MESSAGE FROM THE CEO
Mpumi Z Mpofu
As we reflect on the financial year under review, as well as our forward-looking strategic plans to adapt to a changing landscape caused by the COVID-19 pandemic, we are confident air travel will remain a critical service that connects people and enables trade, driving economic growth and job creation. The impact of COVID-19 on our industry has been severe and the path to recovery will be long, but we are confident the foundation of a solid balance sheet, a strong reputation and enduring competitive advantages will stand us in good stead. We continue to pursue a long-term focus on social responsibility and sustainable value creation.
The COVID-19 pandemic has adversely impacted our results and our outlook for the future. Fortunately, Airports Company South Africa is a fortified and resilient company, well positioned to weather this storm. The response of all our employees has been a source of inspiration, as I have witnessed first-hand the dedication, innovation and flexibility of each and every one of our employees, who have worked tirelessly to ensure adaptation to a new normal. Prior to the lockdown, we successfully enacted business continuity plans, to continue to serve all our stakeholders while protecting the wellbeing of our people. Confidently emerging from a position of strength, our airport operations are sound and world class, with rigorous health and safety measures in place. This pandemic demonstrates how important it is to think beyond operational objectives, by rising to challenges and seeking out opportunities, guided by our vision to be a world-leading airports company.
Revenue for the year was down 0.03% to R7.12 billion, reflecting the impact of a tough operating environment, resulting in a 1.7% drop aeronautical revenue. A 1.9% increase in non-aeronautical revenue offset the muted aeronautical income. However, the overall decrease in revenue combined with increased operating costs and considerably higher employee expenses, eroded earnings. Our performance in KPI’s of ROE and ROCE are dependent on factors such as traffic volumes, commercial activity for non-aeronautical revenue and cost management and was therefore subdued.
Despite the challenging environment, our network was on track to weather the storm, recording 3.3% total passenger growth, as at year-to-date February 2020, comprising of muted growth of 0.3% for cross border traffic and 4.7% for domestic travel. However, the positive growth trajectory recorded in the 11 months of the financial year came to an abrupt halt as the COVID-19 pandemic sent shock waves through the global aviation industry. The remaining month was marred by panic relating to travel and almost a week of a hard lockdown in the country. This decimated the passenger growth for the financial year, to a total passenger throughput contraction of 0.9%. The contractions were mainly observed on the international and regional traffic sides, which recorded decreases of 3.5% and 5.7% respectively, with the domestic passenger traffic remaining in positive territory with a 0.4% growth.
In previous years, our non-aeronautical revenue performance did not reach its full potential. In response, we shifted our operating model towards a greater inclusion of non-aeronautical revenue. Leading up to the last quarter, our plans to grow this revenue were yielding good results. Compared to the previous year, commercial and retail revenues were up 4% and 1% respectively. Annual escalations pushed car rental and property revenues up 4% and 9% respectively. Advertising recorded a 10% increase, although this still fell short of targets due to a delay in awarding tenders, which resulted in cancellations and reduced rates. Despite the increases, retail and parking performance were below expectations. The onset of the COVID-19 pandemic caused our earnings to take a dramatic downturn and this trend is set to continue in FY2020/21. We were forced to re-think our approach to revenue generation through diversifying our portfolio.
In March 2020, the amended Airports Company Act, which includes the introduction of an appeals mechanism was approved by National Assembly. This is a key milestone for our economic regulatory strategy, which was revised and approved by the Board in December 2019. Key elements of the strategy include strengthening the system of governance overseeing the setting of airport charges, promulgation of pricing policy guidelines and revision of the process utilised in the determination of permitted charges. Post-year end, in light of the changes in the aviation context, we approached the Economic Regulator requesting a postponement of the submission of the permission application for one year, which was granted.
RUN AIRPORTS PERFORMANCE
In running our airports, the highest level of safety and security remains of paramount importance to us. In the year under review, we embarked on several initiatives to ensure the security of all our stakeholders. In the wake of COVID-19, we worked closely with the Department of Health and the South African Civil Aviation Authority to support efforts to mitigate the spread of the virus and implemented precautionary measures based on guidance from the World Health Organisation.
Airport Operations have been the most impacted as a result of COVID-19. This year we recorded a 1% decline in departing passenger numbers to a total of 20 924 465. In the same vein, our aircraft landings for the year were down 4% to 248 519 (FY2018/19: 259 169). Up until the end of the third quarter, we were able to withstand economic headwinds. Unfortunately, the pandemic and subsequent travel bans led to a drastic contraction in departing passengers and aircraft landings, resulting in an overall decline for the year.
At our airport operations, our focus on on-time performance and airport service quality (ASQ) continues to show improvements. In FY2019/20, our on-time performance on average was 85.05% (FY2018/19: 84.09%), earning our three largest airports OAG (Official Airline Guide) awards. In our ASQ performance for the network of airports, we reached a score of 4.04 (FY2018/19: 3.97). These indicators affirm we are running our airports well.
Our non-aeronautical operations, including commercial activities and cargo handling, performed well despite the challenges posed by COVID-19 in the fourth quarter. While we are pleased with the 1.9% growth in non-aeronautical revenue totalling R3.4 billion – which is above our target of R3.3 billion – we remain mindful this positive momentum will be severely hampered by the impacts of COVID-19 in FY2020/21.
Refer to page 80 for additional information.
DEVELOP AIRPORTS PERFORMANCE
Developing our airports enables better service to our passengers and is an essential part of increasing our ability to create value for all our stakeholders. In the year under review, we adopted an integrated airport planning approach to property development. This allowed consideration of regional development and the impacts of design on our commercial offering and passenger experience at the airport development stage.
