New Board Comes up with a Strategy to Arrest Decline of South African Airways

The South African Airways (SAA) has in recent times been granted multiple government bailouts, one after the other, and is currently owing a consortium of lenders part of the R9.2 billion projected in its debt portfolio. The blame for this problem has been attributed squarely to maladministration, lack of effective internal audit instruments, ineffective governance and porous supply chain management processes. After the inauguration of Mr Cyril Ramaphosa as our new President, sweeping changes took place at SAA to restore our country’s credibility that the airline leverages. A new board and executive team have taken the reigns and they seem to have their fingers on the pulse of all the wrongs at SAA.

Presenting their progress report to the Standing Committee on Appropriations, the new Chairperson of the SAA board, Mr Johannes Magwaza, stated frankly that they inherited a company that had no effective culture of productivity. We have realised that while it will help the cause of the new strategy to make funds available to us, it is the culture of an organisation that determines its future success.

Its new Chief Executive Officer, Mr Vuyani Jarana, reassured the committee that they have devised a new turnaround strategy that would ensure that the airline breaks even in 2021 and becomes a viable commercial entity. This strategy seeks to restructure the operations of SAA and to lure skilled personnel to drive this strategy.

He attributed the inefficiencies at SAA to lack of leadership stability that dates back to 2012. A period which saw an increase in its debt portfolio, he said. When we came in we inherited a history of marginal performance and loss-making. We have conducted our reviews so that we can understand the extent of the challenge we are dealing with and what time it will take to turn it around.

Currently, the market share of SAA has been reduced, but Mango’s market share is growing, he said. This growth is due to an increase in demand for low-cost fights as opposed to full service airline such as SAA.

Despite that, SAA is still a strong brand and has an ability to grow that depends on how its various business cases are rationalised, he said. He said the major challenge though, was that the airline has to deal with its liquidity, which poses cash flow challenges and creates negative equity. We have discussed with our shareholders that one of the short-term plans is to improve our liquidity, generate revenue and be able to deal with our underlying costs. As a result, we have cut our central African route as part our rationalisation. This has yielded huge improvements in that regard, he said.

We now have developed an operational model to ascertain whether the airline is fit for purpose to ensure it does not undertake restructuring every three years, he said. This operational model seeks to look at how we can optimise our leases and procurement processes to claw back economic benefits from our suppliers.

Part of which is the need to balance supply and demand to ensure that its operations make commercial sense in the long run, he said. In this regard, we have taken into consideration the cost of cabin, food, and landing rights against revenue to ensure that the debt hole does not get bigger, but how such rationalisation can increase revenue and yield for our margins.

The current executive seeks to ensure that the airline breaks even, but there are things that are out of their hands that may scupper this resolve. He cited one: The rise in oil prices is something that is out of our hands and can have a negative effect on our current projections.

Above all else, he said, we need to address governance at SAA by responding to governance issue flagged by the Auditor-General if we were to sustain our business case going forward.

In his presentation, he listed the difficulty to attract skilled personnel as one of the potential risks to the current turnaround strategy. Currently, SAA is not an attractive brand. People with secured jobs are reluctant to join us. But the truth is that our success depends on our ability to attract skilled people who will drive our new strategy.

But he remains optimistic that the targets they have set for themselves are achievable.

Members of the committee, Mr Ndabakayise Gcwabaza and Ahmed Shaik-Emam, asked what amount of money would SAA need to be sustainable as a business. The CEO responded: Money has a huge impact in ensuring that our turnaround strategy is meant to make SAA a viable business case. With it we can modernise, optimise our route network, and that takes time. But for SAA to achieve that it needs more than just money. We need to re-engineer the organisation’s culture to ensure that its workforce is competitive and productive. As much as our strategy’s success depends on its optimal funding, that is an aspect that money cannot buy.

Mr Paulsen asked if the current executive has considered listing the entity. The CEO responded that they have not yet considered that, but currently SAA is not a lucrative entity for listing, he said. Even if we were to list it now, it would not attract any potential suitors. There is a long journey that Telkom took before it got listed.

Mr Gcwabaza commended the SAA executive for coming up with a strategy to arrest the decline of SAA. We are pleased with your turnaround strategy. We are now relieved that we have people on board who seem to know what it takes to turn the entity around back to profitability.

The Chairperson of the committee, Ms Yvonne Phosa, confirmed there is need for funding for this current strategy to work. But most of all we appreciate your frankness and the accurate information you have provided us with. As a committee we can only work with what you present us with, she said.

She also proclaimed that the committee would track developments at SAA. We have made that our priority. And that is the commitment we would follow through. Most of all, we depend on you to take SAA out of this problematic stage. As you do your work, ensure that there is good governance at SAA because good governance is critical to the optimal performance, competitiveness, respect and trust to keep the SAA brand flying high. Our contract is to monitor you very closely to ensure that you deliver on your commitments, she said.

Source: Parliament of the Republic of South Africa