SA Express Airline briefing, Minister of Public Enterprises Report on Board Membership of State Owned Enterprises

PUBLIC ENTERPRISES PORTFOLIO COMMITTEE
6 June 2007
SOUTH AFRICAN EXPRESS AIRLINE BRIEFING, MINISTER OF PUBLIC ENTERPRISES REPORT ON BOARD MEMBERSHIP OF STATE OWNED ENTERPRISES

Acting Chairpersons: Mr P Hendrickse (ANC) & Ms N Kondlo (ANC)

Documents handed out:
South African Express presentation

Audio Recording of the Meeting Part1 and Part2

SUMMARY
South African Express (SAX) airlines briefed the Committee on its vision and core values, the company’s background, its market position, strategic focus, current fleet and network, domestic and regional strategy, and the financial performance and projections. It indicated that although it was not classed as a low-cost airline it did try to reduce its costs, and relied also on using smaller aircraft, under-serviced routes, better aircraft maintenance and e-ticketing systems. The subsequent discussion consisted of issues such as trade route monopoly, the profitability of the airline, the maintenance and upgrading of the aircraft, the decision to retain S A Express as a state owned enterprise, plans for new routes, ownership of the aircraft, the demographics of senior employees and pilots. It was decided that the financial statements would be requested from Transnet.

Hon Alec Erwin, Minister of Public Enterprises, briefed the Committee on the board appointments to State Owned Enterprises. He indicated that he authorised the appointments, and that it was necessary to consider each board separately, as some boards were essentially legal constructs for housing particular investments. There were some gaps in the records. The process involved consideration of skills requirements, gender, race, credibility and suitability, and most board members were appointed for a three-year term. There was peer review assessment of the board conducted by an outside party to identify any problems with or shortcomings of board members. Any attempt at dictating to an individual the maximum number of board memberships that he or she could hold was not viable. The Minister was confident that all board members were cognizant of and able to deal with their responsibilities. Questions were asked on whether a board member had ever been asked to step down due to failure to fulfil obligations, the weight attached during the selection to membership of other boards, the reasons why parliament was not involved in appointments, whether only a few elite sat on boards, time allocation, the peer review process and performance bonus considerations, especially relating to the 2004 SAA financial year.

MINUTES
South African Express (SAX) Briefing
Ms Siza Mzimela, Chief Executive Officer, South African Express (SAX) briefed the Committee on the vision and core values, the company’s background, its market position, strategic focus, current fleet and network, domestic and regional strategy, and the their financial performance and projections. SAX was shown to be positioned as a regional/feeder carrier within the South African network which operated point to point services, including short distances domestically in less dense markets with smaller aircraft. The majority of customers were business travelers. It had historically suffered from under-capitalisation principle of the carrier was to fly more frequently with smaller aircraft and the advantage of operating on smaller airports. Although it was adopting low cost approaches it was not a low cost carrier. The difference between the carriers was outlined. The strategic focus noted that profitability was essential, that SAX should continue to build a strong regional and feeder airline, that it should apply a low cost focus by reducing distribution costs, increasing internet bookings and promoting e-ticketing, and build efficiencies in aircraft maintenance.

SAX employed 687 employees, and the demographics were outlined. It played an important role in training young commercial pilots and employed the first woman pilot to fly for a commercial airline in South Africa. The fleet compromised 18 aircraft in total and the size of these craft was more efficient than large gauge aircraft, reduced the breakeven number and was able also to fly into smaller airports. The briefing gave a breakdown of the current SAX route network, elaborated on domestic and regional routes and looked at SAX’s competitive advantages. The domestic strategy was to consolidate its network and grow frequency on routes. It had a greater role to play in providing intra-Africa operations. Comparative graphs showing the SAX increases in revenue, operating profit, and net profit before tax over the period 2005 to 2007 were shown.

Discussion
Ms N Kondlo (ANC) asked why, if it did not intend to be a low cost carrier, SAX used the benchmark prices for low cost carriers. Secondly, she asked if the monopoly SAX had over certain routes, by being the sole carrier for those routes, affected the costs on those routes. Thirdly, she asked if SAX was considering completely new routes apart from their intention to grow travel frequency on current routes. Ms Kondlo also asked if any of the 18 aircraft mentioned in the presentation were not owned by SAX. Finally Ms Kondlo asked for clarification on the situation of the employee demographics as it related to strategic levels.

