/ 5 October 2012

What is causing SAA’s turbulence?


But their resignations take place against a background of a troubled global aviation industry and the need for a R5-billion injection, despite a plan for a more orderly exit by board members.

Their choice to leave at short notice has done little to restore confidence in the national carrier, given the appointment of a new chairperson, Vuyisile Kona, who is not entirely free of controversy.

No wrongdoing was found on the part of Kona or his counterparts, but he headed the board of trustees at Trilinear Empowerment Trust at a time when hundreds of millions of rands in clothing workers' pension money, ultimately under Trilinear's care, vanished. The saga was covered in detail in the Mail & Guardian.

Public Enterprises Minister Malusi Gigaba's spokesperson, Mayihlome Tshwete, said the ministry was satisfied that Kona was not implicated in these matters and had the skills and technical expertise to provide strategic leadership to SAA.

Kona worked for SAA before and he sued the airline after he was reportedly fired under former chief executive Khaya Ngqula.

Kona did not respond to questions regarding this incident or his time at Trilinear, but the Times reported that the dispute had been settled.

The timing of resignations, a cloud of allegations from the board about a lack of state support and the ministry's counter accusations about the failure to deliver on a long-term strategy for the airline indicate trouble at the top. A more orderly exit had been planned because a number of board members were not standing for reappointment. Instead, Gigaba was prematurely forced to reveal his replacements, which the Cabinet had approved on September 19.

One of the new board's tasks is to finalise a major aircraft order before year-end to replace its inefficient long-haul aeroplanes.

On October 2 the treasury announced it would provide a guarantee for a loan facility for SAA of up to R5-billion. The guarantee is on condition that the new board develops a turnaround strategy, which Gigaba and Finance Minister Pravin Gordhan must approve.

According to the public enterprises department, the guarantee's conditions also include providing a financing strategy for its planned purchase of both a short- and a long-haul fleet. It will also require the establishment of a technical committee comprising officials from the treasury and the department, which will be tasked with monitoring SAA's financial position and the implementation of the turnaround strategy.

The R5-billion granted to SAA brings the total of guarantees extended to state-owned enterprises and development finance institutions to R475-billion.

Conditions for airlines everywhere have soured, particularly because of rising fuel costs. According to the International Air Transport Association, jet fuel prices rose to $127 a barrel in June, adding an anticipated $208-billion to the industry's fuel bill.

Aggressive competition
Linden Birns, managing director of aviation consultancy Plane Talking, said fuel costs, especially in African countries, aggressive competition from Gulf carriers, rising user charges and the mandate on the state-owned company to service less populous and profitable routes were among the contributors to a tough trading year for SAA.

High jet fuel prices have been seen in a number of African capitals, said Birns. Many of these are destinations for the national carrier. For example, Angola charges a 200% premium on average jet fuel prices.

User charges such as airport taxes and overflight fees – the price airlines pay to fly across a country's airspace – were also on the rise, he said.

Birns said there was added pressure on SAA to increase productivity and better use its equipment, but to achieve this more cost- and fuel-efficient aeroplanes were needed.

Significant technological advancements in fuel and technical efficiencies over recent years have rendered aircraft bought in the past decade, which SAA has done, outdated and costly.

Unlike many international airlines, SAA has been unable to reduce its staff complement to manage cost pressures because it is a state-owned enterprise. International competitors have been turning to their shareholders to recapitalise and SAA is not unique in this regard.

It is circumstances such as these that are believed to be contributors to the loss SAA is expected to report at its annual general meeting in mid-October.

Unfair advantage
The decision to grant the airline finance was immediately challenged. Democratic Alliance spokesperson on public enterprises Natasha Michael said it "perpetuates the unfair advantage afforded to the national carrier at the expense of private airlines".

Private airlines have consistently cried foul over what the industry sees as the subsidisation of SAA's loss-making domestic services, whereas competitors have been left to sink.

Comair chief executive Erik Venter told Sapa that the airline's latest request for funding for new aeroplanes was a result of SAA and its budget airline, Mango, fighting domestic competitors for market share at the expense of generating sufficient profits for sustainability.

SAA was not like other parastatals such as Transnet, said Venter, because there was a "tax-paying private industry willing to fulfil the Southern African air transport requirements".

The minister has also castigated the board for its failure to provide a long-term strategic vision for the airline, although the former board members clearly see this differently.

The airline gave a presentation on its turnaround strategy to Parliament in May. It said:

  • It was expanding its routes into Africa;
  • It had dealt with a slew of competition suits dating back to 2000 and had set about curbing costs other than fuel, aiming for R1-billion in reductions for 2012-13;
  • It overhauled its sponsorship programme, the questionable management of which was a contributing factor in the termination of Ngqula's term as chief executive; and
  • It was in the process of replacing its fleet of short-haul carriers with more fuel-efficient aeroplanes. It was here that SAA indicated it expected to finalise a major order to replace its inefficient long-haul aircraft.

This is an indication that the company had a sound management team and effective board.

There has been speculation that Gigaba was getting rid of those members former minister Barbara Hogan had appointed, seeking to fill the board with people aligned to his interventionist take on the management of state-owned enterprises.

Tshwete called this "nonsense", saying that their terms were due for review and the minister wanted people with technical capabilities in aviation at the helm.

The new board would have to prove that it could deliver, said Tshwete, and it would be assessed on its performance.