saa financial results presentation

SAA financial results presentationJuly 6, 2005

Agenda

• Industry Overview

• Strategic Overview

• Financial highlights

• Financial Review

• Conclusion and way forward

Key messages

• The airline industry remains a challenge for value creation

• Competitors target multiple strategic thrusts to create value

• SAA is well positioned to capture a significant number of growth opportunities

• SAA has taken off to capture these opportunities based on an optimized business system

0

500

1 000

1 500

2 000

2 500

3 000

3 500

Total return to shareholders, 1982–2004Index, 100 = Jan 1982

Creating shareholder value is a continuous challenge for airlines . . .

1/1/021/1/981/1/941/1/901/1/861/1/86

S&P 500

S&P Airlines

-10

-5

0

5

10

15

20

Return on capital employed, 1970-2004, all airlines % pre-tax

… despite increasing load factors

WAACROIC trend

2000199019801970

Load factors in %, 1993 – 2003 all airlinesIndex 1993, 100=61,5%

… despite increasing load factors

9698

100102104106

108110

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Load factors in %, 1993 – 2003 all airlinesIndex 1993, 100=61,5%

… despite increasing load factors

75

80

85

90

95

100

105

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

… operating in a generally difficult external environment

Needs to be managed

Strong government influence

Highly cyclical

High operational andfinancial gearing

Industry fragmentation

Low entry barriers, high exit barriers

Increasing pricing Pressure from customers

Oligopolistic suppliersand labour

High capital intensity

2,91,7

0,06

8

-2,4

USA

However, consistently, across regions, several new airlines are out-performing regional industry leaders (1/3)

Operating margin, % of revenues (2003)

Market capitalisation(US$ bn, October, 27 2004)

Market capitalisation /sales ratio

AA/UA/DL South-west JetBlue

16,6

9,0

1,901,70

11,00,9

2,8

0,45 0,65

2,1 5,2

EUROPE

However, consistently, across regions, several new airlines are out-performing regional industry leaders (2/3)

L/H/BA/AF EasyJet Ryanair

25,0

2,64

Operating margin, % of revenues (2003)

Market capitalisation(US$ bn, October, 27 2004)

Market capitalisation /sales ratio

4,5 1,0

0,56

2,1

AUSTRALIA

However, consistently, across regions, several new airlines are out-performing regional industry leaders (3/3)

Qantas Virgin Blue

16,0

1,32

Operating margin, % of revenues (2003)

Market capitalisation(US$ bn, October, 27 2004)

Market capitalisation /sales ratio

Competitor landscape Examples

Low cost operators

• Rise of short-haul LCC• Creation of lower cost global networks• Redefinition of mainline business models

• Ryanair, Southwest• Emirates, Qatar• Aer Lingus, BMI

Network and fleet (r)evolution

• Increased network (re-)segmentation• A/C innovation in long-haul (e.g., A380,

B777, A350)

• Air France, SAS• Virgin Atlantic, LH,

Emirates, BA

Alliances and partnerships

• Selective cooperation (even within global alliances)

• Co-existence of bilateral agreements with alliance membership

• LH/SIA• LAN Chile

Simplification• Growing cost-effective distribution

channels / e-commerce• Easy check-in and boarding (eg,

e-ticketing, RFID, check-in kiosks)

• Easyjet, British Airways

• Delta Airlines, American Airlines

… and threatening strategic moves from competitors

Agenda

• Industry Overview

• Strategic Overview

• Financial highlights

• Financial Review

• Conclusion and way forward

However, SAA is well positioned to capture global growth opportunities . . .

Grow global network coverage with STAR and bilateral partners

Develop SAA Cargoas operator of first choice in the sub-saharan region

Regain domestic market share through strong competitive response to fast growing SA LCC

Offer extended technical services to STAR alliances and other airlines

Become leading African network operator

Offer advanced products and services to become premium long-haul passenger airline

Provide seamless travel experience to our customers and deliver excellent internal

support services

Provide sustainable return on

invested capital to investors

Develop and nurture world class talent through

enhanced training and performance management

Three pillar framework as foundation for SAA

strategic thrusts

… enforced by the strategic framework of the three pillars Profit, Patronage, and People

A comprehensive change program has been set-up to build SAA´s three pillars . . . (1/3)

Key Initiatives

• People

• Redesign of organisational structure

• Collapsing management structures

• Focus on Risk Management

• Customer services training of all SAA

employees started

• Sales organization restructure and

sales forces trained

1

Major recent achievements

• New SAA leadership group in place, based on the ff principles:– A focus on People– A focus on strengthening

Risk Management– An Aggressive focus on

Customer Service through out the organization

– A culture of excellence with profit and cost control.

