SAA Results Presentation and Future Strategy 31 October 2001

transcript

SAA Results Presentation SAA Results Presentation

and Future Strategyand Future Strategy

31 October 200131 October 2001

2SAA Results and Strategy 210901 ANV

SAA results for last 5 years

YE March 2001 - an extremely challenging year

Details of financial performance

SAA future strategy “Perfecting the Basics”

USA impact

Summary

Agenda

Contents of Results

Operating Statistics

Reported Net Profits/(Losses)- Including Asset Sales and significant items

Headline Earnings/(Losses)- Excluding Asset Sales and other adjustments

Adjusted Net Profits/(Losses)- Headline Results deduct/add once-off items

Balance Sheets

Results for the last 5 Years

South African Airways has been a growing business

2001 6,1

1997 4,9

Cargo Ton

Km (Mil)

29,656

23,659

25,173

21,528

29,034

ASK’s

Turnover improved significantly, however spiralling operating costs offset revenue improvements

2001 10,839

Turnover

11,806

Operating Costs

6,070 6,506

RM’s RM’s

Reported Net Profits/(Losses)

RM’s

31 March 2000

31 March 2001 408*

31 March 1998

31 March 1999

31 March 1997 (396)

Year Ended:

Reported Profits show a strong upward trend

* Subject to any adjustments that may be required by the actuarial valuation and audit of the Transnet Pension Fund

SAA has researched the airline industry to establish if a universal practice exists in publishing reported results:- Some airlines include profits/(losses) from aircraft sales in operating

results (e.g. Swissair, Air France, Finnair, Lufthansa, etc) because regular turnover of the fleet is part of the business

- Other airlines exclude profits/(losses) from aircraft sales to arrive at operating results, but include them only in the bottom line (e.g. airlines reporting under US GAAP - such as KLM, BA)

SAA has in the past (1997-2001) included profits/(losses) from sale of aircraft in its operating results

SAA has decided to present its results in-line with the GAAP headline earnings in order to provide full disclosure

Reporting methodology

To arrive at Headline Earnings/(Losses) (in terms of GAAP) adjust for the following:

- Profit on Sale of aircraft and other assets

- Profit on Sale of business operations

- Other adjustments

Headline Earnings/(Losses)

RM’s

31 March 2000

31 March 2001 (735)

31 March 1998

31 March 1999

31 March 1997 (477)

Year Ended

RM’s

Significant “One Time” and “Exceptional” items are deducted/added back to Headline Earnings/(Losses) to arrive at Adjusted Net Profits/(Losses)

- Revenue items (deducted)

- Cost items (added back)

Adjusted net profits account for one-off items

Adjusted Net Profits/(Losses)

RM’s

31 March 2000

31 March 2001 (627)

31 March 1998

31 March 1999

31 March 1997 (411)

Year Ended

Reported NetProfits/(Losses)

RM’s

HeadlineEarnings/(Losses)

RM’s

Adjusted Net Profits

The “core business” of SAA improved from the year

ended 31 March 1997 to the year ended 31 March 2000

...However...

It declined significantly in the year ended 31 March 2001

What do the Headline Earnings/(Losses) and Adjusted Net Profits/(Losses) show?

USA impact

Summary

Agenda

The challenges of YE March 2001

YE March 2001 was particularly challenging for SAA

Fuel price

Rand devaluation

Implementation problems with B737-800

Long-haul product not competitive

Excess capacity on European routes

Difficulty with implementation of Africa strategy

Hedge gains offset, but did not eliminate fuel cost increase

2000 Price Effect Forex Effect Hedge Gain 2001

(456)2,431

R(m)Budget

SAA’a revenue is earned in a basket of currencies which historically offset US$ operating cost increases as a result of the devaluation of the Rand

The strengthening of the US$ against major European currencies caused SAA’s historical natural hedge to diminish

Steps are being taken to redress this imbalance

Year Ended 31 March: 2000

Rand devaluation:

199919981997 2001

9%6%8%22%– Year-on-year Change

R7.39R6.16R5.87R4.72R4.49– Actual Average Rand/US$

US Dollar strength increased costs more than revenues

20%5%24%5%– Year-on-year Change

R11.46R10.50R9.89R9.18R7.55– Actual Average Rand/GBP£

Implementation problems - revenue/cost impact- Business class seats- Pilot training- Airport handling- Cargo/Baggage Handling- Delayed installation of winglets temporarily increased fuel use- Ownership cost greater due to Rand devaluation, but offset by

interest earned on surplus cash

Negative Impact (R152M)

B737-800’s have not yet delivered gains expected...

