SAA’s long-term turnaround strategy

Sep 10, 2013

Address by South Africa’s Minister of Public Enterprises, Mr Malusi Gigaba, MP, during the briefing to the Public Enterprises Portfolio Committee on the SAA Long-Term Turnaround Strategy (LTTS) in the National Assembly, Cape Town, on 10 September, 2013.

INTRODUCTION: It is my privilege today to address this august meeting on a matter so important that you have patiently waited for so long.  I wish to thank you all for your patience while we worked on this and the day has come that we should table it before you.  I hope you all understand not only the gravity of the situation we are here to deal with, but also its sensitivity as well as its urgency.

My Department, together with the Board, the management and staff of SAA, have worked tirelessly to produce this outcome that we are honoured and proud today to present before you.  What gives me even greater pleasure is that we chose the Portfolio Committee, and therefore Parliament itself, for the platform of releasing this strategy to the public, which demonstrates both our deep respect for this institution as well as our gratitude for the persistent support we have received both from the Portfolio Committee and the two Houses of Parliament over time.

On that note, and before we get into the substances of the matter, please allow me officially to introduce the new CEO of the SAA, Mr Monwabisi Kalawe, who has been at the helm of the company for just a little over two months.  It is a job that has led him to grow a few grey hairs, we imagine.

BACKGROUND:  You will all remember that last year, the SAA AGM was postponed three times whilst we were discussing with the Minister of Finance and the National Treasury about their request for a guarantee.  As you now know, those events precipitated many things, including the resignation of the previous Board of Directors and the awarding of a stringent Government guarantee to SAA.  In a way, this Board that is here today to present this Long-Term Turnaround Strategy was appointed amidst a storm and expected to ride and tame a tiger.  This, in any possible way, was an unenviable situation, accompanied as it was, soon by the resignation of the then CEO.

As soon as they were appointed, I gave them a very clear mandate.  At the Special General Meeting of the new Board on the 15 October, 2012, I made the following remarks to them, that:  “The new Board has been appointed primarily to turn the airline around to a position of financial independence and operational efficiency. This requires a long-term vision and strategy to become a competitive and well-run airline, with clear plans and targets for the future, including on such issues as fleet procurement. It is pivotal that the airline be immediately stabilised!  In collaboration with the Government Shareholder, the SAA management and Board are to review the airline’s business model, structure and strategy, which, as we have stated above, would be included in the envisaged long-term turnaround strategy to be drafted in collaboration with all stakeholders.”

I proceeded to direct that:  “The strategy should highlight the conditions required for an improved and profitable operating model with efficiencies of scale – that is, proposed route network – as well as the strategic importance of the proposed route network to achieve the Government’s objectives. The following should be included:

a)  An aircraft optimisation model for the current fleet programme and replacement fleet programme which is in line with the route network and long-term strategy;

b)  An assessment of the of the state’s aviation assets, including SAA and SAX in relation to Airlink, and the most appropriate structure to advance the state’s objectives in the airline industry;

c)  The development of a cost-management and revenue-enhancing framework on the proposed route network plan and operations; and

d)  The incorporation of the Department of Public Enterprises’ African Aviation Strategy as part of the long-term strategy.”

Furthermore, I said to the new Board that:  “Core to the mandate of the Board would be to provide a stable platform for future growth and sustainability with a focus on reversing recent trends and challenges. The constant request for financial support has placed both the airline and Shareholder in a negative light and a view towards self-funding growth should be a prime focus. I must assure you that the Shareholder continues to be cognisant of the fact that the aviation sector is a capital-intensive industry characterised by low margins and high risks.

“However it is paramount that SAA, in the financial year ahead, be able to deliver on its mandate and strategic objectives and be driven and operated on clear and transparent financial principles that would lead to commercial sustainability.”

Accordingly, and pursuant to my directives, following a rigorous and inclusive process that included staff, management and executive leadership of the airline, the Long-Term Turnaround Strategy was finalized and presented to me on 2 April, 2013.  As I had directed, a Task Team comprising SAA, South African Express (SAX) as well as the Department of Public Enterprises (DPE) was established, under the leadership of a special SAA   Board Sub-Committee, to draft this strategy.

The process included consideration and revalidation of the work that had been commissioned by the previous SAA Boards, management and third party strategy advisors, including the work that had been commissioned by the DPE to Mott MacDonald and Spectrum Capital that had produced for us a business overview of SAA.  The Strategy sought and gained insights into best-practise learnings from leading and successful airlines around the world whilst its projected financial outcomes have been modeled with the assistance of resources provided by Price Waterhouse Cooper.

