GEARING FOR GROWTH

Presentation to Select Committee on Labour and Public EnterprisesOctober

2006

1
“Bringing the World
“Bringing totoAfrica
the World and
Africa and taking
taking Africa Africa to the World”
to the World”
 Agenda

1. Financial Overview

2. Industry Overview

3. Strategic Overview (including Network plans and STAR alliance)

4. Conclusion and way forward

2 “Bringing the World to Africa and taking Africa to the World”

 Financial Overview
Highlights
• Passenger numbers up 4.5%, but yields down (3%)
• Capacity increased 5.6%
• Load factors constant at 70%
• Total revenues up 13.0%, with Passenger revenue flat up only 0.8%
• Costs (excluding fuel) increased by 5.5%
• Fuel costs increased by 51.5%
• Bambanani initiatives bearing fruit ~ R500m of savings achieved
• Successful sale and leaseback of two Airbus A340-600 aircraft
• Positive cash flow from operating and investing activities
• R1.6 billion repaid to Transnet

3 “Bringing the World to Africa and taking Africa to the World”

 Financial Overview
Income statement – R’m
2006 % change 2005
Total Revenue 19 423 13.0 17 186
Airline Revenue 15 642 2.1 15 319 • Airline revenues up 2.1%
Passenger revenue 13 042 .8 12 938
Cargo 1 609 7.9 1 491 • Release of air traffic liabilities
Other 991 11.3 890 up ~R400m due to new
Other Airline Revenue 3 781 >100 1 867
systems implementation
Fuel levies & recoveries 2 210 78.8 1 236
Air Traffic Liabilitity release 1 028 >100 423
• Margins weakened due to a
Other 543 >100 208
decline in yields and increase in
EBITDAR 3 134 11.9 2 800 fuel cost
EBITDAR margin 16.1% -0.20 16.3%
• Bambanani initiatives mitigated
EBIT (b/f fair value adj) 395 -32.0 581 margin weakness
EBIT margin 2.0% -1.40 3.4%
• Air Tanzania - discontinued
Fair value movement 30 100 346 operations
Net finance cost -301 -61.8 -186
Profit - Continuing operations 112 -84.8 739
Loss - Discontinued operations -47 48.3 -91
Profit for the year 65 -90.0 648

NOTE: 2005 were restated for IFRS

4 “Bringing the World to Africa and taking Africa to the World”

 Financial Overview
Income statement – R’m
2006 % change 2005

Aircraft lease costs 1 897 22.9 1 543 • Once-off costs, mainly legacy
Accommodation and refreshments 599 41.6 423
costs and exogenous factors,
negatively impacted SAA FY2006
Depreciation and amortisation 842 24.6 676 results ……. 2006
Distribution costs 1 551 (10.2) 1 728
Impact of strike 300
Maintenance of Parity (MOP) 208
Electronic data costs 529 10.1 480 Competition Commission 100
Energy 4 933 51.5 3 257 Fuel cost not covered by fuel levies 700
TOTAL 1 308
Labour 3 282 (5.1) 3 459

Material 1 466 32.6 1 106

Navigation, landing and parking fees 977 11.6

875

(Profit)/loss – sale/scrapping of fixed (257)

assets 100 25

Other operating costs 3 209 5.8 3 033

Total 19 028 14.6 16 605

5 “Bringing the World to Africa and taking Africa to the World”

 Financial Overview
Balance sheet – R’m
2006 2005

Non-current assets 8 749 10 582

• Post Recap Balance Sheet assumes
R4bn Recap
Current assets 5 240 6 646
• Non-current assets decreased due to
Sale & Leaseback of A340-600’s
Total assets 13 989 17 228

• Net asset value declined after SAA

Capital and reserves 1 179 2 705 repaid Transnet R1.6 billion of the
R4.0 billion Compulsory Convertible
Subordinated Loan
Non-current liabilities 4 593 5 953

• Transnet will convert the balance of

Current liabilities 8 217 8 570 R2.4 billion to Ordinary Equity
• R1.4 billion aircraft related debt
Total equity and liabilities 13 989 17 228
repaid during the year

6 “Bringing the World to Africa and taking Africa to the World”

