business commuting service, SAX could not compete with them. Some of the secondary domestic locations, such as Mthatha, were facing infrastructural challenges that limited SAX’s operability. However, the entity was still looking to increase its flight frequencies in all of its other, active routes.

Ms Mzimela explained that although SAX had 22 aircrafts when it was grounded, not all of them were operating. Eight of them were already self-grounded but the then management had not removed them from the operating certificate at the SACAA. Also, the current management had to return two other aircrafts to their lessors because their rental fees were too high. The entity had planned to be operating 15 aircrafts in 2019 but could only manage to operate 11 aircrafts due to financial constraints.

Ms Mzimela indicated that SAX was given a recapitalisation fund of R1.2 billion in 2018 and it assisted in alleviating the solvency issues of the company. However, it was ring-fenced only for government-guaranteed debt. This money could only be used to settle two accounts (bank loans), at the time; leaving SAX with no working capital facilities. The airline was subsequently grounded by the SACAA for failing to make the required payments and its operations were effectively delayed by seven months. But through the financial support of its shareholder, the matter was resolved and the airline was reinstated. The National Treasury (NT) also recently allocated a recapitalisation amount of R300 million to SAX. This support would also enable SAX to work towards its targets. She said that the company’s On-Time Performance (OTP) rating was at 64% before the airline was grounded; reached a peak of 95% post-grounding but had an average of about 78% due to reliability concerns about the airline in July and August 2019 and the loss of working capital in February 2019.

Ms Fikile Thabethe, General Manager: Legal, SAX, indicated that the entity had a total of 813 employees, as at 31 July 2019. This comprised of 642 Africans, Indians and Coloureds as well as 171 whites (including both males and females). There was still a need for more female pilots; particularly African ones. Technicians were predominantly African males. Africans also dominated the unskilled, semi-skilled, junior, middle and top management levels while senior management mostly comprised whites. The entity was looking to address all of these and more underrepresentation concerns around gender and race in the different profession categories.

Ms Thabethe said that SAX was actively contributing in the skills development and socio-economic sphere of the country by hosting pilot training programmes. These programmes included individuals coming from disadvantaged backgrounds. The entity would typically retain some of the cadets until they have flown 800 hours and would refer them to other airline companies within the state-owned aviation sector; such as Mango Airlines. When they reached about 1 500 flying hours, they would be moved to the South African Airways (SAA) airline.

Ms Thabethe said that cumulative primary and secondary costs incurred by the entity, amounted to R240 million as at 31 May. This highlighted the fact that personnel costs took up 32% of this total with R77 million. She indicated that one of GPOCH’s cost reduction pillars was focused on personnel cost and this necessitated right sizing the staff body. The approach to this started with closing the SAX bases in George, Richard’s Bay and Durban because the airline would no longer be flying to these destinations. In July 2019, the entity started processing voluntary service packages (VSPs) and early retirement benefits; planned to conclude these processes by 30 September 2019. She mentioned that progress had already been made since the 2014/15 financial year, where the headcount was as high as 1 127 employees.

Mr Andre Odendaal, Chief Financial Officer (CFO) of SAX, indicated that since the airline was reinstated after being grounded in all its 16 routes between June and July 2018, the passenger volumes gained positive momentum and showed a positive trend between January to April 2019, following the launch of the Mthatha route in December 2018 and the relaunch of the Cape Town base in January 2019. In terms of domestic route profitability, at contribution level, the current network was performing well above budget. All of the routes were making a contribution but due to fixed costs being more than the revenue generated, all of them were making a net loss; with the JHB-KIM route making the most significant loss. For regional destinations, only the JHB-Gaborone route was making a net profit.

Mr Trevor Abrahams, Non-Executive Director:,SAX Board, stated that the Board and the Executive performed commendably in turning around the entity under trying conditions. He added that it was important to consider that these parties inherited a company that was plagued with several irregularities such as corruption and mismanagement. He said that the Board had been uncompromising in implementing its GPOCH strategy but had not yet been able to calculate the exact cost implications of these practices; these costs continued to burden the organisation. The Board took action against the various role players of unscrupulous activities and the South African Police Services (SAPS) were currently investigating these criminal cases. There were a few SAX employees who testified at the Zondo Commission of Inquiry into State Capture in June 2019, on cases such as the ground handling service contract (North West/Koroneka) and jet fuel contract (EML Engineering and Construction). The entity had since submitted all the information that was requested by the commission, including financial statements, evidence on travel records, etc. The Board submitted a report titled ‘State of Governance at the time of grounding vs state of governance currently’.

