MESSAGE FROM THE CHAIRMAN OF THE BOARD
Adv. Sandile Nogxina
Chairman of the Board
We are in the midst of an era-defining crisis with unprecedented medical, economic and humanitarian challenges. The impact of the coronavirus outbreak will reverberate across societies and economies for many years to come, changing the air travel landscape. As a State-owned company, Airports Company South Africa’s mandate encompasses a responsibility in the nation’s response to this crisis. While managing the human and business impact of COVID-19, we must also ensure we are positioning our business to contribute to rebuilding the economy optimally. Airports are complex operations where fewer than 10% of the people working there are directly employed by Airports Company South Africa.
We are, therefore, significantly aware of the COVID-19 impact on our entire ecosystem. Our efforts to mitigate the business impact of COVID-19 are essential if we are to help preserve the livelihoods of thousands of people in the sector.
Our drive to return to profitability must align with our commitment to transformation and socio-economic development. In the face of the COVID-19 pandemic, this shared responsibility has never been as important. The world in which we operate is increasingly volatile, uncertain, complex and ambiguous. This requires leaders to be agile, responsive and steadfastly focused on their goals. As a Board, we are confident that the leadership of Airports Company South Africa – the Board, executives and management – are equipped with the insight and abilities to navigate the current crisis.
An amended Corporate Plan was submitted to the Department of Transport and National Treasury in August 2020 and September 2020, respectively. The amended Corporate Plan is based on our assessment of the impact of COVID-19 and travel restrictions on traffic volumes, and the ramifications for the Group’s financial performance and position. We anticipate that the impact on traffic volume demand and airline sustainability will be long term. Significant responses that have been introduced to mitigate the impact of the anticipated traffic volume decline include operational expenditure and capital expenditure reductions. The result of this scenario leads to a funding requirement over a five- to sixyear period of up to R11 billion, in the form of guarantees. Of this amount, government support of up to R3 billion will be required in the next three years. It is important to note that the financial position of the Group was solid prior to COVID-19, despite the difficult operating environment. We take great pride in our standing as a well-run State-owned company that has made a profit in all but one of its 26 years.
OUR REPORTING PHILOSOPHY
While the impact of COVID-19 dominates all our consciousness, our Integrated Annual Report is a place to reflect on the challenges and achievements of the past twelve months. The year can be viewed in two distinct parts: the first three quarters and the last quarter.
The Group’s performance in the first three quarters reflects the difficult macroeconomic environment, with a drop in earnings before interest, tax, depreciation and amortisation (EBITDA) as a result of increased costs emanating from regulatory amendments, personnel costs and heightened security measures implemented during the year. A vital achievement during this period was the R2.3 billion reduction of debt, which enhanced the Group’s resilience.
Prior to the outbreak of the coronavirus, FY2019/20 was already a year fraught with challenges that were impacting both aeronautical and non-aeronautical revenue. The global economy was unsettled by the US-China trade dispute, sluggish economic growth in China and heightened Iran-US tensions. Added to this, tension between oil producers resulted in price volatility. In South Africa, ongoing economic stagnation culminated in a 1.4% contraction in the fourth quarter of 2019 and with the downward trend continuing in the first quarter of 2020, our domestic economy slipped into a technical recession.
On 27 March 2020, Moody’s Investors Service (Moody’s) downgraded South Africa from an investment-grade rating to Ba1, maintaining a negative outlook, spurred by the country’s weak economy and unreliable power sector.
Fitch Ratings Inc. later followed suit, retaining a negative outlook given the ongoing risks, particularly in the light of the COVID-19 pandemic. Moody’s downgrade of the sovereign rating led to a consequential downgrade of the Group’s global scale rating to sub-investment grade of Ba1 from Baa3 while the national scale rating was downgraded to Aa2.za from Aa1.za. Moody’s has further placed the Group under review for an additional downgrade based on the global economic outlook and the anticipated drastic decline of passenger traffic in the current year with an ensuing drop in earnings that will impact liquidity position and financial covenants negatively. Management is focused on strengthening the Group’s liquidity and restoring its financial profile in order to avoid a downgrade.
SCANNING THE RUNWAY AHEAD
Airlines, airports, travel companies and the tourism sector as a whole face an unprecedented challenge. With 96% of all worldwide destinations having introduced travel restrictions, the current industry landscape is bleak. COVID-19 has surpassed all previous crises in the air transport sector, particularly when its impact on the global economy is considered. The pandemic, which emerged as a global public health matter, has evolved into a global economic crisis. It is anticipated that the global economy will record contraction in 2020. Due to the aviation industry’s reliance on economic activity for growth, it is expected that the global demand for air travel will be drastically reduced in FY2020/21. This reduction in demand may be exacerbated by measures such as travel bans and lockdowns which are aimed at reducing the spread of the virus as well as passengers’ loss of confidence in air travel in the medium to long term. While it remains unclear how long it will take to recover from the effects of COVID-19, we remain proactive in planning our response to various scenarios.