Mr C Gololo (ANC) asked how SAX addressed the needs of passengers with special disabilities such as the hearing-impaired.

Ms Mzimela said that the benchmark of low costs airlines used by SAX was to provide a creative benchmark for creative ways to reduce costs. She used the example of internet bookings and faster turnaround times to illustrate creative ways of cost reduction employed by low costs airlines that could also be used by SAX in bringing down costs. Regarding the assumption of route monopoly, Ms Mzimela pointed out that due to the shorter routes of the express flights competition came not only from other air carriers but also with the road and rail travel thus there was still a need to reduce costs in order to remain competitive. She said that new routes were always being considered as a way to grow SAX as a business. Of the 18 aircraft used, she maintained that 11 were owned, while 7 aircraft were being leased. Regarding demographics in strategic positions, she said she was confident that these key positions were being occupied by the correct demographic balance of women and black employees. She said that the present delegation was indicative of her assertion. However, she acknowledged the poor representation regarding the pilots, which was still dominated by white males even though SAX employed the first female pilot in South Africa. In regard to provisions for passengers with disabilities, she said that the problem was a general one on airlines and that SAX followed the civil aviations guidelines. She said that provisions such as special attendants were provided, but she acknowledged the general difficulties still faced.

Dr M Van Dyk (DA) asked how many full time pilots were employed by SAX. as 75% of SAX’s customers are business travelers. SAX has very little competition because it operates shorter distances and smaller aircrafts. It is a regional feeder and there is a demand for flights to smaller areas. SAX is a profitable airline. The question is why DPE is heading for a State Owned Enterprise and not a private company.

 Ms Mzimela said that SAX employed around 150 pilots. She said the net profit for the end of the 2007 financial year was just above R100 million after tax.

Hon Alex Erwin, Minister of Public Enterprises, said that the decision to retain SAX as a State Owned Enterprise (SOE) was influenced by the need to stabilise South Africa’s air passenger transport system in anticipation for 2010. He said that a stable shareholder such as the government would ensure that SAX could be steered in the right direction to facilitate the growing tourism market.

Mr Gololo asked what the differences in ticket prices were between SAX and other carriers. He also asked what effect the increased flight frequency had on the maintenance of the aircraft.

Mr E Kholwane (ANC) asked if there was any working relationship between SAX and other airlines. He also asked if any routes being used were unprofitable.

Ms Mzimela said SAX was very competitive with low costs flights as the same pricing mechanism was used. Regarding the frequency of flights and maintenance she said part of the growth of the company required the acquisition of new aircraft. Ms Mzimela said that the issue was not maintenance but back-up aircraft, which SAX was not able to have. Regarding partnerships she said that SAX, SA-Airlink, and SAA were in a reliance agreement entailing a complement of flights based on slot constraints, which needed to be applied for in advance. She said the regulatory body for the slots was the Air Traffic Navigation System (ATNS). Ms Mzimela said that all routes were currently profitable. Some routes were not profitable at first but through experience gained and the tenacity of SAX in sticking with the routes they could be developed into profitable routes, giving SAX a competitive advantage over those other airlines that had abandoned the routes due to the lack of initial profit.

Mr Hendrickse asked if the profits were sustainable. He also asked if there were any plans to upgrade the aircraft as he felt that some of the aircraft were not up to standard. Mr Hendrickse asked if subsidising of tickets for business people from small towns could be considered.

Dr Van Wyk asked SAX to submit its financial statements over the last six years at the next meeting.

The Committee decided that the financial statements could be requested from Transnet, which subsumed SAX.

Ms Mzimela said that no other carrier similar to SAX existed in South Africa prior to 1994. She said the poor quality of the first planes might have been the leased planes, which had subsequently been replaced by more modern planes, noting that the oldest plane was now 13 years. She acknowledged Transnet as the correct channel for the submission of its financial statements and said these would be made available for the Committee.

State Owned Enterprise Boards: Report by Minister of Public Enterprises
Minister Alec Erwin was invited to provide a synopsis of key areas in his report to the parliament on the appointment of the State Owned Enterprise (SOE) boards.

