Message from the chief executive officer
Our main interventions involve the introduction of measures to improve our engagement with key stakeholders and the adoption of technology to ensure that our airports remain safe, secure, efficient and globally competitive.
Our strategic response to challenges in our operating environment enabled Airports Company South Africa to maintain sound financial performance and satisfactory airport service levels. We achieved this while implementing fundamental changes within the Company to ensure that our governance framework and operating model create sustainable long-term value for our stakeholders.
A 35.5% reduction in our regulated airport charges for the use of our airport facilities came into effect on 1 April 2017. While this had an adverse impact on our revenue which declined by 19.4% to R6.9 billion, increases in passenger numbers and non-aeronautical revenue mitigated the impact of lower airport charges. We achieved a return on equity (ROE) of 4.2%.
We met or exceeded 12 (71%) of our 17 KPIs . We continue to work towards the achievement of the remaining five KPIs.
Our strategic evolution
We have worked tirelessly to ensure that the management structures established to govern operational performance are clearly mandated, well-resourced with the necessary expertise to support critical business requirements, and able to achieve our strategic objectives. The organisational culture and leadership approach defined by the governance framework and operating model are being embedded throughout the Company, guiding our employees as they settle into their new roles and new ways of working. This transition was underpinned by a communications campaign, including a CEO Roadshow, to inculcate a culture of growth, accountability and innovation in support of our Vision 2025 goals.
An immediate benefit of the process was the standardisation of contractual arrangements such as lease agreements at all airports, providing more efficient management of airport services. We strengthened project management processes to deliver our major capital investment programmes more efficiently and effectively.
The seven transformation sector strategies implemented in 2017 offer significant potential to accelerate transformation within our Company. The sector strategies achieved varying degrees of progress. By year-end we had awarded three property development opportunities and issued a number of other significant tenders that will increase black business participation in our property, retail and car rental operations. Another important step in the drive towards economic transformation was the appointment of an enterprise supplier development (ESD) partner in December 2017 to guide the development of ESD policies, frameworks and practices, and facilitate the transformation of our supplier base.
We are aware that the use of the B-BBEE scorecard as the primary measure of transformation is limited in that it does not enable us to influence the supply chains of our project contractors and consultants. To address this, we introduced measures in our construction sector strategy, including quantified transformation targets, to ensure that participation in our project procurement processes is accessible to our primary contractors and consultants as well as the subcontractors in their supply chains. Refer to performance review for additional information on our sector strategies.
We consider building relationships with stakeholders as pivotal in creating sustainable value for the Company. To strengthen this process, we developed a stakeholder relations strategy that seeks to support business growth and sustainability, increase shareholder value, build partnerships that grow our footprint, and create mutually beneficial relationships. The strategy was approved by the board during the year and is being implemented. Refer to strategy for additional information.
Despite challenges in our external business environment, the accolades we received demonstrate our global competitiveness. They also support our belief that we remain on track to achieve our vision to be the most sought-after partner in the world for the provision of sustainable airport management solutions by 2025. View our accolades below.
Performance by strategic pillar
We made further progress in the implementation of our three‑pillar strategy, namely to Run airports, Develop airports and Grow our footprint.
Aeronautical revenue declined by 34% to R3.6 billion (2017: R5.4 billion) as a result of the lower airport charges. Non-aeronautical revenue grew by 4.6% to R3.3 billion (2017: R3.1 billion), supported by buoyancy in our retail, car rental and property rental activities.
Our non-aeronautical revenue accounted for 49% of total revenue compared to 37% in 2017. While this is marginally below the 2018 KPI target of 50% , it compares favourably with the global contribution of non-aeronautical revenue, which averages 45% at major global airport operators or groups (source: ACI Airport Economics Report 2017).
We maintained satisfactory service levels and sustained increases in traffic and passenger numbers at our three international airports. However, external factors beyond our control that impacted our business contributed significantly to our inability to achieve our customer service KPI .