• People

1

SAA Structure Prior to Restructuring

VP:HumanResource

VP: CustomerService

CompanySecretary

CEO

Board

EVP Human Resources and Transformation

EVP Operations and Customer Service EVP Subsidiaries EVP Commercial EVP and CFO EVP SAA Technical

VP: Cargo

VP:Marketing

VP Alliance, Network & Revenue Management

VP:Global Sales

VP: Operations

VP:Global PaxServices & OCC

VP:Subsidiaries

VP : CSSEVP: Western Cape Business Dev

VP : Comms &Gov Liaison

Deputy CEO

VP : Finance

VP : Legal

VP : Treasury

VP : Fleet

CIO

Board

CFOGM

Human Resources

New SAA high-level structure –

Safety and Security

CEO

COO

GM Communications

/ Customer General CounselCRO

GM Business

Development

Company Secretary

CIOGeneral Sales Manager

Head of Network,

Planning and Distribution

Head of Passenger

Services

Head of Marketing

General Manager

Cargo

Head of Technical

Operations

2

A comprehensive change program has been set-up to build SAA´s three pillars . . . (2/3)

Key Initiatives

Revenue• STAR alliance and bilateral agreements

• African growth strategy• Asian market entrance• Cargo business aspirations

Cost• Bambanani Program (PIP)• Zero agency commission rollout well underway• Aircraft loans and leases• Reservations system migration (Amadeus)

• Profit

2

Major recent achievements

• Daily flights on routes (eg, Mumbai, Zurich, Paris, Sao Paulo)

• New routes to Washington, Zanzibar, Livingstone

• New code-share agreement with United, Austrian

• Profit

2

Alliances and network development - Highlights

2

• Delta relationship extended for 2y• Start code-share negotiations with

United Airlines (Washington)• Code-share discussions with

LOT, SAS, and TAP• Code-share with Austrian Airlines

effective July 2005• Daily flights FRA-CPT / ZRH-JNB

• Daily services to Mumbai• Thai International to introduce

service to SAA (code-share)• MOU´s with Jet Airways, Asiana

(code-share)• Easier access to Singapore,

Japan, South Korea and China via STAR

• 6 new/amended agreements on route rights (e.g., Mali, DRC, Gabon)

• Licences obtained for 7 African destinations (e.g., Kinshasa, Lagos, Zanzibar)

• Significant opportunities for SAA to connect African countries to RoW via via STAR

• Daily services to Sao Paulo (code-share with Varig) • Reciprocal FFP with VA Airways

• Qantas relationship continued

• Review of Cathy cooperation

• Easier access to New Zealand via STAR

A comprehensive change program has been set-up to build SAA´s three pillars . . . (2/3)

Key Initiatives

• Product improvement, eg Lie-flat to LON• Star Alliance – FFP, Lounges• Service standards review

• Patronage

3

Major recent achievements

• VIP program• SA tourism and tour operator• Customer service training

underway• Sales training completed

• Patronage

3

…. and there is more to come

• . . . Talent and performance management

• . . . Distribution strategy

• . . . Working capital optimisation

Agenda

• Industry Overview

• Strategic Overview

• Financial highlights

• Financial Review

• Conclusion and way forward

Positive financial results support SAA’s new way forward

Rm

Revenues

• 6% improvement in gross profit margin despite the increase in oil price of more than 40%

• First positive impact from– Strict operating cost control– Materialisation of operating

efficiencies– 1,9% growth in costs

• 6,8% increase in total revenues vs 2004 % more passengers flown

• Average load factor grown from 67% to now 70%

0

5 000

10 000

15 000

20 000

2001 2002 2003 2004 2005

-16-10

2 16

-20-15-10-505

10

2001 2002 2003 2004 2005

Positive financial results support SAA’s new way forward

3 884

6 028

-1 337

-2 697

2 228

-5 000

0

5 000

10 000

2001 2002 2003 2004 2005

• Net asset value improved drastically to R2 billion

• SAA beginning to create value for shareholders

Net assets employed

0

500

1 000

1 500

2 000

2001 2002 2003 2004 2005

-10000

-5000

0

5000

2001 2002 2003 2004 2005

Positive financial results support SAA’s new way forward

Cash generated from operations

Net profit

• R1 911 million cash generated from operations.

