SAA Financial Results 2007/08
Restructuring Towards Profitability
2008 SAA Proprietary and confidential.
Page 1
Agenda
• Industry and strategic overview – CEO Khaya Ngqula
• Financial overview – CFO Kaushik Patel
• Conclusion and way forward – Dr Ngqula
2008 SAA Proprietary and confidential.
Page 2
Industry overview
• For the first time since 2000, the global aviation industry
turned a profit in 2007 of approximately US$5,6-billion
• However, the relentless rise of the oil price has wreaked
havoc on carriers across the globe, with the oil price
settling at $138 per barrel last night after reaching a
high of $147 per barrel on Friday
• Global airlines are seeking to cut costs by grounding
aircraft, scrapping unprofitable routes and merging
• Further casualties are expected in the airline industry if
the oil price remains high, and a decline in industry
profitability is predicted for 2008
2008 SAA Proprietary and confidential.
Page 3
Industry overview
• The airline market in Africa is still highly regulated with
restricted entry
• Nevertheless, there remains significant opportunity for
growth in Africa, with an increasing number of
passengers traveling on the continent, particularly from
Southern Africa to East and West Africa
• Despite a relatively small market, South Africa’s airline
industry remains highly competitive
• Competition from low cost carriers in particular
continues unabated
2008 SAA Proprietary and confidential.
Page 4
Strategic overview – strategic direction
• SAA’s strategic vision is to be a profitable African airline
with global reach
• The vision goes hand-in-hand with our mission of
delivering sustainable profits and growing our market
share by offering world class service to our customers
• SAA will thus continue to focus on its operations in
Africa, expanding where there are opportunities
• Domestically, we will continue to service our high
density routes and internationally, the focus is on
ensuring that our routes are profitable and sustainable
2008 SAA Proprietary and confidential.
Page 5
Strategic overview – Restructuring 2007/08
• SAA’s deep and fundamental restructuring programme,
launched in May 2007, had four main pillars: simplify
and rightsize the business as well as reskill and
incentivise management and staff
• The first year was largely financial in nature and
delivered good results, coming in 3% above target
• The programme has resulted in costs being reduced by
almost R1- billion, as well as revenue growth of 9%
• This was achieved despite a tough operating
environment and less capacity due to grounding the
Boeing 747 fleet and closing Paris and Zurich
2008 SAA Proprietary and confidential.
Page 6
Key Performance Indicators
Measure in business plan
Target year
ending March 08
Actual year to
March 08
R47m
R123m
77%
75%
R2000
R2062
RASK (ZAR cents)
66.3
68.1
Cargo Revenue to Passenger
Revenue on International Routes (%)
15%
14%
Daily Block Hours per Aircraft
(excluding Mango)
10.7
10.6
Full CASK (ZAR cents)
64.2
47.2
68.1*
47.7*
Net Profit (ZAR million)
Passenger Load Factor (%)
Average Passenger Fare (ZAR)
CASK excl. fuel
* excluding restructuring costs
2008 SAA Proprietary and confidential.
Page 7
Trend
Strategic overview – Restructuring 2007/08
• Restructuring is now in its second year, where the focus
is on improving customer service and operational
performance while building on financial gains
• New initiatives have been identified, including:
- Establishing a customer service charter to achieve
service excellence across the board
- Establishing management performance standards to
improve employee engagement and operational
excellence
- Improving the customer experience at key touch points
from booking a ticket to arriving safely at a destination
- Improving on-time departures
2008 SAA Proprietary and confidential.
Page 8
Strategic overview – Restructuring 2007/08
New initiatives (cont):
