Message from the acting CEO

Our planned infrastructure development programme over the next few years will assist us to respond to the growing needs of our passengers, the airlines and the business community. The aim is always to provide the planned infrastructure at an appropriate time and in the most cost-effective manner. Whilst the provision of infrastructure is critical, we must pay attention to our changing environment and the challenges it poses to our business. While the Group is an infrastructure-intensive organisation, and the provision of which is demand-driven, it is anticipated that we will be required to increase operational efficiencies even further to still handle increasing traffic and passenger and cargo throughputs with the same infrastructure.

Changes in technologies are also impacting the way airports do business. With digital transformation, processes are getting more and more data-driven and there is a shift towards real-time information and data analytics to assist us with a more reliable and predictive approach to passenger satisfaction. New technologies such as artificial intelligence, robotics, biometrics, augmented realities and facial recognition are changing the way operations are managed, with a focus on efficiencies and excellence. With this advancement, comes cyber-security challenges which potentially threaten data protection.

Airports are now processing more empowered passengers whose travel patterns and behaviours have fundamentally changed over time. Further, the processing of passengers happen more and more off airports, consequently posing challenges to infrastructure relevance. Business is getting more complex with explosive demands, environmental concerns, changing politics, and rapid introduction of disrupters.

This means airports are compelled to work in an integrated manner with their respective stakeholders to ensure relevance and to co-create efficiencies.

In FY2018/19, we celebrated our 25-year anniversary, a Silver Jubilee. As South Africa’s key airports operator, this afforded us the opportunity to reflect on how far we have come since its inception as a state-owned company in 1993. The last 25 years have afforded us the most desired opportunity of turning nine independent airports into a world-class network of facilities; whilst developing institutional expertise as well as an enviable reputation in building, operationalising and commercialising airports.

Over the last 25 years, we have invested billions in the development and maintenance of key airport infrastructure and contributed billions back to the South African economy by way of facilitating trade and commerce each year. Through the ongoing development of this infrastructure, we have also contributed to further opening air travel to more South Africans, thus laying the foundation for future economic growth. During this past financial year, it was also encouraging to see the steady growth of domestic air travel across our network, especially at the King Shaka International Airport.

The Group enjoys a strong financial position, remains profitable, operates on sound financial principles and is underpinned by a strong corporate governance culture. This combination has, over the years, seen Airports Company South Africa through difficult economic conditions, as well as protected the Group from unethical conduct and malice. The significance of striking a balance between the needs and aspirations of a developmental state and running a profitable business guides our daily operations. During the year under review, the Board approved several infrastructure projects aimed at improving our capacity at various levels. These projects have been part of our Permission cycle, approved by the economic regulator. We will speed up implementation so that we augment our capacity as expected by our clientele. We are confident that the completion of these projects will position us to meet all the future needs of our customers and stakeholders. In line with this, the enterprise project management office is being strengthened to support our planning and implementation functions.

Our operating model lays a solid foundation for the work carried out by all the divisions of our business. We have also completed our task of matching competence to new or altered roles in our revised operating model. During the year under review, we have started paying attention to succession planning to ensure proper succession in most areas of our business, particularly for those with critical skills.

An economic impact assessment conducted in FY2017/18, indicates the extent to which we have been successful in playing an enabling role in the economy but also in the communities in which we operate.

Internationally, the Group has sustained its presence through concessions held in Brazil and India. In other markets, particularly on the African continent, we have offered a variety of consulting services. We have also been very active in different committees of the Airports Council International (ACI). This year, we were recognised for our assistance to several airports on the continent to become security compliant by winning an award on the ACI Apex programme.

With several economic constraints domestically, we realise the value of extending our services and operations beyond the realm of our borders. Given this context, we continue to interact with various role players outside South Africa to explore growth opportunities for the Group. During this year, we interacted with several countries like Cuba, Brazil, Germany, Liberia, Zambia, India, Ghana, Thailand and others. These interactions vary from exploring further concessions, to providing strategic services and exchange of experiences. We will continue with this approach as we seek to expand our revenue base from various sources into the future.

Our role as a state-owned company

Being a state-owned company means strategically aligning a profit-making motive with our commitment to socio-economic development and transformation as part of our triple bottom line Sustainability Framework. While we strive to meet stakeholders’ expectations of relentless excellent service, economic growth and sound financial performance, precedent-setting models like Cape Town International Airport’s master plan illustrate how we can work with local communities, suppliers and businesses in a way that brings benefits for all stakeholders. Socio-economic development is not a cost; it is a way of formulating an operating model that will uplift the communities in areas in which we operate.