...But progress has already been made in tough operating environment

Route network extended to over 600 destinations through alliances with world class airlines

Yield management system improved

Sales organisation enhanced

Strong cost controls introduced

Fuel Hedge program continued

Strong Balance Sheet 2001 2000- Free cash R2,0B R1,5B

Built on Strong Bi-lateral Alliances, the SAA Network Serves Over 600 Destinations

Johannesburg/Cape town

Atlanta

NewYork

Frankfurt

Hong Kong

São Paulo

London

Zurich

Perth Sydney

Extensive Network

USA impact

Summary

Agenda

Headline Earnings Adjustments-Profit from sale of assets

Sale of land to ACSA Sale of four A300 aircraft Sale of one B747 Freighter Sale of two A320 aircraft Sale and leaseback of ( x ) B737-200’s Sale and leaseback of two B747-400’s Sale and Leaseback of one B747-300 Sale of Ground Support Equipment business unit Sale of other assets Sale of Duty Free operation

-Payments for Branding & Codeshare - SA Airlink-Phase out costs on A300 and A320 fleets-Write down of Equant NV shares-Write up of Equant NV shares- Impairment of assets

(269) (477)(289)(32)(735)

(391)(760)

(130) 13(202)(1,562) (81)

(30)(26)

10 (396)(302)349408

31/03/98 31/03/9731/03/9931/03/01 31/03/00

SAA (Pty) Ltd SAA a division of Transnet Ltd

Deriving Headline Earnings from Reported Profits

Fleet strategy

To release aircraft equity, where the future value of such aircraft is under threat

To retain the proceeds for investment in future fleet requirements

This strategy has been followed in respect on the following fleets: Boeing 737-200 (13 aircraft) Boeing 747-400 (2 aircraft) Airbus A300’s (4 aircraft) Airbus A320’s (2 aircraft)

737 values dropping due to future noise

abatement regulations

Aircraft assets were sold for good commercial reasons

2001 2002 2003 2004 2004 2006

Boeing 737-200 price developmentUS$ MM- 2nd Half 2000

747 values dropping as major airlines

reduce average aircraft size

Aircraft sales versus guaranteed exit in future from ageing aircraft fleet

A300’s and A320’s sold as part of 737-800 fleet renewal program

2001 2002 2003 2004 2004 2006

Boeing 747-400 price development

US$ MM - 2nd Half 2000

Deriving adjusted profits from headline earnings

Revenue items-Forward Sales releases (Historic)-Voyager Revenue - Accolades Program-FEC rollover profits related to B777 order-Atraxis outsourcing inducement-Airchefs dividends received-Apron Services Management Fees-Restructure of leases in respect of two B747-400’s-B767 Reimbursement for under performance

Cost items-Retrenchment costs-Settlement costs (expatriates)-Engine overhaul outsourcing-Spares write-off - obsolete spares write-off-Spares write-off - A320 and A300 spares write-off-Veer.com write-off-Pension Fund conversion costs-Other provisions- Interest on Pension Fund Debentures

Adjusted Profits/(Losses) after significant items and Headline Earnings/(Losses) adjustments

(7)(7)

SAA (Pty) Ltd SAA a division of Transnet Ltd

(197)(441) (7)(7)(139)

549 146 7343135

31/03/98 31/03/9731/03/9931/03/01 31/03/00

(627) (83) (411)(253)(273)

