Airline announces financial results for year ending March 2017
· SAA operations remain intact due to solid operational fundamentals in place, despite losses posted in Financial Year 2016/17
· Newly appointed CEO and reconstituted Board with aviation experience focus on aggressive strategy implementation
· SAA earmarks financial year 2019/2020 to break even before it becomes profitable
· Quick wins have been implemented already to arrest immediate losses to improve performance
· ‘Green shoots’ progress made with turnaround
JOHANNESBURG. 29 March 2018. South African Airways (SAA) is confident about the future outlook of the airline, a view which has been bolstered by the early positive signs that are beginning to emerge in the form of improved performance especially of the domestic and regional routes. The majority of the airline’s operations remain intact and this is due to solid operational fundamentals despite poor financial performance in financial year 2017. The airline has been able to maintain the integrity of its flight schedule, a significant indicator of stability of its operations.
SAA is forging ahead with implementation of its turnaround strategy, with tangible results set to turn the airline into a financially sustainable entity. The effects of the turnaround strategy will be seen in the 2019/20 financial year.
The airline today announced its financial results for the year ending March 2017 following its Annual General Meeting (AGM). The Annual Financial Statements for the 2016/17 financial year were adopted at today’s AGM. SAA recorded losses of R5.67 billion for the year ending March 2017.
The AGM was the first to be concluded since the appointment of Mr Vuyani Jarana, SAA CEO, a newly reconstituted Board and new Shareholder minister. In November 2017 six new members were appointed to the SAA Board, with Mr Johannes Bhekumuzi (JB) Magwaza appointed as the new chairperson. Minister of Finance Nhlanhla Nene was appointed 27 February 2018 marking his return as the shareholder representative.
FY2017 context and achievements
SAA Group’s performance for the year ending March 2017 needs to be seen in the context of the important role the airline plays in the aviation sector and the broader South African economy.
o 34 000 jobs created and/or sustained in South Africa;
o R9,2 billion, representing approximately 0.3 percent contributed to the national GDP every year;
o SAA Group employed 10 071 staff (SAA airline 5 752 and Mango 713);
FY2017 was earmarked by management turbulence, deteriorating results and increasing debt levels. While numerous attempts have been made to restructure the SAA Group these have been met with limited success due to a failure to translate strategic intent into implementation.
“One of the key reasons for the underperformance was an overt focus on cost reduction without adequately addressing operating model constraints, as well as limited commercial and business skills to drive revenue growth,” said SAA Group CEO, Mr Vuyani Jarana.
Some of SAA Group’s operational highlights included the following:
o SAA maintained its impeccable safety record;
o Received numerous awards as affirmation of operational excellence;
o Africa’s first commercial biofuel flight made history;
o On-time performance consistently above the 87.2% target;
o AMOS implemented at SAA Technical;
Although SAA results showed a net loss of R5.6 billion for FY2017, the business fundamentals remain intact as passenger numbers remained steady albeit at lower fares due to increased competition in the international and domestic market coupled with foreign currency volatility.
Group Financial Performance FY2017
a. Financial performance
SAA recorded very diminished revenue growth of R26 million, from R30.716 billion to R30.742 billion, mostly attributed to increased competition in the domestic and international market, and declining yields. Operating costs rose by R3.360 billion, (R1.8 billion related to translation losses on foreign currency balance sheet items), 11% higher than the previous year. The cost to income ratios continued to move in the wrong direction - an undesirable outcome for any business. With 54 percent of the SAA cost base linked to foreign or hard currencies, the group had significant exposure to foreign exchange fluctuations.
b. Commercial performance
SAA’s commercial performance for the year under review reflects the difficult macro-economic conditions, with fluctuating currency and Brent crude prices, and a fiercely competitive environment, which constrained revenue generation. The nominal increase in revenue year-on-year was less than anticipated. The increase compared with the previous year (FY2016), is largely a result of the local currency weakness, but does reflect an increase in airfares on all our routes. Currency devaluation is a double-edged sword in that, on the one hand, it makes the destination attractive to visitors who view it as a value for money proposition and thereby increases traffic. As long as revenue is generated in those markets, this works in favour of the business.
c. Operational performance
Enhancing customer experience
“We will continue to improve our service to our customers. Our value proposition is underpinned by higher order commitment to maintain high safety standards, and improved customer experience in every customer interaction we engage in. SAA is a well-recognised and respected brand in the aviation industry. The airline has a strong brand, sound track record for passenger safety and its impressive on-time performance is amongst the best of breed in the aviation industry. Voyager, our loyalty programme, is the first Frequent Flyer Programme in Africa that is fully-fledged revenue based – accrual and redemption of Miles,” explained Jarana.
Operational activities aligned to create efficiencies
SAA is implementing a number of initiatives as part of the Change Agenda driven by ten key strategic priorities to turn SAA around. These are intended to transform the airline into a commercially viable organisation with customer experience as its cornerstone by developing a new operating model and ensuring a change in culture.
There is a need for a complete overhaul of SAA’s operating model and structure and build a fit for the future airline capable of operating on a financially sustainable basis. An operating model has been developed and approved by the Board. Urgent attention is also to be given to filling the critical skills gap where SAA lacks the necessary financial, business and commercial skills to implement its long-term turnaround strategy.
A structured approach is being followed to build on our progressive recovery process, with deliverables following broad issues under an overarching strategy: Arrest, Change, Stabilise and Grow. Since November last year, the SAA Group has been in the Arrest phase, marked by urgency and diligence in implementing a number of turnaround initiatives to arrest immediate losses, with a positive financial impact of the initiative. The operating model has to be aligned to the new strategic objectives.
A dedicated change programme office (Change Hub) will manage implementation to ensure sustainable results. The sharpened focus has the intention of successfully implementing the turnaround strategy.
A number of quick wins have recently been implemented to arrest immediate losses and start to turn around performance such as capacity redistribution, where SAA has transferred four aircraft to Mango and the shift has resulted in 7% increase in passengers for the Group for February versus last year. Others are route optimisation, staff costs, organisational redesign, renegotiation of terms with key suppliers, and approaching lenders to support financing requirements.
“Our ultimate aim is that SAA would be the pride of the nation as an independent, financially sustainable airline. To attain this, we are taking decisive action, and accelerating initiatives to ensure alignment and to return to profitability. We continue to strive to be innovative and ensure long term sustainability of the group,” concluded Jarana.