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Why I am resigning from SAA - Vurani Jarana

Group CEO says lack of funding commitment undermined the implementation of strategy

29 May 2019

Mr JB Magwaza
Chairman of the Board of Directors
South Africa Airways SOC LTD

Dear Chairman

Resignation from the position of Group Chief Executive Officer - South African Airways SOC Limited

I joined SAA as a Group Chief Executive Officer in November 2017. During contract negotiations prior to my employment, I requested that the following clauses be incorporated into my contract of employment: -

1. That SAA remains with National Treasury until it reaches the break-even point regardless of who the Ministers of DPE and NT were. This was to ensure that there is consistency and I don't have to go through two state departments (DPE and NT) to obtain approval. I have since gone through four Ministers since joining SAA.

2. That the Board would not unreasonably withhold key decisions for the implementation of the I-TTS.

3. That the Board composition would not change by more than 30% during the first three years of implementation. This was to ensure stability, SAA has a history of lack of stability at Board and Executive levels.

At the time of joining the Airline, R9,2 billion of debt was maturing on the 28 November 2017. A corporate plan developed by Seabuty and approved by the then Board was in place but not being implemented. Considering the fact that, that corporate plan had missed the forecast of some of the critical drivers such as oil price, we had to revise that plan. The revised corporate plan with its attended funding requirements was approved by National Treasury in March 2018. The approved corporate plan is the basis of the SAA's turnaround plan.

The approved corporate plan provided for a break-even point in 2021 , required funding of R21,7 billion, R9,2 billion of which was the old debt and R12,5 billion of which was working capital requirements till 2021. The basis of executing the corporate plan was that the Shareholder would provide the requisite funding to support the corporate plan.

From 2018 to date we have had no less than three incidents in which the company was almost unable to pay salaries due to lack of funding. Uncertainty about funding creates challenges in both operations and market environment in that SAA loses leverage over its suppliers as these suppliers' demand aggressive credit payment terms, in the market environment, global sales agents (GSA) and Travel Management Companies become reluctant to do forward bookings with SAA. TMCs and GSAs can do six to nine months' forward books if they have certainty about the future of the airline.

Whereas govemment injected R5 billion of funding in 2018/2019 financial year, a big chunk of that was used to fund creditors up to the end of March 2018. We have not been able to obtain any further funding commitment from government making it very difficult to focus on the execution of the strategy. I spend most of my time dealing with liquidity and solvency issues. Lack of commitment to fund SAA, is systematically undermining the implementation of the strategy making it increasingly difficult to succeed.

One of the areas of concern is speed of decision making, it is impossible to succeed in the turnaround with the current level of bureaucracy we have to go through to implement the strategy. Currently SAA must obtain approval of DPE and National Treasury to implement some of the key decisions, whilst this in itself is not a problem as a principle, it takes away the agility required for an entity in financial distress, an ICU case.

Decision making takes too long in a number of key areas of strategy execution, ranging from hiring key executives (Glenn Osmond target for SAAT CFO now joint CEO at Comair) to getting approval for loss making route remedial plans, Hong Kong route remedial plan is a case in mind.

Ways of working between the Executive, the Board and Minister (without apportioning blame) have made it difficult to operate with required speed and agility. Lines of accountability are becoming increasingly blurred creating uncertainty about what operational decisions are in my domain, which are in the Board's domain and which are in the Ministers domain. Trust levels are very low thus impacting ways of working.

Implementing a turnaround strategy for a company in crisis as SAA, clarity of command structure, alignment of purpose and high levels of trust are critical elements of success. As far back as 2018 we initiated the process of refinancing the debt. We obtained approvals for lifting of foreign borrowing limits where after we appointed Deutsche Bank to assist with raising capital. When Government embarked in the BASA process, the foreign borrowing limits approval was revoked, and we had to cancel the agreement with Deutsche Bank. When the BASA process failed we were informed in the last hour to find own funding as BASA had failed. We were able to secure R3,5 billion of emergency funding from local banks as a bridge facility. This is what helped us be able to operate from December 2018 to date. The R3,5 billion facility will be depleted in June 2019.

You would know that we negotiated a specific dispensation with the lenders to continue funding SAA going forward, this was predicated on SAA being mentioned in the Minister of Finance budget speech, which did not happen. We have been asking Government to write us a letter indicating its intention to approach parliament to appropriate funds to support SAA working capital requirements as per approved corporate plan. We would use such letter to approach domestic lenders to provide required funding, this has not been forthcoming at least not in the manner and form we believe would satisfy the lenders. We are busy looking for other financing mechanism to close the gap, we have approached the Bank of China and African Export Import Bank for funding.

Uncertainty about funding, slow decision-making processes given the complex coordination processes between the Executive, the Board, DPE and National Treasury, fundamentally changes the basis of execution of the turnaround plan.

We have always maintained the SAA debt levels are unsustainable however instead of reducing debt whilst aggressively implementing the LTTS, we have increased it thus attracting addition interest charges which all undermine the plan.

Given all these matters, the strategy is being systematically undermined, and as the Group Chief Executive Officer, I can no longer be able to assure the Board and the public that the I-TTS is achievable. A lot has to change to enable the accelerated implementation of the LTTS, to date I am not convinced that we can make the required changes both in terms of process and in how we coordinate ourselves as team comprising of Executives, Board, and two shareholder Ministers.

Sixty percent of the problems of SAA are internal (within the control of Management and Staff, the Board and the Shareholder) whilst forty percent are market challenges.

Considering the set of circumstances summarized above, I am no longer able to continue to serve in the position of a CEO of SAA.

I still believe that with commitment from all role players, Government, Board and Management, SAA can be turned around.

I am prepared to serve the required notice period of three months as per my contract of employment, my last day of work at SAA will be 31 August 2019. I want to thank you for your support and wish you every success in turning around SAA.

Yours Sincerely
Mr Vurani Jarana