VZCZCXRO0611
RR RUEHBZ RUEHDU RUEHJO RUEHMR RUEHRN
DE RUEHSA #0473/01 0710558
ZNR UUUUU ZZH
R 120558Z MAR 09
FM AMEMBASSY PRETORIA
TO RUEHC/SECSTATE WASHDC 7656
INFO RULSDMK/DEPT OF TRANSPORTATION WASHINGTON DC
RUCNSAD/SOUTHERN AF DEVELOPMENT COMMUNITY COLLECTIVE

UNCLAS SECTION 01 OF 03 PRETORIA 000473 
 
SIPDIS 
 
DEPT FOR EEB/TRA/OTP 
DEPT FOR EEB/TRA/AN/TERRI ROBL 
ROME FOR ANTHONY GIOVANNIELLO 
DAKAR FOR MO KEANE 
FAA FOR NANCY ANGELO 
 
E.O. 12958: N/A 
TAGS: EAIR ELAB ECON SF
SUBJECT: SOUTH AFRICAN AIRWAYS FACES MAJOR CHALLENGES AND SACKS CEO 
 
REF: A. 09 PRETORIA 329 
     ¶B. 08 PRETORIA 2754 
     ¶C. 09 PRETORIA 333 
     ¶D. 08 PRETORIA 937 
 
¶1. This cable is based on collaboration between Embassy Pretoria and 
Consulate Johannesburg. 
 
¶2. (U) Summary.  State-controlled South African Airways (SAA) 
reached an agreement to terminate CEO Khaya Ngqula's contract 
following charges of mismanagement and corruption.  SAA continues to 
face financial, labor, and security challenges that hamper its 
ability to restructure and pursue route expansion plans.  South 
African Government (SAG) officials have announced that the 
government would be unwilling to provide additional government 
support beyond the $156 million promised by the Treasury in the 2009 
budget speech.  SAG officials believe route expansions into Africa 
still represent the biggest growth opportunity for SAA, but 
expressed fears that the current global economic downturn would 
continue to hamper liberalization of the African aviation market. 
Temporarily-appointed SAA Acting CEO Chris Smyth will have to work 
with government and labor stakeholders to ensure that the airline is 
able to address these challenges and redeem the airline's 
international reputation in the run-up to the World Cup.   End 
Summary. 
 
----------------------------- 
CEO DISMISSED FOLLOWING LABOR 
ALLEGATIONS OF MISMANAGEMENT 
AND CORRUPTION 
----------------------------- 
 
¶3. (U) State-controlled SAA announced the voluntary termination of 
CEO Khaya Nqqula's contract following charges of mismanagement and 
corruption on March 11 (Reftel A).  SAA Chairman Jakes Gerwel did 
not announce the size of Ngqula's settlement.  The media reported 
that based on Ngqula's current salary and the August 2010 expiration 
of his current contract, he could receive a severance package worth 
approximately $800,000 based on his current salary and taking into 
account that his contract was due to run until the end of August 
¶2010.  Ngqula was brought in to fix the ailing airline and return it 
to profitability, something SAA has yet to accomplish.  SAA launched 
a restructuring plan in March 2007.  The plan delivered a $12 
million "profit" for fiscal year 2008, but excluded "restructuring 
costs" of $111 million. 
 
¶4. (U) Ngqula was placed on "special leave" last month pending an 
investigation into allegations highlighted by South African 
Transport and Allied Workers Union (SATAWU).  Reports that first 
broke in the press detailed that Ngqula's wife, Mbali Gasi, 
benefited from a R3.5 billion ($350 million) catering contract. 
French-based Servair emerged as the preferred bidder allegedly 
because of Gasi's financial ties to the consortium.  Ngqula has been 
involved in a number of other controversies since taking the helm of 
SAA.  According to press reports, he would fly to meetings within 
the Gauteng province in a hired helicopter. 
 
