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Statement by Minister Malusi Gigaba MP, on the occasion of the announcement of the SAX Annual Financ

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25-Sep-2013 Statement by Minister Malusi Gigaba MP, on the occasion of the announcement of the SAX Annual Financial Results in Kempton Park on 25 September 2013

The Global Airline industry continues to be plagued by the slow economic growth with no signs of high growth forecasted over the medium-to-long-term.

This has had an impact on load factors and profit margins of airlines as a result of reduced passenger demand and increased direct operating costs.

In South Africa, the domestic market and the regional market services commencing at OR Tambo International Airport have become more competitive as more low cost carriers and regional operators entered the market which had a market impact on the commoditisation of air travel.

However, Africa airlines saw international air travel rise 8.2% in March compared to a year ago, boosted by continued GDP growth and better prospects.

Nevertheless, the African airlines continue to face strong competition from the Middle-East Airlines.

One concern is the fact that load-factors for African airlines remain well behind other regions and the Sub-Saharan region as a whole trails the industry average by 12%.

The South African airline industry has also borne the brunt of the slow economic growth and low passenger load factors.

The industry continues to be plagued by an increasing high cost of landing and navigation charges.

Both the depreciation of the rand and the cost of crude have constrained the airline industry.

These exogenous factors place a heavy burden on the industry.

The environment remains unforgiving to inefficiency and poor implementation of set out business plans.

As the Shareholder Representative, the Department of Public Enterprises has maintained a constructive and pragmatic approach with regards to supporting South African Express (SAX) to improve its performance.

PERFORMANCE

SAX, as the regional carrier and feeder airline to the mainline operator, the SAA, has managed to record a profit, though, marginal in a tough operating environment.

I am pleased to announce the improvement on the achievement of Compact targets in the 2012/13 financial year.

The airline achieved 64.7% of the agreed targets compared to 41% achieved in the 2011/12 financial year.

The airline is expected to improve on this performance in the 2013/14 financial year.

This is a commendable effort by the company.

The airline's revenue grew by 14% for the year, which was mainly driven by an increase in the passenger fares and increases in the passenger load factor.

However, the passenger numbers declined for the year under review.

SAX also managed to save R129 million as part of its cost saving initiatives, bearing in mind that significant reduction in cost was achieved in the context of a tough operating environment.

These efforts enabled SAX to achieve a net profit of R650 000 compared to the R368 million net loss in the previous financial year.

The airline applied a stringent cost-compression programme that resulted in the operating costs remaining constant for the year and optimization of efficiencies.

The airline had targeted a cost savings of R70 million however the entity managed to achieve cost savings of R129.1 million.

There is a common understanding that cost control will in the short and medium future be crucial to the airline's financial sustainability.

As the Shareholder Department, DPE is pleased that the appointment of a full time Chief Financial Officer tasked with relooking and upgrading the staff compliment within the Finance unit is beginning to bear fruits through the improvement in the financial internal controls.

SAX's total asset base increased from R1.1 billion in 2012 to R1.4 billion in 2013.

This was mainly due to the increase in trade and other receivables and the deferred tax asset recognized in the year under review.

LONG-TERM TURNAROUND STRATEGY

As you are aware, the Department of Public Enterprises has received the Long-Term Turnaround Strategy for the States' Airline assets in whose development workers, management and the Board of all entities were involved.

In addition, SAX has presented to me their 20:20 vision which is aligned to the LTTS, which is regarded as an operational plan.

The LTTS has been presented to Cabinet, it was well received and the Cabinet pledged its support.

These strategic documents - both the LTTS as well as the 20-20 Vision, seek to review all the airline entities of the State in relation to the fleet, finance and operational opportunities.

As we have made it clear with the Board of the Company, the new focus of the Shareholder has shifted from good financial performance of one company, to strategic leveraging of state aviation assets to optimize economic impact.

We have strongly insisted that SAX remains aligned with the LTTS; and operational alignment will be a critical yardstick in measuring the performance of the company from here on.

The SAX is a key strategic domestic and regional feeder airline, which promotes Government foreign policy priorities of linking African countries to each other and promoting intra-Africa trade.

Although the Middle-East airlines are setting up hubs within the African continent, SAX is therefore required to act swiftly and decisively to have the first-mover advantage in these strategic markets.

SAX is now a Star Alliance affiliate, which will enable it to partner with a great number of airlines to enter strategic markets and as well explore joint ventures that are based on commercially-sound principles.

As the Department, we have noted the lack of transformation within the airline industry and the SAX is no exception to this industry misnomer.

As the Shareholder, I want to make it very clear that our portfolio of SOC needs to be at the forefront in driving transformation in industry.

SOC cannot measure it in accordance with the sector average.

We are however proud to announce that SAX is the first airline to have recently appointed a Black Female Captain, which has had a significant transformational impact in a male-dominated industry sending a strong signal of the commitment of the SOC to an integrated non-racial and non-sexist labour market.
This is a major milestone.

As Shareholders, we expect to see in concrete terms the participation of previously disadvantaged groups in critical areas of business, particularly in technical positions, captains and pilots.

I am pleased to note that the Airline is addressing the transformation challenges and currently working on creating a pool of black and female talent within all aspects of the industry.

Looking forward, the Department will continue to support the role of the SOC as a catalyst of development and transformation.

A clear example of the SAX transformation drive is the launch of the SAX Cadet Academy.

The Cadet Programme should now also focus on resolving bottlenecks inherent in career progression mobility in SAX, as well as monitor, qualitatively and quantitatively, the various ways in which alternate career paths can be created for previously disadvantaged groups in order to ensure the results required are obtained.

I would like to also reiterate my appreciation and applaud the focus of management regarding the training of pilots in the implementation of the MACH I and MACH II programmes.

This is highly commendable and I would appreciate it if more airlines had such a focus in addressing this critical skills shortage.

While the financial figures for passenger revenue in the business model are commendable, other revenue streams such as Cargo require improvement.

It is important that the entity focuses on increasing its revenue streams.

The airline should focus on increasing regional African penetration in relations to cargo operations.

As the Shareholder, we have long resolved to unlock the productive potential of our aviation assets.

We applaud management and staff for their efforts.

The Board has done well redirecting the company towards stronger performance.

However, the Shareholder does expect more and will continue to support SAX until it reaches sustainable levels of socio-economic success.