The Standing Committee on Appropriations (the Committee) was briefed in a virtual meeting setting by the South African Airways (SAA) Board and the Department of Public Enterprises (DPE) on the 2021 Special Appropriation Bill including issues that required follow-up with SAA.
SAA reported that it was placed in business rescue on 5 December 2019 and exited the process on 30 April 2021. The airline stopped flying in March 2020 and was facing serious challenges to return to the skies in July 2021 as planned. The Committee raised concerns about the critical factors impacting on the restart of operations including the role of a Strategic Equity Partner (SEP), the dispute with the pilots and the retention of technical skills at SAA Technical. The Committee was informed that discussions with the SEP would be finalised in the near future but there was less optimism about resolving the issue with the pilots. SAA would, in future, be operating at a reduced level therefore support for its subsidiaries would be scaled down, which led to the inevitable staff reduction that was taking place at all subsidiaries, including at SAA Technical.
The financial challenges of SAA were largely due to the difficulties faced by the subsidiaries, i.e. Mango Airlines (Mango), SAA Technical and Airchefs which relied to a large extend on SAA business. The subsidiaries were severely impacted when SAA stopped flying. SAA reserved R2,7 billion of the R10,5 billion allocated in the 2020 Adjustment Appropriation, for reallocation to the subsidiaries to assist with the restructuring of the subsidiaries. The assistance of the Committee was needed to fast-track the process of accessing the earmarked funds. The Committee planned to finalise the process by mid-June with the support of the relevant stakeholders, including National Treasury.
The Committee was concerned that the funds allocated for Mango were insufficient and that more money would be needed to compensate for the reputational damage caused by the cancellation of the Zanzibar route and the grounding of the airline. The SAA Board advised the Committee that the situation at Mango was dire and a disproportionate amount of time was dedicated to resolve the status of the airline. Additional funds would be required to ensure the airline remained afloat.
The treatment of employees during the retrenchment process was of concern to members of the Committee. Employees should not be placed in the inhumane position of immediately losing their income. The situation should be remedied through improved communication. The Committee was informed that the number of workers required and by implication, retrenched, was informed by the Business Rescue Plan. The number might have to be relooked by the SEP. The SAA Board agreed to improve communication with employees and to engage adequately in future.
The Chairperson welcomed the SAA team and DPE officials. The meeting was dealing mainly with SAA in response to the letter sent by the Minister. The Minister was on a visit to the Kusile Power Station and might be joining the meeting at a later stage.
The apologies of Ms E Ntlangwini (EFF) and Ms M Dikgale (ANC) were accepted.
The Chairperson requested SAA, to proceed with the presentation.
Mr Mvuleni Geoffrey Qhena, Acting Board Chairperson, SAA, appreciated the opportunity to engage and respond to the questions posed to the SAA Board. He introduced the rest of the SAA team which was appointed as the Interim Board on 8 December 2020, i.e. Mr Thomas Kgokolo: Interim CEO, Mr Fikile Mhlontlo: Interim CFO, and the two non-executive directors, i.e. Nick Fadugba (UK-based) and Professor Edna van Harte.
The Chairperson requested that the presentation be flighted for the benefit of the public.
Mr Qhena said although it was common knowledge, he would provide a brief background of the entity. The group comprised of SAA and three 100% subsidiaries, i.e. Mango, SAA Technical and Airchefs. SAA was placed in business rescue on 5 December 2019 up until 30 April 2021. Although the subsidiaries did not go into business rescue, they were severely impacted when SAA stopped flying in March 2020 and needed support to restructure the companies. As a result, SAA targeted R2,7 billion of the R10,5 billion, which had been allocated in terms of the 2020 Second Adjustment Appropriation, for reallocation to its subsidiaries. The balance of R7,8 billion was for expenses including payment of voluntary severance packages to employees, bar that of the pilots. Some funds had been ring-fenced for future settlement of employee liabilities, un-flown ticket liabilities, guarantees and working capital to restart the airline. SAA was considering other options as the government was no longer offering guarantees.
Mr Mhlontlo responded to questions about the Business Rescue (BR) plan. The BR process was completed at the end of April 2021. Outcomes of the process included amongst others, restoring liquidity and solvency, and organisational structure which was re-designed to make sure it was aligned with the market. In terms of the plan, SAA would be back in the skies in July 2021 depending on the environment. The restart process came with complexities considering Covid-19; the third wave could be critical. The matter of the pilots was complex but it was key in finalising the restart plan.
