Ernst & Young say improper deals behind huge SAA losses

Potentially 60% of the total procurement by South African Airways (SAA) could, in one way or another, be subject to weak business controls, the airline said on Tuesday.

In the airline's view this must lend itself to "some idea as to why the airline makes such large losses".

This week the SAA board received from Ernst and Young forensics its draft report on the procurement investigation at SAA. This report is the first in a number of investigations that will examine specific areas of the business to identify reasons for the company’s unprofitable trading.

The latest report is currently being studied by the board in order to follow up with specific action plans to address what it calls "identified weaknesses". The report and the action plans will also be placed before Minister of Finance Nhanhla Nene.

Ernst and Young selected a total of 48 contracts across SAA, Air Chefs, Mango and  SAA Technical (SAAT) to study. The purpose was to identify and - if applicable - quantify the losses caused by "failings" in either the procurement or contracting phase or implementation phase of the identified contracts.

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The 48 contracts represent a significant portion of the largest contracts with SAA. The report shows that 28 of these 48 contracts (60%) are improperly negotiated, poorly contracted or weakly managed, according to the statement by SAA.

"A logical deduction must be that, if these - many of which are the largest contracts awarded - suffer these weaknesses, then the bulk of the smaller contracts will be at least, if not worse," said SAA.

The board wants to know why it took an external Ernst and Young investigation to identify these contracts and why they were not identified by management - "particularly by the financial executives".

SAA has, however, been through a flurry of management changes. In November Musa Zwane was appointed as SAA’s latest acting chief executive officer, replacing the airline’s human resources director, Thuli Mpshe, who acted as SAA boss for four months. Mpshe, in turn, had taken over from Nico Bezuidenhout, who replaced former permanent CEO Monwabisi Kalawe. Including Bezuidenhout’s two stints in an acting capacity, SAA has had eight CEOs in six years.

SAA's chief financial officer Wolf Meyer also resigned in November and the airline has suspended its chief commercial officer, Sylvain Bosc.Last week Nene announced that he did not approve the proposed amendment by the SAA board of SAA's Airbus A320/A330 swap transaction structure.

Nene has instructed SAA that it must implement the transaction structure in line with the approval that had already been granted. That would mean to conclude the agreement to swap the purchase of ten A320s for a lease of five A330s from Airbus.

According to Treasury, SAA has not demonstrated that there was certainty that the proposed amendment to its Airbus A320/A330 swap transaction structure would leave the airline in a better financial position than it would otherwise have been had the airline implemented the original swap transaction structure.
 

Source: Fin24