South African Express Airways Bill: deliberations

PUBLIC ENTERPRISES PORTFOLIO COMMITTEE
07 September 2007
SOUTH AFRICAN EXPRESS AIRWAYS BILL: DELIBERATIONS

Chairperson: Mr Y Carrim (ANC)

Documents handed out:
Department’s Presentation
South African Express Bill [B14-2007]

Audio recording of meeting

SUMMARY
Members met with the Department of Public Enterprises (DPE) and representatives from South African Express Airways (SAX) in order to discuss the South African Express Airways Bill. The Department’s presentation provided an overview of SAX, the separation of SAX and the implications of the Bill. It was stated that the Department believed that the transfer of SAX to DPE would allow Transnet to focus on its core business and investment programme, and also avoid the potential negative impact on its balance sheet and credit rating. SAX would continue to operate as a regional carrier, limited to Africa, providing links to the main hubs. Strategic focus would be on development in the region, lowering costs and e-ticketing and internet bookings.

Members indicated that there did not appear to have been problems with the performance of SAX, but debated the issue of scheduling. Although it was intended that it be a Schedule 2 entity, this was not in the Bill as it had not been finalised with National Treasury. The Committee expressed its displeasure that the Bill had been referred already to it before the scheduling had been finalized, and stated that it would not accept such Bills in future. The Committee further noted that it would be keeping a close look on Schedule 2 entities, and did not believe that airlines should be bailed out by taxpayers. Further questions related to the load factors and joint ventures.

Members went through each clause of the Bill, and adopted the clauses in principle, but there was partial adoption of Clauses 4 and 6 subject to the further referral to the Parliamentary legal unit. Members hoped to finalise the Bill before Friday 21 September.

MINUTES
South African Express Airways (SAX) Bill: Briefing by Department of Public Enterprises (DPE)
Ms Sandra Coetzee, Deputy Director, Legal Services, DPE, gave a presentation providing an overview of S A Express Airways (SAX), the separation of SAX and the implications of the Bill. It was explained that when the decision was taken in 2004 to turn around Transnet by disposing of its non-core business, SAX was one of the entities to be removed and the transfer of SAX to government would completely exit Transnet from the aviation sector. Cabinet, in April 2007, had approved the separation from Transnet, the establishment of SAX as a State Owned Entity, and submission of the SAX Bill to parliament for adoption. The Bill was published for public comment in May 2007 but there had been no comments. The Bill had been certified by the State Law Advisors on 23 May 2007. The Bill essentially authorized SAX to become an SOE, authorized government to acquire the shareholding in SAX from Transnet and SAX would continue to run its business as usual.

Ms Coetzee summarised that SAX was a regional carrier, which would feed that mainline carriers at their hubs. It operated point to point services at less dense markets. It was not a low cost carrier. She summarised the main features of regional carriers, which had proved resilient and shown good operating profits.

The strategic focus included continuing to build a strong feeder airline and develop new secondary entry points into countries such as the DRC and others better suited to smaller craft. This would increase feed to the Johannesburg hub. It was further intended to adopt lower cost principles, reduce distribution costs and increase internet bookings and e-ticketing. Efficiencies in aircraft maintenance would be built.

Simply integrating SAX into SAA could have competition implications; and since SAX had achieved a turnaround to sustainable profitability as a stand alone unit with its focus on its own mission, with a clear regional focus, it should remain as a stand alone.

Ms Coetzee noted that DPE and Transnet had held preliminary discussions to identify key principles of the separation. A working group had been formed between DPE, Transnet and SAX to deal with the separation. It would agree on issues such as the valuation of assets and liabilities, the transfer of guarantees and letters of support issued by Transnet between DPE, NT and Transnet. The Bill set out that the main object of SAX was to engage in passenger airline and cargo transport services, air charter services and other related services in South Africa and the African continent. SAX’s operative scope was limited to the African continent and surrounding islands, and it would use smaller gauge aircraft than the main line and low cost airlines. SAX’s borrowing powers were subject to the Public Finance Management Act (PFMA).

Discussion
Dr M Van Dyk (DA) asked SAX to comment on how profit was determined, and who its competitors were. He also asked for comment with regard to the capacity of reservations, the joint ventures with various African airlines, and why it was decided to schedule SAX as a Schedule 2 entity.