In terms of property and infrastructure asset management developments, good progress was made on several of our airports’ development projects as well as the construction of our new corporate offices on a site adjacent to O.R. Tambo International Airport. Looking ahead, however, uncertainty prevails regarding the infrastructure development projects we will pursue in FY2020/21. As we move forward, we remain determined to pursue commercial opportunities where feasible, while advancing our transformational agenda. However, the downgrade will significantly impact the affordability of the planned infrastructure development. The industry-wide implication of the pandemic will impact our plans for expansion projects, new terminals and runways, as in all likelihood we will not require additional capacity in the short or medium term.
Refer to page 88 for additional information.
GROW FOOTPRINT PERFORMANCE
Several route developments at our three international hubs, O.R. Tambo International Airport, Cape Town International Airport and King Shaka International Airport, have expanded our international reach and stimulated regional growth. Locally, collaborative partnerships including the Gauteng Route development, Cape Town Air Access, Durban Direct and Nelson Mandela Bay airlift programmes continued to contribute to the growth of our footprint.
Our equity investment in Guarulhos International Airport has not returned to profitability. In the year ahead, we intend to support this equity investments’ return to stability. The sale of Mumbai International Airport Limited (MIAL) is still underway and we are hoping to finalise this in the year ahead.
While FY2019/20 presented opportunities for the establishment of new air travel links and the development of our advisory services and our Training Academy, the challenges we face going into FY2020/21 will require careful consideration of the development of new routes both domestically and internationally. Partnership development opportunities and the identification and development of non-core revenue-generating opportunities, need to be pursued to ensure the long-term sustainability of our operations.
Refer to page 92 for additional information.
Our strategy is not developed in a vacuum, it arises out of a context that gives shape and informs its content. The foundation of our strategy is in line with the ethos of socio-economic transformation in a thriving democracy, social justice and human rights. However, the context has changed dramatically in the last few months and the Executive Committee, with guidance from our Board, has worked tirelessly to reformulate our strategy to adapt to the new normal, which is shaped by the ongoing impact of the pandemic. We remain critical to our metropolitan economies with our airports as engines of growth and stimulating the local economies around our regional airports to enabling the Department of Transport’s socio-economic objectives.
Our transformation agenda focuses our efforts on transforming our people, our society, our supplier base, and our environment. Overall, this year we met, and in many cases exceeded, our transformation targets. We were awaiting the results of a Transformation Audit and proudly maintained a Level 2 B-BBEE.
At executive management level and in our workforce, we have a strong team that represents the demographics of the people of South Africa in ethnicity and gender. We also remain a strong supporter of persons with disabilities and the youth, making more opportunities available throughout our Company.
In transforming our supplier base, we have developed and adopted an economic transformation strategy, which highlights key initiatives relating to our seven sector strategies. Accordingly, within advertising, car rental, retail, construction, information communication and technology, property and ground handling, we support enterprise development and preferential procurement. In the year under review, we increased black business share of commercial revenue generated to 55.4% (FY2018/19: 54%).
In our society, we have supported historically disadvantaged communities through various projects across the country, spending R44.2 million to help meet their needs. While recognising the impact these projects, we also acknowledge our role in supporting job creation in South Africa. In FY2019/20, we employed 3 343 people directly in our own operations and our impact on employment in broader South African society, we created 23 750 jobs in the year under review.
Our dependence on the environment to sustain us in the long term, necessitates the inclusion of environmental transformation in our broader transformational agenda. This year, we exceeded our target of Level 2 ACI Airport Carbon Accreditation for three airports by achieving Level 2 certification for four airports. In addition, all nine of our airports have maintained their ISO 14001:2015 Environmental Management certification. We are committed to maintaining the progress we have made on our transformation journey thus far, while we manage the impact the coronavirus pandemic has on our business and the businesses in our supply chain.
As we look ahead, the only certainty is that high levels of uncertainty about the future will prevail for some time. Risks abound, including the re-emergence of new waves of COVID-19 that may push governments to reinstate travel bans and lockdowns until a vaccine is introduced. The resilience of domestic and international carriers is unclear. The future of our domestic airlines is uncertain and our exposure of capacity to airlines from the Middle East, which rely on oil-sourced funds, is concerning in the light of projected low oil prices. Capacity rationalisation is inevitable, and we are prepared to look for new opportunities or ways of generating or diversifying our revenue. Once the world opens for business again, we expect the majority of airlines to restore capacity in line with demand.
As we resume operations in the future, it is crucial that we put ourselves in the customer’s shoes. Before the COVID-19 pandemic, airport customer experience management was focused on promoting and fostering positive customer emotions and perceptions through their interactions with an airport community. It will be critical to keep customers engaged and involved with the airport new regulations and processes through ongoing communication with added focus on essentials: heightened safety, wellness, cleanliness and sanitation.
I extend my appreciation to my colleagues on the Executive Committee and our Board for their support and guidance during this challenging year.
I would like to thank Lindani Mukhudwani, who has served as Acting CFO since June 2019 for her invaluable contribution to the Group. I welcome our new Chief Financial Officer, Siphamandla Mthethwa, whose appointment was effective on 1 May 2020. I also extend our appreciation to Andre Vermeulen for his service as Group Executive: Airports Management. Subsequently, this position in the structure was abolished, in line with of our review of the governance framework and operating model, the capability model and operating structure review. The COO has assumed responsibility while a fit for purpose structure is developed.
Together, we will build an even stronger, more nimble and more innovative company that delivers value to all our stakeholders.