2008 saa proprietary and confidential. page 1 presentation to portfolio committee on public...

2008 SAA Proprietary and confidential.

Presentation to Portfolio Committee on Public Enterprises June 2008


Context and agenda

• The presentation is based on the request to address specific topics and is structured around:

– Progress made relating to Restructuring– Labour Agreements concluded– An update on efforts to address the boarding and disembarking

of disabled passengers.


Restructuring Feedback

Presented by: Vera Kriel

HOD: Corporate Strategy and Business Planning


Background to restructuring

• By January 2007 SAA experienced significant losses and was forecasting further losses going forward

*Unusual items include impairments, restructuring costs, insurance recoveries, loss on disposition of equipment/ aircraft, loss from discontinuing operations and minority interest(s) and other unusual items identified by management

Historical Profitability

Source: SAA & Seabury analysis

(6.0)

(8.6)

0.1

(0.8) (0.9)(0.8) (0.9)

0.6 0.7

(6.0)

(4.9)

(1.0)

(10.0)

(8.0)

(6.0)

(4.0)

(2.0)

0.0

2.0

Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08Projected

ZA

R (

billi

ons)

Profit (Loss)Profit (Loss) Excluding Unusual Items*


Background to restructuring

• SAA identified that it must overhaul its entire business if it wants to survive and it needs to do this through the theme of

“Simplify, rightsize, re-skill and incentivise”

• The restructuring plan was approved by the SAA board in May, and publicly launched on 4 June 2007.

• The plan envisages the airline returning to profitability by March 2009. Restructuring revolves around group-wide operational, revenue improvement and cost-cutting initiatives to achieve an profit before tax (PBT) margin of 7,5% by March 2009

• Individual General Managers signed off for delivery of initiatives to obtain this improvement


Background to restructuring: The restructuring plan

SAA identified three (3) categories of initiatives in order to achieve most of the 2.7 Billion (ZAR) turnaround:

SAArestructuring

Revenue initiatives

Global initiatives

Departmental initiatives

• 747 elimination• HQ (management) staff

reduction• Labour concessions• Operational performance improvements• Partner relations

• Point of sale share gap• Pricing actions

• Cost reduction• Removal of duplication of functions• Accountability• Contract review


Overall Progress: As on 31 March 2008 the restructuring programme closed at 30m (3%) above target

Cumulative Progress: Budget vs. Actual

0

200

400

600

800

1000

1200

May

-07

May

-07

May

-07

Jun-

07

Jun-

07

Jul-0

7

Jul-0

7

Aug-0

7

Aug-0

7

Sep-0

7

Sep-0

7

Oct-

07

Oct-

07

Oct-

07

Nov-0

7

Nov-0

7

Dec-0

7

Dec-0

7

Jan-

08

Jan-

08

Feb-0

8

Feb-0

8

Month

R

ActualBudget% Above budget

May-07 Jun-07 Jul-07 Aug-07 Sep-07 Oct-07 Nov-07 Dec-07 Jan-08 Feb-08 Mar-08

Actual 14 20 28 46 95 123 365 548 734 943 1141Budget 8 20 38 56 103 111 265 443 649 885 1110% Above budget 78% 0% -25% -17% -8% 11% 38% 24% 13% 7% 3%


Global Initiatives: B747 Grounding – the base case

283

52

57

251

0

100

200

300

400

500

600

ZA

R (

mill

ion

)

Paris OfficeClosure

Lease Costs

Additional Cargo

ProfitabilityImprovement

The B747-400 was an expensive small sub-fleet with high costs versus revenue generated

• Expensive lease costs• Small sub-fleet• Supporting heavy loss

generating routes

Situation:

Action Required: • Cancel Paris• Regauge LHR/HKG/LAD/LOS

routes

Constraint: • (5) B747-400 aircraft leases• (1) owned (defeased Transnet)• Lease expiry: (1) 6/2007, (2)

6/2008, (2) 12/2010• Negotiated mitigation settlement

Potential Incremental Cost (due to immediacy):

• Approximately ZAR 156 million

Grounding of the fleet also triggers accounting write-off of ZAR 1.5 before mitigation

ZAR 643 million

Annual Run Rate Improvement


Global Initiatives: B747 Grounding - progress

• The full fleet was grounded in November 2007.

