SA Airways Investment Plans: briefing

Meeting report

PUBLIC ENTERPRISES PORTFOLIO COMMITTEE
22 June 2005
SA AIRWAYS INVESTMENT PLANS: BRIEFING

Chairperson: Mr Y Carrim (ANC)

Documents handed out:
South African Airways PowerPoint presentation

SUMMARY
South African Airways (SAA) presented a performance overview. Senior officials outlined the SAA business, the Bambanani Turnaround Programme, the restructuring process, the exit plans from Transnet Limited, and the decision to join Star Alliance. SAA had demonstrated poor operating and financial performance from 2001 to 2004. The Bambanani programme had therefore been launched, and much progress had been made since. In the first half of the 2005 financial year, SAA had made an operating profit of R365 million.

The Committee was impressed with the progress that SAA had made in such a short period, and was pleased about their main focus on African routes. Members asked questions around the lease agreement with JET Airways, the market prospects and routes in Africa, strategic partnerships, the restructuring of management, the challenge of competition, SAA’s fuel efficiency, the feasibility study on the South Africa - China route, and the Competition Commission case against SAA.

MINUTES

SA Airways briefing
Dr K Ngqula, SAA CEO and President, presented a performance overview to the Committee. He outlined SAAs’ various businesses, the Bambanani Turnaround Programme, the restructuring process, progress made with the exit plan from Transnet Limited, and the agreement with Star Alliance.

SAA had demonstrated poor operating and financial performance over the last three years. In 2002, it had made a loss of R870 million, which had increased to R6.07 million in 2003, and to R8.09 million in 2004. The Bambanani Turnaround Programme had therefore been launched, and much progress had been made since. In the first half of the 2005 financial year, SAA had achieved an operating profit of R365 million.

The Bambanani Turnaround Programme included a customer service programme, improved risk management, a new leadership team, cost diagnostics, the launch of new routes, and additional flight frequencies. Furthermore, a Memorandum of Understanding (MOU) had been signed with the Indian JET Airways. The SAA management structure had been simplified to increase efficiency and effectiveness.

The separation of SAA from Transnet Limited should be completed by April 2006. He outlined the next steps that had to be taken in this process, and with whom the responsibilities lay for each action. Early in 2004, SAA had decided to join Star Alliance. It would take about two years to finalise this process. Passengers could however benefit from Star Alliance Frequent Flyer Programmes with immediate effect.

Discussion
Dr P Rabie (DA) commented that Dr Ngqula had said that the culture of SAA had been to break even and not to make profits. SAA had signed a MOU with the Indian JET Airways. The media had reported that the alternative bid from Air Sahara would have saved the taxpayer R110 million. He asked for more information on this contentious issue.

Dr Ngqula replied that they had considered about seven airways for the lease of three of its new fleet of Airbuses. These companies had gone through a selection process for which the Financial Department had been responsible. The two main criteria were competitive pricing and a credit check. The latter had included an analysis of their balance sheet, and eventualities such as plane crashes. When the leases expired, the aircraft had to be returned in a certain condition. The challenge had been the difficulty of receiving the required information from some companies. After the Financial Department’s analysis, the results were passed on to the executive team, who had made their final decision on JET Airways. SAA had followed all the required procedures in the decision-making process.

Mr H Bekker (IFP) wondered whether SAA could withdraw from the contracts or refinance the previous deals in the SAA aircraft acquisition programme. He asked whether it was possible that JET Airways would take over the purchase contracts on those planes, and that the planes could shift on a permanent basis to them instead of a lease agreement. The aircraft would probably have to be upgraded in the future.

Dr Ngqula replied that SAA needed the planes. Their capital reserves had to be increased, while SAA’s current cash flow was strong enough. This was the best decision they could have taken. The predicted market growth for the next two years should enable them to get the aircraft back. They should break more than even. In two years, they could renegotiate if they wished.

Ms Maymentshu, SAA General Manager: Business Development added that they were currently renegotiating all their aircraft leases to ensure that they did not pay more than the current market rate.

Dr Ngqula said that they were looking for the minutes of SAA Board meetings of the last four years to investigate how the previous executive team had taken certain decisions.

Mr L Johnson (ANC, Portfolio Committee on Finance) asked if the aircraft had been purchased speculatively in the futures market.

Dr Ngqula replied that SAA had been fortunate because the Rand had been strong when the transactions had taken place, and because some of the financial institutions had funded them without any guarantees but only on the strength of their balance sheet. In terms of the exchange rate, they had not speculated when they had bought the aircraft. The only speculation that did occur regarded fuel.

Mr C Gololo (ANC) was pleased about SAA’s vision of ‘bringing the world to Africa, and taking Africa to the world’. The Committee had recently been informed that the African market had a potential growth rate of 5% due to positive GDP (Gross Domestic Product) growth and trade flows. He asked about the present market prospects in Africa; how many MOUs had been signed, and with which countries and airlines. He also queried how many direct flights were planned to those countries. He asked for more information on negotiations with Nigeria.