(269) (477)(289)(32)(735)Headline (loss) Earnings

Balance sheets for last 5 years31 March 31 March 31 March 31 March 31 March

2001 2000 1999 1998 1997R Million R Million R Million R Million R Million

ASSETSNon-current assets 5,496 5,423 5,792 4,346 3,972

Property, aircraft and equipment 3,677 5,031 5,640 4,255 3,943

Intangible asset 203 179 - - -Investments and long-term asset 1,616 213 152 91 29

Current assets 5,240 4,403 2,681 2,080 1,640

Inventories 535 764 883 721 607Accounts receivable 2,072 2,116 1,183 944 741Other assets 424 72 - - -Short-term portion of long-term asset 169 - - - -Bank balances and cash 2,040 1,451 615 415 292

10,736 9,826 8,473 6,426 5,612

EQUITY AND LIABILITIESCapital and reserves 3,884 3,463 2,031 2,031 2,031

Non-current liabilitiesDebentures to pension fund - - 261 261 261Long-term liabilities 1,818 2,089 2,947 1,824 1,311Current liabilities 5,034 4,274 3,234 2,310 2,009

Bank overdraft 1 - - 30 62Other liabilities 174 412 - - -Air traffic liability 1,346 1,140 1,071 1,080 730Accounts payable 3,381 2,554 2,163 1,200 1,217Short-term portion of long-term liabilities 132 168 - - -

10,736 9,826 8,473 6,426 5,612

Cash flow

2001RM

2000RM

1999RM

1998RM

1997RM

Operations 389 440 844 101 (17)

Investments 506 (1,253) (1,708) (759) (356)

Financing (307) 1,649 1,094 813 383

Increase 588 836 230 155 10

Year beginning 1,451 615 385 230 220

Year End 2,039 1,451 615 385 230

USA impact

Summary

Agenda

Return SAA to profitability

Key challenge for the future

Future Strategy

Strategy of

“Perfecting the Basics”

Revamp customer service

Sustained revenue growth

Optimise alliances

Implement Africa strategy

Cost reductions

Improve operating efficiencies

Renew long haul fleet

Manage currency and fuel exposure

Staff development

Future Strategy

Key Deliverables

Know our customers- Customer focus groups

Give customers what they want- Revamp gate to gate service and product to deliver

seamless and differentiated customer service- Implement business class seating in short haul fleet- Implement product upgrades on key long haul routes- Plan future long haul fleet

Revamp customer service

RegainPremiumMarket share

Key Deliverables

Optimise frequencies, schedules and aircraft type; eliminate multi-stop services

Offer maximum connectivity from existing alliances

Attract new alliance partners to extend global access

Revamp customer service continued...

Key Deliverables

2002 YTD growth - 26,7%

Passenger

155427

DomesticRegionalInternational

Revenue Growth

Key Deliverables

2002 Yields2001

Domestic

RegionalInternational

Passenger

6331,2803,083

7291,6163,335

Key Deliverables

2002 Load Factors2001

Domestic

Regional

International

Passenger

65,566,6

67,464,5

Key Deliverables

2002 YTD growth - 14,6%%

Revenue Growth

Domestic

Regional

International

Key Deliverables

Planned growth of R250M

- SwissAir MD11 D-checks (12)

- Lufthansa B747 D-checks (2)

- 1,000,000 manhours committed by Boeing as part of the B737-800 acquisition

Technical

Key Deliverables

Optimise Alliances

Maximise benefits- Growth in yields achieved- Better connectivity- Increase in destinations served (600)- Relationships with all major global alliances

Star Alliance one world Sky Team Qualiflyer

- Audit underway

Key Deliverables

Implement Africa Strategy

Develop hub strategy for East and West Africa

Resume operations to US$ markets Kinshasa Livingstone Ndola

Increased capacity and frequency (54% revenue growth)

Great Opportunity African Open SkiesBuild SAA’s position as the leading airline in Africa

AccraAccra

HarareHarareLusakaLusaka

Dar Es SalaamDar Es SalaamNdolaNdolaLuandaLuanda

NairobiNairobiEntebbeEntebbe

KigaliKigali

LagosLagos

AbidjanAbidjan

ComoresComores

MauritiusMauritiusBulawayoBulawayo

DurbanDurban

SalSal

Walvis BayWalvis Bay

LilongweLilongwe

BlantyreBlantyre

GaboroneGaboroneMaputoMaputo

MaseruMaseru

ManziniManzini

Vic FallsVic Falls

WindhoekWindhoek

Cape TownCape Town

JNB JNB

Key Deliverables

Cost reductions

Cut general costs by R250M Reduce catering costs through product simplification (R40M)

