South African Airways predicts a turbulent 2012, with a buildup of external pressure

Dileseng Koetle, SAA’s spokesperson, says the state-owned enterprise (SOE) made a net profit of R782 million in the 2010/2011 financial year – a 77% increase from last year’s R442m, despite the fact that the operating landscape was challenging due to brent crude cost fluctuation.

“In addition, SAA – as with most global airlines – felt the impact of the dip in passenger numbers due to adverse global economic conditions,” she adds.

“The financial performance is an encouraging response to the strategic objective contained in the group strategy of becoming a fully sustainable business over the next three years.

“The focus for the airline over the last financial year included marked enhancement of business efficiencies as well as improved governance and operations,” explains Koetle.

SOEs, with some exceptions, have been plagued by poor decision-making and frequent reliance on the government to bail them out of financial difficulty.

Minister of Public Enterprises Malusi Gigaba is on record saying that his department will exercise a “hands-on, robust” approach to ensure SOEs meet policy standards. “We have to ensure there is alignment between the national interest and commercial interest mandates,” he said.

South Africa has over 400 SOEs but, because they straddle other departments and tiers of government, only nine fall within the ambit of the Department of Public Enterprises.

Manie van Dyk, shadow minister of Public Enterprises for the Democratic Alliance, says the party believes that when public companies compete directly against private companies, there may be the unfortunate situation where taxpayers bail out inefficient operations and may crowd out the private sector. This has happened in previous years, with the bailouts of SAA and the SABC.

Calling for the possible privatisation of SAA, he says the DA believes international experience has shown that other countries were able to privatise their national carrier without jeopardising national pride or the clear national branding of the airline.

Although the national airline is now on steadier ground, its turnaround involved an ongoing legal battle with former chief executive officer Khaya Ngqula, who was accused of misspending sponsorship money during his time at the company. The SAA board went to court in a bid to recover around R30m from him.

Economist Zandile Makhoba of Econometrix agrees that following a change in leadership, SAA has been able to achieve a significant improvement in revenues and operating profits. “The business is expected to expand over the next few months, with its African destinations expected to be increased from the 20 it currently has.

“SAA’s improved financial performance is indicative of an organisation that is operating optimally,” she adds.

Despite internal improvements, however, a smooth ride is not predicted. A rise in airport costs, increased competition, the global financial crisis, environmental pressure and anger over baggage pilfering all indicate that a tough 2012 lies ahead.

Airports Company South Africa’s 70% tariff hike in October 2011 could clip the wings of many travellers.

“Any increase in airport costs increases the cost of air travel for South Africans and reduces the competitive position of South African aviation (with other African hubs) when travel decisions are made outside of South Africa,” says Koetle.

“The price of a ticket influences the choices of passengers and travel agents globally, and this will be felt by all consumers considering air travel.

“Energy costs have increased substantially, with a gross impact on demand for air travel. In line with the ‘supply and demand’ principle, increases in price will affect demand, as airlines may be forced to increase their pricing in order to remain profitable. SAA, however, is focused on cost compression without further increase in pricing,” she emphasises.

“SAA is increasing capacity in the markets it currently serves, and passenger numbers are expected to increase accordingly. SAA’s low-cost subsidiary, Mango, will play a significant role in capturing this growth with its capacity increase in the domestic markets.

“Mango has been successful in ensuring first-time flyers take to the South African skies, and will continue to stimulate this market,” says Koetle.

With 1time making a loss in the first six months of 2011; Comair, which operates Kulula.com and British Airways, reporting a drop in profit in the year ending June 2011; and the International Air Transport Association (Iata) reporting in July 2011 that “African carriers continue to experience the weakest demand, with a 2.9% fall compared to June 2010 levels” – SAA and other African airlines will have to find innovative ways to stimulate demand.

SAA finds itself under pressure environmentally as well. In October, Minister Gigaba stressed that South Africa, which is one of the highest per capita carbon emitters, has identified the transition to a “green economy” as an opportunity to develop new industrial and technological capabilities to support economic growth. He said SOEs could play a key role in catalysing diversification to a green economy, and singled out SAA as being vulnerable to policies in countries in which it operates, which impose penalties and taxes on carbon emissions.

“Indications are that SAA will require that biofuels make up half its fuel supply by 2020, in order to avoid future penalties,” he said.