Discussion
The Chairperson thanked the SAX delegation for its presentation and opened the floor for Members to express their comments and ask questions.

Ms L Bebee (ANC; KZN) asked how many aircrafts SAX owned and how many they were leasing; who was responsible for the leased aircrafts. What are the maintenance costs associated to these aircrafts?

Ms Bebee asked if the entity was carrying out consequence management on the reported corruption cases and asked if there were any measures taken to recover the money lost through the unscrupulous activities. She also asked the delegation what they reckoned was the cause for its Board Members, audit committees and accounting officers all failing to deal with corruption practices that had compromised the airline by disregarding procurement regulations in irregular and wasteful expenditure.

Ms Bebee asked if SAX still operated flights between JHB and Dar es Salaam.

Ms T Modise welcomed the presentation from SAX. She applauded them for their consequence management over a corruption case in North West and asked when the case would be finalised. She also asked if the airline would be relaunched in Mafikeng.

Ms W Ngwenya (ANC; Gauteng) thanked SAX for the presentation. She asked how far the entity was in its turnaround strategy and what challenges had they faced doing so, especially in relation to SAA’s Long-Term Turnaround Strategy (LTTS). Is SAX still integrated to SAA and Mango?

Ms Ngwenya asked what measures SAX was undertaking in response to the rising fuel costs and weakening of the rand. Can SAX pinpoint any positive impact attributed to receiving regular government bailouts?

Mr M Nhanha (DA; Eastern Cape) welcomed Ms Siza Mzimela to her Interim CEO portfolio. He then said that SAX was a typical example of a state-owned entity (SOE) that had been subjected to state capture. It went from being an exemplary SOE to being in shambles, within a period of nine years, under the fallacy of radical economic transformation; its condition was now far worse than that of SAA. He asked if it was viable for SAX to reintegrate with SAA and Mango.

Mr Nhanha asked how the entity was going to ensure 100% safety of its aircrafts given its liquidity problems. He also asked if SAX was carrying the can to maintain its leased aircrafts.

Mr Nhanha said that although the JHB to George and JHB to Richard’s Bay routes were not profitable, they were of a strategic nature and thus had considerable upside. He asked what impact closing down these routes would have on tourism and on the national economy. He asked if there were any warning signs on the aircrafts leading up to the grounding of the airline and if so, what measures did the company take to address them.

He pointed out that it did not make sense for SAX to always pride itself about its cadet training programme but then come to Parliament and complain about not having enough women of colour participating in the programme; this was SAX’s responsibility. He asked how the programme lost track of its skilled cadets yet taxpayers’ money was used to train them. How do they fall through the cracks?

He asked finally which airline the delegation used to travel to Cape Town to attend the meeting with the Committee.

Mr A Cloete (FF+; Free State) asked if SAX had done any research on the status of its brand relative to its competitors. He also asked what implications a merger with Mango would have on its brand.

Mr Cloete asked if SAX had already received the R300 million in recapitalisation funds from the NT and how it would be utilised to improve the entity. He also inquired about the shareholders that offered financial support – who they were, how much support they offered and if they were a private company.

Finally, he asked how the SAX Executive was addressing low staff morale.

Mr A Nyambi (ANC; Mpumalanga) appreciated the comprehensive presentation given by the SAX delegation. He expressed that it was comforting that the entity had made submissions, about past governance to the Zondo Commission. He pointed out that the entity could not function with optimal efficacy and efficiency with its current vacancy rate on key portfolios; there should be a timeframe within which they can all be finalised. He also said that he expected the aviation experience of the current Board members to be clearly indicated, much like the experience of the Executives was as he felt that inexperience was part of the causes of the problems that the entity was facing. How is SAX dealing with the reputational damage that these problems have caused, in order to restore its prestige? Has corruption been fully eradicated or has it merely lessened?

Mr Nyambi asked the entity to clarify the skill classifications of its employees, particularly the ones about semi-skilled and unskilled workers. He said that this clarity would assist the committee when exercising its oversight duties. He also stressed the importance of realising both gender and racial transformation on all levels of the organisation.

Mr Nyambi asked about the causes that led to net losses in the current route network; why revenues were less than the fixed costs.

