South African Airways 2006 Annual Report: briefing

PUBLIC ENTERPRISES PORTFOLIO COMMITTEE
19 October 2006
SOUTH AFRICAN AIRWAYS 2006 ANNUAL REPORT: BRIEFING

Chairperson: Mr Y Carrim (ANC)

Documents handed out:
South African Airways (SAA) annual report for 2006
SAA Presentation: Part1 & Part2
SAA: Financial Overview: Part1 & Part2

SUMMARY

South African Airways presented its 2006 Annual Report to the Committee. The presentation focused on its financial performance and future strategies. Passenger numbers and revenue decreased, while rising fuel costs had weakened profits. SAA was faced with increasing competition in the domestic market and had decided to launch a low cost carrier, which was seen to be part of the future of the airline industry.

The Committee concentrated on poor customer service and the airline’s initiatives to improve this. The Chairperson was also very dissatisfied that the Chair of the SAA Board had not attended the meeting, and warned public entities that either the Chair of the Board or a Board representative must be present when they appeared before the Committee.

MINUTES

South African Airways (SAA) presentation

SAA was represented by Mr K Ngqula (CEO), Ms N Magwentshu (General Manager: Business Development), Mr G Griffiths (Chief Financial Officer), Mr V Naicker (Chief Risk Officer) and Ms J O' Sullivan (Head: Cooperate Communications). Mr Griffiths begun the presentation by stating that passenger numbers at SAA and airline revenue had been up by 4.5 and 2.1% respectively. However profit margins weakened as a result of a decline in yields (3%) and an increase in fuel costs (5.5%).

Mr Ngqula apologised on behalf of Professor J Gerwel (Chairperson: SAA Board) for his absence, as he had urgent matters to attend to. He argued that 2005 was a turbulent year for the airline industry, in which the industry experienced losses of approximately US$6 billion. One of the main reasons for the losses was the volatility and uncertainty of the fuel price. Over the past few years there has been an increase in competition, where the main competitors are low cost carriers. However in order for SAA to survive, they have to focus on ways in which to reduce costs and improve efficiencies. Looking into the future, SAA has decided to enter the low cost airline market, as it is the future of the airline industry. SAA will also look into improving customer service, and partner up with African carriers in order to capture more of the African market.

Discussion

The Chair began the discussions by making it clear that the Board Chairperson of a public entity must be present when annual reports are discussed. If the Chairman of the board could not attend the meeting, then they should send a board representative. He strongly stated that in future the Committee would not accept an annual report if the Chairman or a representative of the board is not present. Since the Committee had specific questions for the board chairperson, they will address them to the CEO; however the questions will have to be answered by the board chairperson in writing.

Mr Ngqula stated that the documents handed out at the meeting accidentally contained a highly confidential section and he requested that anyone who was not a Member of the Committee return the confidential section immediately.

The Chair stated that he understood that someone had made an error. However it would be unconstitutional in a open public meeting to keep documents away from the public. Therefore everyone, including the Committee Members, should return the confidential document.

Mr P Hendrickse (ANC) had the following questions for the Chairman of the SAA board: The SAA should elaborate on the challenges faced; SAA experienced a significant saving of R73 million out of R4.5 billion turnover, which works out to be an insignificant amount; the report did not address issues such as board attendance; SAA should elaborate on how the amount of R14.5 million allocated to the social responsibility programme compared to the amount that it spends on golf and tennis tournaments; SAA should explain “irregularities” in respect of the Public Finance Management Act (PFMA) and auditors’ concerns; SAA should explain the apparent contradiction in the number of people on the nominations and governance committees (4 and 7) and SAA should elaborate why it had a high turnover of executives.

Mr Ngqula in attempting to answer some of the questions stated that the R73 million saving was part of the savings on fuel costs. The amount may seem insignificant; however compared to SAA's profit of R65 million it was a huge amount. With regards to the high turnover rate of executives, some resigned on their own accord while others were asked to leave because they were not good enough. However it was important to note that the airline was struggling and there were many problems it had to resolve.

The Chair stated that he acknowledged the difficulties faced by SAA; however the annual report provided by SAA was very “glum”. The Chair argued that he understood the reasons why SAA provided a glossy presentation as it was the first time SAA appeared before the Committee on its own. However when presenting before any Portfolio Committee, one has to provide a detailed report on the challenges faced and what is being done to address the challenges. As far as customer service is concerned, SAA has continually provided poor customer service to their passengers, which is unacceptable. On the other hand, the Chair stated that he acknowledged all the awards received by SAA during the financial year and looked forward to better financial results.

Mr Ngqula stated that in future SAA will provide a detailed report, and told the Committee that the current report only dealt with future issues, and they had tried to make it as positive as possible.

Mr Ngqula argued that SAA is constantly recruiting and training new staff in order to improve customer service. In the near future, SAA would look into employing staff with a tertiary qualification as a minimum, as they will be able to provide service in a more caring and professional manner.

Mr J Stevens (DA) argued that people from his constituency were constantly complaining about the poor customer service provided by SAA and asked if it was possible for SAA to provide a senior official who is easily accessible than can address issues regarding customer service.

Mr Ngqula noted Mr Stevens’ point on customer service and stated that SAA needs to communicate better with the public, and is looking into revamping customer service.

Mr C Gololo (ANC) asked SAA to elaborate on what was being done to limit baggage handling errors at airports. He also asked SAA to state whether or not the prices of the low cost carrier would be cheaper than that of their competitors.

Mr Ngqula replied that in terms of baggage handling, a tender has been issued to various companies; however no service level agreements have been signed. SAA plans in the near future to use fingerprinting technology for airport workers in order curb baggage tampering. He also stated that with regards to the pricing of the new airline, the prices would be very competitive. Low cost essentially meant the cost of flying to the airline.

Ms D Carolus (ANC Researcher) questioned on the auditors report, where she asked if the reason given to the auditors on regarding how SAA's performance relates to their predetermined objectives, was the only reason. SAA should also provide an update on how their procurement system relates to their fruitless and wasteful expenditure. SAA should further elaborate on how the issuing of credit cards related to their non-core functions and why they had to stop flying to certain destinations.

Mr Ngqula stated that the issuing of credit cards by airlines is a worldwide phenomenon. They already had 1.8 million members in their Voyager programme.

Ms Magwentshu said that flights to certain destinations were stopped due to a lack of passenger demand, traffic rights and non-profitability.

Mr Stevens said that SAA should provide a more detailed report on their cost cutting exercise. He asked if the low cost carrier would be a subsidiary of SAA.

Mr Griffiths replied that a detailed report on cost cutting was provided in the annual report

Ms Magwentshu stated that the low cost carrier would be operated by a different company.

Mr C Wang (ANC) asked SAA to elaborate on their labour relations and why duty free items are sold in US Dollars.

Mr Ngqula stated that a different company operated the duty free shops and SAA had no control over their pricing policies.

Mr Hendrickse said that SAA should provide details of their new pension fund, and an explanation for why Air Tanzania was sold. Finally with regards to SAA Technical, SAA should explain the reasons why managers were fired, only to have the same posts advertised a few weeks later.

Mr Ngqula stated that the reason for establishing a new fund was due to the fact that SAA will no longer be a part of Transnet. Therefore it was impossible to work for one company and receive benefits such as pension from another company. In terms of filling the vacancies, the industry was expanding and needed people with different skills. SAA was a minority shareholder in Air Tanzania and the acquisition of the airline in the first place was a political decision, not a business decision. This was a poor decision which eventually backfired.

The Chair reiterated that he expected a more detailed presentation from SAA on their next annual report.

The meeting was adjourned.