SAA Financial Results 2007/08 Restructuring Towards Profitability

SAA Financial Results 2007/08Restructuring Towards Profitability

Agenda • Industry and strategic overview – CEO Khaya Ngqula • Financial overview – CFO Kaushik Patel • Conclusion and way forward – Dr Ngqula

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

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

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

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

Key Performance Indicators * excluding restructuring costs

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

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

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

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

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

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 R883-million 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

SAA Group – Income Statement Note: Net Profit before restructuring of R123m compares with Corporate Plan targeted profit of R47m

Revenue • 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 R584-million • 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 R317-million

Operating costs • 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

SAA Group Balance Sheet

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

Cash & cash equivalents • 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)

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

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.

Thank you

SAA Financial Results 2007/08 Restructuring Towards Profitability