We consider matters to be material if they have the potential to substantially affect our ability to implement our strategy as a State-owned company and fulfil our commitment to creating and sustaining value for our stakeholders over the short, medium and long-term.
HOW WE DETERMINE MATERIALITY
Our material matters, which include risks and opportunities, are derived through an integrated assessment process conducted by our executives and approved by the board within the context of our overarching governance framework and operating model. This process is depicted below, followed by a more detailed discussion on each stage of the process.
We assess local and global business conditions that have the potential to affect our business negatively or positively. This includes regular reviews of global megatrends, aviation-specific trends and high-impact events. Refer to business environment.
We identify our stakeholders, review and analyse their concerns and needs in relation to our operating context, and engage with them. This process enables the Company to develop and sustain positive, value-creating relationships with stakeholders. Refer to stakeholder engagement.
Risks and opportunities
A comprehensive risk analysis of our business informs our assessment of materiality and strategic decisions. Refer to risk management.
Magnitude of effect and likelihood of occurrence
We classify our material matters by assessing the relevant internal and external matters identified according to the magnitude of their effect and the likelihood of their occurrence. Refer to assess material matters.
The result of our integrated materiality determination process is a set of clearly defined and prioritised material risks and opportunities that inform our strategy and have the potential to influence the execution of our strategic objectives. Refer to prioritise material matters.
HOW OUR RESPONSE TO MATERIAL MATTERS CREATES VALUE
Our strategy is informed by our material matters. Throughout this report, we demonstrate how our strategic objectives generate sustainable value for our Company, our stakeholders and the broader society in which we operate. The following table demonstrates our strategic response to our material matters, the impact on stakeholders, and the trade-offs that were necessary to create value during 2018 and in the medium and longer term.
Detailed information on strategic objectives and KPIs is available in our strategy.
Identify relevant internal and external matters
We consider internal and external matters in the assessment of our business environment. Our assessment includes an analysis of potential risks and opportunities in our environment and their impact on our stakeholders and our Company. The most significant of these are discussed below.
Increasing demand for global air travel is driven by GDP growth, burgeoning middle-class populations, air service agreements in global and African markets, and lower air fares. This trend is reflected in consistent growth in recent years in the number of international visitors to South Africa and South Africans travelling to Africa or further afield. While this presents a significant growth opportunity for our Company, the increasing demand places pressure on our airport facilities and requires additional investment in the maintenance and expansion of airport infrastructure.
Our ability to plan for the future, achieve our strategic objectives and create sustainable value depends on the regulation of the tariffs we charge for the use of our airport facilities and approval of our infrastructure investment programmes. In December 2016, the Regulating Committee promulgated a five-year tariff determination (Permission Decision) that lends stability to our operating horizon until 2020. This creates a base for the Company’s short-term financial and infrastructure investment planning, and our medium-term and long-term planning is conditional on the outcome of the 2019 to 2023 permission application which was submitted on 6 November 2017. The regulatory decision received in August 2018 provides for an increase in airport charges of 5.8% in 2019 and no increases until 2021. The Company will continue to apply a conservative financial management approach to mitigate against the continuous unpredictability of regulatory decisions, which includes the rationalisation of the infrastructure investment programme from time to time. This is often unfortunate in light of the Industry capacity requirements based on traffic volume growth and the socio-economic benefits that such infrastructure investments would have resulted in. Refer to prioritise material matters for details.
Like all businesses, our Company is affected by economic trends, but we also have a responsibility to enable economic growth. As a State-owned company we are mandated by government to provide certain aeronautical transport services and to contribute positively to the South African economy. Growth in the domestic economy remains under pressure, despite signs of slow economic recovery reflected in 1.3% GDP growth during 2017. The downgrading of Airports Company South Africa’s credit rating, following that of the sovereign credit rating in April 2017 will make it more difficult for us to secure affordable funding in future. Our revenue declined as a result of the 35.5% reduction in regulated airport charges but this was partially offset by growth in passenger numbers and an increase in non‑aeronautical revenue. Lower employee costs supported our drive to contain operational costs. Although confidence has improved since the election of Cyril Ramaphosa as President of South Africa, conditions in the domestic economy are likely to remain challenging, compounded by an increased focus on politics in the lead up to the 2019 General Election.
There were signs of recovery in many other economies in Africa following a loss of growth momentum in 2016. This should have a positive effect on our business activities in Ghana and improve our opportunities in other African economies. It is also likely to heighten competition in the continent’s airport industry.
The Brazilian economy emerged from a recession during 2017. Sustained growth in 2018 is likely to impact positively on the performance of the GruPar consortium and reduce the need for additional funding.