Mr Qhena agreed that the issue of the pilots was playing a big role in the ability to restart the business. The BR plan was also important to remedy the financial situation. In terms of the BR plan, some liabilities would be paid in extended periods. The creditors voted to take funds from the balance sheet to ensure future liquidity. SIU investigations were receiving attention with the cooperation from the SAA Legal and Compliance Department. The financial challenges faced by SAA were largely due to dilemma faced by the subsidiaries, i.e. Mango, SAA Technical and Airchefs which relied heavily on SAA business. The delay in accessing the R2,7 billion placed the subsidiaries in an extremely difficult position. The guarantee required from SAA was impacting on the working capital. The squeeze on the guarantee was not anticipated.
The Chairperson offered the CFO and directors the opportunity to engage but none of them had anything further to contribute.
Mr Kgokolo emphasised the urgency of allowing SAA to transfer money to its subsidiaries. He said that in considering the restart and overall turnaround plan, SAA planned to be prudent in its spending to make sure that every cent goes the extra mile and that the organisation was run more efficiently. SAA was facing a tough environment and needed to ensure that the business was tight on cost management.
Mr O Mothafa (ANC) acknowledged and thanked the SAA team for the responses. The presentation covered most of the questions from previous engagements with the entity. Stakeholders were preoccupied with numbers, but behind the numbers were human beings, families and livelihoods. He wanted to know whether there were processes aimed at taking on board the staff and other affected people so that they also had an understanding of the process. There seemed to be a lack of communication between board members and staff, not only at SAA but also at other SOEs. A recent article in the media reported about the emotional hardships as it pertained to Denel where someone took his own life due to the trauma and another person lost his family.
In terms of the presentation, SAA would enforce a strict process to sure that each rand and cent would go the extra mile. In light of this statement, Mr Mothafa asked whether there would be specific conditions attached to the disbursement of the money to realise this objective. It was his wish that conditions would be attached to allow the Commission to monitor the process. He enquired whether the R800 million earmarked for Mango would be sufficient to ensure the airline remained afloat considering the reputational damage caused by the cancellation of the Zanzibar route. He wanted to know: whether the team and the Board were aware of the extent of Mango’s debt liability to Airports Company South Africa (ACSA); what the Board’s understanding was of other obligations; what the view of the creditors was. According to him, SAA Express was in liquidation because the creditors approached the court due to uncertainty about whether they would receive what was due to them. This was based on their assumption that SAA was insolvent; and the court agreed. He wanted to know whether there was engagement on this matter. He asked whether the financial implications, as a result of the reputational damage, could be quantified and enquired how it could be remedied with all those affected by the glitch and whether it could lead to the grounding of certain routes.
Mr X Qayiso (ANC) appreciated the presentation and the clarifying of questions by the SAA team. He expressed the wish that the entity did not collapse. The Committee had an interest in seeing SAA take off the ground to be able to boost the economy. He was concerned about the bad experience of workers during the retrenchment process and asked how SAA, and SOEs in general, could avoid this from reoccurring. Benefits and salaries should be protected and workers should not be subjected to the brutal experience of immediately losing their income. In relation to the decade-long dispute with the staff of SAA Technical, he asked how SAA was going to resolve this difficult conflict and if the Committee could be provided with a break-down of the approached that would be followed. He was aware of the section 189 engagements and wanted to know whether a process was in place to reskill the huge number of workers that had been retrenched. Referring to the SIU cases, he asked how much money was recovered from McKinsey. He raised concerns that money earmarked for Mango would not be enough considering the reputational damage caused.
Mr Mothafa asked whether the BR process generated Intellectual Property rights (IP) and who gets to own it, i.e. would SAA have access to information gathered, consolidated and used up until the process exit date or was it the property of the practitioners. He wanted to know whether the BR costs could be quantified and how much of the R7,8 billion received was paid to the practitioners. He requested a break-down of the payments to practitioners per line item. He asked whether the impact of the pandemic had been factored into the long-term sustainability plan. Considering the operational costs of running an airline and the trajectory to put SAA on a sustainability path, calculations must take into account that the level of passengers would not be the same as was the case prior to Covid-19. He was just as concerned as Mr Qayiso about the protracted negotiations with the Pilots Association. He enquired about the relations between the pilots and the cabin crew. He noted from media reports that the pilots would be indifferent to an offer while the cabin crew would accept it. Better results could be achieved through a collaborative and uniform approach by the two associations.