• R1 600 million to be paid to Transnet

• High positive net profit of R966m Compared to last year’s historic net loss of R8 610m

R10 billion turnaround

Agenda

• Industry Overview

• Strategic Overview

• Financial highlights

• Financial Review

• Conclusion and way forward

Financial reviewImprovements in operating margins

2005 % change 2004Total airline income 17 442 6,8 16 339Operating costs before ownership 14 451 4,2 13 864EBITDAR 2 991 20,8 2 475EBITDAR margin 17,1% 15,1%Depreciation, amortisation and leases 2 056 (12,2) 2 341EBIT (before impairmentsand fair value movements) 935 134EBIT margin 5,3% 0,8%

2005 % change 2004Total airline income 17 442 6,8 16 339Operating costs (16 507) 1,9 (16 205)Gross profit 935 > 100 134Impairments (141) (95,9) (3 410)Other 16 > 100 (331)Fair value movement 342 > 100 (4 470)Net interest paid (186) (65,1) (533)Net profit for the year 966 > 100 (8 610)

Financial reviewR 10 billion turnaround

12

3

79%

9%12%

Passenger revenue Cargo Other

0

5 000

10 000

15 000

20 000

2001 2002 2003 2004 2005

Total airlineincome

Airline income –

Increase

6,8%

75%

9%16%

Passenger revenue Cargo Other

20042005

1

Passenger revenue analysis

Passenger numbers 5%Rand appreciation

14%

59%16%

25%

International Regional Domestic

58%16%

26%

International Regional Domestic

20042005

Operating costs – Cost increase BELOW inflation

2005 % Change 2004Aircraft lease costs 1 585 1,9 1 556Accommodation and refreshments 442 (19,1) 546Depreciation and amortisation 471 (40) 785Distribution costs 1 766 (6,5) 1 888Electronic data costs 486 (23,2) 633Energy 3 345 18,6 2 820Labour 3 266 5,9 3 084Material 1 141 (2,2) 1 167Navigation, landing and parking fees 890 3,9 857Other operating costs 3 115 8,6 2 869

16 507 1,9 16 205

2

Gross Profit Margin

-16

-10

2 1

5

-20

-15

-10

-5

0

5

10

2001 2002 2003 2004 2005

Operating efficiencies –

• Despite > 40% in US$ oil price

2005 2004Operating cost to revenue ratio 94,64% 99,18%

2

Net profit – SAA returns to profitability

3

340

2 144

-5 977

-8 610

966

-10 000

-8 000

-6 000

-4 000

-2 000

0

2 000

4 000

2001 2002 2003 2004 2005

Balance sheetSettlement of hedge book – R 5,9 billion

2005 2004Non-current assets 9 783 9 433Current assets 6 644 7 454Total assets 16 427 16 887Capital and reserves 2 228 (2 697)Non-current liabilities 5 858 4 789Current liabilities- Derivative liability - 5 957- Other 8 341 8 838Total equity and liabilities 16 427 16 887Return on market value of operated aircraft 6,2% < 0%

Cash flow statement

Strict working capital management generates R749 million

2005 2004Cash generated from operations 1 911 741Net interest and derivatives (6 108) (2 144)Net cash outflow (4 197) (1 403)Cash flow from investing activities (188) (4 422)Cash from financing activities 4 029 8 144Increase/(decrease) in cash (356) 2 319Cash at end of year 2 614 2 977

Cash generated from operations

169

1 985

872741

1 911

0

500

1 000

1 500

2 000

2 500

2001 2002 2003 2004 2005

Post-balance sheet event

• SAA Recapitalisation– Transnet’s continued support to SAA– Amendment to terms of Compulsorily Convertible

Subordinated Loan of R 4 billion• SAA to be recapitalised by R 2,4 billion• R1,6 billion to be repaid to Transnet

– Renewal of credit facility of R1,5 billion

Agenda

• Industry Overview

• Strategic Overview

• Financial highlights

• Financial Review

• Conclusion and way forward

SAA priorities going forward – Passenger unit

SAA priorities going forward Challenges

Low cost operators

• Review of business model for SAA short-haul network • Further declining yields

• SA LCC´s adding further routes to their network

Network and fleet (r)evolution

• Revisit of SAA long-haul fleet strategy (B747, A340, A380, B777)

• Aggressive implementation of African growth (licenses, rights)

• Declining yields on long-haul based on A380 economics

• Soccer World Cup 2010

• Bilateral negotiations

• RSA competition authority

• Airport infrastructure

Alliances & partnerships

• STAR migration

• Increase network connectivity via additional bilateral and STAR related partnerships

• IT challenges

• Balance STAR members interests with SAA priorities

Simplification• Continue existing Bambanani and line functional

initiatives to become a cost-effective and realiable airline

• Training needs

• Changes in mindset and capabilities

And . . .

• Implementation of a global Cargo strategy to– Grow SAA´s global market share on most profitable routes– Become preferred Air Cargo carrier in the sub-Saharan region

• Optimal Capital Structure– Build capital and reserves

• SAA separation from Transnet by March 2006– SAA (98% owned by Transnet) will be spun off to the

South African government– A joint team has been established to formulate SAA’s

exit from Transnet– The Team expects the SAA exit from Transnet to be

completed by March 2006

Focus Going Forward continues . . .

Revenue

Cost

Profitability

Productivity and Efficiency

This will require a changeThis will require a change

in mindset and a focusin mindset and a focus

on our customerson our customers

Thank youAny questions?