SAA financial results presentation
July 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
Creating shareholder value is a
continuous challenge for airlines . . .
Total return to shareholders, 1982–2004
Index, 100 = Jan 1982
3 500
3 000
S&P 500
2 500
2 000
1 500
1 000
500
S&P Airlines
0
1/1/86
1/1/86
1/1/90
1/1/94
1/1/98
1/1/02
… despite increasing load factors
Return on capital employed, 1970-2004, all airlines
% pre-tax
20
15
10
5
WAAC
ROIC trend
0
-5
-10
1970
1980
1990
2000
… despite increasing load factors
Load factors in %, 1993 – 2003 all airlines
Index 1993, 100=61,5%
110
108
106
104
102
100
98
96
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
… despite increasing load factors
Load factors in %, 1993 – 2003 all airlines
Index 1993, 100=61,5%
105
100
95
90
85
80
75
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
… operating in a generally difficult
external environment
Low entry barriers,
high exit barriers
Strong government influence
Increasing pricing Pressure
from customers
Highly cyclical
Needs to be
managed
High operational and
financial gearing
Industry fragmentation
Oligopolistic suppliers
and labour
High capital intensity
However, consistently, across regions,
several new airlines are out-performing
regional industry leaders (1/3)
USA
Operating margin,
% of revenues
(2003)
8
16,6
-2,4
Market capitalisation
(US$ bn, October,
27 2004)
Market capitalisation
/sales ratio
2,9
0,06
9,0
1,7
1,70
AA/UA/DL South-west
1,90
JetBlue
However, consistently, across regions,
several new airlines are out-performing
regional industry leaders (2/3)
EUROPE
Operating margin,
% of revenues
(2003)
Market capitalisation
(US$ bn, October,
27 2004)
Market capitalisation
/sales ratio
25,0
2,1
5,2
11,0
2,8
0,9
0,45
0,65
L/H/BA/AF EasyJet
2,64
Ryanair
However, consistently, across regions,
several new airlines are out-performing
regional industry leaders (3/3)
AUSTRALIA
Operating margin,
% of revenues
(2003)
Market capitalisation
(US$ bn, October,
27 2004)
2,1
4,5
0,56
Market capitalisation
/sales ratio
Qantas
16,0
1,0
1,32
Virgin Blue
… and threatening strategic moves from
competitors
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
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
Offer advanced
products and
services to become
premium long-haul
passenger airline
Become leading
African network
operator
Develop SAA Cargo
as operator of first
choice in the subsaharan region
Regain domestic market share through
strong competitive response to fast
growing SA LCC
Offer extended
technical services
to STAR alliances
and other airlines
… enforced by the strategic
framework of the three
pillars Profit, Patronage,
and People
Develop and nurture world
class talent through
enhanced training and
performance management
Three pillar framework
as foundation for SAA
strategic thrusts
Provide sustainable
return on
invested capital
to investors
Provide seamless travel
experience to our customers
and deliver excellent internal
support services
A comprehensive change program
has been set-up to build SAA´s
three pillars . . . (1/3)
Key Initiatives
1
• Redesign of organisational structure
• Collapsing management structures
• Focus on Risk Management
• People
• Customer services training of all SAA
employees started
• Sales organization restructure and
sales forces trained
Major recent achievements
1
• New SAA leadership group in
place, based on the ff principles:
– A focus on People
– A focus on strengthening
Risk Management
• People
– An Aggressive focus on
Customer Service through
out the organization
– A culture of excellence
with profit and cost control.
SAA Structure Prior to Restructuring
Company
Secretary
Board
Deputy CEO
CEO
EVP Human
Resources and
Transformation
VP:Human
Resource
EVP Operations
and Customer Service
VP: Operations
VP: Western Cape
Business Dev
VP : CSSE
EVP Subsidiaries
EVP Commercial
EVP and CFO
VP:Subsidiaries
VP: Cargo
VP:Marketing
VP: Customer
Service
VP:Global Pax
Services & OCC
VP:Global
Sales
VP Alliance,
Network &
Revenue
Management
VP : Legal
VP : Treasury
VP : Finance
CI
O
VP : Fleet
VP : Comms &
Gov Liaison
EVP SAA
Technical
New SAA high-level structure –
Company
Secretary
2
Board
CEO
CFO
CRO
Safety and
Security
Head of
Network,
Planning and
Distribution
General Sales
Manager
GM
Communications
/ Customer
General Counsel
GM
Business
Development
GM
Human
Resources
COO
Head of
Marketing
Head of
Passenger
Services
Head of
Technical
Operations
General
Manager
Cargo
CIO
A comprehensive change program
has been set-up to build SAA´s three
pillars . . . (2/3)
Key Initiatives
2
Revenue
• STAR alliance and bilateral agreements
• African growth strategy
• Asian market entrance
• Cargo business aspirations
• Profit
Cost
• Bambanani Program (PIP)
• Zero agency commission rollout well
underway
• Aircraft loans and leases
• Reservations system migration (Amadeus)
Major recent achievements
2
• Daily flights on routes
(eg, Mumbai, Zurich, Paris,
Sao Paulo)
• Profit
• New routes to Washington,
Zanzibar, Livingstone
• New code-share agreement with
United, Austrian
Alliances and network development Highlights
• 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
• 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)
2
• 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
• Qantas relationship
continued
• Review of Cathy
cooperation
• Easier access to New
Zealand via STAR
• Reciprocal FFP with VA Airways
A comprehensive change program
has been set-up to build SAA´s three
pillars . . . (2/3)
Key Initiatives
3
• Patronage
• Product improvement, eg
Lie-flat to LON
• Star Alliance – FFP, Lounges
• Service standards review
Major recent achievements
3
• VIP program
• SA tourism and tour operator
• Patronage
• Customer service training
underway
• Sales training completed
…. 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
Revenues
• 6,8% increase in total
revenues vs 2004 % more
passengers flown
• Average load factor grown
from 67% to now 70%
20 000
15 000
10 000
5 000
0
2001
2002
2003
2004
2005
•
Rm
10
5
0
-5
-10
-15
-20
6
2
1
2003
2004
-10
-16
2001
2002
2005
•
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
Positive financial results support SAA’s
new way forward
Net assets employed
10 000
6 028
5 000
3 884
2 228
• SAA beginning to create
value for shareholders
0
-1 337
-2 697
-5 000
2001
2002
2003
• Net asset value improved
drastically to R2 billion
2004
2005
Positive financial results support SAA’s
new way forward
Net profit
5000
• High positive net profit of
R966m Compared to last
year’s historic net loss of
R8 610m
0
-5000
-10000
2001
2002
2003
2004
2005
Cash generated from operations
2 000
• R1 911 million cash generated
from operations.
