1. Presentation to Parliamentary Portfolio Committee on Public Enterprises 18 February 2009 Dr A Shaw DDG: Transport Department of Public Enterprises

2. OPERATIONAL ENVIRONMENT SAA is currently facing the effect of the worldwide downturn in economic activity which is expected to continue in the medium term. Passenger demand rapidly deteriorated from August/September 2008 and worsened considerably by the end of the calendar year as the global financial crisis intensified. Passengers carried in the markets between SA and USA, Europe and India have since September reduced substantially. Passengers in the domestic market have also declined but not as dramatically as in the inter- continental market. African regional air travel has over the same period increased. The African market however currently accounts for a small portion of SAA’s total revenue compared to approximately 60% of SAA’s revenue derived in the intercontinental market.

3. SOUTH AFRICA HAS EXPERIENCED A DRAMATIC DROP IN PASSENGERS SINCE APRIL 2008

4. THE RESTRUCTURING PLAN After failing to meet going concern requirements in March 2007, the restructuring programme was introduced. The objective was to improve SAA’s operational competitiveness through reducing cost and restructuring the company and its network of operations. The resulting restructuring plan incorporated the following elements: A reassessment of the SAA fleet and network of operations including the elimination of inefficient Boeing 747-400 aircraft. Organisational re-alignment and the corporatisation of non-core entities with a view to finding strategic equity partners in these areas. Head office staff reductions including voluntary severance packages across the organisation. Cost reductions and simplified procedures. Review of contracts including unwinding certain onerous legacy contracts. Improvement in revenue and yield management leading to increased average revenue per passenger

5. EFFECTIVENESS OF RESTRUCTURING The plan was funded by a transfer of R653 million to SAA for labour restructuring and the provision of quasi-equity in the form of a guarantee for R1.56 billion to cover the costs of grounding the Boeing 747-400 aircraft. Restructuring achieved cost savings of R1.141 billion by March 2008; enabling SAA to post a operating profit of R123 (before restructuring costs) at 2007/2008 year end. SAA however, failed to achieve effective organisational re-alignment within the proposed time frames: Corporatisation, outsourcing or selection of strategic equity partners for Voyager, SAAT, catering and potentially air-freight have not progressed. There has been improvements in revenue management, marketing and market share, however these have not achieved the restructuring targets. Whilst average fares have increased, load factors have declined as a result of the general economic downturn.

6. INTERNATIONAL BUSINESS ENVIRONMENT Most network airlines have suffered substantial reductions in profitability or losses as a result of the high fuel prices and subsequent fuel hedges and a softening of demand leading to lower revenue yields. 35 medium sized network airlines have been liquated in the last year. IATA forecasts losses for the airline industry at US$5 billion for the 2008 calendar year with larger losses expected in the 2009 calendar year. The continuing recession has resulted in new lows for consumer and business confidence with all traffic markets expected to fall substantially. Reduction in costs are offset by larger reductions in prices and yields. Published capacity plans in the airline industry indicate sharp cut-backs and cost saving measures by most airlines; cost cutting measures of a similar nature to the cost savings measures implemented by SAA during its restructuring programme.

7. GLOBAL AVIATION HAS BEEN HARD IT BY THE ECONOMIC DOWNTURN Source: IATA Analysis for DPE Both passenger Revenue Passenger Kilometers (RPK) and air freight

8. IATA ANALYSIS SHOWS THAT PUBLISHED CAPACITY PLANS INDICATE SHARP CUT_BACKS PARTICULARLY IN THE US Growth in planned and forecast Average Seat Kilometers (ASK) Source: IATA Analysis for DPE

9. EQUITY COMPARISON WITH OTHER AIRLINES SAA has the highest on and off balance sheet gearing ratio. Higher than American Airlines and Delta currently under Chapter 11 bankruptcy protection at the time of their last financial statements On and Off Balance Sheet DebtOn and Off Balance Sheet Debt to Turnover SAA has the highest level of debt to turnover SAA would need to increase its shareholders funds substantially to be at sustainable debt levels in alignment with industry peers.

10. Guarantee for Air Traffic Liability of SAA for R 1 600 million expires on 31 March 2009. Future requirements to be negotiated with the Air Services Licensing Council and the International Air Services Licensing Council. Quasi-equity of guarantees funded by subordinated loans impose conditions that SAA may not utilise such funds for other purposes. Funds remain in cash and SAA incurs a higher interest cost than can be earned on current deposits. Funding utilisedFinancial assistance providedImpactFundsGuarantees for Loan Subordinated loan Guarantee provided to assure going concern and restore 2006 balance sheet equity value (Cover losses of 2006/07) Cash is ring fenced and may not be used by SAA 1 300 Transfer of funds Shareholder injection for labour restructuring Only to be used for labour restructuring costs 653 Subordinated loan received from funding banks Guarantee provided to restore balance sheet after providing for cost of B747-400 fleet grounding Cash is ring fenced and may not be used by SAA 1 560 Sub-Total 6532860 Total3 513 FUNDS AND GUARANTEES SINCE TRANSFER OF SAA TO GOVERNMENT (R Million)

11. Background Two guarantees were issued to SAA to enable it to raise subordinated loans that are treated as equity and meant that SAA could maintain its balance sheet solvency. A R1,300 million subordinated loan issued in March 2007 to cover losses and A R1,560 million subordinated loan was issued in March 2008 to cover costs related to the grounding of the B747-400 fleet. Benefit was to reduce SAA’s on and off balance sheet debt but in reality interest cost for SAA is retained. SAA incurs interest cost on cash that may not be used in the business Benefit of R1.56 Bill Ideally there would be a need to replace the subordinated loans with permanent equity finance that will require the conversion of the guaranteed subordinated loans into share capital The 2008 Budget converts the current guarantee of R1,560 million from quasi-equity to full equity. The overall equity position of SAA does not change. However, the current substantial interest burden is reduced. It is required that the guarantee is cancelled such that the equity injection is used to pay down loans issued previously using the guarantee as a mechanism for funding the grounding of the 747-400s CONVERSION OF R1.56 BILL FROM QUASI-EQUITY TO FULL EQUITY

12. A STRATEGIC CHANGE IN DIRECTION SAA is inadequately positioned to deal with recent turbulence in the aviation market. It remains thinly capitalised. The R1.56bn allocated in the budget is not sufficient, but is a good beginning. The culture of dependence on government must be reversed. The airline must trade itself into profitability. The restructuring programme has reduced costs, but revenue and route profitability remain ongoing challenges. Route profitability needs to be comprehensively assessed and routes and schedules need to be adjusted more rapidly in the face of market related changes. Support services need to be converted into profit centres with arms length agreements with SAA. Operationally the airline requires additional skills and expertise

13. IMMEDIATE CHALLENGES THAT MUST BE ADDRESSED Voyager liability must be resolved Negotiations with Airbus on the order must be finalised Resolve all outstanding competition matters Renegotiation of all internal supplier contracts to market standards

14. THANK YOU