• Three aircraft were returned to the lessors and one aircraft has been sub-leased to TAAG, the Angolan airline, until November 2008.

• The remaining two aircraft are in the process of being sub-leased through their owners. One of the aircraft has a Termination Agreement signed to date. There is current negotiations underway for the 2nd aircraft.

• As of end of March 2008, a saving of ZAR209.3m was achieved through operational improvements of the fleet and sublease to TAAG.


Global Initiatives: Head Quarter management reduction

Base Case

• SAA benchmarked its headquarters staff levels with those of four (4) other globally oriented airlines.

• The analysis was adjusted to recognize the differing size of the airlines, the complexity of their operations, the geographic locations and other factors (e.g. outsourcing versus insourcing of functions) to create benchmarks for SAA.

• The analysis suggested that there is about 30% excess management headcount in most departments.

• Along with a new organisation design and more streamlined reporting structure for senior management, a total of 235 managers left SAA in the year to end March 2008.

• A saving of R40m was achieved to end March 2008.

• This is sustainable and the full R110m target will be reached by end March 2009.


Global Initiatives: Operational Performance Improvements

Base Case• SAA incur costs associated with

on-time performance, sub-par baggage delivery, lost baggage, interrupted trip, employee turnover and attendance.

• In addition, SAA creates many schedule changes on relatively short notice driving duplication of certain costs such as cabin crew/pilot payroll costs and numerous other inefficiencies.

• It is estimated that improved operational performance could result in annual savings of 50 million (ZAR) by March 2009.

• SAA introduced a new ground handler (Swissport) in February 2008 and operations performance meetings are happening bi-weekly.

• Operational statistics is starting to show the needed improvements.

• Initiatives to improve on-time performance include: Minimum boarding gate closure times have been increased, hand baggage tagging indicating weight to allow for faster boarding as well as boarding by rows.


Global Initiatives: Partnership relationships

• SAA is ready for implementation July 2008

• In alignment with Competition Commission rules and regulations.

Regional airline contracts is rationalised to “best-practice” (pay for service) resulting in ZAR 200 million potential improvement

(15)

34

67

80

34

ZA

R (

millio

n)

Reduction in aircraftownership

Forecast change inoperating costs

Forecast reductionin operating costs

Forecast revenueimprovement

Forecast change inrevenue

ZAR 200 million



Other Departmental Initiatives - Commercial

• Negotiations to reduce distribution costs (ticket booking fees) finalised with Travelport, resulting in savings of up to R78-million a year

• The recent overhaul of SAA’s website, flysaa.com, has been enhanced with the launch of the Online Check-in Service

• Sponsorships were reduced from 37 to five titles. Travel packages have been put in place for most sponsored events

• Closure of international offices where SAA is not flying to and replacing them with agents have resulted in savings of R33m and business class and economy class pricing initiatives resulted in additional R115m at 30 March 2008.

• At year end Commercial delivered R229.2m


Other Departmental Initiatives - Operations

• Second phase of the One-Stop-Shop, whereby each airport counter will be able to process Voyager transactions, ticketing and check-in, is under way. The initiative will be fully operational at all key domestic airports by the middle of the current financial year

• Strong focus on improving SAA’s operational performance to reduce delays, improve on-time performance and reduce baggage mishandling

• Change-over of ground handlers to Swissport has been largely bedded down

• Operations identified additional initiatives (not in original plan) that are sustainable and brought in an additional 12m by March 2008

• At year end Operations delivered 99.6m (22.5m above target)


Other Departmental Initiatives – SAA Technical

• SAA technical delivered a total of R63.3m (R5.8m above target) by 31 March 2008.

• All initiatives at SAA Technical, with a total value of R217m to March 2009 are on track.

