Report of the Portfolio Committee on Public Enterprises on a Special Meeting with Representatives from South African Airways (SAA) on 4 June 2008, dated 19 August 2008.

The Portfolio Committee on Public Enterprises, having conducted a special meeting with representatives from South African Airways (SAA) on 4 June 2008, reports as follows:

Following certain outstanding matters pertaining to the ongoing restructuring process at SAA, the representatives of SAA pledged to revert to the Portfolio Committee on Public Enterprises (Portfolio Committee) during hearings on their annual reports in 2007. Accordingly this report should be read together with the report of the Portfolio Committee on Public Enterprises on the occasion of the presentation of the Annual Report of SAA 2007.

Due to complaints received from the disabled community regarding boarding procedures for some disabled passengers the Committee requested SAA to address these concerns as well.

SAA was represented by Ms Vera Kriel - Head of Department: Strategy, Mr Chris Smyth - General Manager: Operations and Mr Bhabhalazi Bulunga - General Manager: Human Resources.

Presentation on Corporate Strategy and Business Planning - Ms V Kriel

By way of background to the restructuring process, Ms Kriel stated that by January 2007 SAA had experienced significant losses and was forecasting further losses going forward. SAA accordingly needed to implement a focused strategy, articulated by the motto: “simplify, rightsize, re-skill and incentivise”.

The restructuring plan was approved by the SAA Board in May 2007, and publicly launched on 4 June 2007. It envisages the airline returning to profitability by March 2009. Ms Kriel gave a broad outline of the restructuring plan which identified three categories of initiatives i.e. global, revenue and departmental – and elaborated on each of the initiatives.

1. Global Initiatives are composed of:

· the 747 grounding,

· Head Quarters management staff reduction,

· Obtaining Labour concessions,

· Operational performance improvements,

· Strategic Air-partner relations.

2. Revenue Initiatives are composed of:

· Point-of-Sale Share gap,

· Pricing actions.

3. Departmental Initiatives are composed of:

· Cost reduction,

· Removal of duplication of functions,

· Reviewing contracts

· Accountability.

These initiatives were aimed at achieving most of the R 2.7 Billion turnaround.

Ms Kriel indicated that the restructuring plan was on track, but SAA faced massive challenges with soaring oil prices and exchange rate volatility. SAA’s operational performance had improved significantly over the past year, but once-off restructuring costs would push the airline into the red for 2007/08. SAA had embarked on a process to re-engineer the business to improve efficiencies and keep costs low. The process of unbundling SAA and establishing seven stand alone entities was under way. SAA had expanded the restructuring programme from pure cost and revenue initiatives to a customer service improvement programme – this began in April 2008.

Presentation on Labour – Mr B Bulunga

Mr Bulunga stated that the re-negotiation of conditions of employment was identified as a crucial element in the sustainable turnaround of the company. The aim was and still is to standardise and simplify conditions of employment for all – management, pilots, cabin crew and ground staff. SAA had been in negotiations with all of the 6 recognised unions. Mr Bulunga gave the Committee an update on the wage negotiations with ground staff, cabin crew and pilots.

Challenges faced included the following:

· Time constraints – stringent timeframes compromised process and

quality.

· Crisis mode – shortchanged thought out process by constant reality

checks, which in some cases compromised the implementation

process.

· Imbalance between skills and loyalty – your most loyal employees are

not always your most skilled.

· SAA Technical wage negotiations were due in September 2008.

· Turnover – Increase in staff turnover caused further instability.

The Committee received a summary of all exits per job category where the majority of resignations occurred for the period 1 April 2007 to 31 March 2008. Of the 1992 employees that left SAA, 963 were voluntary severance packages (VSPs). The job losses per job category can be summarized as follows:

Position	Total
Cabin Crew	516
Flight Deck Crew	76
Ground Staff	2
Ground Staff – Airport	294
Ground Staff – Cargo	101
Ground Staff – Corporate	376
Management	235
Technicians	240
Technical (other i.e. admin)	152
Grand Total	1992

SAA has signed 3-year wage agreements with employees providing long term sustainability. Management stability was achieved through implementation of a retention policy.

Presentation on Operations (concerns relating to boarding of disabled passengers) – Mr C Smyth

Mr Smyth gave the Committee some background on the ground handling licences tendered for all of its airports which was awarded in July 2007 to two new handlers, Menzies Aviation and Bidair Services. Neither was willing to or capable of handling SAA at the commencement of the licence on 1 March 2008 and it was decided to award a 3^rd licence in 2008. It was further agreed to let SAA make temporary arrangements until then. SAA entered into negotiations with its handler Equity Aviation to extend its licence for 6 months but by Dec 2007 had not been able to agree terms with them. SAA went to its alternative option and closed a 7 month agreement with Swissport SA to take over from 1 Feb 2008.

