Face to Face with SAA CEO Vuyani Jarana

Guy Leitch: All CEOs for the past 20 or so years before you have failed to turn the airline around. Are you the exception — are you on track with your turnaround strategy?

Vuyani Jarana: Yes, we are on track. My team and I have agreed that there is no way we can miss the turnaround milestones, including the whole group budget.

Even with the current high oil price and weak rand?

Yes. The key reason we are on track is because of the way we are trading. We need to trade smartly — to understand the supply and demand dynamics, and thus know where we can trade volume for better yields. We have been too rigid on that, so we are giving it a lot more focus.

How much have you hedged the rand and the jet fuel price?

We have not hedged either of them. To hedge you need money to pay upfront and we don’t have that.

How are you managing fuel costs and a weak rand?

At the moment fuel is outside our budget range, although not in an unmanageable area. We have a timing issue as we can’t pass on all of the increases in fuel costs due to forward bookings, especially in the international routes. We are getting analysts in to look at all probabilities; we need to rebuild skills at SAA which will help us model these variables more accurately.

Okay, but that doesn’t change the reality of higher oil prices and a weak rand. Are you nonetheless confident that you are not going to have to ask Minister Mboweni for more money?

So far we are weathering the storm. We have put in initiatives to box smart. We brought in savings initiatives earlier than we otherwise might have, in for instance tweaking the schedule in anticipation of the unfolding oil storm. But if we get further outside the modelled range, we will have a problem.

There is much talk in the industry that SAA is in a cash flow crisis and will not be able to keep its aircraft flying. Your strategy called for a significant revenue reduction from cutting unprofitable routes, while at the same time your overheads cannot be reduced as quickly as your revenue. So you have an even faster rate of cash burn. What is your current cash flow position?

To cover cash requirements for the turnaround we have a R5-billion bridging facility from the banks that was made available in April this year. This was granted by the banks on the basis of a commitment from Treasury to repay the facility, as the banks were not comfortable with a government guarantee on its own.

Why would the banks not be happy with a government-backed guarantee for SAA?

The banks said that more debt is not the answer for SAA — and we have to agree. The banks said they want two things: a turnaround plan to profitability and a commitment to debt reduction.

The banks also want a capital injection, and that required a parliamentary appropriation, which takes time, so an interim commitment letter was provided by Treasury. On the strength of that letter we were able to go to a consortium of banks led by Nedbank for bridging finance. So our cash flow is okay for now. Then, at the end of October, the R5-billion special appropriation bill was approved to settle debt redeeming between now and March 2019.

Our big challenge now is the R9.2-billion of old debt that matures in 2019. That has to be addressed, either through refinancing from the existing lenders, or from new financiers, or from a shareholder capital injection.

If you cannot raise the cash from banks, are you going to have to slow down the implementation of your turnaround plan?

When we formulated the turnaround plan we factored in a rate of revenue restructuring and cost reduction. But what is critical for me now is that on the commercial side of the business we have the right focus on both revenue and expenses. We can now see gross margin being achieved.

We are pushing cost restructuring hard. One of the key things has been the contracting out of pilots; there has been a big uptake on that. We are dealing with the cabin crew side of things now with VSPs (voluntary severance packages). Another key objective is to change supply chain policies, especially with regard to SAAT (SAA Technical).

How are you covering short term cash flow?

The plan is simple. A total of R21.7-billion is required, of which R9.2-billion is legacy debt that matures in March 2019. We need shareholder funding of R12.5-billion to the break-even point. R5-billion of that is already in from October’s Medium Term Budget Policy Statement (MTBPS). The MTBPS stated that the funds would help to prevent a call on the airline’s outstanding debt of R16.4-billion of the total of R19.1-billion guaranteed by government. We also need the lenders to work with SAA and the shareholder on the basis of the trust and commitment already demonstrated by the shareholder to support SAA.

So you actually need R12.5 billion to turn the airline around — not the usually quoted R21.7-billion?

Yes. But if the March 2019 loan repayment of R9.2-billion is not found, that debt will have to be restructured or rolled over until 2023.

But you have already spent that R5-billion — you were expecting R5-billion losses for 2018.

Yes — R3-billion of that R5-billion went into paying arrears.

So in fact you only have R2-billion available?

Yes, we have the R2-billion and have been working within that limit, helped by better cash flow management, including the fact that Angola started paying us the funds it had blocked.

Moving on to subsidiaries — SAA Technical has been a big problem.

Yes. SAAT’s policy was to procure aircraft parts through intermediaries, but that created problems because we did not have access to the price benefits from buying from OEMs (original equipment manufacturers) directly. Now we have implemented co-ordinated buying at the right price points — we are being much more aggressive in procurement negotiations. But there is a lot of heavy lifting still to be done in terms of legacy contracts.

Why was most of SAAT’s procurement through intermediaries? Doesn’t that open the door to procurement abuse and extra layers of cost?

The key advantage of using specialised intermediaries is that, for seldom-used parts, it gives us access to bulk buying of scarce parts, especially for older aircraft. The issue is not the use of intermediaries per se, but a case of excessive mark-ups that pushes the price far beyond an acceptable range, especially when you compare with that of OEMs.

The big challenge has been to restructure procurement costs across the whole airline. We need to renegotiate contracts. The Open Letter you wrote to me on Daily Maverick a year ago, about the problems with procurement, is spot on. We have suspended and disciplined people because we have to deal with the adverse behaviour and build a new ethos and culture in the airline.

So how much has crooked procurement been costing SAA?

We can improve our cost of procurement by more than 10%, and that will mean we can pull R3-billion expenditure out of the costs.

Where will this come from?

Contracts that were not properly negotiated can get 25%-30% taken out straight away by going through a proper tender process. Some of it comes from taking out duplicate spend in, for instance, IT. We will clean it up and put it under one CIO.

I am confident we are now doing procurement at the right price point. The big frustration I have is the big contracts, where I know I can reduce costs, but the only way is to put them out to tender, but in government we cannot move fast, which costs time and continuity. SAA unfortunately now has a history and culture of malfeasance. So when you want to change things the trust level is low. We have to follow every step of the process even it means you take a bit longer to get to the outcomes you want.

But you are still confident that the airline can be turned around, on time and on budget?

Yes. DM

Guy Leitch is editor of SA Flyer and FlightCom magazine.