Are SAA’s financial statements worth anything?

File picture: Simphiwe Mbokazi

File picture: Simphiwe Mbokazi

Published Dec 7, 2015


SAA represents in so many ways a microcosm of the bigger South African picture – a majority of loyal and capable employees, just like our citizens, being let down by mostly negligent, incompetent and at times dishonest leadership.

The leadership woes afflicting SAA are not the exclusive preserve of the current executive management, rather, they stem back to the days of apartheid where the monopoly enjoyed by SAA allowed its gross operational inefficiencies to be concealed by high ticket prices.

Logic would dictate that even a relatively short period of poor management is sufficient to bring a company and its brand to its knees, but quite miraculously, the SAA brand, notwithstanding decades of mismanagement, has been preserved due to the unswerving commitment of technical staff, ground crew, cabin attendants and pilots who represent the glue holding brand SAA together.

If the airline industry is one of the hardest industries in which to operate successfully owing to all the uncontrollable extraneous factors, then the additional requirement of profitability necessitates a supremely focused and well-functioning board and top executive management that is suitably qualified, experienced and prepared to raise its collective head above the parapets.

It is little wonder then that SAA, with a history of unsuitable and ill-qualified individuals holding key positions at board and executive level, has been unable to reach operational efficiency and eventual profitability.

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

The elementary concept of profitability requires that revenue must exceed expenditure and on the face of it, the consistent failure by successive SAA leadership regimes seems to point to the inability to either really understand or implement this concept. Instead of grasping the stinging nettles which are close at hand, it is far easier to trot out another “new action plan” as a way of confusing and then placating the various stakeholders.

The most recent iteration is the Long-Term Turnaround Strategy, which is destined to crash land, if only because of its complexity and the inability by SAA management to execute.

Default setting

Adding further confusion to the SAA boardroom flight deck is the popular default setting that the repeated disastrous financial performances of the airline rests exclusively at the door of fuel inefficient long-haul Airbus 340s and that the panacea is the unaffordable capex for a fleet of new fuel-efficient aircraft.

New fuel-efficient aircraft will certainly mitigate losses for a limited period and will, much like the high ticket prices enjoyed by SAA prior to “open skies” paper over the cracks, but the fact remains that new aircraft for SAA are as futile as a schoolboy with a poor batting technique demanding a brand new cricket bat from his father as the solution to scoring runs and getting into the first XI.

Rather than the new cricket bat, Treasury would be well advised to study the revenue and expenses of the SAA income statement and make the necessary and easily manageable changes there. A closer look at the revenue side of SAA would indicate that revenues are deeply “discounted” for the following reasons:

- A travel agents’ commission of up to 8 percent.

- Discounts on fares for large corporate clients and government departments of up to 25 percent.

- Up to 3 percent cost for the Voyager programme.

How could any normal business, let alone one operating in the most challenging airline environment ever hope to be profitable with these sort of hidden costs or discounts which could end up being almost 30 percent off the selling price of the ticket?

The expense side of the SAA income statement raises similar concerns. The 2014 SAA annual financial statement (AFS) shows expenditure at R30 billion comprising R5.5bn in employee salaries and benefits, R11bn in fuel procurement with the balance of R13.5bn comprising other procurement and operating costs. SAA in 2014 had a staff complement of 11 500 employees and when divided into the R5.5bn salaries and benefit bill it equates to R478 000 per employee on an annual basis.

This begs two questions:

- The apartheid era created unnecessary employment in the public sector and this unfortunate legacy has continued into democracy – what is international best practice in the airline industry in terms of employment numbers for an airline the size of SAA?

- Are salaries, especially at the dysfunctional Airways Park “head office”, way above what is market related, given the general sub-optimum performance of many of these employees? Trimming 2 000 employees off the head count would result in a saving of a R1bn a year or more, especially if the focus of that blow torch is applied to Airways Park.

The significant saving on the expenditure side is hidden in the “fat” of the large procurement numbers.

The dishonest manipulation of the procurement process lies at the heart of almost all the corruption found within the government and public entity sectors.

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 now endemic to South Africa.

Within the context of SAA, procurement comprises a material amount of some R24.5bn in the 2014 AFS. The same AFS wax lyrical about sound procurement, compliance with the Public Finance Management Act and other statutes, impressive internal control and a well-functioning internal audit department and it would appear that the external auditors concur.

Yet, the current chairperson of SAA describes a “situation of corruption at the core within SAA” and National Treasury in a recent investigation into a tender confirmed breaches of statute while an external forensic company’s investigation into the same tender describes the situation as “chaotic”.

Quite unbelievably, the chief internal audit executive of SAA, following his own investigation into the same tender, concluded “the tender process was compliant with SAA supply chain management policy” which places serious questions with respect to the competence of SAA’s internal audit.

The SAA chairperson’s admissions regarding corruption point to a scale of abuse within procurement which is so material that it might easily warrant a restating of the 2014 SAA AFS, owing to the fact that there is every risk of a “material misstatement owing to fraud or error” and that the previously unqualified joint external auditors’ opinion should be reviewed.

Properly managed procurement would see between 4 percent and 7 percent be trimmed off the procurement figure of R24.5bn, resulting in further savings of upwards of R1bn a year.

Correction needed

The batting technique of SAA has to be corrected before any capex is foisted on the fiscus, and this can only be done by reviewing and amending the discount structures and commissions of tickets, right sizing employee numbers and ensuring effective procurement.

Comair and Airlink are excellent examples of privately-owned airlines that, notwithstanding all the obstacles placed in their way by government and SAA, have operated profitably over the years and more often than not, with far older and less fuel-efficient aircraft than SAA.

The SAA brand is a national asset that should be treated as such, and it can be run at break-even and eventually achieve profitably by focusing on the basics, which definitely excludes the purchasing of new aircraft.

* Simon Mantell runs the biscuit factory Mantelli’s based in Cape Town.

** The views expressed here do not necessarily reflect those of Independent Media.


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