GEARING FOR GROWTH Presentation to Select Committee on Labour and Public EnterprisesOctober 2006

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GEARING FOR GROWTH Presentation
to Select Committee on Labour and Public
EnterprisesOctober 2006
2
Agenda

• Financial Overview
• Industry Overview
• Strategic Overview (including Network plans and
  STAR alliance)
• Conclusion and way forward

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Highlights
Financial Overview

• Passenger numbers up 4.5, but yields down (3)
• Capacity increased 5.6
• Load factors constant at 70
• Total revenues up 13.0, with Passenger revenue
  flat up only 0.8
• Costs (excluding fuel) increased by 5.5
• Fuel costs increased by 51.5
• Bambanani initiatives bearing fruit R500m of
  savings achieved
• Successful sale and leaseback of two Airbus
  A340-600 aircraft
• Positive cash flow from operating and investing
  activities
• R1.6 billion repaid to Transnet

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Income statement Rm
Financial Overview

• Airline revenues up 2.1
• Release of air traffic liabilities up R400m due
  to new systems implementation
• Margins weakened due to a decline in yields and
  increase in fuel cost
• Bambanani initiatives mitigated margin weakness
• Air Tanzania - discontinued operations

NOTE 2005 were restated for IFRS
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Income statement Rm
Financial Overview
2006 change 2005
Aircraft lease costs 1 897 22.9 1 543
Accommodation and refreshments 599 41.6 423
Depreciation and amortisation 842 24.6 676
Distribution costs 1 551 (10.2) 1 728
Electronic data costs 529 10.1 480
Energy 4 933 51.5 3 257
Labour 3 282 (5.1) 3 459
Material 1 466 32.6 1 106
Navigation, landing and parking fees 977 11.6 875
(Profit)/loss sale/scrapping of fixed assets (257) 100 25
Other operating costs 3 209 5.8 3 033
Total 19 028 14.6 16 605

• Once-off costs, mainly legacy costs and exogenous
  factors, negatively impacted SAA FY2006 results
  .

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Balance sheet Rm
Financial Overview
2006 2005
Non-current assets 8 749 10 582
Current assets 5 240 6 646
Total assets 13 989 17 228
Capital and reserves 1 179 2 705
Non-current liabilities 4 593 5 953
Current liabilities 8 217 8 570
Total equity and liabilities 13 989 17 228

• Post Recap Balance Sheet assumes R4bn Recap
• Non-current assets decreased due to Sale
  Leaseback of A340-600s
• Net asset value declined after SAA repaid
  Transnet R1.6 billion of the R4.0 billion
  Compulsory Convertible Subordinated Loan
• Transnet will convert the balance of R2.4 billion
  to Ordinary Equity
• R1.4 billion aircraft related debt repaid during
  the year

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Cash flow statement Rm
Financial Overview
2006 2005
Cash generated from operations 336 2 021
Net finance costs and derivatives (9) (6 108)
Net cash inflow/(outflow) from operating activities 327 (4 087)
Cash inflow/(outflow) from investing activities 1 456 (298)
Cash (outflow)/inflow from financing activities (3 043) 4 029
(Decrease) in cash (1 260) (356)
Foreign exchange effect on cash 86 (7)
Cash at the beginning of the year 2 614 2 977
Cash at the end of the year 1 440 2 614

• Efficient working capital management resulted in
  decrease in net working capital of R1 billion
• Sale Leaseback proceeds of R1.3 billion
• R1.4 billion aircraft related debt repaid
• R1.6 billion of Transnets CCSL repaid

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Impact of strike
Financial Overview
. . . .on revenue
. . . .on passenger numbers
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Financial risk management
Financial Overview

• Currency risk management..
• SAA exposed to currency risk from foreign
  revenues earned, foreign expenses incurred and
  aircraft financing transactions
• SAA hedges between 50 and 75 of exposure on a
  12 month rolling basis
• Currency risk also managed through cash
  collection and conversion strategies
• Jet Fuel
• Jet fuel is SAAs largest expense
• SAA hedges 40 - 60 of its jet fuel price
  exposure on a 12 month rolling basis
• Interest rate risk.
• SAA interest rate exposure arises from aircraft
  financing structures
• SAA manages its interest rate exposure through
  adjusting fixed vs floating ratio and USD vs ZAR
  ratio of its aircraft financing portfolio

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Unbundling Recapitalisation
Financial Overview

• Unbundling from Transnet..
• Sale of SAA from Transnet to DPE concluded for
  R2.05 billion
• Suspensive conditions to be fulfilled by 31
  December 2006, mainly
• PFMA legislative requirements
• Approvals from 3rd parties replacement
  guarantees
• Resolution of E Class Shareholder matter
• SAA Recapitalisation.
• SAA will be raising R3.2bn - R4.0bn equity to
  restructure its balance sheet
• position SAA for future growth and expansion
• lower cost of capital
• improve gearing and cover ratios
• mitigate currency risks