The Chairperson asked who was responsible for implementing the SAX’s turnaround strategy; if it was being outsourced how certain the entity was that external agents knew about all the challenges it was facing. Has the strategy had any impact on the conditions of the entity?

Mr Edwin Besa, Senior Specialist: Financial Analysis, DPE, recounted that in 2017, the Department and the NT carried out a study on the consolidation of state-owned airlines. The outcome was that it was beneficial for them to be consolidated because the current arrangement, of being reliant on commercial arrangements, was ineffective; there were mostly disagreements between SAX and SAA in working together and this consolidation would mediate and allow better synergy between them. The consolidation was being presented to the economic cluster and would be submitted to Cabinet for a final decision, during the following week. The funding requirements would be determined thereafter.

Ms Nonny Mashika, Director: Aviation, DPE, indicated that one of the key recommendations of the study was for SAA to be transferred from the NT to the DPE to ensure that there was a common vision in giving strategic direction to how these airlines were going to be consolidated. This was one of the initiatives that had already started from the DPE, as the lead in the restructuring of state-owned airlines; with consideration of the regulatory and governing processes that needed to be undertaken before the consolidation occurred.

Ms Mzimela indicated that SAX owned five of the 15 aircrafts; the other eight were leased via a bank. She explained that the lease agreements were over terms as long as eight years. They were not the same as chartering the aircrafts for a few months – which was far more expensive. The entity had the obligation to maintain these aircrafts at a particular standard and thus incurred the related costs.

Ms Mzimela reported that consequence management was thoroughly conducted in taking action against the employees who were found to have done unscrupulous and irregular activities. The entity was ensuring that there would be consequences beyond termination; particularly taking the legal route to try and recover the money owed to it. She said that the entity had done its part in all the cases and left things on the hands of the SAPS, the Hawks and the Zondo Commission. She expressed that she could only hope that corruption had been fully eradicated from the system but realistically, there still may be some unknown corrupt individuals.

Ms Mzimela said that the current management could not answer on behalf of its predecessors, regarding their failure to deal with corruption practices, but reckoned that some of these practices were enabled by policy flaws.

Ms Mzimela indicated that SAX was not intending on relaunching its airline in North West. This was because it did not have aircrafts that were small enough to match the level of the demand and be profitable in the area. She expressed that she understood the strategic nature of destinations such as Richard’s Bay and George. The George route commuters were not affected because there were sufficient airlines participating in that market. For the Richard’s Bay route was reduced to one carrier, whose prices had to be lowered to meet the demand and this was not sustainable. The entity’s competitors were granted the exclusive right to operate their airlines at the Kruger Mpumalanga International Airport and SAX thus could not operate there.

Ms Mzimela said that the biggest challenge in implementing the turnaround strategy had been due to timing delays as a result of the challenges relating to liquidity. In turn, this slowed down the return of the aircrafts that the entity needed to operate; more active aircrafts lead to more routes and more revenue. She stressed that aircraft safety should never be a concern because the entity would never clear an aircraft for operation when it is not completely ready for safe flight; this was why even airlines would rather delay flights just to ensure that an aircraft would not put the lives of the commuters in danger. The last line of defence against this would always be pilots – who would never take off without being sure about the safety of the aircraft. The linkage between the financials and aircraft safety spoke to the entity’s reliability and how quickly it could recover from a disruption prior to flight, not to the actual safety of the aircrafts.

Ms Mzimela confirmed that there were some warning signs on the aircrafts leading the grounding that happened in May 2018. This was largely due to the fact that the then management did not remove the questionable aircrafts from SAX’s operating certificate before SACAA grounded the airline. To address this, the current management appointed permanent personnel into post-holder positions – ones that are critical for the SACAA, such as the Head of Safety, Maintenance as well as persons responsible for the aircraft and for flight. These personnel had the necessary skills and experience. There were only two vacancies left – CEO and General Manager of Human Capital.

Ms Mzimela indicated that the delegation boarded SAA flights to come to Parliament because SAX did not have flights operating the on the JHB-CPT route otherwise they would have used SAX.

She said that once the cadets had gone through the entity’s training programme, they would eventually move on to Mango and other airlines – bigger aircraft. Because of this, the demographics of the staff body did not reflect the actual number of people that were trained by the entity. Although the entity’s gender and racial profiles would be quite different if it retained them, it was still proud to have contributed in their skills development.