• The bulk of the savings relate to more economical supply agreements

35

10

40

132

0

50

100

150

200

1

ZA

R (

mill

ion

)

Current orRequests for NewProposals

Union AgreementAsks

Cabin MaintenancePhilosophyChanges

Internal ProductivityImprovements

```

ZAR 217 million



Other Departmental Initiatives - SAA Cargo

Base Case• Cargo initiatives include a reduction in South Africa and

International based staffing covering both the headquarters and airport handling operations, renegotiating General Sales Agency agreements and purchase of capacity rates.

Progress• Cargo delivered R33m to end of March 2008, R21m more than the

target for year-end.

• These are sustainable to end March 2009

• Key focus now is on further increasing market share in Africa


Restructuring Overview: Summary

• The restructuring plan is on track, but SAA faces massive challenges with soaring oil price and exchange rate volatility

• SAA’s operational performance has improved significantly over the past year, but once-off restructuring costs will push the airline into the red for 2007/08

• SAA has embarked on a process to re-engineer the business to improve efficiencies and keep costs low

• The process of unbundling SAA and establishing seven stand alone entities is under way

• SAA has expanded the restructuring programme from pure cost and revenue initiatives to a customer service improvement programme – this was kicked-off in April 2008.


Labour Restructuring Update

Presented by: Bhabhalazi Bulunga

General Manager: HR


Intro: Process Followed

• The Re-negotiation of conditions of employment was identified as a crucial element in the sustainable turnaround of company.

• The aim was and still is to Standardise and Simplify conditions of employment for all – management, pilots, cabin crew, ground staff.

• This will ensure fairness and uniformity amongst employees and reduce SAA’s high fixed cost base in the future.

• At the same time we are striving to ensure employees are skilled and incentivised.


Process Followed

• There are 6 recognised unions in SAA

• The major challenge was that the 3 processes had to be run concurrently as the timeframes for completion overlapped

• Management headcount reduction• Non Management headcount reduction• Headcount reduction as a result of the implementation of other

restructurings initiatives i.e. One-stop-shop.


Negotiation Update

Wage Negotiations: Ground Staff and Cabin Crew:

• Wage negotiations between SAA management and unions representing the airline’s ground staff and cabin crew members, SATAWU and UASA (AIWU) began in February this year.

• This follows an agreement by labour to freeze wages in 2008 as part of its commitment to supporting the restructuring process.

• Agreement was reached in May on a multi-year wage deal which involved a 9% wage increase for 2008/09, along with a wage agreement formula of CPIX plus 1% in 2009/10 and CPIX plus 2% in 2010/2011.

• Profit Sharing mechanism to be approved and agreed for implementation 2009/2010 onwards


Negotiation Update

Wage Negotiations : Pilots

• The South African Airways Pilots Association (SAAPA) and management also reached a multi-year wage agreement.

• This agreement involved a local market movement formula for salary increases for 2008/09 and 2009/10 and an agreement to suspend the Maintenance of Parity (MOP) agreement for three years.

• SAAPA had also agreed to freeze wages in 2008 as part of its commitment to the restructuring process.

• As part of the restructuring initiatives, SAA management and SAAPA entered into negotiations in 2007 and 2008 on conditions of employment and reached agreement in May 2008.

• This agreement includes a 5% productivity improvement by pilots, a reduction in the overtime rate and other changes to conditions of employment to achieve sustainable savings to the Company

• Profit Sharing mechanism to be approved and agreed for implementation 2009/2010 onwards


Summary performance

• HR delivered R441.7m by the end of March 2008 (R269.6m) above target

• This is primarily because the savings were reached earlier (from October 2007) than anticipated (January 2008)

• These savings are sustainable provided that management:– Maintains the level of staff as agreed– Does not replace employees currently filling permanent positions

at higher cost to company – Does not use contractors to fill these vacancies.