Ms Siza Mzimela, CEO, SAX, replied that a profitable domestic airline may not necessarily be a low cost carrier, but it should be noted that SAX operated on low cost principles. The airline was adopting various strategies which would enable it to compete with the low cost carriers. The airline had no competitors in the regional domestic markets. With regard to its capacity, on average the airline had load factors between 65% and 75%. The airline had been approached by two African airlines, in Malawi, and the Democratic Republic of Congo.

The Chairperson asked for comment on the norm of the load factors

Ms Mzimela responded that the cost factor depended on the load factor. Trying to reduce cost was a critical part of the business, and even the type of aircraft that was used was carefully thought through.

Ms Coetzee added that the scheduling was informed by the commercial operations. SAX should operate on its own balance sheet; it had never been subsidised, and could not operate as an airline as a Schedule 3(b) entity. It should however be noted that a Schedule 2 entity still needed to disclose its borrowing plans.

Dr Van Dyk stated that he was not convinced with the Department’s argument, and was worried that SAX would end up in a situation where it would have to be bailed out by the taxpayers.

The Chairperson asked the Department whether the Bill spelt out what Schedule SAX should fall into.

Ms Coetzee replied that the Department still needed to address the scheduling in the Bill and a recommendation would be made.

The Chairperson asked the Department to state whether or not the scheduling was spelt out in the South African Airways (SAA) Bill.

Ms Coetzee replied that the scheduling here was spelt out to the effect that SAA was to be listed under Schedule 2.

The Chairperson asked the Department for comment why the issue of scheduling was brought up at such a late stage.

Ms Coetzee responded that by the time the Bill was being processed the Department was still in discussion with National Treasury (NT).

The Chairperson stressed the fact that the issue of scheduling must be dealt with by Cabinet, and
Cabinet should have an agreement on the scheduling before the Bill was brought to parliament. The Department should state whether National Treasury agreed with the Department on their choice of scheduling.

Ms Coetzee replied that an agreement still had to be made with National Treasury. It should however be noted that National Treasury did receive the borrowing plans of the Schedule 2 entities, and there was regular interaction between the Department and National Treasury.

Ms Mzimela added that it would be a disaster for the airline to be changed from a schedule 2 to a schedule 3(b) entity. There was no financial flexibility for Schedule 3(b) entities, and SAX needed to respond quickly to changes.

Dr Van Dyk noted that if there was proper planning and management then matters would run smoothly and there would be no cause for concern.

Mr Joachim Vermooten, DPE stated that SAX had till now operated a successful business. He warned that if SAX was listed as a schedule 3(b) entity, financial decisions would take a long time to be approved, which would make it impossible to plan ahead.

The Chairperson noted that it was unfair to dump the issue of scheduling to parliament when it had not been finalised. If the executive decided to leave the decision to Parliament, then parliament had the right to employ experts on the airline industry and the Public Finance Management Act (PFMA). In the future the Committee would not accept a Bill if the scheduling had not been resolved. It should also be noted that in future the Committee would get tougher on the use of the national fiscus to bail out the airline industry. The airline industry was not a basic human need. The Committee also believed that the case for SAX to be a schedule 2 entity was much stronger than that of Infraco, as the entity already existed and was doing well. Mr Van Dyk had a legitimate concern. The Committee would be keeping a close look on Schedule 2 entities in terms of their performance.

Dr Van Dyk concurred with the Chairperson and stated that the matter should be referred to Cabinet

Clause by Clause Deliberation of the Bill

Long title
Members decided to accept the long title, as amended.

Preamble
Members decided to accept the preamble without any amendments

Objects of the Act
Members decided to accept all the sub-clauses.

Definitions
Members decided to accept all the definitions without any amendments

Clause 3: Transfer of SAX shares and SAX interests
Members decided to adopt the Clause without any amendments.

Clause 4: Main objects and powers of SAX
The Members decided to partially adopt the Clause, subject to the referral to the Parliamentary Legal unit for final checking.

Clause 5: Borrowing powers of SAX
Members decided to adopt the Clause without any amendments.

Clause 6: Conversion of South African Express (Proprietary) Limited into public company
Members decided to partially adopt the Clause subject to the referral by the Parliamentary Legal unit.

Clause 7: Effect of conversion
Members decided to adopt the Clause without any amendments.

Clause 8 – 10
Members decided to adopt the Clause without any amendments.

The referrals back to the Committee would take place in due course.

The Meeting was adjourned.