Ms Mzimela indicated that the entity was working hard to improve the staff morale by improving communication. Now that the entity had finalised the VSP process there would be a lot more initiatives that would be put in place to improve the morale. Some staff members were already voluntarily being more proactive in the work that they do.

Ms Mzimela said that the entity recognised the importance of managing the reputational damage that had been inflicted on the SAX brand. A stimulant to it had been the stigmas associated to the grounding of an airline; it immediately raised doubts within the public about the safety and reliability of the airline. Another disadvantage was that SAX would always be tied to the SAA even when it was not warranted. However, the entity would do its best to spend more time, in each of the airline’s markets, trying to change the perception about the SAX brand.

Ms Mzimela said that the turnaround strategy was not outsourced. The Board had set out initiatives that would closely monitor the implementation of the strategy; these were categorised into timeframes of 0-6 months and 6-12 months. The entity performed well in the 0-6 category but had challenges in the 6-12 months. These challenges were due to working capital deficiencies caused by insufficient revenue and taking too long to extract the fixed costs. To address this, the entity was negotiating the costs incurred from some of its service providers.

Dr Leoka indicated that she was in attendance on acting capacity as Chairperson of the Board; the Chairperson, Ms Tryphosa Ramano, was unable to attend. She then introduced the Board members, both present and absent, according to their portfolio, while briefly sharing their respective, notable work experience. She then expressed that she would not have joined the Board if she did not believe in the entity and its governance; that she would not have expose her professional reputation to jeopardy. She expressed her desire to be part of a team that would be responsible for turning around the entity, saying that it had great potential and value.

Dr Leoka indicated that the entity had requested about R2.4 billion from government but received far less than expected; which was understandable, given the pressure that it was facing in allocating funds to the various entities. SAX did the best it could under the circumstances. In trying to survive, the entity resorted to utilising its revenues and the overdraft facility it had at a bank. However, the Public Finance Management Act (PFMA) allowed entities to receive finances from private financial institutions only when there was a government guarantee of funding. This caused delays of payments to service providers and was a direct catalyst for the grounding of the airline.

Dr Leoka agreed about the nine wasted years for SOEs but emphasised the challenges that the new Board had inherited. She said that it had made commendable progress in restoring the entity’s dignity; pleaded for the committee’s patience and support.

Mr Abrahams claimed that the current SAX Board probably the best one there ever was amongst SOEs; it comprised of a wide range and wealth of experience. He indicated that the Board managed to come up with a plan that would help the entity to continue trading under the difficult conditions; to a point where a commercial bank was willing to offer its support. He reckoned that there was a broader management problem in the way that government managed its aviation assets.

Mr Abrahams said that he opened a case against those responsible in the Korekena matter after receiving information from a whistle blower. He said he was astonished to discover that the SAX Executive Committee (Exco) had already known about this matter for nine months but had not filed a case. Instead, the Exco gave the Board false information on this and other matters. Much of the disciplinary action was in the hands of the Hawks, SAPS and the Zondo Commission; the Board was cooperating in the processes as requested.

Dr Leoka indicated that in 2018, the Board, along with key stakeholders, conducted an interview process for the filling of vacancies for the SAX executive management. The Board approved the shortlisted names and submitted them to DPE; the decision for the final candidates was still pending.

Mr Nyambi said that in the absence of information, perception becomes a reality. He implored SAX to maximise its communication with the public and not allow the media to control the narrative. He also highlighted the importance of finalising the filling of vacancies in improving the conditions of SAX.

The Chairperson asked if the entity still had a challenge of submitting its financial statements to Parliament.

Mr Odendaal indicated that the statements were still being finalised; the Executive would meet the Board on 13 September 2019, seeking for the approval of the statements.

Ms Mzimela confirmed that all the previous finalised statements had also been finalised and signed off; they were awaiting the Annual General Meeting for them to be tabled.

Dr Leoka agreed with the importance of communication. She indicated that the entity wished to revitalise its media presence and responses to public comments. However, this would come at a cost that the entity was currently unable to bear. She said that once the target of 15 active aircrafts had been achieved, the entity would manage to improve the efficiency and reliability of its airline.

The Chairperson thanked the SAX delegation for the presentation. He appreciated that the presented information was sent prior to the meeting, enabling Members to come well prepared to engage with the issues. He expressed that the Committee would continue to support the entity, maximally exercising its oversight duty over it to restore its dignity and elevate it to greater heights.

The meeting was adjourned.


 

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