- Enhancing baggage systems via new technology and
regular scrutiny of key problem areas
- Promoting the use of self service check-in kiosks to
reduce congestion at counters
- In-flight entertainment on flights to be upgraded
- Voyager, the frequent flyer programme, has upgraded
its membership relations office and plans to add new
services such as luxury transport to and from the airport
- Business Class departure lounge at OR Tambo
International Airport will move to a new venue early next
year and receive a facelift
2008 SAA Proprietary and confidential.
Page 9
Strategic overview – Low-cost competition
• The high oil price has equally challenged the low cost
industry worldwide, including in SA
• Mango, launched in November 2006, has kept costs low
by using aircraft efficiently and boosting productivity
amongst employees
• Mango carried its 2 millionth passenger in March 2008,
and is on track to achieve its business goals
2008 SAA Proprietary and confidential.
Page 10
Strategic overview – SAA Cargo and SAA Technical
• SAA Cargo focused on protecting and growing its
market share, particularly in key markets such as
Lagos, Luanda, DRC, Accra and Kinshasa
• Two Boeing 737-300 freighters were introduced on
domestic routes and into the rest of Africa
• SAA Technical (SAAT) grew its client base and further
diversified its revenue base. This included reaching
agreement to maintain 22 of Comair’s Boeing 737’s
• The high skills level of SAAT technicians make them
marketable, resulting in the loss of a high level of staff
• SAAT has made good progress towards restoring the
skills base, reflected in the Federal Aviation Authority’s
decision to renew SAAT’s certificate for 2008
2008 SAA Proprietary and confidential.
Page 11
Strategic overview
• The rising oil price poses a huge challenge to SAA and
is a threat to the airline achieving its restructuring profit
target
• When the restructuring plan was devised in 2006/07, a
profit target of 7,5% was set for 2008/09 when oil was
trading at $50 - $60 per barrel. The profit target was set
on the assumption that oil would average $65 per barrel
• Oil is trading at more than double this original
assumption, which has placed significant pressure on
our margins
• However, the grounding of aircraft, focus on profitable
routes and cost cutting has left SAA more streamlined
and efficient
2008 SAA Proprietary and confidential.
Page 12
Agenda
• Industry and strategic overview – CEO Khaya
Ngqula
• Financial overview – CFO Kaushik Patel
• Conclusion and way forward – Dr Ngqula
2008 SAA Proprietary and confidential.
Page 13
Financial Results – 2007/08
• SAA posted strong growth in revenue to R22,51-billion
for 2007/08 from R20,65-billion previously, a 9%
increase
• SAA posted a net profit of R123-million, excluding
restructuring costs, for 2007/08 from a loss of R883million the previous year
• Restructuring costs amounted to R1,34-billion against
an original estimate of R3-billion
• This is a significant turnaround, which was made
possible due to the efforts of all SAA employees
2008 SAA Proprietary and confidential.
Page 14
SAA Group – Income Statement
SAA GROUP (R'm)
2007/8
Actual
2006/7
Actual
Variance
%
Variance
2007/8
Actual excl.
restructuring
Total Revenue
22,511
20,652
1,859
(23,629)
(21,174)
(2,455)
(12%)
(22,283)
(1,372)
(650)
(722)
(111%)
(26)
Hedging & Forex
399
40
359
905%
399
Net Interest Paid
(130)
(280)
150
54%
(130)
(1,103)
(890)
(213)
15
(42)
57
NET (LOSS) / PROFIT FOR THE YEAR
(1,085)
(883)
(202)
Restruct Costs (Included above)
(1,346)
0
(1,346)
* 123
(883)
1,006
Total Operating Cost
EBIT
Loss before tax
Tax & Dividends
NET PROFIT FOR THE YEAR
Net Profit Margin
0.55%
(4.3%)
* After accounting for interest of 137 as a dividend, classified as equity instrument
Note: Net Profit before restructuring of R123m compares with Corporate Plan targeted
profit of R47m
2008 SAA Proprietary and confidential.
Page 15
9%
22,511
(24%)
243
-
15
23%
114%
* 123
Revenue
Total Revenue
2007/8
Actual
22,511
2006/7
Actual
20,652
Turnover
Other Airline
19270
2987
17020
3504
SAA GROUP (R'm)
•
•
•
•
•
Variance
1,859
2259
(517)
%
Variance
9%
13%
(15%)