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Agenda

• Financial Overview
• Industry Overview
• Strategic Overview (including Network plans and
  STAR alliance)
• Conclusion and way forward

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Key themes - Global
Industry Overview

• 2005 was a turbulent year for the airline
  industry
• Global airline industry losses approx US6
  billion in 2005 (IATA estimates)
• Oil price is wild card, cutting into airlines
  efficiency gains and profit
• Oil prices are volatile and remain uncertain
• Airlines need to
• Reduce cost and improve efficiencies
• Consolidate and join global alliances
• Low Cost Carriers continue to be a threat to
  legacy carriers

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Key themes - Africa
Industry Overview

• Increased competitive threat (AF/KLM/KQ, EK)
• Increased partnering and code-share
• BASA constraints (e.g. Nigeria, Angola,
  Yamoussoukro Declaration)
• Strong market growth
• Franchise opportunities
• Aircraft maintenance opportunities
• Increasing Cargo opportunities

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Key themes - South Africa
Industry Overview

• Strong pax growth (only 5 of South Africans
  fly)
• LCC position strengthening
• Competition intensity driving yields down
• Fuel costs bite
• Strong voice of Labour
• Growing online bookings

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Agenda

• Financial Overview
• Industry Overview
• Strategic Overview (including Network plans and
  STAR alliance)
• Conclusion and way forward

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Strategic Initiatives
Strategic Overview

• SAA strategy and specific initiatives

SAA
Corporate Strategy
Domestic
Africa
International
Cargo
SAAT
Low Cost Carrier
Legacy Carrier
Cost Reduction
Bambanani II
Subsidiaries and Non-Core Functions
(Re-engineer, Retain, Sell)
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Network strategy
Strategic Overview

• Domestic/SADC

- Launch low cost offering for leisure and new
travellers- Premium offering for business
passengers

• Africa

- Partner with African carriers Ghana,
Nigeria- Increase point-to-point flying

• International

- Consolidate network in partnership with Star
Alliance- Lie flat seats- Focus on tourists-
Increase direct services- Reduce costs
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Strategic Achievements
Strategic Overview

• ..FY2006
• Historic admission to the Star Alliance
• Bambanani II embedded across the organisation
• IT system implementation complete Amadeus,
  Pegasys, Rapid
• Strong leadership and management team in place
• Marketing achievements ATP, SAA Tennis Open,
  SAA Open

• ..FY2007
• Improved pricing and revenue management
• Improved customer experience
• Voyager Credit Card
• Strong SAA Cargo growth to achieve R4.5bn
  turnover by 2010
• SAA Technical pursuing partnerships, 3rd party
  business Freighter conversions
• 2010 World Cup preparations
• Launch of LCC

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Network plans
Strategic Overview

• SAA is planning growth in key International and
  Regional markets between now and the end of 2007
• Growth in the short term will be driven by
  increased utilization of the existing fleet
  (increasing the return on assets for our
  shareholders)
• SAA will commence operations to five new markets
• Central Africa (2), West Africa (1), North
  America (1) and Europe (1)
• SAA will increase capacity in the four markets in
  the short term
• Supplementary flights will be operated over
  periods of peak demand to strategic markets
• SAA would also like to add capacity to Luanda,
  Lagos and additional flights to Accra however
  bilateral agreements prevent this

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Network plans
Strategic Overview

• October 29 2006
• Operate Washington Johannesburg non stop
• Add one additional Johannesburg - Mumbai flight
• Add one additional Johannesburg - Accra flight
• Increase Johannesburg - Livingstone from 3 to 7
  flights to per week
• Increase Johannesburg - Sao Paulo capacity (by
  574 seats per week)
• Retime Johannesburg - Entebbe flights to
  overnight increasing aircraft utilization)
• Cancel flights to Kigali (to be replaced with
  Rwandair express codeshare)
• Codeshare with Egypt Air between Johannesburg and
  Cairo (Tuesdays, Thursdays, Saturdays and
  Sundays)
• Additional capacity between Johannesburg and Cape
  Town and between Johannesburg and Durban .(to be
  operated at peak times) planned additional 56
  flights between 20 Nov and 1 January schedules
  to be finalised within next few days

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Network plans
Strategic Overview

• November 2006
• Two extra flights between Johannesburg and East
  London on Fridays and Sundays and the return
  flight will be on the same days. The extra
  flights will depart as SA481 from Johannesburg at
  18h50 to arrive in East London at 20h20. The
  return flight, SA484 will depart from East London
  at 2050 to arrive in Johannesburg at 22h20
• Note As of August Business Class reintroduced
  on East London and Port Elizabeth flights
• Air India codeshare implementation
• December 2006
• Operate supplementary flights to London,
  Frankfurt and Perth (December06 January07)
• Thai Airways, Air Mauritius, Air Malaysia
  codeshare implementations