 Financial Overview
Cash flow statement – R’m
2006 2005

Cash generated from operations 336 2 021 • Efficient working capital

management resulted in
Net finance costs and derivatives (9) (6 108)
decrease in net working
Net cash inflow/(outflow) from operating 327 (4 087) capital of R1 billion
activities
• Sale & Leaseback proceeds of
Cash inflow/(outflow) from investing activities 1 456 (298) R1.3 billion
• R1.4 billion aircraft related
Cash (outflow)/inflow from financing activities (3 043) 4 029 debt repaid
• R1.6 billion of Transnet’s CCSL
(Decrease) in cash (1 260) (356) repaid
Foreign exchange effect on cash 86 (7)

Cash at the beginning of the year 2 614 2 977

Cash at the end of the year 1 440 2 614

7 “Bringing the World to Africa and taking Africa to the World”

 Financial Overview
Impact of strike

. . . .on revenue . . . .on passenger numbers

1,300,000 700 000

1,200,000 650 000

1,100,000 600 000

Number
R 000's

1,000,000 550 000

900,000 500 000

~12% drop vs. FY0405
800,000 450 000 ~12% drop vs. FY0405
700,000 400 000
A pr M ay Jun Jul A ug S ep Oct Nov D ec Jan F eb M ar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar
M o n th s Months

2004/05 2005/06 2004/05 2005/06

8 “Bringing the World to Africa and taking Africa to the World”

 Financial Overview
Financial risk management
• Currency risk management…..
– SAA exposed to currency risk from foreign revenues earned, foreign expenses incurred and
aircraft financing transactions
– SAA hedges between 50% and 75% of exposure on a 12 month rolling basis
– Currency risk also managed through cash collection and conversion strategies

• Jet Fuel ……
– Jet fuel is SAA’s largest expense
– SAA hedges 40% - 60% of its jet fuel price exposure on a 12 month rolling basis

• Interest rate risk….

– SAA interest rate exposure arises from aircraft financing structures
– SAA manages its interest rate exposure through adjusting fixed vs floating ratio and USD vs
ZAR ratio of its aircraft financing portfolio

9 “Bringing the World to Africa and taking Africa to the World”

 Financial Overview
Unbundling & Recapitalisation
• Unbundling from Transnet…..
– Sale of SAA from Transnet to DPE concluded for R2.05 billion
– Suspensive conditions to be fulfilled by 31 December 2006, mainly
• PFMA legislative requirements
• Approvals from 3rd parties & replacement guarantees
• Resolution of E Class Shareholder matter

• SAA Recapitalisation….
– SAA will be raising R3.2bn - R4.0bn equity to restructure its balance sheet
• position SAA for future growth and expansion
• lower cost of capital
• improve gearing and cover ratios
• mitigate currency risks

10 “Bringing the World to Africa and taking Africa to the World”

 Agenda

1. Financial Overview

2. Industry Overview

3. Strategic Overview (including Network plans and STAR alliance)

4. Conclusion and way forward

11 “Bringing the World to Africa and taking Africa to the World”

 Industry Overview
Key themes - Global
• 2005 was a turbulent year for the airline industry

• Global airline industry losses approx US$6 billion in 2005 (IATA estimates)

• Oil price is wild card, cutting into airlines’ efficiency gains and profit

• Oil prices are volatile and remain uncertain

• Airlines need to:

– Reduce cost and improve efficiencies
– Consolidate and join global alliances

• Low Cost Carriers continue to be a threat to legacy carriers

12 “Bringing the World to Africa and taking Africa to the World”

 Industry Overview
Key themes - Africa
• Increased competitive threat (AF/KLM/KQ, EK)

• Increased partnering and code-share

• BASA constraints (e.g. Nigeria, Angola, Yamoussoukro Declaration)

• Strong market growth

• Franchise opportunities

• Aircraft maintenance opportunities

• Increasing Cargo opportunities

13 “Bringing the World to Africa and taking Africa to the World”

 Industry Overview
Key themes - South Africa
• Strong pax growth – (only 5% of South Africans fly)

• LCC position strengthening

• Competition intensity driving yields down

• Fuel costs bite

• Strong voice of Labour

• Growing online bookings

14 “Bringing the World to Africa and taking Africa to the World”

 Agenda

1. Financial Overview

2. Industry Overview

3. Strategic Overview (including Network plans and STAR alliance)

4. Conclusion and way forward

15 “Bringing the World to Africa and taking Africa to the World”

 Strategic Overview
Strategic Initiatives
• SAA strategy and specific initiatives

Corporate Strategy
Low Cost Carrier
Domestic Africa International Cargo SAAT
Legacy Carrier

SAA
Cost Reduction

Subsidiaries and Non-Core

Bambanani II Functions
(Re-engineer, Retain, Sell)