¶5. (U) The labor unions feel vindicated by the decision as they 
believe their actions brought Ngqula's  conflict of interest to 
light and helped lead to his his dismissal.  SATAWU also provided 
the SAG with a long list of other concerns about Ngqula's approach 
to the SAA restructuring program, which included potential 
outsourcing plans and layoffs that angered SATAWU.  SATAWU has been 
upset about bonuses and salary increases awarded to top-level 
management at a time when the airline was in the red.  More than 
2,000 employees were retrenched during this period and others agreed 
Q2,000 employees were retrenched during this period and others agreed 
to voluntary pay-cuts to improve the airlines financial standing. 
SAA announced that the investigation into mismanagement would 
continue until all of the allegations raised were addressed. 
 
------------------------------- 
SAA CONTINUES TO FACE MAJOR 
CHALLENGES AND SEEKS ADDITIONAL 
GOVERNMENT BAILOUTS 
------------------------------- 
 
¶6. (U) SAA continues to face major financial challenges that will 
hamper its ability to restructure and pursue route expansion plans. 
Fears have emerged of an impending technical insolvency as the 
airline celebrated 75 years of operations in February.  SAA Chief 
Financial Officer Kaushik Patel announced that despite the airline 
having received a total injection or more than $1.1 billion in 
taxpayers' bailouts for its restructuring plan, SAA remains 
undercapitalized and is now in a debt trap.  SAA has a 110 percent 
debt-to-turnover ratio, one of the highest in the world (compared to 
 
PRETORIA 00000473  002 OF 003 
 
 
67 percent for Cathay Pacific, 23 percent for Lufthansa, 47 percent 
for Qantas, 43 percent for British Airways, and 63 percent for Air 
Canada). 
 
 
¶7. (U) SAA recently requested an additional R5.2 billion ($520 
million) in capital from the SAG to deal with the accumulated 
liabilities for its frequent flyer program and to proceed with an 
Airbus contract to avoid being sued for an order cancellation. 
Airbus is demanding millions of dollars in pre-delivery payments for 
an order SAA claims it had cancelled in 2004.  SAA will need 
additional aircraft to capitalize on the opportunities of the 2010 
FIFA World Cup and is considering purchasing new aircraft from 
Airbus for its expansion plans, partly to avoid penalties for the 
order cancellation.  However, SAA's current financial standing 
hinders its ability to secure additional aircraft. 
 
----------------------- 
SAG UNLIKELY TO SUPPORT 
ADDITIONAL BAILOUTS 
----------------------- 
 
¶8. (U) Department of Public Enterprise (DPE) Deputy Director General 
for Transport Dr. Andrew Shaw told an audience at the Africa 
Aviation Outlook Conference in Cape Town that the SAG would be 
unwilling to sink any additional funds into SAA beyond the R1.56 
billion ($156 million) promised by Minister of Finance Trevor Manuel 
in the 2009 budget speech.  The SAG would rather consider 
guaranteeing a commercial loan to help the under-capitalized airline 
survive the current economic downturn.  Shaw also told the February 
18 Parliamentary Portfolio Committee that SAA's restructuring had 
failed in certain respects.  He noted that SAA had not achieved its 
target of spinning-off the freight division, selecting equity 
partners for its frequent flyer program, or meeting revenue 
management targets. 
 
¶9. (U) Shaw said SAA needed to increase its shareholder funds 
substantially to be at sustainable debt levels in alignment with its 
industry peers. However, in the current economic climate, interested 
investors were difficult to find, so recapitalizing of the airline 
remained a problem. 
 
¶10. (U) Shaw said SAG must make SAA "survivable over the next year 
or two" and it needed to identify what it could do to make the 
airline less dependent on SAG funding.  He emphasized that SAA could 
not be allowed to be dependent on bail-outs because the government 
had many other pressing priorities of national importance.  Shaw 
said the recent restructuring of SAA would play a big role in 
setting it up for future health; however, it needed a more 
aggressive rescheduling strategy to deal with rapidly declining 
international passenger demand. 
 
