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SOUTH AFRICAN EXPRESS BILL, 2007

Portfolio Committee on Public Enterprises, Cape Town7 September 2007

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Table of Contents• Introduction

• Overview of SAX

• Separation of SAX

• The Bill

• Implications of the Bill

• Conclusion

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Introduction

• In 2004 the Minister of Public Enterprises approved Transnet’s four-point turn-around strategy to focus on core freight services, namely the provision of rail, ports and pipeline

• The four point turn-around strategy entails the disposal of non core businesses, which will help Transnet management focus on turning the company around into a focused freight logistics company

• South African Express (Pty) Ltd (“SAX”) is not core to Transnet’s freight business.

• The transfer of SAX to Government exits Transnet completely from the aviation sector, thereby cementing a key element of the four-point turnaround strategy.

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Introduction (cont.)• Some of Transnet’s subsidiaries and business divisions that are strategic to

the objectives of Government have been transferred to the State as shareholder or another public entity (indirect shareholding by the State) – eg SAA, Metrorail.

• On 18 April 2007 a full cabinet meeting confirmed and approved the following:

– separation of SAX from Transnet;– acquisition of the SAX shareholding from Transnet by Government represented

by the Minister of Public Enterprises;– establishment of SAX as a SOE; and– submission of the SAX Bill to Parliament for adoption

• The Department published the Bill for public comment in Government Gazette No.29879 of 11 May 2007.

• No comments were received on the Bill and the Bill was certified by the State Law Advisors on 23 May 2007.

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Financial markets characterise airlines in one of three groupings

• Mainline network carriers (e.g. South African Airways)

– Legacy carriers with large hubs

– High costs resulting from high labor costs and hub inefficiencies

– Enjoy revenue premium driven by network and service product advantages

• Low cost carriers (e.g. Mango)

– Single class service with minimal frills

– No hubs or interlining of traffic

– High productivity of aircraft, labor and facilities

• Regional carriers (e.g. South African Express)

– Feed mainline carriers at their hubs

– Operate point to point service in less dense markets

– May be independent or partially spun off from mainline parent

SAX is positioned as a regional/feeder carrier feeding SAA routes. Although SAX is adopting LCC principles as applied to a feeder carrier, SAX is not a low cost carrier

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Regional carriers• Regional carriers mainly operate on shorter distance domestic and

transborder routes

– Less vulnerable to currency fluctuations

– Less dependent on leisure travel which can be impacted by the economic

cycle

– Less vulnerable to general malaise accompanying international terrorism

and instability

• Regional carriers operate a high proportion of their capacity in markets with

little, or no, direct competition

• Despite economic environment and fluctuations in expenses, regional

airlines have shown great resilience by reporting solid operating profits

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Strategic Focus• Continue to build a strong feeder airline

– Develop new secondary entry points into countries such as the DRC and other which are

better suited by a 50 to 70 seater gauge aircraft (SAX is regularly approached by other

African airlines to pursue joint venture opportunities as we are deemed less threatening

than SAA)

– This will increase feed to SAA’s international network via the Johannesburg hub

– The higher regional yield will optimise SAX’s net revenue

• Adopt low cost principles without necessarily adopting no frills model

– Reduce distribution costs. Increase internet bookings

– Promote e ticketing to reduce ticketing costs

• Build efficiencies in aircraft maintenance

– Re-negotiate terms of the engine overhaul contracts

– Re-engineer process of management of spares

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Separation of SAX• Similarly to SAA, SAX will become a stand-alone SOE

that will report directly to Government.• Government decided that SAX should be a stand-alone

SOE rather than a subsidiary of SAA for the following reasons:

– integrating SAX into SAA may have competition implications; – SAX has achieved a turnaround to sustainable profitability as a

stand alone unit with its focus on its own mission rather than merely serving the primary objectives of SAA;

– SAX has a clear focus on its regional service offering; and – focus SAA management on turning SAA around, in line with the

decision to separate SAA from Transnet and make it a stand-alone SOE.

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Separation of SAX (cont.)

• DPE and Transnet held preliminary discussions to identify key principles of the separation.

• DPE, National Treasury (“NT”) Transnet and SAX have formed a working group to execute the separation for the benefit of Government, Transnet and SAX.

• The working group will seek to agree on issues such as the valuation of assets and liabilities, the transfer of guarantees and letters of support issued by Transnet between DPE, NT and Transnet.

• The Minister of Public Enterprises will represent Government for purposes of the transaction.

• The SAX Bill will constitute one of the key conditions for the close of the transaction.

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The Bill

• On 18 April 2007 Cabinet approved the draft SAX Bill• The draft Bill has been published in Government Gazette No. 29879

dated 11 May 2007.• The purpose of the Bill is to provide for -

– The transfer of Transnet’s shares, interests and claims in SAX to Government;

– The future conversion of SAX into a public company with share capital.• The Bill records that the main object of SAX is to engage in

passenger airline and cargo transport services, air charter services and other related services in South Africa and the African continent.

• The Bill limits SAX’s operative scope to the African continent and surrounding islands This will be achieved by using smaller gauge aircraft than the main line and low cost airlines.

• SAX’s borrowing powers are subject to the PFMA, similar to other public entities.

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Implications of the Bill• The Bill authorises Government to acquire the

shareholding in SAX from Transnet• The future conversion of SAX into a public

company will enable SAX to access funding from the private sector easily since public companies are generally recognised as the optimal corporate form to access capital markets

• SAX will continue to run its business as usual• DPE believes SAX should be classified as a

major public entity under Schedule 2 of the PFMA

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Conclusion

• The transfer of SAX to DPE will allow Transnet to focus on its core business and investment programme and avoid the potential negative impact on its balance sheet and credit rating.