The aviation sector’s most critical issue is the sustainability of airlines worldwide. Domestically SAA, SA Express and Comair are under business rescue. Similar to the South African context, governments and national authorities globally will play a key role in stimulating air transport demand and fostering a rapid recovery of the aviation sector. A recovery is estimated at approximately four to five years depending on the distance travelled, either locally or internationally, and the type of travel. Similarly, business travel is expected to recover faster than leisure travel, albeit at a permanently lower level. Ultimately, a loss of five to seven years of industry growth is expected.
Although this era is one of extreme loss it also poses an opportunity to redefine the air transport sector to become more sustainable, agile and resilient. This will be possible only through extensive stakeholder collaboration and engagement. Post year end, we have seen the South African Reserve Bank cutting rates twice by 50 basis points within a short period of time in an effort to stimulate the economy. The central bank also introduced additional measures to manage liquidity in financial markets during the COVID-19 crisis, which entailed buying government bonds on the secondary market. These unprecedented measures show that South Africa is facing serious headwinds accentuated by credit rating downgrade, rising borrowing cost, constrained fiscal policy and rising unemployment. The IMF projects that the economy will contract by 5.8% in 2020 before recovering in the following year to expand by 4%.
As we enter this business environment, navigating our new normal goes beyond cost reduction by focusing on all facets of our operations. As part of the strategy review, we developed a ‘Recovery and Sustain’ Tactical Plan and will undergo a full strategy review encompassing the Department of Transport ministerial mandate and the South African Government’s MTSF priorities. The key areas of the ministerial mandate which we anticipate will make significant contributions span safety and security, economic growth and job creation as well as seamless integration of public transport across modes and accelerating transformation towards greater economic participation. These dovetail with our focus on MTSF priorities such as Economic Transformation and Job Creation; Spatial Integration, Human Settlements and Local Government; A better Africa and world. To address these, we have refined our strategic approach to the aerotropolis concept, cargo business, strategic partnerships, enterprise security and our training academy.
We define transformation as a process that collapses the barriers of exclusion and provides development opportunities for previously excluded groups, which contributes to inclusive growth and stability, thereby creating a sustainable future. We remain committed to the transformation of the South African construction, engineering and aviation sectors in line with national transformation imperatives in a manner that broadens economic participation, economic growth and job creation. Even though our operating environment has changed we remain committed to our transformation agenda.
LEADERSHIP AND GOVERNANCE
Robust governance is an indispensable foundation to successfully manage the impact of the COVID-19 pandemic on our country, the aviation industry and our business. Sound financial principles, underpinned by a strong corporate governance culture have, over the years, seen Airports Company South Africa through difficult economic conditions.
During the year under review, our governance structures were strengthened and management stability restored with the appointment of new board members and a permanent CEO and CFO.
My fellow Board members and I are committed to working with the Minister of Transport, the Auditor-General of South Africa and other relevant state organisations to move us forward and ensure the effective implementation of good governance. We are focused on scrutinising aspects such as irregular expenditure and will not hesitate to implement consequence management.
On behalf of the Board, I would like to commend Mpumi Mpofu, her executive team and all employees for their unwavering commitment to the Group and the extra effort in these challenging times. I must also extend the Board’s gratitude to Bongiwe Mbomvu and Fundi Sithebe, who were appointed as acting CEOs while the recruitment process was underway.
Finally, I extend my appreciation to my fellow directors for their wisdom, diligence, commitment and continued support. I would like to thank the outgoing directors, Kate Matlou and Deon Botha for their invaluable contribution during your tenure. We welcome the new directors who were nominated to serve on the Board by the PIC, Kemira Esterhuizen and Graeme Victor. We also welcome new directors who were appointed by the Minister, Dr Kgabo H Badimo and Dudu Hlatshwayo, to serve on Airports Company South Africa’s Board.
I know I speak for our entire Board and leadership team in saying that, despite the extraordinary and unprecedented current circumstances, we remain confident in our people and we are optimistic we will retain our position as Africa’s leading airport company. The world will continue to change and so will we, finding ways to do our work, developing new capabilities and helping our stakeholders thrive through what is sure to be a challenging few years.