In response to the South African National Taxi Council (Santaco) low-cost airline launched in September, Koetle says: “SAA welcomes competition. Our airline is confident that Mango offers travel options that are both convenient and cost-effective. Mango’s young fleet, impressive on-time performance record, coupled with a number of innovative solutions – Mango was the first airline to retail air tickets in-store (purchasing tickets at Checkers) and offer retail charge card options – makes it an attractive travel option.”

With pressure from these newcomers and existing competitors shaping SAA’s approach to customer service, travellers stand to benefit. “The more competitors in the market, the tougher it gets to stand out on customer service. SAA is undertaking a major Customer Service Improvement Programme, and we are already receiving feedback that this is having an effect,” says Koetle.

A more controllable threat to SAA is that of baggage theft at OR Tambo International Airport (ORTIA). SAA CEO Siza Mzimela has been quoted as saying that the airline suffers more reputational damage than other airlines from baggage theft at ORTIA because so much of its capacity is concentrated there.

Koetle adds that pilferage at ORTIA is 0.6 per 1 000 – double the average 0.3 rate at other airports in the world.

“SAA has a zero-tolerance approach to pilferage, and is spearheading an intensive joint project with all its key stakeholders at ORTIA. This structured approach is geared toward improving baggage handling, reducing pilferage, and providing a sustainable change that will benefit our customers,” she says.

Vuledzani Patience Ndou of Economists.co.za agrees that SAA seems to be healing from past shames that “include unnecessary spending, which led to losses and much debt”. “The company seems to be moving toward better health,” she adds.

Ndou believes that flying has been made affordable through competition in the market, saying that Africa’s largest air carrier – and its customers – can only benefit from sharing customers with Comair, 1time (which now includes Velvet Skies) and soon from Santaco, “if it succeeds”.

Fellow economist Makhoba adds that the challenges faced by SAA are not unique. “Possibly the greatest concern for businesses in this sector is the higher oil price during 2011, which may have a lagged impact on business costs in the near future.

“A slowdown in economic activity may also see revenues declining in the medium term. However, the new leadership seems well equipped to manage these challenges.

“Increased competition from lower cost airlines is likely to present ongoing challenges. Nevertheless, Mango contributed R18.5m in profits during 2010/11,” she notes.

SAA’s commitment to furthering the continental linkages is likely to contribute positively to business activity and relations in Africa with South Africa, believes Makhoba.

“In particular, SAA has been looking at expanding its services to towns with mining linkages with the continent. The active role within the mining chain could contribute to improved efficiency in the production, sale and distribution of mining resources, with the expansion of airfreight services also easing logistical challenges on the continent.”

Expands Koetle: “Aligned to the airline’s growth strategy, the Johannesburg–Ndola route was recently launched. This is set to connect the City of Gold to Zambia’s copper mining capital.

“As part of SAA’s plans to improve its intra-Africa connections and grow its route network, the airline will similarly provide connections to Abidjan, Abuja, Antanarivo, Bujumbura, Cotonou, Kigali and Ponte Noire. These routes are set to strengthen SAA’s already expansive route network, positioning South Africa as a major destination and key transit point for connecting long-haul international and regional African destinations.”

To further unlock connectivity in Africa and eastern markets, SAA is geared to launch its Johannesburg–Beijing route later this year.

Another positive development is CEO Mzimela’s appointment as a member of the Iata board of directors – the first woman to be appointed to the board in 67 years.

“This is a step forward for South Africa and the continent as a whole. It adds to Africa’s voice internationally and increases our continent’s level of influence at industry-related strategic forums,” says Koetle.

In addition, SAA won the Skytrax Best Airline in Africa Award earlier this year for the ninth time.

Looking forward, Koetle says that establishing a sustainable capital base and inculcating financial and operational efficiency is SAA’s primary focus. “In addition, strengthening our African and global presence and focusing on the airline’s growth as a group through Mango, SAA Technical (SAA’s maintenance repair organisation), AirChefs (SAA’s inflight catering business) and South African Travel Centre (SAA’s corporate and leisure travel centre) are areas the airline constantly works toward optimising.

“SAA has a very clear understanding of its role as an SOE and its role to support state policy objectives.

“As we grow our business, we see no challenge in supporting policy objectives such as the Airlift Strategy (growing in-bound passenger numbers) and the New Growth Path,” she concludes.

Sentech sends outs the right signals

State-owned signal provider, Sentech, is starting to shake off its dismal reputation.

CEO Setumo Mohapi, however, has admitted that its turnaround strategy is not yet complete after a history of irregular and wasteful expenditure.

Ndou of Economists.co.za says the services offered by this company are of the utmost importance to channel global information to consumers and businesspeople.