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Network plans
Strategic Overview

• January 2007
• Commence new destination Point Noire, Congo
• Commence new destination Bamako, Mali
• Terminate Johannesburg Zanzibar flight (to be
  replaced with Air Tanzania codeshare)
• Swiss and SAS Scandinavian codeshare
  implementation
• February 1 2007
• Commence new destination Libreville, Gabon
• Add two additional Johannesburg Maputo flights
• April 1 2007
• Commence new destination Johannesburg Chicago
  (3 flights per week)
• Add one additional Johannesburg - Entebbe flight
• Final decision on the continuation of
  Johannesburg Zurich operations
• Commence one daily JohannesburgCape Town flight
  from the International Terminal

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Network plans
Strategic Overview

• July 1 2007
• Commence new destination Johannesburg Munich
  (3 flights per week)
• Operate supplementary flights to Frankfurt (July
  - August)
• September 1 2007
• Operate supplementary flights to Paris (Rugby
  world Cup)
• November 1 2007
• Increase frequency to daily Johannesburg -
  Chicago
• Increase frequency to daily Johannesburg - Munich
• Increase frequency to daily Johannesburg - Mumbai
• Increase frequency to daily Johannesburg - Perth
• Final decision on the continuation of
  Johannesburg Paris operations

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STAR Alliance
Strategic Overview

• The global STAR network that SAA can leverage

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STAR Alliance Highlights Key initiatives
Strategic Overview

• Internal reviews as part of the Star Alliance
  Strategy Realignment Process for the definition
  of all Minimum Requirements was completed (Assets
  Review).
• Collocation in London (LHR airport) and Paris
  (CDG airport).
• After joining Star Alliance, SAA released 12000
  Voyager seats in June 2006 linked to joining Star
  Alliance.
• Round the World Fares (RTW), for the month of
  Jul06 the total Revenue received of R1,2 mil
  from 283 coupons
• Star Alliance Airport Audit was conducted end
  Sep/Oct 2006
• Visit Southern Africa Campaign postponed till
  January 2007 due to inability of all carriers to
  participate effectively.
• Star Alliance Upgrade Awards (SAUA), the Business
  case is currently in progress
• Interline Ticketing in progress, will be
  implemented within 1 year, paperless transactions
• SITA cost savings 657,139 as at Jun06, for the
  period Mar 2005-Dec 2005

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STAR Alliance Codeshares
Strategic Overview
Airlines Current Code-share agreement status
Air Canada Discussions in progress
Air New Zealand None investigating (current Quantas codeshare barrier)
All Nippon Discussions in progress
Asiana Airlines Implemented SAA Marketing and Operating
Austrian Implemented SAA Marketing and Operating
BMI Implemented SAA Marketing and Operating
LOT Polish Airlnes None - for future (2010) investigations
Lufthansa Implemented SAA Operating and Marketing
Scandinavian Airlines Discussion in progress
Singapore Airlines Implemented SAA Marketing
Spanair None for future (2009) according to network strategy
TAP Portugal None for future (2009) according to network strategy
Thai Airways International Discussion in progress
United Airlines Implemented SAA Marketing and Operating
US Airways Discussion in progress
Varig Code-share terminated. Possible discussion with new airline
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STAR Alliance
Strategic Overview

• During June 06 the first STAR alliance customer
  satisfaction survey in which SAA participated was
  completed, with SAA scoring above the STAR
  average. These benchmarks are valuable tools to
  enhance our service offering to the clients

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Product improvements
Strategic Overview

• As of October SAA introduced its premium lie flat
  bed on all its long haul routes
• The premium class experience
• Offers comfortable duvets and big pillows.
• Amenity kits that are being redesigned for more
  variety and a stronger African look and feel.
• Menus have been improved to incorporate the
  creations of foremost South African chefs.
• In-flight entertainment offers a selection of
  block buster movies, documentaries, comedies, PC
  Games and music compilations.
• SAA has refitted the seats in economy class on
  the new Airbus A340s to between 33 and 34 inches
  for increased comfort.  
• The selection of the meal offering on domestic
  routes has been refreshed and introduced
  following our tasting sessions for customers at
  Johannesburg International Airport.

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Agenda

• Financial Overview
• Industry Overview
• Strategic Overview
• Conclusion and way forward

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Conclusion and Way forward

• Looking forward, SAA will focus on the following
  strategic initiatives
• Realising Star Alliance benefits
• Continued focus on Bambanani II
• Improving Customer Service
• Implementation of Network strategy - Low-cost
  carrier, Legacy business, International business
• Gearing Cargo and SAA Technical for growth
• Restructure, Retain or Sell Subsidiaries and
  Non-Core Functions
• Recapitalising SAA Finalising Unbundling from
  Transnet

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Thank youQ A