Our Company operates in an economically constrained social environment. To fulfil our mandate as an employer and a State-owned company, we work with our partners to make airline access affordable and to improve skills development to benefit the Company and South Africa. Our transformation processes form part of our business operations as we seek to create value through inclusive growth that aligns the needs of our Company and our partners with those of other stakeholders, including the broader society in which we operate.
Rapid advances in technology have the dual effect of improving efficiency and exposing businesses to the risk of disruption. Our ability to adopt innovative technology and leverage it for the purposes of safety, security, operational efficiency and improved customer service is critical to our global competitiveness and continued operation. We invested in new digital solutions to integrate our airport management systems and implemented a comprehensive strategy to support our intent to become a digitised business able to respond more effectively to opportunities and risk. More details are available below.
Management presents a stakeholder engagement report to the board quarterly through the social and ethics committee. Stakeholder engagement is managed by means of a board‑approved strategy, policy and procedures. Internal assurance of engagement processes identified minor administrative improvements. An action plan was drawn up and the improvements were implemented.
Stakeholder engagement is key to determining our material matters and achieving our strategic objectives. We are committed to purposeful and responsive relationship building with our internal and external stakeholders to achieve expected outcomes that support sustainable value creation.
We strengthened our stakeholder relations strategy and engagement process with the introduction of a stakeholder relations policy which formalises our multi-level engagement plans. The engagement plans are implemented by our executives and business divisions which identify stakeholders relevant to their activities and appoint dedicated stakeholder champions to manage their engagement processes.
A newly formed stakeholder relations team ensures that stakeholder centricity is embedded in the Company’s culture. The team monitors effective implementation of the stakeholder relations strategy according to defined KPIs. Internal awareness and support are developed through workshops and various other interactions to ensure the strategy is implemented in line with our governance framework and operating model.
The following key stakeholder events were conducted during the year:
- A multi-stakeholder survey engagement session with key stakeholders based on RepTrak® survey results. Refer to the graphic
- A Company presentation to Parliament and meetings with the National Assembly’s Portfolio Committee on Transport
- A meeting between the new Minister of Transport, Dr Bonginkosi (Blade) Nzimande and the board
- Distribution of the first quarterly external stakeholder newsletter
- The launch of an annual Airports Company South Africa golf day to prioritise stakeholder engagement with non‑aviation industry stakeholders
- Business-to-business industry engagements and other stakeholder events
A key focus for the year ahead will be to complete the implementation of our engagement plans and improve our performance with new stakeholder engagement software.
Refer to stakeholder relationships for additional information on the governance of stakeholder engagement.
The graphic below outlines our stakeholders, their material expectations and concerns, and their role in our value creation process.
Most of our benchmarking or assessments are independent and externally evaluated. For additional information refer to performance report back.
Integrated risk management
Our integrated risk management process aims to achieve an appropriate balance between realising opportunities for gain, while minimising adverse impacts. The board is responsible for the governance of risk. The audit and risk committee is the delegated board committee responsible for governance and effective oversight of risk.
Our key risks and opportunities are continuously monitored through our enterprise risk management process, which is reviewed annually by our Internal Audit division. The process is based on the outcomes of best practice reviews, annual maturity assessments and continuous interaction with our governance structures, including executives, executive committees, sub-committees and the audit and risk committee. The 2018 review indicated that internal controls and management activities require moderate management intervention and improvement in mitigating against the possible likelihood or consequences of the risks materialising.
The implementation of the revised governance framework and operating model improved the integration of risk throughout the Company. An important development was the implementation of a board-approved integrated business continuity programme to strengthen the effectiveness of our identification and response to internal and external risks. This programme was implemented company-wide with effect from 1 April 2018.
The board vets and monitors the treatment of strategic risks, including active engagement in the review of strategic risks and identification of mitigation activities for each.
The following table describes our top five risks, year-on-year changes and reasons for the changes. Each risk is linked to the relevant material matters and our responses to mitigate risk or realise opportunity. Refer to the governance report for additional information.
|1||The risks are ranked as Priority I (critical risks) and Priority II (significant risks).|
Assess material matters
Our top material matters derived from our integrated risk management process, stakeholder engagement and external environment reviews were:
Our material matters are assessed according to magnitude of effect and likelihood of occurrence on a heat map. We correlate information to assess the degree of relation and completeness against global trends, industry reviews, media searches and a peer analysis. Our executives review the material matters heat map to assess relevance and to ensure its completeness and accuracy. In 2018, this resulted in movements in the effect and likelihood of existing matters. This analysis is reflected in the heat map below with explanations of significant year-on-year movements in the table that follows.
Material matters from 2017 that were managed or mitigated during the year and are reported on throughout this integrated report.
Prioritise material matters
The table below outlines the reason each matter is viewed as material to Airports Company South Africa and these are ranked according to importance.