The Honourable Chairperson Mr Y.Carrim, MP
Standing Committee on Finance PO Box 15
CAPE TOWN
8000
Honourable Chairperson,
LETTER: HONOURABLE MEMBER OF DEMOCRATIC ALLIANCE, MR DAVID MAYNIER
Subsequent to the Parliamentary Standing Committee on Finance meeting with SAA on the 20th of September 2016, the Hon David Maynier asked a question as stated below:
QUESTION:“Will the Chairperson, in the light of the preliminary report tabled today, tell us whether:
a). she still believes that it is still in the best interests of the airline that she doesn’t resign, and if she believes that,
b). why does she believe that?”
RESPONSES:
a) It is in the best interest of SAA and Taxpayers that I serve my prescribed full term.
b) As stated previously, as part of their mandate, the South African Cabinet appointed the Board of South African Airways (SAA). I did not appoint myself. The SAA Chairperson therefore serves at the pleasure of the executive arm of the state (Cabinet)
Importantly, SAA’s performance as reported in the financial report, presented to the Parliamentary Standing Committee on Finance on 20 Septembers 2016, cannot be solely attributed to me, as current Chairperson. Objective facts dictate that SAA’s performance it is a historical consequence, underpinned by factors known to all South Africans. Further SAA has never been capitalised and its competitive position was worsened by an American Aviation Expert, who sold the fleet and leased them back.
Such were bad decisions, which continue to haunt the airline, and quite conveniently, they are lumped on my doorstep. We still lease all our fleet from foreign countries and pay in dollars.
In November 2015, the Honourable David Maynier MP, asked the same question during the Parliamentary Standing Committee on Finance hearing at which I appeared on behalf of SAA. The question posed then was “Tell us why you should not resign, (as the Chairperson)
It is concerns one that this question persists without any indication as to the specific part(s) bases for the same relative to the alleged bearing on the performance of SAA in general. I shall therefore attempt to deal with the question from a broad perspective and also share some of historical challenges and achievements to date.
At the outset, it is common cause that it is the prerogative of the shareholder to determine who is best to serve on the Board and my suitability, as a question, is therefore irrelevant. I accept that the Board is accountable for the performance of the company. As the “Accounting Authority”, as prescribed in the PFMA, the Board carries a well enshrined fiduciary responsibility for its own performance and that of the company. Acknowledging this responsibility against my personal prudency, as a leader, I continually reflect on my own performance in respect of SAA’s interest. I have found no sound reason not to continue to serve. As a member of a collective, I believe my contribution has added intrinsic value to the SAA.
My recent reappointment confirms the Shareholder’s confidence in my role as Chairperson. I have nothing but respect for that.
There are many factors that have impaired our financial performance; while some are within our control and others are distinctly out of our control. And they are not dissimilar to what other players in our sector face.
It has been established as an irrefutable fact that an airline is a capital intensive business and SAA is no exception. SAA has, for many years, been under capitalised, something acknowledged by most, including a series of former Boards.
MY RESPONSE IS AS FOLLOWS:
"To rephrase the BMW, Gore, Rodenstock and Royal Australian Navy case studies, no leader can lead an organisation single-handedly. "Rather, leadership is a distributed phenomenon, occurring in various parts of an organisation, just not emanating from the top."
This is the constant about all organisations, nationally and globally. Similarly, the challenges of SAA cannot credibly be attributed to me as a person. Such a view is as bereft of any empirical corporate rationale as it represents a self-perpetuating narrative. Whilst this fact-free theory has no proximity to the objective facts, it has been authored and handed down to the multitudes of unsuspecting citizens, who have unquestioningly assimilated it.
Whilst the status quo of non-transformation has been allowed to linger, owing largely to those who are hanging onto their ill-gotten unearned privilege, for over 22 years into the Constitutional Democracy, at the expense of the national imperatives, my term has sought to shake the R24 billion Procurement Spend benefiting 98% of the minority groups. The disadvantaged South Africans, who happen to be the majority, benefit only 2% of the R24 Billion Rand; this is absurd in any language.
It is a serious concern that we preside over a State Owned Company, which continues to be dominated by one section of the society against the majority who receive crumbs from the R24bn procurement spend. Further, I have taken a dim view of the exclusive benefits enjoyed by the pilots, as have been exposed in the leaks from SAA by those who are not happy with the Board’s moves to correct the situation. None of these glaring issues have received as much as a whimper from some people.
I wonder why it is that certain issues are elevated at the expense of the supremely important issues which have a positive bearing on the envisaged state of nationhood. I am reluctant to state the obvious (that the key issues are being sneezed at owing to the fact that they tinker with the assumed unearned privilege by some).
I would have therefore been a revered Chairperson had I protected the status quo; the media would be hoisting me overheads and standing ovation as the most effective Chairperson while poverty, unemployment and inequality continues to affect those in the majority and many downtrodden. My problem results from doing what is right, investigating losses, dealing with corruption and ensuring that we transform the hugely skewed SAA. I therefore respectfully submit that I will not resign.
