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.

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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.

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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.

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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.

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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.

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Key Performance Indicators Measure in business plan

Net Profit (ZAR million) Passenger Load Factor (%) Average Passenger Fare (ZAR) RASK (ZAR cents) Cargo Revenue to Passenger Revenue on International Routes (%)

Target year ending March 08

R47m 77% R2000 66.3

15% Daily Block Hours per Aircraft (excluding Mango) Full CASK (ZAR cents) CASK excl. fuel 10.7

64.2

47.2

Actual year to March 08

R123m 75% R2062 68.1

14%

Trend

10.6

68.1* 47.7* * excluding restructuring costs 2008 SAA Proprietary and confidential.

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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.

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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.

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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.

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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.

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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.

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Agenda

• Industry and strategic overview – CEO Khaya Ngqula

• Financial overview – CFO Kaushik Patel

• Conclusion and way forward – Dr Ngqula 2008 SAA Proprietary and confidential.

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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 2008 SAA Proprietary and confidential.

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SAA Group – Income Statement

SAA GROUP (R'm) Total Revenue Total Operating Cost EBIT Hedging & Forex Net Interest Paid Loss before tax

2007/8 Actual

22,511 (23,629) (1,372) 399 (130) (1,103)

2006/7 Actual

20,652

Variance

1,859

% Variance

9%

2007/8 Actual excl.

restructuring

22,511 (21,174) (650) (2,455) (722) (12%) (111%) (22,283) (26) 40 (280) (890) 359 150 (213) 905% 54% (24%) 399 (130) 243 Tax & Dividends 15

NET (LOSS) / PROFIT FOR THE YEAR

Restruct Costs (Included above) (1,085) (1,346)

NET PROFIT FOR THE YEAR * 123

Net Profit Margin

* After accounting for interest of 137 as a dividend, classified as equity instrument

0.55%

(42) (883) 0

(883)

(4.3%)

Note

: Net Profit before restructuring of R123m compares with Corporate Plan targeted profit of R47m 57 (202) (1,346) 1,006 23% 114% 15 * 123 2008 SAA Proprietary and confidential.

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SAA GROUP (R'm) Total Revenue Turnover Other Airline

Revenue 2007/8 Actual

22,511

2006/7 Actual

20,652

Variance

1,859

% Variance

9% 19270 2987 17020 3504 2259 (517) 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 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 2008 SAA Proprietary and confidential.

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Operating costs

SAA GROUP (R'm) Operating costs

2007/8 Actual

23,629

2006/7 Actual

21,174

Variance

2,455

% Variance

12% Major cost items excluding aircraft lease costs & maintenance Energy Labour Restructuring 6,685 3,298 1,346 5,734 3,300 0 951 (2) 1,346 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.

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SAA Group Balance Sheet

SAA GROUP (R'm)

Non-Current Assets Current Assets* Less: Current Liabilities Net Assets Funded by: Equity: - Shareholders Surplus/(Deficit) - Subordinated Loans Non-current liabilites (mainly borrowings) Net Funding Debt/Equity Ratio Cash & Cash Equivalents I ncluded in Current Assets * 2007/8 Actual 7,204 (517) 10,366 (10,883) 6,687 2,496 (368) 2,864 4,191 6,687 1.7

5,393

2008 SAA Proprietary and confidential.

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2006/7 Actual 8,352 (1,748) 6,824 (8,572) 6,604 1,570 270 1,300 5,034 6,604 3.2

2,364 Movement (1,148) 1,231 3,542 (2,311) 83 926 (638) 1,564 (843) 83 3,029

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.

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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.

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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.

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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.

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Thank you

2008 SAA Proprietary and confidential.

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