In terms of strategic posture, the LTTS focuses on the best-fit business model intended to finance the balance sheet.  Whilst it recognizes the intensifying nature of the competitive landscape, domestically, regionally and globally, it places emphasis on managing SAA’s high-cost structure and on improving yield.

The main focus will be on the most profitable areas of the network, domestic South Africa and regional Africa.  SAA and the DPE are both mindful that there is a strategic need to focus on finalising and approving of the network strategy which will invariably have a direct financial impact on SAA.  There is no luxury to fail in the implementation of this Strategy. SAA will improve operations and strengthen its balance sheet to the point that the airline is able adequately to leverage off its balance sheet without the stringent conditions imposed by lenders due to a weak financial position.

Our collective focus right now is to ensure that the strategy is fully implemented.   We have developed an action plan that clarifies roles and duties for the different components of the LTTS. We will focus, both on hardware, as well as heart-ware, to ensure successful implementation.  Beyond the development of this Strategy, its steadfast implementation is crucial and will be aligned to four corporate plans spanning over a period of 12 years with clear milestones.  The DPE will also strengthen its monitoring and oversight role to ensure the implementation of this Strategy.  The LTTS will now form part of the Shareholder’s compact.

To this end, the DPE has started negotiations for the 2014/15 Shareholder Compact on the basis of the Strategy propositions and we have also established quarterly bilateral engagements between the Director General and Chief Executive of the SAA Group to review progress regarding the implementation of the Strategy.  Whilst we recognise that the LTTS is a living document, we want to say, without any ambiguity, that the LTTS will form the bedrock against which SAA’s success will be judged for future generations and it’s a litmus test for the role of the developmental state in the economy.

SAA will not only be judged on its ability to chart a strategic way forward but will also be judged concretely, on its ability to bring programmatic and institutional expression to the LTTS.  That is how it will live beyond the words and ideas on the pages that have been conceptualised.

STRATEGIC Propositions of the Strategy: The analysis of SAA’s business and performance history explains why its business model continues to produce poor financial results and erode Shareholder value.  The LTTS proceeds from the premise that SAA has a dual mandate, to fulfil both the commercial as well as developmental mandate of this Government.

The market analysis revealed, obviously, that SAA and its subsidiaries all operate in highly competitive global markets, which are rapidly liberalising and consolidating, resulting in growing levels of competition.  This assisted SAA to identify specific opportunities involved in transitioning into a commercially sustainable model:

To instil a new collective Group Vision and Mission with the strategic focus being to support South Africa’s National Developmental Agenda, achieve and maintain commercial sustainability, and foster performance excellent. The new vision and mission seeks to guide the airline in the delivery of its Shareholder’s Mandate as South Africa’s national strategic asset which supports the country’s National Development Plan.

The role of SAA ought to be aligned to the proposed new vision of the airline. The overall contribution of the entity to the economy needs to be measured and forecasted to ascertain the total impact the entity has on the economy. The Government is required to focus and highlight its expectations of SAA. This will be done through the Shareholder’s Strategic Intent Statement.

The creation of an Integrated Airline Group (SAA Group Holdings) where SAA, Mango and SA Express (SAX) operate as part of one holding company structure in order the better and more effectively to utilise our assets and improve the overall efficiency of operations and the capital allocated to the airlines.

Implementation of a new Network, Alliance and Fleet Strategy for the deployment of:

  • SAA as a full service world-class premium carrier
  • Mango as Africa’s leading world-class low-cost carrier
  • SAX as Africa’s world-class regional feeder airline. In this regard, we are soon to engage with the SAX Turnaround Strategy.

A focus on the above objectives for each respective airline will allow the Group to match current and projected future demand; the production of capacity through alliance relationships; and an integrated fleet planning methodology.  SAA has already embarked on a fleet replacement programme for its narrow-bodied fleet.

The development of a “Whole of State Aviation Framework.”  This would ensure a consolidated policy approach to aviation in South Africa. SAA’s largest and/or fastest growing competitors such as the United Arab Emirates, Ethiopia and Kenya operate their airlines under a holistic state aviation policy framework. In those states, policy around airlines, airports, visa requirements, purchase of capital assets (aircraft), traffic rights for foreign airlines and others are all co-ordinated to maximize the growth potential of their local airlines to achieve their mandates. South Africa and SAA would benefit from a similar approach.