----------------------------- 
AFRICAN MARKET COULD BE KEY 
TO GROWTH, BUT LIBERALIZATION 
HAS BEEN SLOW 
----------------------------- 
 
¶11. U) Shaw believed Africa still represented the biggest growth 
opportunity for SAA.  SAA's ambitious route expansion plan unveiled 
in December 2008 features several new flights to destinations in 
West Africa.  Currently, only 16 percent of SAA revenue is generated 
on African routes, while 60 percent is generated in the 
international market.  The airline hopes to establish regional hubs 
in Dakar, Senegal and Johannesburg (Reftel B).  However, Shaw noted 
that expansion into Africa was being hampered by the lack of 
airspace deregulation in Africa. 
 
¶12. (U) Shaw said the SAG's policy on aviation liberalization had 
been to lead by example by deregulating its own airspace.  Director 
Qbeen to lead by example by deregulating its own airspace.  Director 
General of Transport Mpumi Mpofu has told post on several occasions 
that the 2010 FIFA World Cup has provided the impetus for South 
Africa to pursue unilateral and bilateral airlift strategies to 
expand existing routes in time for the June 2010 games (Reftel D). 
Mpofu said South Africa has been one of the most vocal supporters of 
the Yamoussoukro Declaration (African Union Open Skies agreement) 
through the African Union, but is frustrated by the slow progress 
with African Union deliberations and implementation. 
 
¶13. (U) Shaw noted that the global economic downturn might affect 
African governments' willingness to liberalize the sector.  He said 
"governments may open up their markets and some of their carriers 
will not survive." 
 
----------------------- 
LABOR AND SECURITY 
 
PRETORIA 00000473  003 OF 003 
 
 
CHALLENGES ALSO PERSIST 
----------------------- 
 
¶14. (U) In addition to its financial challenges, SAA has recently 
received negative media attention for continued SATAWU labor 
disputes.  SATAWU announced a general strike on February 20, citing 
large retention bonuses for management and the use of labor brokers 
at SAA.  SAA service has not been affected by the strike thus far, 
but labor unrest has risen and SAA has had to request police 
assistance to ensure the security of air and ground crew members not 
participating in the strike.  SATAWU will take issue with any SAA 
restructuring plans that reduce staff numbers. 
 
¶15. (U) The airline has also received negative international 
publicity recently for security lapses on its international flight 
to London.  Two SAA crews were intercepted at London's Heathrow 
Airport for drug trafficking in January and February 2009 (Reftel 
C).  SAA has created a task team to probe the drug busts and is 
examining the implementation additional of security measures to 
address the security breaches. 
 
------- 
COMMENT 
------- 
 
¶16. (U) SATAWU's willingness to call for Ngqula's head had more to 
do with outrage over management bonuses in the face of worker 
lay-offs than it did with unhappiness about mismanagement or 
corruption.  The fact is that SAA has been losing money for years 
and it has only recently begun to retrench employees.  After the 
voluntary retrenchment of more than 2,000 employees, SAA still 
retains a workforce of more than 8,000 employees.  Industry 
observers also report that many more workers will have to be 
retrenched before SAA returns to profitability.  However, any 
further restructuring will be difficult because SATAWU takes an 
almost irrational view towards retrenchment and will fight any 
layoff plan to the bitter end. 
 
¶17. (U) SAA's decision to terminate Ngqula's contract also comes at 
a time when the airline is facing major challenges and is preparing 
to take advantage of the expected increase in passenger traffic 
during the 2010 FIFA World Cup. The corruption and mismanagement 
charges, drug busts, and labor strikes have hurt the airline's 
international reputation.   SAA Acting CEO Chris Smyth will likely 
remain in the position until the April 22 general elections.  Smyth 
will have to work with government and labor stakeholders to ensure 
that the airline is able to address these challenges in the run-up 
to the World Cup. 
 
LA LIME