The Minister said that the report was delayed due to the need for accuracy of the information. He said that the final choice of the Board appointments was granted to the Minister and he felt it would be inappropriate to discuss such appointments with anyone other than himself, which is why he made himself available. He mentioned that it was necessary to distinguish between the types of boards. The Minister said that after the credibility of the individual was established for the post, and his or her capability and confidence, the letter of appointment would normally stipulate a three-year term of office. The Minister said that after the credibility of the individual was established for the post, and his or her capability and confidence, the letter of appointment would normally stipulate a three-year term of office. He pointed out the introduction of a peer review assessment of the board conducted by an outside party to identify any problems with or shortcomings of board members. He said that any attempt at dictating to an individual a maximum number of board memberships that the individual could accept was not viable or wise, due to the nature of some boards as investment companies or holdings. The Minister was confident that a position on a board was taken with the full knowledge of the responsibility attached.

Mr P Hendrickse asked if it was ever necessary to ask a board member to stand down due to failure to fulfil obligations.

Mr Van Dyk said that the he had received the report late and said it was leaked to the media before he could read it. He asked if the Minister was aware of the number of boards that the appointed members served on. Clarity should also be provided on whether or not the candidates for board positions were ever asked to indicate whether they had served on other boards. Clarity should also be provided on the weight that was given to the fact that some people had served on other boards.  .

Mr Gololo asked what the role of parliament was in appointing such members.

Mr Y Carrim (ANC) clarified that he had provided the media with a copy of the report as he felt it to be a public document.

The Minister said that members were often rotated at AGMs and the option to change members had been exercised but that no member thus far was asked to step down from a post due to their failure to meet their responsibility as board member. In regard to other board memberships of candidates, he said conflict of interests was considered at the time of appointment, and that consideration was given to the main boards on which the candidates already sat, especially public boards. Here he emphasised the selection considerations of time available, other main board-membership and potential conflicts. He said that parliament might have a role to play on certain regulatory bodies, but it would only cause confusion and conflict with the shareholders’ powers under the Companies Act if parliament were to have a role in the appointment of board members.

Mr Kholwane asked the Minister to address the public perception that part of the failure of companies such as SAA was due to membership of its board members on multiple other boards.

Ms Kondlo asked if multiple board membership had any effect on performance and whether membership was only being confined to an elite few.

The Minister said that it was common practice that senior business people sat on numerous boards. He said he believed that there was no strong concentration of a few people sitting on multiple boards. He reiterated that multiple board-membership might not always entail seating on major boards but rather on smaller investment boards. The Minister said that there was a need to be cautious about creating misconceptions about multiple board membership and reiterated that no viable limit could be placed on board membership. He said that procedures were put in place to ensure that the board members, when taking on certain responsibilities, were not overburdened. He said multiple memberships on main boards might be a problem, but it must be considered that it was the chosen profession of some of these candidates to sit on various boards. The Minister argued that there was no major stress and overlap and the process of selection and monitoring with recourse made sure of this.

Dr Van Dyk said that full time commitments of these board members should also be taken into account. He said he acknowledged the fact that public board membership was important, but he felt that time constraints could limit the proper execution of the responsibilities of board members. He asked if time allocation should not play a more salient role in selection.

The Minister reiterated that all boards were considered, but particularly public and main boards. He said that the appointments essentially entailed trusting the candidate’s commitments and confidence in meeting those commitments. He argued that one would seldom find these members having other full time executive commitments and that would certainly play a role in selection. The minister re-emphasised his confidence in the selection procedure.

Mr Kholwane asked for clarification on the peer review process of the monitoring the performance of board members.  
 
The Minister said that outside firms usually conducted these reviews and they were presented to him. He said that the peer reviews were strictly confidential to allow any information to be disclosed in confidence.

Dr Van Dyk asked why the performance bonuses were being paid out in situation such as SAA’s 2004 financial year, when it in fact recorded a loss. He asked if this was good or bad management on behalf of the board of directors.

The Minister said that a Board could be very good but a company might still make a loss. He said the link was very complex. The SAA board was appointed by Transnet. The Minister said that the granting of bonuses was often determined per department or grouping and the overall company loss did not mean that certain departments could not be functioning excellently. He said that bonuses were not granted frivolously but were subject to contractual agreements. The Minister pointed out that final bonuses were authorised by the board.

The meeting was adjourned.