Challenges

• Time constraints – stringent timeframes compromised process and quality.

• Crisis mode – shortchanged thought out process by constant reality checks, which in some cases compromised the implementation process.

• Imbalance between skills and loyalty – your most loyal employees are not always your most skilled.

• SAA Technical wage negotiation are due in September of this year.

• Turnover – Increase in turnover caused further instability.


Summary of Staff Turnover

Summary of all exits (per job category) where the majority of resignations occurred for the period 1 April 2007 to 31 March 2008

Positions VSP’s Resign Exp. contract Retire Other Total

Cabin Crew 374 121 - 4 17 516

Flight Deck Crew 12 41 - 21 2 76

Ground Staff - 2 - - - 2

Ground Staff – Airport 136 133 - 2 23 294

Ground Staff - Cargo 54 43 - - 4 101

Ground Staff - Corporate 239 126 - 3 8 376

Management 118 105 1 7 4 235

Technicians 8 217 - 7 8 240

Technical (other i.e. admin) 22 81 30 9 10 152

Grand Total 963 869 31 53 76 1992

The job category where the highest exits (resignations occurred) were in Technical – Technicians and Mngt


Staff Turnover (cont.)

% of turnover per GM area over a three year period for the years 01 April 2005 – 31 March 2006, 01 April 2006 – 31 March 2007 and 01 April 2007 – 31 March 2008

AVERAGE %

CARGO

CEO

COMM

FIN

GENERAL COUNSEL

HR

OPS

RISK

SAAT

TOTAL

04/05 – 03/06 0.30% 0.00% 0.38% 0.38% 0.00% 0.21% 2.62% 0.00% 1.48% 5.38%

04/06 – 03/07 0.33% 0.00% 0.74% 0.40% 0.00% 0.18% 3.14% 0.03% 1.70% 6.52%

04/07 – 03/08 1.12% 0.10% 3.00% 1.33% 0.17% 0.60% 10.64% 0.05% 4.39% 21.40%


Mitigating Actions

Category Current Action Mitigating Action

Management Implemented Retention

premiums based on a approved

submission made to RemCo.

Propose to RemCo to move all

managers/Specialist that is paid

below the minimum of the new

Grading Structure to the minimum.

Technical Currently Attraction and

Retention System is in place in

SAAT

Implement Retention Premium to

Technicians in SAAT. The detail of

the scheme, categories, timeframe,

what form of payment etc. still

needs to be developed and

discussed with Organised Labour.

General Staff None Implement Cabin Crew Ranking

amongst other.

Implement Retention premium to

categories of staff where SAA

believe we have a threat if more

staff leave. The detail of the

scheme, categories, timeframe,

what form of payment etc. still

needs to be developed and

discussed with Organised Labour.


Smooth Landing – Celebrate the accomplishments

• 1992 employees left the employ of SAA during the last financial year. 963 of these were VSPs, majority of which left within a 6 month period.

• SAA signed a 3 year wage agreement providing long term sustainability to SAA (inclusive of 2010).

• Management stability as a result of the implementation of Retention.

• Management & Union Relationship is constructive and productive.


HANDLING OF PASSENGERS WITH DISABILITIES

Presented by: Chris Smyth

General Manager: Operations


Agenda

• Background• Immediate Action Taken• Industry Meeting held 11 March 2008• Subsequent Progress• Future Plans


Background

• During 2007 ACSA put out its ground handling licences to tender for all of its Airports

• The tender was awarded in July 2007 to two new handlers, Menzies Aviation and Bidair Services

• Neither were willing to or capable of handling SAA at the commencement of the licence on 1 March 2008.

• ACSA decided to award a 3rd licence in 2008 and agreed to let SAA make temporary arrangements until then.

• SAA entered into negotiations with its handler Equity Aviation to extend its licence for 6 mths but by Dec 2007 had not been able to agree terms with them.

• SAA went to its alternative option and closed a 7 month agreement with Swissport SA to take over from 1 Feb.


Background

• The agreement signed with Swissport was the standard IATA agreement with amendments thereto recorded.

• Swissport SA was initially willing to take on all services except Bussing, Aircraft Cleaning/Watering/Toilets and Passenger Assistance Units (“PAUs”).

• SAA then approached Bidair to conduct these services but in the rush to conclude, a misunderstanding arose between Bidair and SAA over the inclusion of PAUs in their services which was only realised about a week before the 1 February handover.

