South African Airways Annual Report 2006/7: briefing

Meeting report

PUBLIC ENTERPRISES PORTFOLIO COMMITTEE
17 October 2007
SOUTH AFRICAN AIRWAYS ANNUAL REPORT 2006/7: BRIEFING

Chairperson: Ms F Chohan (ANC)

Documents handed out:
South African Airways presentation
South African Airways Annual Report [available shortly at www.flysaa.com]

Audio recording of meeting

SUMMARY
The South African Airways (SAA) presentation on its 2006/7 Annual report outlined the shareholder compact mandate, the strategic objectives of the company, its restructuring process and the way forward for the airline. SAA noted that its current restructuring process was a painful and difficult process.

Members raised great concern with the airline’s high turnover of senior managers and asked for clarity on was being done to address the matter. Members also raised several issues regarding the performance of the SAA Board, and asked whether the board was happy with the performance and attendance of its members. Questions were also raised on the number of staff retrenchments and the exact number of retrenchments to date, the issue of the 747’s and what would happen to the planes once they had been grounded.

The Chairperson asked SAA to provide a number of reports in writing, which must be handed to the Committee secretary within three weeks. If the reports were not in on time, SAA would have to explain the reason for the delay. If SAA failed to provide a written explanation at all, it would be “subpoenaed” to appear before the Committee.

MINUTES
SAA presentation
The SAA presentation was made by Prof Jakes Gerwel (Chairman, SAA Board) and Mr Khaya Ngqula (Chief Executive Officer, SAA). Prof Gerwel in his opening review outlined the shareholder compact mandate, and the strategic objectives of SAA. He stated that some of the major challenges facing the airline included the fact that revenue growth was predicted to halve from 10% to 5%, and the volatility of fuel prices and world currencies would always remain a serious challenge. SAA however had planned on taking advantage of new opportunities, such as the expected growth in the African and domestic markets.

Mr Ngqula provided an outline of the SAA performance overview, the industry and strategic overview, an outline of SAA’s restructuring process and the way forward. The 2007/08 financial year would be extremely challenging because the airline was undergoing restructuring, which was a painful and difficult process. It should be noted that restructuring was very common, and most network carriers had implemented at least one turnaround strategy during the past decade. Several carriers were now into their second restructuring exercise. It should also be noted that the SAA business plan reflected a gap of R638 million which had to be filled in order to achieve the 7.5% profit margin, which was essential for the company’s survival. The company had therefore decided to reduce the management headcount by 223. The company had until 5 November 2007 to consult with trade unions in order to come up with solutions to the R638 million gap.

In terms of the way forward SAA now planned to focusing on its role as an African airline with global reach. In November 2007 SAA would add capacity to 10 African markets. SAA had begun rationalising its European network with the launch of the Munich route, which would replace Paris and Zurich. SAA’s response to the growth of low-cost carriers was the launch of Mango in November 2006. Mango had seen good growth since its launch, capturing approximately 10% of the domestic market.

 

Discussion
The Chairperson commended SAA for providing such a detailed and comprehensive presentation and stated that she understood that the airline industry was a challenging industry.

Mr P Hendrikse (ANC) welcomed the new Chairperson of the Board, and expressed sympathy to Mr Ngqula for the loss of his child. He sought clarity on the Board’s view on the high turnover of senior managers, and whether the Board was happy with the performance and attendance of Board Members. Clarity should also be provided on how the Board evaluated the payment of senior managers. With regard to the Seabury process, clarity should be provided on whether there was an evaluation of SAA management.

Prof Gerwel replied that the high staff turnover was a major concern in any organization and SAA’s Remuneration Committee took a keen interest in the company’s staff turnover. It should be noted that SAA was undergoing a restructuring period in which a reduction and retention scheme had been implemented in order to address issues of turnover.

The Seabury process was not tasked with evaluating the SAA managers but merely to assist with the restructuring of the airline. In terms of issues pertaining to the Board, it should be noted that the Board exercised a oversight power over the SAA executive, to assess whether or not they were performing, It was established that the Members were performing, and each member provided a valuable contribution.

With regard to salary determination, SAA made use of benchmark market prices.

The Chairperson asked for clarity on whether there were bonuses paid to executives
Prof Gerwel replied that no bonuses had been paid during the financial year.

