Full disclosure will go a long way to clearing the SAA air

THE recent confirmation of the departure of Mango CEO Nico Bezuidenhout to a rival low-cost carrier resulted in a response from South African Airways (SAA) that seemed to be motivated by a desire to imply that he was not as valuable an executive as portrayed in the media, and that Mango’s consistent financial success actually arose from it subleasing 10 aircraft from SAA at a significant discount.

This startling admission is symptomatic of the bumbling buffoonery of our national carrier. As recently as December 2015 it was reported in the media that the board had implied some of its executives were guilty of corruption and mismanagement, while executives in turn accused the board of improper interference and poor governance. By confirming the supply of aircraft to Mango at a discount, SAA essentially corroborated an allegation made by its competitors for years — that it was in contravention of the Competition Act.

Bezuidenhout’s almost immediate response to SAA’s claims was unambiguous: “It’s outright, straightforward, not true,” he said. Later media reports said that Bezuidenhout and Mango had obtained advisory opinions from the Competition Commission on two occasions with respect to Competition Act compliance.

It then dawned on SAA that its first statement could be self-incriminating, and a subsequent damage-control statement “clarified” its position by explaining that “all such agreements had been concluded on a full-cost recovery basis relating to different periods between 2006 and 2016 …. These aircraft were accordingly not leased at a discount and (we) are confident in the assertion regarding the cost of aircraft subleases,” the board said.

Claims, counterclaims, retractions and clarifications have simply added fuel to the latest fire at SAA, giving rise to the question whether Mango’s “consistent profit” story is simply too good to be true given SAA’s history of continual losses and the fact that the companies share the same state-owned enterprise DNA.

Mango’s apparent bucking of trends does raise the question whether its reported accounting profits have arisen from a failure to match all expenses attributable to its operations with revenues in the same accounting period, as required by international accounting standards.

It is unfortunate that because the SAA Group finances are consolidated, there is no detailed disclosure of Mango’s expenses.

To blindly accept the board and Bezuidenhout’s representations that SAA has not unfairly assisted Mango, and to accept at face value that Mango has consistently delivered profits without further interrogation, would be a dereliction of duty. It follows that the historical representations of SAA and Bezuidenhout require closer scrutiny.

Bezuidenhout’s bona fides was questioned about 18 months ago when it became apparent that in two successive sets of SAA Group financial statements (2011 and 2012) it was incorrectly disclosed that he had a BCom and MBA. SAA indicated that he had never claimed he had these qualifications and that although the airline was aware of this, for some reason 2011’s incorrect disclosure was repeated in 2012.

Different biographies of Bezuidenhout appear in these two sets of statements, and if Bezuidenhout didn’t write them himself he must surely have checked them for accuracy. Yet no communication with the company secretary along these lines has ever entered the public domain.

Former ANC minister Pallo Jordan chose to remain silent when, quite inexplicably, the “Dr” moniker stuck. Notwithstanding ample opportunity to correct it, he chose not to do so and eventually paid the price. One has to ask whether the situation with respect to Bezuidenhout’s qualifications is not similar? If the Mango CEO did in fact overlook such an obvious error in successive SAA Group statements, is there not a possibility that he might have perused Mango figures without the necessary attention to detail prior to group consolidation?

It is not apparent which aspects of the Competition Act Bezuidenhout sought advisories on from the competition authorities. Was it specifically with respect to the treatment of lease agreements or did it relate to other matters? Full disclosure, including the context of the information supplied, the questions asked by Mango as well as the answers provided by the commission, would go a long way to clearing the air.

Given the SAA flip-flopping, it isn’t unreasonable to then ask whether the board’s latest claim that the aircraft leases did not favour Mango is factually correct.

One only has to look at the report of the directors in the 2014 SAA Group statements (the most recently released and available financials) and consider the positive and definitive claims the board makes regarding statutory compliance, internal control and internal audit at SAA.

Such claims were soundly debunked by the 2015 EY Forensics investigation, which concluded that 60% of the tenders it investigated at SAA failed to pass muster, prompting further mudslinging between the board and the executive.

Compliance and internal control does not fail overnight and even if EY Forensics investigated matters that fell outside the 2014 accounting period, its findings point towards systemic failure with respect to compliance and internal control.

This surely questions the veracity of the board’s disclosures in the report of the directors for 2014. SAA identifies “integrity” as a core value in its accounts and full disclosure by the board with respect to the following would go a long way to restoring some semblance of credibility:

All separate Mango accounts since incorporation, with detailed disclosure of aircraft lease agreements with SAA and others;

All aircraft lease agreements between SAA and principal lessors relating to Mango aircraft, and the monthly payments made by SAA to lessor/s in respect of these leases;

Detailed schedules of monthly lease payments made by Mango to SAA to ascertain whether there was an initial “lease holiday” or not, and whether monthly Mango payments actually match those made by SAA to the principal lessors.

The conflicting statements regarding leases are cause for concern, and one has to ask if Mango income statement line items — aircraft maintenance, fuel and other shared operational expenses and overheads — have been appropriately allocated and matched. In the event that SAA and/or Bezuidenhout in his capacity of CEO of Mango are unwilling or unable to provide full disclosure, interested parties would be more than justified in drawing adverse inferences.

It remains to be seen whether SAA’s leadership can display the necessary transparency, which is a cornerstone of its claimed core value of integrity.

Claims, counterclaims, retractions and clarifications have simply added fuel to the latest fire at SAA