16 “Bringing the World to Africa and taking Africa to the World”

 Strategic Overview
Network strategy
• Domestic/SAD - Launch low cost offering for leisure and new
C travellers
- Premium offering for business passengers

• Africa - Partner with African carriers – Ghana, Nigeria

- Increase point-to-point flying

• International - Consolidate network in partnership with Star Alliance

- Lie flat seats
- Focus on tourists
- Increase direct services
- Reduce costs

17 “Bringing the World to Africa and taking Africa to the World”

 Strategic Overview
…..FY2006 Strategic Achievements
• Historic admission to the Star Alliance

• Bambanani II embedded across the organisation

• IT system implementation complete – Amadeus, Pegasys, Rapid

• Strong leadership and management team in place

• Marketing achievements – ATP, SAA Tennis Open, SAA Open

…..FY2007
• Improved pricing and revenue management
• Improved customer experience
• Voyager Credit Card
• Strong SAA Cargo growth to achieve R4.5bn turnover by 2010
• SAA Technical pursuing partnerships, 3rd party business & Freighter conversions
• 2010 World Cup preparations
• Launch of LCC

18 “Bringing the World to Africa and taking Africa to the World”

 Strategic Overview
Network plans
• SAA is planning growth in key International and Regional markets
between now and the end of 2007

• Growth in the short term will be driven by increased utilization of the

existing fleet (increasing the return on assets for our shareholders)

• SAA will commence operations to five new markets

– Central Africa (2), West Africa (1), North America (1) and Europe (1)

• SAA will increase capacity in the four markets in the short term

• Supplementary flights will be operated over periods of peak demand to

strategic markets

• SAA would also like to add capacity to Luanda, Lagos and additional
flights to Accra however bilateral agreements prevent this

19 “Bringing the World to Africa and taking Africa to the World”

 Strategic Overview
October 29; 2006
Network plans
• Operate Washington – Johannesburg non stop
• Add one additional Johannesburg - Mumbai flight
• Add one additional Johannesburg - Accra flight
• Increase Johannesburg - Livingstone from 3 to 7 flights to per
week
• Increase Johannesburg - Sao Paulo capacity (by 574 seats per
week)
• Retime Johannesburg - Entebbe flights to overnight increasing
aircraft utilization)
• Cancel flights to Kigali (to be replaced with Rwandair express
codeshare)
• Codeshare with Egypt Air between Johannesburg and Cairo
(Tuesdays, Thursdays, Saturdays and Sundays)
• Additional capacity between Johannesburg and Cape Town and
between Johannesburg and Durban .(to be operated at peak
times) – [planned additional 56 flights between 20 Nov and 1
January – schedules to be finalised within next few days]
20 “Bringing the World to Africa and taking Africa to the World”
 Strategic Overview
November ; 2006 Network plans
• Two extra flights between Johannesburg and East London on Fridays
and Sundays and the return flight will be on the same days. The
extra flights will depart as SA481 from Johannesburg at 18h50 to
arrive in East London at 20h20. The return flight, SA484 will depart
from East London at 2050 to arrive in Johannesburg at 22h20
– Note: As of August: Business Class reintroduced on East London and Port
Elizabeth flights
• Air India codeshare implementation

December; 2006
• Operate supplementary flights: to London, Frankfurt and Perth
(December06 – January07)
• Thai Airways, Air Mauritius, Air Malaysia codeshare implementations

21 “Bringing the World to Africa and taking Africa to the World”

 Strategic Overview
January; 2007 Network plans
• Commence new destination: Point Noire, Congo
• Commence new destination: Bamako, Mali
• Terminate Johannesburg – Zanzibar flight (to be replaced with
Air Tanzania codeshare)
• Swiss and SAS Scandinavian codeshare implementation

February 1; 2007
• Commence new destination: Libreville, Gabon
• Add two additional Johannesburg – Maputo flights

April 1; 2007
• Commence new destination: Johannesburg – Chicago (3 flights
per week)
• Add one additional Johannesburg - Entebbe flight
• Final decision on the continuation of Johannesburg – Zurich
operations
• Commence one daily Johannesburg–Cape Town flight from the
International Terminal

22 “Bringing the World to Africa and taking Africa to the World”

 Strategic Overview
Network plans
July 1; 2007
• Commence new destination: Johannesburg – Munich (3
flights per week)
• Operate supplementary flights: to Frankfurt (July - August)