Revenue Passenger numbers were 1.3% down on last year, but this
was nowhere near the reduction in capacity with Available Seat
Kilometres (ASKs) falling 7.9%
Average fares increased 14.8%, including currency benefit of R584million
Cargo & Mail revenue declined from R1,82-billion to R1,76-billion
Fuel levy recoveries were R414-million higher than previous year and
increased as a % of gross fuel cost from 22% in 2007 to 26% in 2008
Releases from Air Traffic liability provision were lower in 2008 by R317million
2008 SAA Proprietary and confidential.
Page 16
Operating costs
2007/8
Actual
23,629
SAA GROUP (R'm)
Operating costs
2006/7
Actual
21,174
Major cost items excluding aircraft lease costs & maintenance
Energy
6,685
5,734
Labour
3,298
3,300
Restructuring
1,346
0
•
•
•
•
•
Variance
2,455
951
(2)
1,346
%
Variance
12%
17%
0%
Employees played a big role in keeping operating costs low which was
painful and was only achieved through commitment and tenacity
Fuel uplifts in barrels were 5% less than 2007 due to fleet and route
rationalisation
The underlying Brent price per barrel increased from an average of $64.72
to $78.78. The currency impact on fuel costs, excluding Forex hedging, was
an adverse R113-million
The labour bill was steady although savings did not fully materialise due to
the later than anticipated exits of voluntary severance packages
Restructuring costs of R1,34 billion consisted mainly of provision for aircraft
leases and impairments with associated maintenance costs in respect of
grounded Boeing 747-400s and redundancy payouts
2008 SAA Proprietary and confidential.
Page 17
SAA Group Balance Sheet
2007/8
Actual
2006/7
Actual
Movement
7,204
(517)
10,366
(10,883)
8,352
(1,748)
6,824
(8,572)
(1,148)
1,231
3,542
(2,311)
Net Assets
6,687
6,604
83
Funded by:
Equity:
- Shareholders Surplus/(Deficit)
- Subordinated Loans
2,496
(368)
2,864
1,570
270
1,300
926
(638)
1,564
Non-current liabilites (mainly borrowings)
4,191
5,034
(843)
Net Funding
6,687
6,604
83
1.7
3.2
-
5,393
2,364
3,029
SAA GROUP (R'm)
Non-Current Assets
Current Assets*
Less: Current Liabilities
Debt/Equity Ratio
Cash & Cash Equivalents Included in Current Assets *
2008 SAA Proprietary and confidential.
Page 18
Balance Sheet
• In 2006/07, SAA was recapitalised by a total of R1,3 billion
and an additional R1,56-billion was secured in 2007/08 to
assist with restructuring costs
• The funding was received in the form of a subordinated
loan with a guarantee provided by our shareholder, the
Public Enterprises Department
• The loan has been classified as an equity instrument and
any interest SAA elects to pay is classified as dividends
• SAA paid dividends of R137-million in 2007/08 relating to
the subordinated loan which is classified as equity. SAA is
not ideally capitalised and consideration is being given to
converting the subordinated loan to equity
2008 SAA Proprietary and confidential.
Page 19
Cash & cash equivalents
Cash & Cash Equivalents
Included in Current Assets
5,394
2,362
3,031
• Cash flow from operating activities was much stronger at
R1,39-billion versus previous year of R316-million
• Debtor levels were in line with previous year and the number
of days outstanding was reduced from 70 days in 2007 to 60
days in 2008
• Accounts payable increased by R1,47-billion with the bulk of
the movement attributable to the provision of R900-million for
the Boeing 747-400 write off and accelerated year end catch
up accruals
• External borrowings of R1,56-billion were raised against a
government guarantee to assist in recapitalisation after
restructuring on top of the previous R1,3-billion
• An injection of R653-million was also received from National
Treasury to fund certain restructuring costs (treated as equity)
2008 SAA Proprietary and confidential.
Page 20
Key financial focus areas
• To deliver on a sustainable restructuring and turnaround
strategy
– Reduce and contain operating costs
– Margin and yield enhancement
– Focus on ensuring SAA is profitable for 2008/09
• Recapitalisation
– SAA will require further recapitalisation in order to:
• lower its cost of capital
• improve gearing
• mitigate currency risks
• position SAA for future growth and expansion
2008 SAA Proprietary and confidential.
Page 21
Agenda
• Industry and strategic overview – CEO Khaya Ngqula
• Financial overview – CFO Kaushik Patel
• Conclusion and way forward – Dr Ngqula
2008 SAA Proprietary and confidential.
Page 22
Conclusion and way forward
• SAA achieved a R2-billion turnaround in 2007/08: the oil
price added more than R950-million in unbudgeted costs
and R1-billion in costs were removed through restructuring
• The focus of restructuring now is on improving customer
service and the operational performance, re-engineering the
business, building on our financial gains and reshaping SAA
into a new corporate structure
• Africa will remain a strong focus in terms of growth
• The soaring oil price poses major challenges which has
forced SAA to renew its focus on cutting cost.
• Depending on the oil price, SA is on track to be profitable in
2008/09, but will not reach the 7,5% profit target.
2008 SAA Proprietary and confidential.
Page 23
Thank you
2008 SAA Proprietary and confidential.
Page 24