Mr Ngqula replied that worldwide, the fastest growing markets were North America and Africa. SAA endeavoured to be the leading airline in Africa. The market was particularly promising in West Africa, because it was a convenient stopover to the United States. SAA had an advantage over other airlines because it flew to America via West Africa. Other airlines – besides Ethiopian Airlines – went to America via Europe. The new route to Washington DC would become effective in July 2005.

Daily flights from Johannesburg to Lagos and Ghana were planned, and from there to any destination in the United States three or four times per week. They were currently negotiating with the Ghanaian government for complete freedom to pick up passengers in Ghana. SAA was also negotiating with the Angolan government about the route from Luanda to the United States.

The SAA routes to Dakar and Luanda were profitable, particularly in first and business class. Routes from Johannesburg to the Seychelles, Maldives, and India were under discussion. SAA already flew to Kenya. There were daily flights to Zimbabwe and Zambia, where SAA had 70% of the market share. SAA had decided to build business lounges, because that was most profitable. They were in the process of opening business class lounges to those destinations SAA flew to more than three times per week.

African Heads of State had agreed on the Yamoussoukro declaration to make it possible for African airlines to fly anywhere in the continent without applying for land rights. The negotiations in Africa were tough. Once the Yamoussoukro declaration was implemented, it would be easier for SAA.

SAA had a MOU with Ethiopian Airlines and with Senegal, and was currently negotiating with Zimbabwe, Angola, and Ghana. They were striving for co-operation with everybody they could, as this was to their advantage.

Ms N Ngcengwane (ANC) asked whether they had encountered challenges and legal problems in the management restructuring process.

Ms Kondlo followed up by asking how they were dealing with those employees that had not been ready to take exit packages.

Dr Ngqula answered that the offer of exit packages to management had not been a problem, and that the restructuring of management was a transformation process. All actions taken had been in the interests of SAA.

Dr Rabie queried how the fuel efficiency of SAA aircraft compared to those of Singapore Airways and Lufthansa. He also asked whether SAA had an official policy for chartered flights for senior personnel.

Dr Ngqula replied that SAA fuel efficiency was very good. They had a strong technical support system. The challenge was the cost of running the Technical Division. For the last three years, the SAA Technical Division had not been audited. Their aircraft utilisation was comparatively low, and this was a competitive disadvantage. Deals that they were trying to strike in West Africa were crucial, as they lowered the unit costs. SAA had a travel policy and a budgeting process for senior personnel.

Mr R Nogumla (ANC) asked how strategic partners would be selected, and what their experiences were in this regard, particularly their negative experiences.

Dr Ngqula answered that SAA did not have a strategic partner, and that they did not intend to enter into a strategic partnership. They did not want to repeat the experience that they had had with Swissair. SAA needed investors and shareholders.

Mr Johnson expressed concern that SAA seemed to focus more on business and first class than on economy class. He said that during a recent flight with SAA to Port Elisabeth, something had been stolen out of his bag. However, SAA had denied responsibility. SAA baggage handlers had told him that a number of such incidences had occurred this June. He was also worried about the implications if somebody deliberately put an illegal item into a passenger’s baggage.

Dr Ngqula apologised to Mr Johnson about the incident, and stressed that it was SAA’s responsibility to ensure that both passenger and baggage arrived safely at the destination. These incidents would be looked into. SAA was co-operating with the security forces, police, and government to address the security of baggage.

The Chairperson acknowledged the progress SAA had made since Dr Ngqula’s recent appointment. The Committee was discussing its role regarding SAA with the Minister and the Department of Public Enterprises. He asked how the Committee could assist in advancing SAA’s goals. He was pleased about SAA’s focus on African routes. He expressed the Committee’s general concern about the risk management at State-Owned Enterprises (SOEs). He asked for more information on the King Shaka airport, and the SAA’s feasibility study on the China route.

Dr Ngqula replied that SAA would fly to the King Shaka airport in Durban if there were passengers. SAA supported the airport, as it was a great opportunity for tourism growth. Long-term planning was needed. SAA wanted to fly from Nairobi directly to Durban. SAA also planned to fly to China, and was currently discussing the frequency. SAA would be the only airline to fly to China directly.

Ms Ngcengwane asked how tough international competition was, taking into account that SAA was a small airline. She also asked how the recent 7% cut in commission for travel agencies impacted on clients.

Dr Ngqula replied that competition was very tough. The best airline to and from Africa was SAA. It was able to compete with the best airlines in the world. Ticket prices had been reduced by 4% due to the fact that no commission had to be paid any longer. The remaining money was kept for marketing purposes. SAA intended to bring prices down and make flights more affordable for South Africans.

Ms Kondlo asked whether cheaper airlines like kulula.com were a problem for SAA, and whether they were considering reducing prices for domestic flights. She asked for information on the fine of R100 million that had been imposed on SAA by the Competition Commission.

Dr Ngqula replied that he was not worried about competition from low-cost airlines. They were trying to convince the Competition Commission to give SAA a fair hearing, and to consider that the competition laws had been different in 2001. SAA would defend their rights and position in this case.

The meeting was adjourned.