SAA's Long-Term Turnaround Strategy Briefing

1. 28 March 2013 SAA LONG-TERM TURNAROUND STRATEGY (LTTS) BRIEFING FOR PORTFOLIO COMMITTEE ON PUBLIC ENTERPRISES AGENDA Overview of development process Document Structure Strategic Objectives Main Thrusts & Expected Outcomes Key Decisions & Implementation focus 10 September 2013 Commercial in Confidence

2. Introduction The most comprehensive & inclusive strategy development process in SAA’s history Necessitated by Commercial reality, informed by explicit Shareholder requirements • Inclusivity • Benchmarked • Actionable • Validated • Sustainability • Governance • Stakeholder focussed • Immediate Process Outcome • Extensive staff engagement: 400+ suggections received; • SAA’s first holistic long-term strategy, drawing on 7 of the World’s top 10 consulting groups & peer group comparisons; • SA Express & DPE involvement throughout; • Proven strategy development framework applied; • Board led; • Independently validated; • 20-year outlook horizon; • Immediate benefits & clear path to profitability; • Explicit emphasis on accountability & addressing weaknesses; and • Submitted to the Minister on 2 April 2013 and to Cabinet in August.

3. Context Context informs South African Airways’ required & relevant Strategic response Internal strengths & weaknesses and Market realities culminate in Problems to be addressed and Opportunities to be pursued • High cost base: expensive Assets & unproductive People • Sub-optimal capital structure • Poor Stakeholder management • Strong African footprint, operations & Brand • New collective Group Vision & Mission • Creation of Integrated Airline Group • Implementation of new Network, Alliance & Fleet Strategy • Developing a “Whole of State” policy framework • Immediate roll-out of human capital development interventions • Implementation of new Financial Plan • Implementation of business infrastructure & service interventions • On-going focus on cost efficiency • Executive implementation accountability Problem Statement Opportunity Statement Assessment • Sub-optimal route network: International losses, Regional threat & Domestic pressure • Failure to address geographic disposition • Long-term weakness of Balance Sheet & high cost structure • Cultural deficiencies & leadership volatility • Governance of subsidiaries and processes lack maturity • Poor implementation record • Poor decision support systems • Preceived Mandate conflict • No holistic aviation policy approach • Increased liberalisation of markets • Airline market consolidation • Shifts in global air traffic • Commoditisation of short-haul air travel • Value destructive Business Model

4. Our Strategy: Vision, Mission & Strategic Objectives Mission, Vision & Strategic Objectives provides clarity of purpose to South African Airways Brought to life, every day and in every way, by the values that we exhibit Objectives Vision Mission

5. Our Strategy: Strategic Objectives Our 5 new Strategic Objectives provide clarity for the Shareholder, Board & Management SAA has to balance support for our National Development Agenda with commercial sustainability • Support for South Africa’s National Development Agenda • Growth will materially build on SAA’s current contribution • Facilitating trade & tourism to major partners and African states (26 intra-African routes) through direct passenger and cargo services • R 8.6 billion annually contributed to South Africa’s GDP and supporting 35 000 jobs in the general economy and a further 44 000 in tourism (2012 Oxford Economics Study) • Aviation is a key enabler for the National Development Plan • Continued improvement in transformation profile • Commercial sustainability • Net Operating Profit • Net positive cash flow from operating activities • DPE & NT, in consultation with SAA, are reviewing the financial model and requirements for the business

6. Our Strategy: Strategic Objectives Our 5 new Strategic Objectives provide clarity for the Shareholder, Board & Management Achieving the other 3 objectives are also critical to our long-term sustainability • Providing excellent customer service • A new SAA passenger Customer Service Experience Framework has already been developed and is being implemented & Voyager is under-going major changes • SAA Cargo, SAA Technical & Air Chefs all have customer service improvement initiatives underway • Achieving consistent, efficient & effective operations • SAA will build on its already outstanding safety and on-time performance records • A new Shareholder Engagement Model being developed and a new approach to reputational management and internal/external communications • Major inititiaves underway to improve labour productivity, recruitement and retention, succession planning and organisational design • Foster performance excellence • Driving accountability, by linking performacne management to reward & recognition and consequence management • A new Enterprise Performance Management system will be developed, which will greatly improve Management Information Systems

7. Our Strategy: force integration and accountability through structure • Provides structure for asset and capital deployment coordination • Provides mechanism for ring-fencing and/or equity flexibility • Single point of oversight with operational specialisation across the aviation value chain Structure serves as an enabler to more effectively achieve our Strategic Objectives Structure is also a mechanism for improved Governance

8. Our Strategy: we need to address our major competitive challenges Sub-optimal route network The Network, Alliance & Fleet Strategy is at the core of any airline strategy • Our long-haul international network is under-performing financially • Our regional (African) network continues to perform well, however competition is steadily increasing • The domestic market is challenging, however our dual-brand model of SAA/Mango leaves us well placed to respond to a commoditising market • Mango continues ot perform well and can play a greater role for the Group in the years ahead • SAA Cargo continues to perform well and can can also play a greater role for the Group

