/ 12 October 2012

New SAA boss faces bumpy ride

SAA's new executive chairperson
SAA's new executive chairperson

Bumped up to executive chairperson after South African Airways chief executive Siza Mzimela quit on Monday, Vuyisile Kona, like many of his predecessors, has an in-tray from hell.

It has been widely reported that the airline will post a loss of R1.25-billion this year. To ensure the government's R5-billion loan guarantee, Kona must deliver yet another turnaround plan to its shareholder, the department of public enterprises, as well as the treasury. This will require monthly reports to both departments.

The expected loss follows on from last year's nearly R23-billion in ­revenue and R782-million in profits.

But aside from sourcing much- needed capital and squeezing cost efficiencies from a state-owned entity, Kona has to set about repairing the apparent strained relationship between the department of public enterprises' aviation unit and the airline's management.

The exit of the chief executive, two senior managers and most of the board under chairperson Cheryl Carolus has led to allegations that leaders are jumping the plummeting airline. This is countered by continued assertions by previous board members that the government failed to give adequate support to the company and its management.

Leadership squabbles aside, the airline's performance cannot be isolated from the difficult and generally depressed global economic environment and rising fuel costs.

Further bailouts
There are, however, long-standing internal legacy issues with which  Kona will have to deal that could go some way towards preventing further bailouts from taxpayers.

There remains, particularly at middle and upper management levels, a good deal of "fat built into the system", as one trade union source, who did not want to be named, put it.

This includes generous leave packages negotiated over a number of years for staff such as pilots, who require licences. And this would be a very difficult egg to "unscramble", the source noted. Although it is understood that SAA ­salaries are not exorbitantly above industry standards, allowances for items such as accommodation and food are generous.

Given the airline's status as a state- owned enterprise, sweeping changes on staffing policies are a particularly sensitive issue.

Kona will also have to replace the chief executive and her exiting managers – commercial general manager Theunis Potgieter and Sandra Coetzee, general manager for legal risk and compliance.

The rising fuel bill, which last year cost the airline well in excess of R6-billion, is said to be a large factor in the company's expected losses.

Carolus flagged the problem as early as February as a threat to the company's performance.

But SAA's location as what is termed an "end of hemisphere" carrier makes it particularly vulnerable to increases in fuel, because it has to fly that much further to reach most regions. This is in stark contrast to state-owned competitors such as those in the Gulf region that occupy middle-hemisphere status.

With the increase in fuel costs, SAA has to purchase more fuel-efficient aircraft. In the conditions the governnment has set out for the new board, the turnaround plan must include a financing strategy for its planned purchase of a short- and long-haul fleet.

The routes the airline flies add complexity to the question of costs. It seems that strategic decisions on the viability of routes that carry consistent losses do not come rapidly enough.

This particular issue addresses one of perhaps the most joyless tasks Kona has ahead of him – patching up existing and forging new relationships between the department of public enterprises, the new board and the remaining management.

Russell Loubser, former chief executive of the JSE, told SAfm's Market Update with Moneyweb that the aviation unit at public enterprises was a major factor in the strained relationship. The unit is tasked with overseeing SAA and its subsidiary Mango, as well as the domestic and regional ­carrier SA Express.

Loubser argued that even the guarantee from the government was unlikely to be sufficient to help the technically insolvent company.

Turbulence of a temporary nature
Its woes could not come as a surprise to the unit, he noted, because it met with management on a monthly basis and it should have been obvious that SAA needed every possible support. Ministry spokesperson Mayihlome Tshwete questioned these assertions, saying Loubser had served a full term on the board and had had ample opportunity to raise his concerns.

The airline gave assurances earlier this week that, despite the upheaval, it viewed the resignations as "turbulence of a temporary nature, which must not be allowed to affect its ability to discharge its core function in a responsible and prudent manner".

The controversy surrounding his own appointment notwithstanding, Kona has the backing of Public Enterprises Minister Malusi Gigaba.

That backing is going to be needed because the outlook for the airline is unlikely to improve. Already there are rumblings of the limited fiscal space the government has available in the run-up to the treasury's medium-term budget policy statement. The airline has to compete with private sector players for profits and juggle a host of competing economic and political priorities to continue getting government support.