Dr Van Dyk (DA) stated that SAA had planned to retrench a number of workers. Clarity should be provided how many employees were to be retrenched, and whether there was any consultation with regard to the labour packages. In terms of the remuneration packages, clarity should be provided as to whether there would be a cut in executive members as part of the restructuring process. It had been widely reported that there had been an increasing amount of theft from passenger luggage. SAA should therefore elaborate on those reports, and what was being done to address the issue.

Mr Ngqula responded to the issue of retrenchment of workers by stating that regular consultation had been taking place, and a restructuring standing committee had been implemented to address the issues that pertained to labour. That committee worked within the labour relations laws and also worked with the trade unions on a daily basis. The media reports were not 100% correct, and the presentation answered some of the issues that were raised.

With regard to staff cuts, the issue was dependent on what was on the negotiation table. The issue would be made certain on 5 November.

The Chairperson asked for further clarity on possible retrenchments and the voluntary packages. SAA should also provide progressive reports in writing, by the end of next week, on the number of theft cases, and the report on negotiations by 10 November.

Mr Ngqula replied that 223 managers would be leaving voluntarily at the end of the month, and If no one accepted the packages, then SAA would be forced to exit via the marginal routes.

Mr C Gololo (ANC) asked for clarity on what was being done to the Boeing 747’s once they had been grounded. With regard to the restructuring of staff it should be noted that the reduction of counters would only create longer queues during the 2010 FIFA Soccer World Cup. With regard to the lease of aircrafts, SAA should provide clarity on how long the lease agreements were.

Mr Clive Else (SAA Chief Financial Officer) replied that some of the aircrafts were due back to the lessor at the beginning of next year. SAA was still in negotiations with the sub lessor on the return of two aircrafts, and one aircraft was owned by SAA. There had been many interests from European airlines in the purchase of the aircraft that was owned by SAA. All leases on aircrafts were fully paid up, and the lease agreements lasted between 10 to 15 years. There had been an option for a short term lease, however short term contracts were very expensive.

With regard to the staff complement, he stated that the training of existing staff with regard to multi-skilling had been taking place. It was however still a big challenge.

The Chairperson stated that SAA should provide a written report on the background of the grounded aircrafts and other legacy issues that had plagued the company.

Mr C Wang (ANC) stated that customer services still remained a concern, and asked whether SAA would be implementing a new customer service plan. Clarity should also be provided on the impact of the rightsizing of labour, and why there was non compliance with the Public Finance Management Act (PFMA). It had been reported that SAA had once donated an aircraft, clarification should be provided on the donation of the aircraft.

Prof Gerwel replied that the Board had appointed an official ensure compliance with the PFMA. However it should be noted that the PFMA had very strict requirements.

Mr Else replied that SAA had donated an aircraft which was completely obsolete, and the donation was seen as some form of advertising for SAA.

Mr Ngqula responded that with regard to the customer service plan, SAA was implementing various customer service plans, as well as a customer service division.

The Chairperson stated that it would be an enormous contribution for SAA to introduce a customer service feedback plan.

Mr Hendrikse asked for clarity on the operating cost of SAA in American Dollars as opposed to cost in Rands. With regards to SAA Voyager, clarity should be provided on the booking system and seat allocations for SAA, and what percentage of seats had been reserved for voyager members.

Mr Else replied that in terms of the operating costs, he would provide a written report on both situations.

Mr Ngqula responded that there was a problem with the booking systems, and it should be noted that there were a high number of ‘no shows’ when it came to the allocation of seats. It should also be noted that there was a certain percentage of seats that were allocated to voyager members.

Dr van Dyk asked for a report on the voyager numbers.

Mr Hendrikse asked SAA to elaborate on the reason for the absence of figures for Mango in the SAA annual report, and also sought further clarity on the SAA technical services.

The Chairperson asked for a written report on the status of Mango

Mr Ngqula replied that technical staff had been retained due to the fact that SAA would now be providing technical services to Kulula.com

Mr Kholwane asked whether any measures that had been put in place with regard to the pending cases of staff misconduct, and why there was no report on the matter or on any disciplinary cases.

Mr Ngqula responded that there were cases that had been taking place, however a number of cases had stood over from the previous years.

Concluding remarks by Chairperson
The Chairperson stated that SAA should provide a written report on the number of cases, and how many were still pending. SAA had been required to hand in a number of reports to the Committee. All reports should be handed to the Committee Secretary within three weeks. If the reports were not handed in on time, SAA should provide an explanation for the delay. If SAA failed to provide a written explanations at all, it would be “subpoenaed” to appear before the Committee at a later date.

The meeting was adjourned.