9. Our Strategy: align efforts while retaining unit-level focus Subsidiary and Business Unit Strategies must be aligned to the Group objectives Plans of Action enforce accountability for delivery • SAA Technical focussed on: • Integration of SA Express Technical, synergy extraction with Denel and In-sourcing of high-value services • African expansion and continuation of existing Turnaround Plan • SAA Cargo focussed on: • Full implementation of transfer pricing and Process enhancements to improve efficiency • Top-line revenue growth • SA Travel Centre focussed on: • Growth in SAA revenue contribution and Expansion of African footprint • Enhacement of franchisee value proposition • Voyager focussed on: • Cost-effective enhacements to redemption options • System rejuvenation • Air Chefs focussed on: • Product enhancements, customer wins • Process improvements and loss control

10. Supporting Processes: the bridge between strategy & action Supporting processes are focussed on Efficiency and Effectiveness, reducing cost and ensuring service consistency Balanced Scorecards serve as instrument to translate strategy to tangible actions • Human Capital:Performance management, succession and accountability emphasis • Sales and Distribution:Increasing reach through cross-Group leverage and specfic segment focus • Operations:Continued focus on safety and operational integrity, along with automation and cost compression • Information Technology:Modernisation of business support infrastructure, MIS & direct service/sales channels • Environment:Focus on meeting compliance requirements • Marketing:Brand standardisation and rebuilding • Communication:pro-active, commercialy orientated messaging to highlight the value SAA adds to South Africa; • Customer service:Alignment of processes, systems and people to deliver consistent service externally benchmarked • Procurement: Compliance emphasis and focus on service level management and enterprise development • Governance and Risk: Focus on full PFMA compliance through improvements in planning activities • Stakeholder relations: Development of an integrated Stakeholder relations function within SAA

11. Supporting Processes: the Financial Plan All Strategies, Plans and Processes culminate in a Financial outcome The projected Finance Plan outcomes indicates a financially sustainable business • Contain current Shareholder value depletion • Redress deficiencies in the Group’s capital composition • Equip the Integrated Airline Group with an appropriate fleet • Realise organic growth in retained earnings • Optimise the group’s Balance Sheet Approach Objectives • Containment – maintaining liquidity and solvency • Alignment – address group capital structure • Refinement – strategies and plans aimed at sustained growth • Growth – full benefits of new wide body fleet and resumption of international network • Optimisation and growth – funding further expansion and growth (internally generated capital and reserves)

12. LTTS implementation will transition SAA to a sustainable business model These are the attributes of successful major change programmes Organisational clarity on the way forward and everyone’s role. CEO ownership & long-term tenure. Executive (Change Leader) stability. All actions are informed by the strategy. Good market intelligence reaches the leadership and informs decision support. Once decisions are made they are rarely second-guessed. Very effective rapid implementation. High visibility of implementation progress for all stakeholders. Alignment of performance and reward. On-going strategy revalidation informed by the competitive landscape. LTTS Implementation: attributes of successful major change programmes

13. LTTS implementation will transition SAA to a sustainable business model Future SAA Corporate Plans will include an LTTS Implementation Plan, including all KPIs agreed with the Shareholder 2013-16 Corporate Plan LTTS Amendment Board (incl. LTTS Committee) DPE & National Treasury and via Quarterly Reports As required to Portfolio Committee & other key stakeholders CEO Turnaround Office Group EXCO LTTS Implementation: alignment to PFMA cycle via annual Corporate Plan

14. LTTS Implementation: quick wins already achieved There have already been some quick LTTS implementation wins Already supporting the more effective achievement of our 5 Strategic Objectives • SAA & SAA Cargo African growth: SAA capacity increases on existing routes (from 6-7 weekly flights to Accra [already operating], new schedules in place for Mauritius (8-9 weekly, September); Dar es Salaam (11-12 weekly, October); Lusaka (18-19 weekly, October); and Kinshasa (4-6 weekly, November). Evaluations also being completed on increased capacity to Harare, Ndola and Windhoek • Mango operating to Zanzibar (weekly from September) and received two more aircraft and increasing domestic scale (operational from 8 September) • Combined SAA/Mango response to Fastjet market entry • Etihad and TAM code-share agreements (building “non-metal” capacity • Nigerian National Carrier project added to West Africa Hub options (Shareholder engagement required) • New SAA Customer Experience Framework approved by Group EXCO and being implemented • Higher utilisation of the fixed capital cost base (aircraft), from September, will further reduce unit cost • Further (≈ R 100 million) Cost Compression Programme savings (currently being audited) MAURITIUS GHANA DRC ZAMBIA TANZANIA

15. Long-Term Turnaround Strategy Questions & Comments