• Swissport was then contracted to supply PAUs in the understanding that it would take up to 6 months to procure and commission them.


Background

• SAA again attempted to negotiate an extension of Equity’s contract, this time only for PAUs.

• Equity would only extend if we agreed to do so for 6 mths and for all services, despite our having advised them that we had committed to Swissport.

• The changeover occurred on 1 Feb without any phasing in or assistance from Equity whatsoever.

• Due to the late decision to switch to Swissport (2 months before hand over) we were woefully short of equipment on all fronts, including PAUs.

• The initial 2 months were very difficult, with on time performance dropping to below 50% and considerable volumes of baggage being left behind.


Impact

• Despite needing 9 PAU’s across the country Swissport only had 3 of which only 2 were in reasonable condition.

• Passengers with disabilities therefore had to suffer being left for long periods on board plus the indignity and risk of novice handlers using risky Washington chairs.


Immediate Action Taken

• Swissport immediately placed orders for 7 more PAUs for delivery ranging from early April to end July.

• SAA consulted QASA and advised them of the pending shortage of PAUs. QASA provided useful guidance.

• SAA negotiated with both Bidair and Menzies for use of all of their equipment including PAUs. Both handlers were extremely helpful.

• We were able to secure B737 PAUs at the coast which could not reach A319s.

• Many workarounds were tried and discarded. • Eventually we sourced a correctly sized PAU for DUR

and we built a ramp for the undersized PAU in PLZ. We continued to use Washington Chairs (WCh) in ELS.

• We immediately conducted WCh and PAU training


Industry Meeting on 11 March 2008

• Despite these actions we were unable to handle pax with disabilities in accordance within acceptable norms.

• Initially SAA came under vigorous (but justified) attack, but the attention soon shifted to the industry as a whole once Equity withdrew their PAUs completely on 1 March.

• ACSA called a crisis meeting of all handlers, airlines and the two main Disabled Community representative bodies (QASA and NCPPDSA) on 11 March 2008.

• Numerous actions were agreed upon at that meeting.


Remedial Actions Agreed Upon by the Industry

• PAUs have to be equipped with towels and water. • SAA will advise ACSA of flights with passengers needing

PAUs to ensure these are allocated air bridges.• The 3 ground handlers Swissport, BidAir and Menzies

will co-operate and assist each other with PAUs.• PAUs will be regularly inspected for min equipment

(slipper chair, seatbelts, footrests, aircon and interiors)• Old and dilapidated PAUs will be repaired and used but

only until the new units arrived from abroad. • Swissport staff, under the guidance and leadership of the

Disability Sector, will be trained in various sensitivities and the correct handling of passengers with disabilities.


Subsequent Progress and Future Plans

• 2 new PAUs were commissioned in May at JNB/CPT. • Another unit has arrived and is being commissioned this

week in ELS to replace the Washington Chairs• More slipper chairs were ordered according to specs

received from the QASA.• All PAUs are inspected daily and provisioned as agreed• Old PAUs have been refurbished • The SA Disabled Alliance was asked to set up training in

the sensitivities and treatment of pax with disabilities. Trainers led by Ari Seirlis, Therina Wentzel and Jill Wagner came from QASA, NCPPDSA the SANCB.

• This training is now complete.


Future Plans

• 4 more PAUs will arrive this month and will be in use by mid July as follows:– JNB – 1 to bring the total to 4 units– DUR – 1 to replace the unit borrowed from Bidair– PLZ – 1 to replace the small unit with a ramp– ELS – 1 to replace the Washington Chairs– CPT – has its full capacity already

• SAA and Swissport will continue to maintain close co-operation with the leaders of the Disability Alliance.

• SAA will work with ACSA to develop Disability Sector owned and managed handling operations for special needs passengers.


Thank you

2008 saa proprietary and confidential. page 1 presentation to portfolio committee on public...

Documents

saa proprietary

restructuring plan saa

saa board

restructuring costs

restructuring feedback

restructuring programme

saa seabury analysis

target slide