What has not been asked is how SAA found itself into this situation and how the Board has navigated to keep the airline afloat
2. Historical constraints
Looking at the history of the SAA in the period 1998 to 2003 in particular, one realises that the decisions taken by erstwhile CEO, management and board, set the tone for the underperformance of the company in the next 18 years.
The 2002/03 performance of the SAA realised billions of rands of earnings achieved through fuel hedging contracts. These earnings could not be attributable to operational performance but were a result of mainly currency and fuel price movements, with speculative hedging as the driver. In the subsequent financial year, having achieved huge earnings, the SAA locked itself further in hedging contracts, some of which lasted for up to
10 years. This saw SAA incurring hedging losses in excess of R5bn as the rand unexpectedly strengthened from around R13 to the US dollar to around R6.00 to the dollar. The Government was therefore compelled to issue guarantees in access of R3 billion to cover SAA’s debts. The SAA’s balance sheet was severely weakened, and as a result Transnet, the former holding company instituted an investigation into the SAA’s hedging activities. This resulted in suspensions and resignations of senior executives including the CFO. The oil hedge losses of 2004 to 2010 are calculated to have amounted to R8 billion. This was under Mr Viljoen, when SAA suffered such losses.
SAA has ever since relied on financial support from the shareholder in the form of government guarantees. Equity and reserves continued to be negatively impacted with the concomitant adverse impact on solvency. Some people suddenly found their loudest voices when they were patently silent when the company was being run down by the “so called” Aviation Experts, who happen to be from America and trusted as they were of colour.
a) Today, SAA has settled a debt, which resulted from decisions made in 2000 - the courts ruled in favour of Nationwide Airline. And I am not there when all the seeds of unprofitability were planted.
b) A portion of SAA was sold to SWISS Air, another poor decision which resulted in a fiasco, which purported to privatise SAA in part, another call for the DA. I was not there.
c) The Pilot Evergreen Contracts, which consume billions from the revenues, represent a hobbling historical decision. I never signed those contracts, yet the DA finds a scapegoat in me for all these things.
2.1 Mismanagement
Around 1998, SAA sought the services of an American, Mr Coleman Andrews, who then assumed the position of leadership of the airline. It is common knowledge that the Andrews’ era was a clear disaster. Corporate governance and sound business decision- making became a challenge and a risk which continue to erode the value of the business. During this period, SAA paid more than R1-billion (in expenditure) without realising any return for it.
There were allegations of nepotism, wasteful expenditure and poor business decisions with regard to the appointment of consultants, Baine Capital, employment of staff, including expatriates, and decision-making based on factors beyond the mandate and business imperatives of the SAA.
The allegations stemmed from, among others, the disclosure that Andrews, a founding member of Bain Capital, had appointed Bain and Company as consultants to SAA, and had not disclosed this relationship with the consulting firm to the board at the time of his appointment. During this period, the consultant Baine Capital, became the largest recipient of consultant payments from SAA, totaling R243 million. In addition, nine expatriates were employed at a cost of R118 million. The expatriates, who formed the core leadership of SAA between 1998 and 2001, at the expense of local and experienced managers, also enjoyed inflated performance bonuses, although there were no auditable performance measures in place.
The majority of appointments of consultants did not comply with the SAA’s tender procedures and PFMA, and no questions about such contraventions. Mr Andrews agreed to pay performance-related fees to the consultants despite the fact that there were no performance measures in place, and also conflicted.
In addition, SAA reported profits of R350-million during the Board and former CEO, Coleman Andrews’ tenure. However, it turned out that this reported profit resulted from aircraft sales and lease backs, which had never been the core business of SAA. If this item (aircraft sales) was removed from the books, the SAA showed a loss for that year. Having been stripped of assets including aircraft, SAA’s balance sheet became weaker over time, since the cash realised from the aircraft sales was used to cover operational costs rather than buy assets.SAA had to later seek funding to buy new aircrafts. At the time, there was no identifiable turnaround strategy to be spoken of, other than the stripping and selling of SAA’s assets. This was not profit, but a pure and simple sale of the most prized assets of the airline. It is in this era that SAA switched from sourcing aircrafts from Airbus to Boeing without a fathomable business case advanced.
Notwithstanding these disastrous decisions, the board gave Coleman Andrews more than R220-million in earnings during his 20-month stay at SAA – a record-breaking feat viewed against a questionable return on investment and decisions which continue to haunt the future of the airline. Over and above that, Coleman Andrews had contracted Baine Capital Consulting to help turn SAA around, without disclosing that he was part of the same company, as a co-founder. He paid the consulting firm over 200m. To be fair, Mr Andrews didn’t make these decisions on his own, but he had the full Board to support him. It appears, some people are allowed to elevate certain issues to serve certain interest with impunity.
If we truly represent the honest interest of this nation, let us ask genuine questions which are informed by the objective issues and circumstances. There are dominant share of voices on SAA issues, but some could be scored zero in relation to the real risks affecting SAA.
The issue here is SAA pays for all its fleet, 65
The performance of SAA in the 2014/15 financial year is inextricably linked to the historical performance of the airline of at least the past 18 years. The past three Boards of Directors and management teams of SAA have continued to be constrained by these historical decisions, whose impact continues to permeate the operations of SAA to date.