• R1 600 million to be paid
to Transnet
1 500
1 000
500
0
2001
2002
2003
2004
2005
R10 billion turnaround
Agenda
• Industry Overview
• Strategic Overview
• Financial highlights
• Financial Review
• Conclusion and way forward
Financial review
Improvements in operating margins
2005
% change
2004
Total airline income
17 442
6,8
16 339
Operating costs before
ownership
14 451
4,2
13 864
2 991
20,8
2 475
EBITDAR
EBITDAR margin
Depreciation, amortisation
and leases
EBIT (before impairments
and fair value movements)
EBIT margin
17,1%
2 056
15,1%
(12,2)
2 341
935
134
5,3%
0,8%
Financial review
R 10 billion turnaround
2005
% change
2004
Total airline income
1
17 442
6,8
16 339
Operating costs
2
(16 507)
1,9
(16 205)
935
> 100
134
(141)
(95,9)
(3 410)
16
> 100
(331)
342
> 100
(4 470)
(186)
(65,1)
(533)
966
> 100
(8 610)
Gross profit
Impairments
Other
Fair value movement
Net interest paid
Net profit for the year
3
Airline income –
1
20 000
15 000
Increase
Total airline
income
10 000
6,8%
5 000
0
2001
2002
2003
2004
2004
2005
12%
16%
9%
9%
75%
Passenger revenue
2005
Cargo
Other
79%
Passenger revenue
Cargo
Other
Passenger revenue analysis
Passenger numbers
5%
Rand appreciation
14%
2004
2005
25%
26%
59%
16%
International
Regional
Domestic
58%
16%
International
Regional
Domestic
Operating costs –
2
Cost increase BELOW inflation
2005
% Change
2004
1 585
1,9
1 556
Accommodation and refreshments
442
(19,1)
546
Depreciation and amortisation
471
(40)
785
1 766
(6,5)
1 888
486
(23,2)
633
Energy
3 345
18,6
2 820
Labour
3 266
5,9
3 084
Material
1 141
(2,2)
1 167
890
3,9
857
3 115
8,6
2 869
16 507
1,9
16 205
Aircraft lease costs
Distribution costs
Electronic data costs
Navigation, landing and parking fees
Other operating costs
Operating efficiencies –
2
Gross Profit Margin
• Despite > 40%
US$ oil price
in
10
5
5
2
1
2003
2004
0
-5
-10
-10
-15
-20
-16
2001
Operating cost to revenue ratio
2002
2005
2005
2004
94,64%
99,18%
Net profit –
3
SAA returns to profitability
4 000
2 144
2 000
966
340
0
-2 000
-4 000
-6 000
-5 977
-8 000
-8 610
-10 000
2001
2002
2003
2004
2005
Balance sheet
Settlement of hedge book – R 5,9 billion
2005
2004
Non-current assets
9 783
9 433
Current assets
6 644
7 454
16 427
16 887
Capital and reserves
2 228
(2 697)
Non-current liabilities
5 858
4 789
-
5 957
8 341
8 838
16 427
16 887
6,2%
< 0%
Total assets
Current liabilities
- Derivative liability
- Other
Total equity and liabilities
Return on market value of operated aircraft
Cash flow statement
Strict working
capital management
generates R749 million
Cash generated from
operations
2 500
1 985
1 911
2 000
1 500
872
1 000
741
500
169
0
2001
2002
2003
2004
2005
2005
2004
1 911
741
Net 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
8 144
Increase/(decrease) in cash
(356)
2 319
Cash at end of year
2 614
2 977
Cash generated from operations
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
• Review of business model for SAA short-haul network
Low cost operators
Challenges
• Further declining yields
• SA LCC´s adding further routes to
their network
• Revisit of SAA long-haul fleet strategy
(B747, A340, A380, B777)
• Declining yields on long-haul based
on A380 economics
• Soccer World Cup 2010
Network and fleet
(r)evolution
• Bilateral negotiations
• Aggressive implementation of African growth
(licenses, rights)
• RSA competition authority
• Airport infrastructure
Alliances &
partnerships
Simplification
• STAR migration
• IT challenges
• Increase network connectivity via additional bilateral
and STAR related partnerships
• Balance STAR members interests
with SAA priorities
• 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
This will require a change
in mindset and a focus
Profitability
Productivity and Efficiency
on our customers
Thank you
Any questions?