Immediate roll-out of new human capital development interventions; and immediate and on-going implementation of new business infrastructure interventions.  We will work together with SAA’s leadership to ensure that we build the prerequisite capabilities for driving projects, whilst honouring the everyday commitments to fly ordinary South Africans.  The Department of Public Enterprises, as the Shareholder Ministry, will ensure that SAA achieves the critical milestones of the LTTS.

We make the firm commitment that SAA will achieve what it can within the ambit of its own competencies.  It will build implementation capacities.  It will move from a diagnostic paradigm to a ‘learning-by-doing’ paradigm: moving steadily towards action.  In our bid to support the LTTS, as the Shareholder Ministry, we have intervened on several occasions, as part of my shareholder prerogative, including the following:

  • At a strategic level, we have had significant engagements with Treasury in an attempt to secure the prerequisite funding necessary to ensure the airline is a Going-Concern, which engagements are set to continue; an
  • I have had several engagements with both the SAA Chairperson and CEO to reiterate my concerns and expectations and the need for an active approach from the Board.

The DPE will continue to facilitate a series of inter-Departmental engagements to try resolving some of the major policy concerns facing SAA currently.  The DPE has already started with research for the development of a Fly South Africa Policy / Act, as proposed by the Strategy, which is similar to the one adopted by the United States of America, that is, the Fly America Act, which compels Government officials to fly with airlines owned by their state where Government is funding the travel.

The proposed development or implementation of a Fly SA Regulatory Framework would be fruitless if SAA continues to have a bad customer service record.  This means that the airline needs to be comprehensive in terms of the market segments that the airline caters for in their product.  SAA has requested assistance in finalising its decisions on key routes such as Mumbai and Beijing as these proposals were made purely on the basis of economic principles while they may also have far-reaching diplomatic implications especially given the strategic objectives of the BRICS countries.

In deliberations with various stakeholders on the route network, it was recommended that SAA should be mindful of short-term responses to current challenges which may have long-term implications.  It has been proposed that Government should identify all strategic routes irrespective of whether they are profitable or not, and we should develop strategies to address those that are strategic but not profitable.  We will explore alternative priority initiatives in order to support these strategic interventions.

We continue to learn from what other players in other geographies are doing to respond to the dynamic market forces.  We are confident that there are best examples of players, both regionally and domestically, who have found themselves in the same situation.  We are confident that a turn-around is within our reach: it is palatable, it is plausible. It can be done.

FUNDING REQUIREMENTS:  Capitalisation requirements are being reviewed further and developed in conjunction with the National Treasury.  In the short-term, SAA needs to focus on cost containment and improvement in the company’s debt-to-equity ratio.  It should improve its operations and strengthen its balance sheet to a point where the airline is able adequately to leverage off its balance sheet without the stringent conditions imposed by lenders due to a weak financial position.   This would entail reducing the high levels of debt and building the airline’s asset base in a sustainable manner.

CONCLUSION:  The strategy has been submitted as I had requested; what is of crucial importance now is its implementation to ensure that the airline returns to profitability.  The tactics that will be applied and the agility of the business model are critical in ensuring that the airline is able to react positively to changes in its environment.  The Department will continue to track the progress of the implementation of the strategy and to provide the necessary support required in the implementation phase of the strategy.

The LTTS has since been sent to Cabinet, which gave it a boisterous support.  The Cabinet continues to show confidence in our ability, both as the Shareholder Department, working with other Departments, as well as SAA, to turn things around.  Honourable Members must note that the airline’s governance structures are stable, its management is stable and its operations solid.

Even as financial challenges persist, and we are working around the clock to contain them, this Strategy provides us a roadmap into the future.  We now know where we are going, both in the short-term as well as in the medium-to-long-term.  We understand that change takes time. We must give the LTTS the time it requires to yield the desired fruits.  However, we will continue to ask the difficult questions, to engage actively, constructively and robustly, even when the airline has turned around.   We believe that the Board has the prerequisite abilities to change the momentum.  It is incumbent upon us to implement this strategy with speed and unyielding resolve.  Failure is not an option.  I thank you.

South African Airways CEO, Monwabisi Kalawe (left) and (right) Malusi Gigaba, South Africa’s Minister of Public Enterprises.