Despite this, it is a prime example of why the government needed to initiate a review of SOEs.

According to the DA’s Van Dyk, the party has documented the total value of state support to SOEs since 2005/2006; and of the R281.75bn, Sentech received a total of R953m.

Early in 2010, the Mail & Guardian reported on an internal Ministry of Communications report which, it claimed, said that “serious consideration” should be given to replacing the board and executive management, and that Sentech required the implementation of drastic measures to avoid lapsing into terminal decline.

Subsequently, senior staff members left Sentech after being implicated in mismanagement, and the board was fired. A number of senior employees were suspended earlier this year as part of the SOE’s bid to cultivate “a culture of integrity”.

In the 2010/11 financial year, the Sentech board sought to restore financial and operational stability within the organisation. “Significant progress has been made, particularly the restoration of positive cash flows, improved relationships with our customers, and implementation of key infrastructure projects,” says Sentech spokesperson, Nthabeleng Mokitimi.

“Sentech is solvent, cash-positive and profitable,” she claims. “The company has received an unqualified audit report.”

This follows a loss of over R100m in the 2009/10 financial year and R191m in losses posted between 2005 and 2009.

“Sentech maintained a healthy cash position with R363m in unencumbered cash as at 31 March 2011. This cash position meant that the company would be able to operate as a ‘going concern’ – one of the challenges highlighted by external auditors in the previous reporting period,” says Mokitimi.

“The discontinuation of the Carrier of Carriers business, combined with a significant improvement in the billing process, has improved the debt collection rate by 36% – to 95% – as at financial year-end. The debtor days stood at 16 days – exceeding the 30-day target that was set at the beginning of the financial year.

“Revenue by product improved from an average of 14% in the year ended March 2010 to 22% in this reporting period. This was mostly driven by analogue TV, FM, DTH [direct to home], BTV [Business Television] and facility rentals, which performed above set revenue targets,” she adds.

“The company’s SW [short wave] and VSAT [very small aperture terminal] products remain a concern, and plans have been put in place to reposition these services.

“Total revenue decreased from R846m to R826m. The decrease is largely attributed to the decrease in the dual illumination government grant, from R51m to R36m,” explains Mokitimi.

Presenting its 2010/11 annual report to Parliament in October 2010, Sentech chairperson Logan Naidoo said the SOE’s strategic road map for 2011 to 2014 will “go a long way in the restructuring of the company as we prepare to enter the digital world”.

When the new board was appointed last April, its first task was to develop a business plan that would serve as the first part of its turnaround strategy.

New CEO Dr Setumo Mohapi was appointed in November 2010.

Sentech, which reports to the minister of Communication, began as a technical division of the SABC, responsible for signal distribution services of the corporation. In 1992, the SABC corporatised the division as Sentech, a wholly owned subsidiary of the corporation.

In 1996, the Sentech Act 63 of 1996 was amended, converting Sentech into a separate public company responsible for providing broadcasting signal distribution services as a “common carrier” to licensed television and radio broadcasters.

Sentech is responsible for the development and operation of a vital infrastructure that provides broadcasting, wireless broadband (VSAT) and managed services to a wide range of customers.

According to Mokitimi, digitising the analogue terrestrial network is a key project within the broader objective of establishing an information society. In this respect, Sentech is responsible for building network infrastructure to ensure broadcasters migrate to digital television broadcasting within the timelines of the International Telecommunication Union and the government.

“Digital terrestrial television (DTT) will provide free-to-view and subscription multi-channel, multi-platform viewing experience with access to more television programmes,” she says.

Sentech is confident that the December 2013 analogue switch-off deadline will be met. “In this respect, we are upgrading the current DVB-T sites to DVB-T2, and 21 more sites will be rolled out to achieve 74% population coverage by end of March 2012.”

Compared with peer countries, both Internet and broadband penetration remain on a rather low level in southern Africa, admits Mokitimi. “To address this issue, the Department of Communications was tasked with rolling out a Consolidated National Broadband Network. Sentech, as an enabler, will then roll out a National Wireless Broadband Network to provide a multimedia platform.

“This will offer access and connectivity to clinics, schools and further education and training institutions in rural and underserviced areas; and any other sphere of government,” she says.

There have been rumours that Sentech and fellow SOE, Broadband Infraco, will be merged – but all that Mokitimi would divulge is that the two will “explore partnerships where possible, for the achievement of their respective public service mandates”.

Cathy Grosvenor