The Chairperson thanked Mr Qhena and rest of the SAA team and wished them well in addressing the challenges of getting SAA back to the skies. He stressed the issue of the employees who did not have other means of survival. He asked for better communication with workers and the broader South African public due to the fact that SAA was recapitalised through a bail-out and so that South Africans were aware of what was happening with their airline.
For the benefit of the public and the media, the Chairperson emphasised that no additional appropriation was being considered. The discussion was about a technical issue concerning the reallocation of the R10,5 billion which had already been approved. The Committee needed further engagement on the strategy to fly SAA in a sustainable way. He noted that the presentation did not address the issue of voyager mile holders. He asked how much the BR practitioners were paid, what functions they performed that management could not do and what was the value of what the work done. The Committee understood the confidentiality issue regarding the Strategic Equity Partner but was interested in timelines of taking the partner on board. Each day SAA was not flying, the competition was eating at the market share.
The Chairperson noted that so much had been reported about the dispute with the pilots and the issue was cited as a major concern. He wanted to know what the main areas of concern were. He asked what the situation with the ever-green contracts was as the charges appeared to be excessive and above what the market rates. He questioned the timeframe of July-August 2021 to get SAA flying and implored management to work on a firmer date. SAA was burning cash while being grounded. Domestic and regional flights had picked up; airports were busy but the tail of SAA was conspicuous in its absence.
Mr Qhena thanked the Committee for taking an interest in their work. He noted an overlap in some of the issues raised by the members. He appreciated the clarification by the Chairperson that this was not a new application or an additional appropriation. He acknowledged that communication with all stakeholders needed to improve. He emphasised that in terms of the law, practitioners were allowed to take charge of the company. The Board, although tempted, could not intervene in the BR process.
Mr Qhena advised that the Minister was best suited to respond to questions about the Strategic Equity Partner. The importance of the role of the Strategic Equity Partner, in the sustainability of SAA, could not be overemphasised. The issue of the treatment employees was very important and close to the heart of the Interim Board. He wished the situations could have been easier but from approximately 4 000 employees, only 1000 remained. Up to 200 of the 1000 employees were sent for training to be reskilled for other opportunities that may arise. The number of 1000 was informed by the restart plan of the BR practitioners who factored in the revenue and cost implications based on the number of people required. There was no clear indication of the impact of the pandemic when the decision was made which meant that assumptions had to be adjusted. The Strategic Equity Partner might have to relook the numbers. SAA Technical was going through a section 189 process as allowed in terms of labour law. The Committee was reminded that SAA Technical derived 80% of its business from SAA which was severely impacted when SAA stopped flying. Since SAA would be operating at a much lower scale, support for its subsidiaries would be at a reduced level. Most airlines were finding it difficult to operate at prior Covid-19 levels. In addition, a number of countries were not allowing entry to travellers from all over the world. Airchefs was in the same position as SAA Technical. The section 189 process was the humane way of dealing with staff reduction.
Mr Qhena said the R2,7 billion reallocation of funds was not a pleasant situation. He had hoped the funds would be available but SAA still did not have access to the money. Other options which had been considered, were unsuccessful. Talks with National Treasury and government to regularise the appropriation was ongoing. The financials of the affected entities had been severely stressed as a result of the delay in the reallocation of the funds.
Mr Qhena explained that all scenarios were factored into the BR plan including the number of people needed, the role of the equity partner and the impact of the pandemic on the number of travellers. The restart process was made more difficult as a result of unknown factors. The dispute with the pilots was simply an issue of money. SAA and the pilots held different views on the matter. Agreements were reached through the BR process with other associations but not with the pilots. The completion of the BR process meant that the pilots’ issue was in the hands of management. It was unclear how long it would take to resolve the issue. Everyone, including the pilots, was required to make a sacrifice to ensure the sustainability of the airline. The funds could not all go to one set of stakeholders to the detriment of others. He added that he was not in a position to express an opinion on how the two associations should conduct their business.
Mr Mhlontlo advised that R231 million was paid for the BR process, which included fees charged by the lawyers and R78 million paid to the BR practitioners. The R900 million Voyager Programme had been closed but would reopen when the airline restarted. The Voyager Programme had been accounted for as one of the creditors of the airline.