September 1; 2007
• Operate supplementary flights: to Paris (Rugby world Cup)

November 1; 2007
• Increase frequency to daily Johannesburg - Chicago
• Increase frequency to daily Johannesburg - Munich
• Increase frequency to daily Johannesburg - Mumbai
• Increase frequency to daily Johannesburg - Perth
• Final decision on the continuation of Johannesburg – Paris
operations

23 “Bringing the World to Africa and taking Africa to the World”

 Strategic Overview
STAR Alliance
The global STAR network that SAA can leverage

24 “Bringing the World to Africa and taking Africa to the World”

 Strategic Overview
STAR Alliance: Highlights & Key initiatives
– Internal reviews as part of the Star Alliance Strategy
Realignment Process for the definition of all Minimum
Requirements was completed (Assets Review).
– Collocation – in London (LHR airport) and Paris (CDG airport).
– After joining Star Alliance, SAA released 12000 Voyager seats
in June 2006 linked to joining Star Alliance.
– Round the World Fares (RTW), for the month of Jul’06 the
total Revenue received of R1,2 mil from 283 coupons
– Star Alliance Airport Audit was conducted end Sep/Oct 2006
– Visit Southern Africa Campaign postponed till January 2007
due to inability of all carriers to participate effectively.
– Star Alliance Upgrade Awards (SAUA), the Business case is
currently in progress
– Interline Ticketing – in progress, will be implemented within 1
year, paperless transactions
– SITA cost savings $657,139 as at Jun’06, for the period Mar
2005-Dec 2005

25 “Bringing the World to Africa and taking Africa to the World”

 Strategic Overview
STAR Alliance: Codeshares
Airlines Current Code-share agreement status
Air Canada Discussions in progress
Air New Zealand None – investigating (current Quantas codeshare barrier)
All Nippon Discussions in progress
Asiana Airlines Implemented: SAA Marketing and Operating
Austrian Implemented: SAA Marketing and Operating
BMI Implemented: SAA Marketing and Operating
LOT Polish Airlnes None - for future (2010) investigations
Lufthansa Implemented: SAA Operating and Marketing
Scandinavian Airlines Discussion in progress
Singapore Airlines Implemented: SAA Marketing
Spanair None – for future (2009) according to network strategy
TAP Portugal None – for future (2009) according to network strategy
Thai Airways International Discussion in progress
United Airlines Implemented: SAA Marketing and Operating
US Airways Discussion in progress
Varig Code-share terminated. Possible discussion with new airline
26 “Bringing the World to Africa and taking Africa to the World”
 Strategic Overview
STAR Alliance

During June 06 the first STAR

alliance customer satisfaction
survey in which SAA participated
was completed, with SAA scoring
above the STAR average. These
benchmarks are valuable tools to
enhance our service offering to
the clients

27 “Bringing the World to Africa and taking Africa to the World”

 Strategic Overview
Product improvements
• As of October SAA introduced its premium lie flat bed on all
its long haul routes
• The premium class experience:
– Offers comfortable duvets and big pillows.
– Amenity kits that are being redesigned for more variety and a
stronger African look and feel.
– Menus have been improved to incorporate the creations of
foremost South African chefs.
– In-flight entertainment offers a selection of block buster movies,
documentaries, comedies, PC Games and music compilations.
• SAA has refitted the seats in economy class on the new Airbus
A340s to between 33 and 34 inches for increased comfort.  
• The selection of the meal offering on domestic routes has been
refreshed and introduced following our tasting sessions for
customers at Johannesburg International Airport.

28 “Bringing the World to Africa and taking Africa to the World”

 Agenda

1. Financial Overview

2. Industry Overview

3. Strategic Overview

4. Conclusion and way forward

29 “Bringing the World to Africa and taking Africa to the World”

 Conclusion and Way forward

• Looking forward, SAA will focus on the following strategic initiatives:

• Realising Star Alliance benefits

• Continued focus on Bambanani II

• Improving Customer Service

• Implementation of Network strategy - Low-cost carrier, Legacy

business, International business

• Gearing Cargo and SAA Technical for growth

• Restructure, Retain or Sell Subsidiaries and Non-Core Functions

• Recapitalising SAA & Finalising Unbundling from Transnet

30 “Bringing the World to Africa and taking Africa to the World”

 Thank you
Q&A

“Bringing the World

“Bringing totoAfrica
the World and
Africa and taking
taking Africa Africa to the World”
to the World”