Bistro bag

Rand procurement i.s.o. US$ procurement Toilet bags

New fleet will reduce maintenance costs Distribution costs

Commissions reduced by 2% (R70M from 2003) Overrides limited to 60% of prior year (R30M from 2003)

Renegotiate labour agreements for FDC Restrict use of expatriates and consultants (R250M)

Minimum savings expected R600M

Key Deliverables

Shorthaul Optimise B737-800 implementation

Split B737-800 and B737-200 fleet Install new business class seats Retrofit winglets to achieve fuel savings Lease out off peak surplus capacity (Transavia - R20M)

Reduce turn times on domestic schedule from 60 to 30 minutes Free up 4 aircraft (R100M saving in ownership cost)

Key Deliverables

Longhaul Millenium product

Complete implementation on B747-400 fleet Regain competitiveness

New fleet RFP scheduled for 26 September 2001 Reduce DOC’s (to significantly offset ownership costs) Enhance reliability Increase utilisation Crewing efficiency Improve cargo capacity Additional lift for domestic and regional

Key Deliverables

Manage currency and fuel exposure

Total commitment - US$1,3 B Covered - US$1,0 B MTM ±R500 M

Covered 70% Objective 100% Expected cash flows US$3 M per month Implementing hedging strategy for

domestic uplifts Expected savings (R15 M)

Jet Fuel:

US$ Commitments:

Key Deliverables

Staff development

Restrict use of consultants (R130M)

Fast track talented individuals SwissAir training

Utilise industry training programs

Proper succession planning to reduce reliance on expatriates

Reward for performance Incentive programs being developed

YTD Results 2002

SAA (Pty) Ltd Actual Budget Actual

Year to date Year to date Year to dateSep-01 Oct-01 Sep-00

Reported Net Profits/(Losses) 96,113 (60,544) 285,395

Headline Earnings adjustments:

Profit from sale of assets (512,592) (149,099) (457,775)

5 x A320's (484,051) (149,099) 0

2 x A300's (28,541) 0 (66,922)

13 x Boeing 737's 0 0 (390,853)

Sale of route rights to SA Airlink 0 0 (34,500)

Phase out costs on A300 and A320 fleets 72,920 0 42,483

Write down of Equant NV shares 28,512 0 103,008

Impairment of Atraxis 186,411 0 0

Headline (loss) earnings (128,636) (209,643) (61,389)

USA impact

Summary

Agenda

R1,8B turnover generated out of the USA

Too early to quantify impact

Team currently analysing situation

Freeze placed on employment

Insurance impact (R70M)

USA Impact

Agenda

USA impact

Summary

Strategy of

Summary

will return SAA to profitability

“Perfecting the Basics”

Corporate Governance

Significant focus

PFMA 1 April 2000 Significant complexity

New Chairman - D.M.J. Ncube

Directors and Management committed to highest level of corporate governance and compliance with the PFMA

Thank YouThank You

Male Female

Black BulletText BulletText

White BulletText BulletText

Asian/Coloured BulletText BulletText

Head Count

- Step 1 - New Leadership Team

- Step 2 - Developing Our People

- Step 3 - Strategic Changes and Implementation

“Perfecting the Basics” comprise of three steps:

Future Strategy

Focused on developing “customer service”

Introducing additional airline experienced leaders in key portfolios

Empowering management and staff - reducing the number of direct reports to CEO from 17 officers to 11 EVP’s

Future Strategy

Step 1 - A new leadership team

Substantial focus on Corporate Governance

Future Strategy

Corporate Governance - PFMA

The PFMA as introduced 1 April 2000 with the intention of ensuring that State owned enterprises are managed efficiently and effectively

This act has introduced significant complexity in management of the airline

Both the Directors and Management are committed to the highest levels of corporate governance and compliance with the PFMA