Develop airports

We cannot create value for our stakeholders without world-class facilities which respond to their needs effectively. We have used a window of certainty in our tariff structure to plan our airport infrastructure expansion and maintenance which address capacity constraints. Capital investment plans will see our three international airports, O.R. Tambo, King Shaka and Cape Town receive much-needed injections which will not only enhance our status as an attractive air travel hub but also as facilitators of transformation. These developments will enable us to lay down infrastructure that truly enables business and commerce in a sustainable way that benefits the country at large.

Improvement of our planning capability has meant that tenders will be issued to market in FY2019/20 accurately specified and ready for implementation. Our major projects will be:

• To construct a new domestic arrivals terminal at Cape Town International Airport, as well as an entirely new Terminal 2 for international departures and a new runway to increase capacity and efficiency.
• To increase aircraft parking capacity and expand Terminal A arrivals at O.R. Tambo International Airport. We are also in the process of redeveloping the airport’s western precinct, where our new head office will be located, as well as a midfield cargo terminal which will enhance South Africa’s status as an air traffic hub and drive new traffic through our lead airport.
• To expand aircraft parking facilities and the Bravo taxiway at King Shaka International Airport.

More details

Grow our footprint

While FY2018/19 featured both the establishment of new air travel links to under-connected regions and the cancellation of some existing routes, we believe as a net outcome this has balanced supply and demand more efficiently so that we can seek replacement destinations in future. During the year we began offering a new route into Shenzen from Johannesburg, links between Vienna and Hong Kong from Cape Town, and a London Heathrow service from Durban. A direct route between Newark in New York and Cape Town will begin later in the 2019 calendar year through United Airlines, as will further links between East and West Africa through Air Tanzania and ASKY Togo.

Our business development team continues to build relationships with airports and authorities across the continent both as a means of securing airport management and consultancy contracts and in order to lay the groundwork for our airport training academy, which is set to become a key component of our non-core revenue in the near future.

In 2006, we acquired 10% of the shares in Mumbai International Airport Limited (“MIAL”) concession and in January 2019 we received an offer from a third-party buyer to purchase our entire 10% shareholding. We are currently going through a pre-emptive process with the majority shareholder, GVK, in compliance with the Shareholders Agreement. We expect this transaction to conclude in FY2019/20 and we are excited as this will create a new pool of capital for investment in the advancement of our Strategy 2025 under this strategic pillar.

On the advisory services and consultancy side, we secured contracts from both foreign and domestic airports:

• Oribi Airport in Pietermaritzburg
• Roberts International Airport in Monrovia, Liberia
• Kenneth Kaunda International Airport in Lusaka, Zambia
• Bugesera International Airport in Kigali, Rwanda

More details

Supply chain management

We took decisive remedial action to correct the challenges we experienced in our supply chain management environment and have implemented stringent measures to strengthen our governance and compliance within supply chain management. This strengthened compliance has led to an increase in the monitoring and detection of irregular expenditure. We should see a reduction over the next financial years.

We trace all non-conforming expenditure and follow appropriate investigations and corrective actions with respect to root causes.

During FY2018/19 we found that key causes of 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, which we note as a challenge plaguing the construction sector as we embark on expansion projects,
• non-compliance with Construction Industry Development Board (CIDB) regulations in awarding bids, and
• delays in issuing tenders to market to replace current service providers before their contracts expire.

Our revision of our supply chain management governance framework and restructuring of the supply chain management function has succeeded alongside strengthening policies, risk management procedures and critical controls in achieving a higher level of reporting of non-compliance. In conjunction with a centralised bid adjudication committee and internal audit reviews, we believe we have eliminated our earlier weaknesses in supply chain management.

Outlook

We are filled with optimism for both the modern, digitally driven airport business we are unveiling and the important transformative role we can play in South African society at large. In the lead-up to 2025 we have much to achieve in improving non-aeronautical revenue’s contribution to overall Group revenue, with an exciting new customer-facing commercial offering. The value creation benefits are sure to be significant. While we have faced challenges in dealing with reduced tariffs affecting our aeronautical revenue, attrition in the global airline industry and a tough global economic backdrop, we enter 2020 with a balance sheet that is in good shape and confidence in our operating model, our global opportunities, our reputation and our capabilities.

We trace all non-conforming expenditure and follow appropriate investigations and corrective actions with respect to root causes.

During FY2018/19 we found that key causes of 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, which we note as a challenge plaguing the construction sector as we embark on expansion projects,
• non-compliance with Construction Industry Development Board (CIDB) regulations in awarding bids, and
• delays in issuing tenders to market to replace current service providers before their contracts expire.

Our revision of our supply chain management governance framework and restructuring of the supply chain management function has succeeded alongside strengthening policies, risk management procedures and critical controls in achieving a higher level of reporting of non-compliance. In conjunction with a centralised bid adjudication committee and internal audit reviews, we believe we have eliminated our earlier weaknesses in supply chain management.

Refer to page 76 for additional information.