These external factors included:
- The delay in infrastructure development programmes to expand our airport facilities due to the two-year delay in the Regulating Committee’s Permission Decision
- Liquidity and operational challenges experienced by domestic state‑owned airlines
- Lengthy queues at immigration counters managed by the Department of Home Affairs
We are actively addressing these challenges. Our main interventions involve the introduction of measures to improve our engagement with key stakeholders and the adoption of technology to ensure that our airports remain safe, secure, efficient and globally competitive.
Technology is improving the efficiency of most industries and placing many at risk of business disruption. We recognise that to remain relevant to our customers, and competitive in the longer term, it is necessary for us to accelerate our investment in innovative digital technology. We need to transform over time from an airport business that leverages technology into a digital business that offers safe and efficient airport services. We upgraded our airport management system to provide our airports with real-time access to all relevant information relating to flight tracking, peak hour analysis and security. Our comprehensive digital strategy drives the enhancement of operational efficiency and customer experience at our airports, while protecting our information and systems. The Company piloted, and is preparing to implement, a range of self-service offerings, including Smart Security technology, to improve customer experience.
Refer to safety and security for additional information.
Airports Company South Africa creates stakeholder value by developing world-class facilities. Key to this is the design and construction of airport infrastructure that responds to the needs of our customers and our industry. Since the approval of the Permission Decision for the 2016 to 2020 period, we have accelerated the planning processes for our five-year infrastructure investment programme to address capacity constraints at our major airports. The board and key stakeholders approved plans for capital investment programmes at our three largest airports, O.R. Tambo International Airport, Cape Town International Airport and King Shaka International Airport.
At Cape Town International Airport, we will construct a new domestic arrivals terminal that will separate the movement of passengers and goods to streamline the flow of passengers and increase capacity for baggage services and retail outlets.
Designs are being finalised for the redevelopment of Terminal 2 international departures to increase capacity, strengthen security and enhance retail, commercial and passenger lounge facilities. Our achievement of an uncontested environmental impact assessment from the Department of Environmental Affairs demonstrates our thorough and environmentally considerate approach to development. It also paves the way for the Company to undertake the construction of a new realigned runway that will enable a sustainable airside development plan for the future.
At O.R. Tambo International Airport, we are increasing aircraft parking capacity and expanding our facilities in Terminal A arrivals. Plans are underway to develop the airport’s western precinct and midfield cargo terminal to accommodate growing demand.
At King Shaka International Airport, a smaller project to expand runway and aircraft parking capacity will be undertaken.
Grow our footprint
Our business development division made progress in its concerted efforts to grow our aeronautical footprint, while increasing our airport advisory services to airports in South Africa and the continent. We continue to build relationships in new markets in Africa, based on our experience and world-class reputation in airport management. We invest considerable energy into translating these relationships into tangible business opportunities that will generate additional non-core revenue.
We secured new routes that connect Rome and St Helena to Johannesburg, and Cologne to Cape Town, while a new route between Vienna and Cape Town is scheduled to commence in November 2018. New carriers expanded their flight offerings on seven existing routes at our three international airports.
We facilitated the establishment of a route development agency in Gauteng. The Gauteng Route Development Committee is mandated to develop new and expanded routes to O.R. Tambo International Airport. Our ongoing relationships with the route development agencies of provincial governments in the Western Cape, KwaZulu-Natal, and Eastern Cape facilitate growth in traffic to our airports, which, in turn, contributes to regional economic growth.
In addition to these developments, we made steady progress in the expansion of our airport advisory service activities. In South Africa, we secured a five-year contract to provide management and consultancy services to the Mthatha Airport. Further afield, we increased the scope of our work at the Kotoka International Airport in Ghana, where we are contracted by Ghana Airports Company Limited to manage the airport expansion project and the terminal after construction is complete. The opening of the airport’s new terminal in August 2018 will represent a significant milestone for our Company, demonstrating our proven track record for the provision of airport management services in the growing African aviation industry. We concluded several memoranda of understanding between Airports Company South Africa and airport authorities in sub-Saharan Africa, including the Cameroon Civil Aviation Authority, Liberia Airports Authority and Namibia Airports Company.