Steps have already been implemented to improve corporate governance

Developing Passionate People …... Training & Rewarding Performance

Working the Right Way …... Changing Culture; living SAA’s Values

and being Accountable

Doing the Right Things …... Aligning with “Perfecting the Basics”

Future Strategy

Step 2 - Developing our people

Commitment to highest standard of corporate governance New highly regarded Chairman (D Ncube)

Revised Delegation of Authority for Management

Board to be strengthened with addition of experienced non-

executive directors

Developing our people, building passionate customer service Complete revamp of Service from Gate to Gate in process

Entire service delivery redefined and retraining being undertaken

Jobs being regraded and incentive scheme under development

With our “Perfecting the Basics” strategy, we are committed to putting SAA on the path to profitability

Summary and Outlook 2002

Costs reduction program implemented: 75-60% of Fuel usage hedged at $31,7/barrel and constantly

monitored

the reduction in the natural hedge of the Rand/US$ devaluation

being addressed through specific hedging instruments purchased

Use of external Consultants limited annual savings R130M

Expatriates reduced to 2 annual savings R120M

Cost reduction in all operating units expected to generate R500M

Other one-off costs not to be repeated (Engine outsource,

Veer.com, Pension conversion)

Strong Balance Sheet with substantial free cash to enable fleet

renewal

R2,04B

Strong position to take advantage of liberalised skies in Africa

B737-800 Renewal Program:

Sale of two A320 aircraft 194

Sale of four A300 aircraft 93

391 Sale and Leaseback of B737-200’s

RM’s

Understanding the financial performance

129 Sale of Ground Support Equipment Business

- Sale of non core “toilet and cleaning” services to Apron

Services

760 Sale and Leaseback of two B747-400’s

Details of the adjustments

- Revaluation of Equant Shares (Write down

from $85.0 to $34.0 per share. Previous

year (2000) was a write up of R178.708M)

Cost added back

Write down of Equant NV Shares

35 One Time Payment for Branding and Codeshare - 25 year contract with SA Airlink

(299)Cost added back

Phase out costs of A300 and A320 fleets - preparation costs in respect of sale of A300’s and A320’s fleets

RM’s

Details of the adjustments (cont.)

39 B767 reimbursement for poor technical performance of “Second Hand” B767’s leased

300 Forward Sales Releases (Historic)- Systems now set up to determine historic

prescribed unclaimed tickets and cargo manifest receipts - which have been written off to revenue

102 Restructure of leases in respect of two B747-400 to improve overall costs

RM’s

Details of adjustments to arrive at adjusted profits

106 Veer.com write-off- Write-off of Veer.com e-Commerce portal

136 Engine Overhaul Outsourcing- One-off cost of moving to “power by hour” contracts

109 Settlement Costs- Early termination costs of Expatriates

Spares write-off- Obsolete spares write-off - A300’s and A320’s spares write-off

RM’s

Details of adjustments to arrive at adjusted profits (cont.)

Fleet plan will further simplify the operations of SAA

2000 2001 2002 2003 2004 2005

B747-400 8 8 8 6 6 6

B747-300 4 6 6 3 - -

B747-200 5 5 1 - - -

B747-SP 3 3 - - - -

B747-200F Cargo - - - - - -

B767-200 3 2 - - - -

B737-200 13 18 20 20 20 20

B737-800 - 11 16 19 20 21

A320 7 5 - - - -

A300 8 4 - - - -

Mid-gauge New Aircraft* - - 5 11 15 15

Total 51 62 56 59 61 62

* Assumes no-growth

Improved domestic market share

Strong international network and connectivity

Marketing capabilities to international standards

- sales

- yield management

- e-commerce

World class technical operations and third party sales capabilities

Key strengths for the future

Future Strategy

Consultants Costs 2001 2000

- Bain & Co. R82,2M R76,6M

- McKinsey and Co. R54,4M R 9,6M

(including Veer.com charges)

Expatriate Costs R174M

Items not adjusted for in years 2000 and 2001

SAA Results Presentation and Future Strategy 31 October 2001

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