2.2 Hedging contracts
SAA continues to face hedging losses as a result of plummeting global oil prices and currency movements. These can hardly be placed at the doorstep of management and the immediate past Board of Directors. The ripple effects of the past fuel hedging decisions coupled with the weak currency continue to impact adversely SAA’s ability to reap the benefits of low oil prices. Fuel remains SAA’s single biggest variable cost and will remain so for some time to come.
3. Current constraints
3.1 Liquidity constraints
In the past financial year, SAA’s ability to raise funding for its operations was severely affected by factors beyond the powers of management and the Board. With a balance sheet that had been severely eroded by past operational and strategic decisions, the SAA could not raise funding. This had, as a result, led to SAA requesting an extension of the guarantee from the shareholder, in itself leading to unjustified views that the SAA was a drain to the fiscus. This was a mistaken belief that SAA received cash transfers from the fiscus; a fallacy willfully peddled by just a few who choose to ignore good efforts.
Going forward, it is envisaged that the turnaround strategy will go a long way in not only stabilizing the SAA, but also propelling it to the path of sustainability. Be that as it may, it is critically important to ensure (as the deputy Minister of Finance intimated) that the current Board be given space to lead the SAA to stability.
3.2 Transformation/ Evergreen contracts
Transformation relating both to procurement of goods and services for SAA and employment equity remain some of the biggest challenges facing the airline today. The powerful vested interests have used every means available to defend and further entrench their positions to the exclusion of the majority of the people. In the process, the Board, and particularly, current, as Chairperson, have been attacked by various forums including the media.
The SAA Pilots’ Association has used every means to resist the attempts to restructure the pilots’ unprecedented evergreen contracts that are a significant drain on the cash-flow of SAA. The pilots are costing the SAA in excess of R600 million per year in excessive guaranteed benefits - constituting a huge chunk of the losses SAA recorded in the financial report table in Parliament on the 20th September 2016. The structure of these agreements is such that even if SAA were to be sold to another shareholder, they(the agreements) would continue to bind the new shareholder.
It is a matter of public record that the SAA Pilot’s Association recently petitioned the courts to stop the Board from slashing their benefits. SAA buys cars for Pilots. Yet again this matter, which threatens the sustainability of SAA, is a non-issue for those who continue to attack the airlines leadership. Why?
4. ACHIEVEMENTS TO DATE
4.1 It is under our tenure that we resolved to commission an investigation into financial losses of SAA. This has been the most successful intervention, as it has unearthed a lot of historical corruption. The extent is that some people decided to resign than face disciplinary hearings and/or being fired as a consequence.
4.2 It is under our tenure, that we resolved to commission an investigation into procurement, where we discovered that many contracts were as old as 1993, they never get advertised, and they continue to be extended without testing the market and also exploring options for transformation.
4.3 We appointed a Black Chief Pilot for the first time in the 82 years of history of the Airline.
4.4 We continue to find ways to grow the airline, albeit all negative media reportage, but we have managed to expand in Africa, we increased frequencies, and added more routes, such as Abudja in Nigeria, and a new Ghana/Washington Route during our tenure.
Route profitability is a key yardstick. Recently we completed a network and fleet review conducted by an international organisation. It is evident that that had SAA been able to introduce new generation aircraft on its international routes these routes would almost immediately turn to profit.
I would also like to make the point that SAA is an incredibly efficient operation. Our flights take off and land on time. Our passengers enjoy our superior service and we lose less baggage today than we regrettably did historically. We are a reliable airline and few would disagree.SAA is revered all over the world and is still the leading Airline on the continent. I urge those members of the society, in particular to refrain from making reckless statements which serve nothing but erode the value for SAA.
Any emerging economy, or developing country without its own National Carrier does not progress well economically and in the tourism space.
I will be the first one to admit that we have some serious challenges. But we have overcome many more, in a number of key areas and this is illustrated by a measureable improvement.
I cannot take credit for these improvements, as an individual, as these results emanate from the efforts of our vision, contribution made by our loyal employees, customer support and suppliers.
This airline is not the product of one or a few people but a collective of various teams working in concert with each other. Ultimately, the South African Government who is the sole shareholder.
SAA is a proud airline. We facilitate the efficient movement of millions of South Africans and foreign visitors. We all share the responsibility to promote its sustainability and this includes all South Africans. When we are attacked unfairly we dent our valuable image and brand.
I am proud and equally humbled to have been entrusted with the responsibility to serve; I don’t take this for granted and, to this end, I will continue to give my best for the duration of my term as Chairperson.
4 Conclusion
As I conclude, I request that the Honourable Member join SAA to root out institutionalized corruption and lack of transformation. SAA has fully subscribed to the OECD and we have rolled out the Anti corruption and bribery compliance workshops into the whole company and its subsidiaries. This is the commitment the Board made and therefore, this should auger well to those who support such actions like our Honourable Member, Mr Maynier, and indeed, we will equally expect support to the Boards Transformation Agenda, to balance the 24 Billion Procurement Spend to benefit poor majority South Africans.
To be signed:
Ms Duduzile Myeni
South African Airways Chairperson
Date: 19 October 2016