Swissport was then contracted to supply Passenger Assistance Units (PAUs) with the understanding that it would take up to 6 months to procure and commission them. SAA again attempted to negotiate an extension of Equity’s contract, this time only for PAUs. Due to the late decision to switch to Swissport (2 months before hand over) SAA was short of equipment on all fronts, including PAUs. Despite needing 9 PAU’s across the country Swissport only had 3 of which only 2 were in reasonable condition. Swissport immediately placed orders for 7 more PAUs for delivery ranging from early April to end July. SAA negotiated with both Bidair and Menzies for use of all of their equipment including PAUs. Both handlers were extremely helpful. SAA was able to secure B737 PAUs at the coast which could not reach A319s. SAA eventually sourced a correctly sized PAU for Durban and built a ramp for the undersized PAU in Port Elizabeth

Mr Smyth mentioned they were still unable to handle passengers with disabilities in accordance with acceptable norms. ACSA called a crisis meeting of all handlers, airlines and the two main disabled community representative bodies (QASA and NCPPDSA) on 11 March 2008.

The immediate action agreed upon included the following:

· PAUs had to be equipped with towels and water.

· SAA would advise ACSA of flights with passengers needing PAUs to ensure these aircraft were allocated air bridges.

· The 3 ground handlers Swissport, BidAir and Menzies would co-operate and assist each other with PAUs.

· PAUs would be regularly inspected for minimum equipment (slipper chair, seatbelts, foot-rests, air-conditioning and interiors)

· Old and dilapidated PAUs would be repaired and used but only until the new units arrived from abroad.

· Swissport staff, under the guidance and leadership of the Disability Sector, would be trained in various codes and the correct handling of passengers with disabilities.

Mr Smyth also listed the subsequent progress and future plans. Two new PAUs were commissioned. More slipper chairs were ordered according to specifications received from the QASA. All PAUs were inspected daily and provisioned as agreed. Old PAUs have been refurbished. The SA Disabled Alliance was asked to set up training appropriate treatment of passengers with disabilities.

Engagement with SAA

Members of the Committee engaged at length with the submissions during which concerns were raised regarding the seemingly never ending restructuring process at SAA. Particularly those members, who have been attached to the Portfolio Committee for many years, felt that there were a string of initiatives that never seemed to bear fruit. Members were also concerned at the lack of appropriate levels of service at OR Tambo Airport in particular where passengers standing in long queues often missed their flights due to the lack of management or apparent lack of interest by staff. A recent experience by the Committee with a member of the staff at SAA during a committee visit was alluded to, with the suggestion that some staff seemed to lack basic “people skills”.

Issues were raised to which no immediate responses were able to be provided and the Portfolio Committee requested that these be relayed in writing. The following is a list of those questions posed by Members of the Committee and the responses received from SAA:

Question 1:

Information pertaining to the composition of South African Airways Technical (SAAT's) board and members' attendance.

Answer 1:

The SAAT Board consists of the following Board Members Khaya Ngqula, Billy Modise and Jan Blake. According to the Company Secretary’s Office, two recorded meetings took place for the year starting January 2008, on 14 February 2008 and 19 May 2008. At the said meetings the following members were present:

• February 2008 - Khaya Ngqula, Jan Blake, Billy Modise. At this meeting Jan Blake resigned and Clive Else was appointed as Director.
• May 2008 - Khaya Ngqula, Billy Modise and Clive Else.

Question 2:

Confirmation from CEO of SAAT that safety is not compromised based on supplier negotiations for lower prices of parts.

Answer 2:

SAT has always had a very strict policy regarding the procurement of Aircraft related parts/components and repair services. The procurement of these pars/components is from only reputable FAA (American Regulatory Authority} and EASA (European Regulatory Authority) approved Companies with years of experience in providing the said parts and services where the majority of the parts/components are supplied by the Original Equipment Manufacturer (OEM).

Prior to the SAA Group restructuring process, SAT identified opportunities to renegotiate better contract pricing by selecting a Single Source Service Provider rather than the dual/multiple source service providers currently being used.

The new contracts provide savings in terms of better pricing due to use of a single supplier rather than several, the longer term over which the supplier's overhead cost can be spread, guaranteed Turn Around Time, better warranties and reciprocal work opportunities for SAT (which is where the service provider commits on send outsourced work opportunities to SAT as part of this contract).

Notwithstanding price reductions negotiated, the new contracts prohibit the suppliers from providing substandard parts/components, but rather specify that the Supplier can only make use of Original Equipment Manufacturer parts and/or FAA/EASA approved parts.

Furthermore, in order to become an aircraft component/parts/service provider to SAT, all vendors' credentials are double checked by SAT's Quality Assurance Department before they are approved and loaded on the SAP system as an approved Supplier.

Whenever a part/component is procured it will undergo an incoming inspection, whereby the necessary FAA/EASA release label is inspected. If there is any doubt as to the quality of the part, its origin, traceability or authenticity of the paperwork, the component is placed in quarantine and returned to the Vendor if the matter could not be resolved.