Mr Qhena said the plan that the executives was working from was an outcome of the BR process. In terms of the plan, the creditors agreed to take a haircut.
Mr Kgokolo echoed the sentiments expressed earlier about the treatment of SAA employees. The Board was not trying to minimise the negative impact of the BR process on employees and promised to ramp up communication and to engage adequately. In response to the question about employment of strategies to gain market share, he preferred to keep the tactics of SAA close to his chest for the sake of not divulging too much for the competitors. On a high level, information that he was able to share included loading off lease agreements, using cargo to leverage on the SAA brand and careful selection of routes. Only profitable domestic and regional routes would be considered at first. A strong business case would be required to venture into international routes. The key was to make sure the burning of cash was kept to a minimum and to avoid escalation of costs. Mechanisms would be introduced to make the most of the cost (more with less) and to hold people accountable through adequate consequence management and transparency. Clarity on strategies would be sought in terms of agreements with subsidiaries.
Mr Qhena asked the Committee to bear with him for leaving questions on Mango for last. On ever-green contracts, he commented that SAA was almost on a clean slate and did not anticipate uncovering ever-green contracts that the company was not already aware of.
Mr Mhlontlo explained that McKinsey repaid R10 million after revelations at the Zondo Commission. SAA argued that the payment to McKinsey was based on borrowed funds therefore the interest factor should not be omitted. The issue of interest was still on the table.
Adv Melanchton Makobe, Deputy Director-General (DDG), Legal, Governance and Risk, DPE, said the appointment of the Strategic Equity Partner was the responsibility of the shareholder. Discussions were in the final stages and should be completed within the next month.
Mr Qhena explained that Mango was in dire straits. It would be a misrepresentation of the facts to say everything was well. The grounding impacted on its reputation and was making future prospects of flying challenging. The airline was burning cash as passenger numbers were not at a sustainable level and this made the creditors, including ACSA, nervous. The money earmarked for Mango was not sufficient hence all options were being considered. The SAA Board was engaging with the shareholder in helping to restructure the airline and was spending a disproportionate amount of time in dealing with the Mango issue. The delay in the reallocation of the funds was exacerbating the problem. Once guidance was received from the shareholder, the information would be shared with the Committee. In the interim, the SAA Board was considering giving the airline oxygen to get them through the difficult period and was counting on help from the Committee to ensure that the appropriation would happen.
The Chairperson asked the DPE officials to explain the strategies that were being considered with the subsidiaries. It was important that the skills, residing in SAA Technical, not be lost even if the aircrafts were not flying. He reminded the SAA team that they should bring any observations about potential changes to legislation to the attention of the Committee. For example, if an outcome of the BR process required a change in the Act, the Committee should be informed.
Adv Makobe said discussions were at a very sensitive stage and requested the Committee to allow the Department to finalise discussions after which feedback would be given.
Mr Qhena said the observation about the retention of technical skills was spot-on. SAA relied on the technical skill to maintain the airline and was therefore trying to preserve it. He understood how key the role of SAA Technical was and would try to position them to have a chance at survival. In terms of changes to law, he said the BR process had been difficult and many lessons had been learnt. SAA would share the information with DPE, who in turn would engage with the Committee through the Minister. The idea of the BR process was good but some areas could be improved, especially when dealing with one shareholder.
The Chairperson remarked that at the right time, he would like DPE to share some of the lessons. Responding to the plea for intervention at Mango and Airchefs, he said the Committee was planning to finalise the process during the first week in June in collaboration with the Standing Committee on Finance and National Treasury. The NCOP should be finalising the technical aspects, of the money already approved, by mid-June. He thanked the SAA team for the useful engagement.
Adv Makobe thanked the Committee for the opportunity and support.
Mr Darrin Arends, Committee Secretary advised the members that the meeting with the Minister of Higher Education, scheduled for Tuesday 18 May 2021 had been rescheduled to Friday 21 May 2021.
The Chairperson asked the Committee Secretary to provide reasons for the postponement of the meeting.
The Committee Secretary explained that the Minister of Higher Education had a prior engagement with SCOPA and was also required to present the budget vote of his department to the National Assembly.
The Chairperson said this was an indication of the busy schedule of Parliament and confirmed that the meeting with the Agriculture Department was scheduled for Tuesday 18 May 2021 at 09:00.
The meeting was adjourned.
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