Our equity investments in India and Brazil benefited from strong growth in passenger numbers. Refer to equity investments for additional information.
Supply chain management
We continue to strengthen our supply chain management processes, although we still encounter challenges. As part of this journey, we continue to identify and report irregular expenditure, which is R1.1 billion on a cumulative basis. We are still experiencing areas of non-conformance to supply chain management policies and procedures and, in some cases, non‑conformance to relevant legislation. Where irregular expenditure relates to the Company’s supply chain management non‑conformances, we aim to condone such non‑conformances following appropriate investigations and corrective actions with respect to the root causes.
During the year there was a key focus on the identification of non-conformances to ensure that material irregular expenditure has been reported and is in the process of being treated.
The primary causes of the irregular expenditure were:
- Unavailability of documentation, such as tax and B-BBEE compliance, to provide evidence of conformance to supply chain management policies and procedures
- Non-compliance with Construction Industry Development Board regulations in awarding bids
- Inadequate planning to ensure that new service providers are appointed before current contracts expire
We introduced remedial measures to enforce regulatory compliance and evolve the Company’s supply chain management into an efficient value-adding process.
These measures include:
- A revision of the supply chain management governance framework in line with the new governance framework and operating model and the Auditor-General’s audit recommendations
- Restructuring and resourcing the supply chain division to strengthen management capacity and expertise in line with the new governance framework and operating model
- Strengthening risk management processes by introducing critical controls throughout the supply chain management process. These include contract management to improve project planning and execution. They eliminate irregular expenditure, and document management to locate, validate and review tender files against the supply chain management policies and procedures, identifying and reporting on non-compliant tender files
- Probity reviews by internal audit
In 2019, a new centralised bid adjudication committee will replace decentralised committees. This will provide the Company with a comprehensive view of supply chain management activities across all its operations and enable it to respond early in instances that require forensic investigation. Refer to message from the Acting Chief Financial Officer for additional information.
In July 2018, we celebrated the 25-year anniversary of Airports Company South Africa as a leading provider of airport services. During this period, the airports we inherited from the Government in 1993 have undergone a physical transformation in response to renewed interest in the economic potential of a democratic South Africa and increased air traffic to our country. Consequently, the Company has gained expertise in the building, operationalisation and commercialisation of airports.
We commenced the new financial year well positioned for the future. Our operating model and three-pillar strategy have taken root in the Company and are expected to support the effective management of our cost base and increase revenue over the medium term as a result of stronger operational performance and an increasing contribution from non-aeronautical business activities.
The Company submitted its permission application for the 2019 – 2023 period in November 2017, following extensive engagement with the Regulating Committee to ensure that future revenue and capital expenditure approvals take our strategic objectives into consideration. In August 2018 the regulatory decision stipulated 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.
We will continue to interact with the Regulating Committee to ensure we have a stable and predictable regulatory environment for the benefit of our business and our passengers.
I thank our Acting Chairman, Deon Botha, and the board for guiding us through the difficult but critically important transition in the past year.
Our Company Secretary, Nosisa Kekana, resigned in January 2018 to pursue further studies. Our Chief Information Officer, Sello Mmakau resigned in March 2018 to take up another opportunity. I thank Nosisa and Sello for their valuable contributions to our Company and wish them well in their future endeavours.
Our management team was strengthened by the appointment of Fundi Sithebe as Chief Operating Officer with effect from 1 December 2017. I welcome Fundi to this position.
On behalf of the Executive team, I would like to express my gratitude to our employees for participating in our transition with commitment and determination. I am confident that we have the necessary capacity and capability to implement our strategy effectively and continue providing value to the people of South Africa.
Chief Executive Officer