Opinionista Simon Mantell 23 August 2017

SAA is beyond redemption

Turning SAA around can be likened to trying to push water uphill with a rake.

Like a stuck record, SAA simply delivers more of the same with frequent appointments of new boards and CEOs, revised action plans, fighting talk from finance ministers and consistent reports of financial misadventure, with the latest being the R1.4-billion loss posted in the first quarter of 2017 and the coming liquidity squeeze as a result of R6-billion in loans being due for settlement in September.

The misguided propping up of SAA over the last 15 years to the tune of more than R20-billion is brought into stark relief when one considers that these funds could have built 200,000 RDP houses and that SAA management’s latest request for an additional R13-billion injection over the next three years could finance a further 130,000 houses.

Turning SAA around can be likened to trying to push water uphill with a rake, yet the finance minister, with a mixture of giddy optimism and hubris, prefers to declare that “there is no way we are going to be giving SAA money for free… we are not going to babysit it and treat it like a child or throw money into a bottomless pit.”

Indicative of Finance Minster Malusi Gigaba’s lack of comprehension of the severity of the situation is his praise of SAA executives’ decision to cut their salaries by 5% by describing it as “commendable” when in the real world they would most probably be fired.

The airline industry is one of the most complex businesses to operate profitably owing to extremely tight margins and often uncontrollable extraneous factors, but the fact remains that there are many well managed full service international and local airlines that are profitable.

Respected and capable executive leadership attracts good senior managers and middle managers and, like the rot in the proverbial fish’s head, the stench of poor leadership at SAA over the years has tainted the best efforts and intentions of those committed SAA employees who have jet fuel coursing through their veins.

Under normal circumstances, SAA should not face continual liquidity crises and consistent losses, because a significant proportion of air tickets are paid for well in advance, and fuel, the biggest operational cost for any airline, has been at historic lows over the last three years. The simple answer to SAA’s woes is that the cost for each kilometre flown far exceeds the revenue generated per corresponding kilometre and it would seem that the elementary concept of profitability which requires that revenue exceed expenditure has always been a bridge too far for SAA management.

Newly appointed CEO Vuyani Jarana’s task in avoiding a crash landing can be likened to climbing Everest without oxygen and Sherpas given that it is unlikely that he will be empowered by the political masters to be able to take the necessary decisive action to address the basics of internal control, revenue management and containment of operating costs.

Internal control

Internal control is the system which ensures operational efficiency, reliable financial reporting and compliance with laws and regulations and the safeguarding of assets at the entity. This same system should ensure that procurement at SAA each financial year is correctly managed with the best possible outcome for the company and even Gigaba got it right when he confirmed “that very clear internal controls need to be established”.

In essence, the finance minister is confirming the absence of adequate internal control at SAA.

In 2016, procurement at SAA was R22-billion and if the malfeasance at Eskom is anything to go by, has SAA overpaid for goods and services supplied?

It seems that no one at SAA knows and that procurement was not subjected to very close interrogation as the Report of the Directors’ in the 2016 SAA AFS discloses a minuscule R5-million in irregular spend and a miserly R7-million in fruitless and wasteful expenditure with losses to criminal activity of only R100,000. Perhaps it is all too good to be true, especially when these figures are compared with the findings of the 2015 Ernst & Young forensic investigation into 48 tenders at SAA where 28 tenders failed to pass muster?

The overwhelming evidence suggests a combination of systemic weakness in internal control and the fact that very few of the investigative reports are ever finalised seems to suggest malfeasance on a grand scale and the question has to be asked of whether the veracity of the disclosures with respect to internal control and quantum of wasteful and irregular expenditure by the SAA Board.

Revenue – discounts

A closer look at the revenue side of SAA would indicate that ticket revenues are deeply “discounted” for the following reasons:

  • A travel agents’ commission of up to 8%;
  • Discounts on fares for large corporate clients and government departments of up to 25% with government employees accounting for a very high percentage of SAA passengers;
  • Up to 3% cost for the Voyager programme.

How can any business operating in a most challenging environment with paper thin margins be profitable with hidden costs and discounts comprising 30% off the top line?

Costs – salaries

The 2016 SAA AFS shows operating expenditure of R30-billion with R5.8-billion comprising employee salaries and benefits. The staff complement for the year totalled 10,700 employees and average cost to company per employee is an eye-watering R542,000 per annum.

The salary income statement line item begs two questions:

  • What is international best practice in terms of employment numbers per aircraft so as to measure productivity?
  • Are salaries, especially at what appears to be a dysfunctional Airways Park “head office”, way above what are market related given the general sub-optimum performance?

International best practice on comparable full service airlines in the USA, Europe and Asia report a ratio of between 120 and 140 employees per aircraft and SAA, with about 190 employees per aircraft, is approximately 46% higher than the average.

To be competitive, SAA would be required to retrench 3,000 employees resulting in at least R1.6-billion being trimmed off the annual salary bill. Market-related pay cuts for those who are the easy riders at Airways Park would probably see another R400-million saved annually.

Costs – procurement

The dishonest manipulation of the procurement process lies at the heart of almost all the corruption found within the government and public entity sectors and this is where the real “fat” lies.

It is not about the very necessary preferential procurement giving black business owners a step up into the mainstream economy, but rather about failures of internal control, the failures of internal audit departments, the failures of external auditors and the failure of risk and audit committees and the boards to identify and then address the multitude of issues within procurement leading to corruption which is endemic within South Africa.

In 2015, the current chairperson of SAA described procurement at the carrier as a “situation of corruption at the core within SAA” and it would seem that a hidden premium of at least 10% on all procurement at SAA is not unrealistic and that in all probability, the annual procurement spend at SAA is over-inflated by R2-billion or more.

It must not be forgotten that owing to a benign oil price, SAA is paying R3.5-billion less per year on fuel when compared with 2014 and when the oil price moves against SAA, as it surely will, the current “bailouts” will be small fry when compared with what is to come.

Comair and Airlink are excellent examples of privately-owned airlines which, notwithstanding all the obstacles placed in their way by government and the uncompetitive conduct of SAA, have operated profitably over the years and often with far older and less fuel-efficient aircraft than SAA. They have achieved this with extremely capable executives, good revenue management, sound internal control and cautious procurement.

The focusing on a few basics could see the profitability of SAA and the preservation of what is an iconic brand, but the billion-rand bailout question is whether the new CEO has the stomach to apply the scalpel generously and is hard-nosed enough stand up to political interference.

Given the situation at other dysfunctional state-owned enterprises, the prognosis for success is bleak at best. DM

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