It is also important to note that as part of the FAA/EASA regulatory requirements, SAT must have traceability for all parts/component, whether they are serialised, rotable components or expendable components. Serialised components must be tracked and a record must be kept of all maintenance work that had been performed on the unit throughout its life.

In conclusion, SAT does not procure, use or support the use of bogus, grey market, pirate, untraceable or unauthorised parts and will not support any savings initiative which might affect the quality and safety of its customers' aircraft.

Question 3

What amount of baggage claims have we paid out last year (2007)?

Answer 3:

Question 4

A written explanation of what the Retention Premium is, who benefited by it and the criteria applied in respect of allocation.

Answer 4

The purposes of the retention premiums are to ensure long term stability within SAA in order to deliver or restructuring initiatives as proposed to DPE. The retention premiums are applicable to all levels of management payable over a maximum period of three years. 127 Managers entered into a contract with SAA. For the purpose eligibility to this scheme, the following profiles of managers were identified as potential candidates:

• Top performers / High Flyers (Consistent superior performers)

Shows great deal of competency, performs consistently and exceptionally and further fits the organization cult SAA. These categories of employees are regarded as high flyers by management/leadership based on displayed expertise and skills over time.

• Unique expertise/experience

These skills are classified as unique due to new technology and/ or experience not easily found in the Company, the market or that is unique to the airline industry. Should these skilled employees desert the Company, business will be adversely affected.

• Staff with critical skills

Those skills, which are categorized as crucial

• Staff with scarce skills

These skills are classified as scarce based on the market demand and supply factors. These skills are important for the restructuring phase based on the current and/or future work requirements.

For the FY 2007/2008 an amount of R4, 544,340.70 were paid. For the FY 2008/2009 to date an amount R9, 075,608.84 were paid.

It should be noted that if a manager resigns from SAA all monies already paid will be paid back to SAA.

Question 5:

A written breakdown of the years of experience of pilots, technicians and ground staff

Answer 5: Pilots:

Question 6:

More detail on the vacancies at year-end

Answer 6:

Question 7

Which routes have been closed and opened the last 5 years and the reasons for that?

Answer 7:

These are the routes closed in the past 5 years.

International

Atlanta - as part to joining the STAR Alliance SAA needed better feeder traffic from the STAR partners out of the hubs that they serve. Atlanta is a Delta hub.

Paris - Pans was making approximately R200m loss per year. With the grounding of the B747 as part of the restructuring process, the aircraft was moved to the London route that has better profitability Zurich - Zurich was making losses especially when the joint venture proved not to be beneficial to SAA.

As part of the mandate received from government that SAA should operate profitable routes, the following regional and domestic routes were also not profitable and therefore closed: Kigali (Rwanda). Zanzibar, Johannesburg - George, Port Elizabeth- East London.

The following routes were launched in the past 5 years.

Munich - based on a business case for profitability. Showed profits in shorter timeframe than anticipated in the business case

Washington - As part of joining the STAR Alliance - Atlanta (a Delta hub) was closed and Washington (United hub) opened

Cape town- Frankfurt - to accommodate seasonal traffic during the summer months

Libreville (Gabon) - business case show profitability

Livingston - business case show profitable route

Zanzibar - as part of the Air Tanzania deal. This has proved to be not beneficial to SAA and therefore closed the route

Question 8

When will the 2010 plan be completed and the committee wants to be notified when this has been submitted to DOT as per 2010 project plan as they would like to also be briefed.

Answer 8

The plan was now submitted to DOT 9) 06/2008 and SAA can brief the committee when convenient to the committee.

Question 9

A list of all the corporate initiatives over the past four years, with an indication of successes, failures and the measures it took to address the failures and challenges.

Answer 9

Before the restructuring, which was the first fundamental turnaround plan in SAA history the following corporate initiatives to bring about change in the organization were embarked upon:

1. Bambanani campaign was launched in November 2004. This programme identified cost-cutting measures across the company. At end of March 2006 approximately R600m was realized, although 25% under target.
2. Bambanani 2 was launched on 12 May 2006 following the confirmation of specific initiatives proposed by the SAA Leadership Team to close this 25% gap Although the projects were completed the monetary value was
   not reflected in the f mandate.

The biggest lesson learned during these 2 corporate projects was that the projects can not be measured separately from the financials and credit for completion can only be given if these savings are reflected in the income statement specifically. This lesson was taken into the restructuring programme embarked upon in 2007 and strong monitoring and evaluation and auditing was introduced to confirm claimed savings. This resulted in almost R1b confirmed and audited savings from the restructuring that was reflected in the financial statements for 07/08.

Other lessons learned and incorporated into the restructuring programme were personal accountability for leadership worked into performance contracts, transparency, constant {weekly, monthly) monitoring and feedback to the organization and other stakeholders and lastly to bring the staff and unions on board from day 1.

Conclusion

The Portfolio Committee notes the written responses to questions posed and undertake to continue its discussions with SAA when next it engages with SAA.

Report to be considered.