Commission Restructuring: Progress Update

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Commission Restructuring Progress Update
2

Introduction to SAA
SAA is the largest carrier in Africa with 94
aircraft

• SAA underwent a fleet renewal programme in 2001
• Replaced 747 Classics and 767s with A340 family
• Replaced 737-200s with A319s
• Average fleet age is 4 years
• Utilisation is 13 hours (longhaul) / 7.9 hours
  (shorthaul)

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Introduction to SAA
which enables us to serve 42 destinations (88
with our partners)

• SAA has a well developed network
• Africa 19 destinations
• Domestic 9 destinations
• International 14 destinations
• With our feeder airlines this number increases
• Africa 32 destinations
• Domestic 42 destinations
• International 14 destinations

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Commercial Strategy
SAAs commercial strategy is very simple

• Launch new routes
• Washington DC (Jul)
• Zanzibar (Jul)
• Livingston (Jul)
• Move all existing routes to daily service (has
  already been done)
• Zurich / Paris / Sao Paulo / Mumbai
• CPT-FRA (September 2005)
• Reduce costs
• Have the best long-haul product in the premium
  cabin / fleet is all flat bed
• High frequency in the domestic market
• Focus sales energy on new opportunities

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Objective Delivery
Most plans are already well advanced to deliver
this

• New route launches
• Zanzibar, Livingstone, Washington DC, CPT-Nairobi
• Increased frequency into Africa
• Maputo, Zambia, Zimbabwe, Kenya
• Increased domestic frequency
• New fleet delivery
• A319s
• A340-600s
• Increased utilisation
• Planned 15 increased utilisation on long-haul
• 13.07 hours currently plan to operate 15.01
  hours

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Cost Reductions
in conjunction with our cost initiatives

• Intention to remove 1.6b ZAR of costs in 3 years
• Project is already underway
• Commission Reduction
• Electronic ticketing
• Revenue Accounting
• Fleet negotiation
• Aligns SAA with global world standards
• Review all operating areas
• Overhaul our entire cost base
• The Goal
• To ensure SAA remains profitable

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Performance
enabling us to grow revenue and passenger
volumes

• ASK increase of 6 per annum
• Revenue increase of 3 nett above ASK growth
• Aggressive growth targets

Compounding growth from base year

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Unit cash operating costs
Our costs are in line with industry averages, but
need to be lower

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Passenger unit revenue
while passenger yield is at acceptable levels

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Commission Restructuring
Revising the commission structure was not a new
project

• Restructuring commission is a cornerstone of our
  drive to global standards
• Commission reduction was first proposed by SAA in
  August 2001 by A. Viljoen
• Sector fee was proposed withdrawn
• Nett fares were proposed
• Creeping reduction of commission also proposed
  (7?5?3?0 over 5 years)
• SAA paused the project in 2003 and gave an 18
  month extension of existing arrangement.
• Agents guaranteed 7 in an MoU
• This ended in Apr 2005
• SAA and ASATA have met many times with no
  resolution
• SAA announced a new remuneration model in Nov
  2004 and implemented it in May 2005

Withdrawn due to IT constraints at SAA

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Global Summary
but was delayed, placing South Africa out of
step globally
Country
Commission Level
Year

• 2006
• 2003
• 2004
• 2004
• 2004
• 2005
• 2001
• 2005
• 2004

• Austria
• France
• Germany
• Switzerland
• United Kingdom
• Scandinavia
• United States
• Netherlands
• New Zealand

• 0
• 0
• 0
• 0
• 1
• 0
• 0
• 0
• 0

Commissions replaced by Nett fares/sector fees

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Commission Volumes
The commissions paid are a significant component
of our cost base

• Commission was out of step with business
  practices
• SAA has been pushing for a streamlined approach
  to business
• We intend to simplify wherever possible

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Evolution of Travel
changing this contributes to industry evolution

• The industry is moving to a differentiated sales
  model
• Airlines control unbundled solutions
• Agents control bundle solutions
• Agents differentiate from each other (this is
  already occurring)
• All sell the destination
• Menu pricing is being examined by many airlines
• Base fare is n
• Fare plus luggage thru-check (l) ? (n l)
• The industry is evolving it is returning to
  origin
• Agency commission occurred in 1970s
• Industry moved away from user pays and service
  fees as a result
• Airlines are now removing the agents earnings cap

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Changes to the Consumer relationship
with all parties now approaching the consumer
from many angles

• This change is not unique to airlines
• The internet is being used to drive selected
  disintermediation at all levels
• Business literature is full of these scenarios

Intermediary
Intermediary
Supplier
Consumer
Supplier
Consumer
Environmental Change
These groupings now approach each other directly
excluding the intermediary where mutual benefit
occurs
Previously the consumer/supplier relationship was
controlled by an intermediary
Model reproduced from Johnson Scholes (2002)

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Passenger Choice
This is demonstrated in recent changes

• Our GO sale set a record for internet sales in
  South Africa
• Over 100,000 seats available
• Over 60,000 seats sold
• We have not done this for overseas travel
• International value is through package concepts
  not discounted airfares
• Customers want to use websites this is a global
  trend
• A customers purchase decision will be driven by
  the varying value propositions offered
• SAAs goal is to make SAA the first choice for
  customers irrespective of channel

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Remuneration Position
SAA and agents had a general common position

• Trade Position
• Nett fares
• Volume incentive
• Consumer education
• Agent education
• Seamless transaction

• Agreed Position
• Nett fares
• Volume incentive to be discussed on a 1 to 1
  basis
• Consumer education given high priority
• Agent education given high priority
• Agree in principle

• Trade Position
• SAA not to undercut agents
• Payment of merchant fees
• Adherence to the PSAA payment guidelines
• Payment of sector fee
• Corporate strategy
• Direct Strategy (must not be cheaper than agent)

• Non-Agreed Position
• Not acceptable. Will never agree to tacit
  price-fixing
• Only fees relating to the ticket will be paid by
  SAA
• Agreement not specific about how agents are paid
• SAA will not use both remuneration methods
• To be discussed individually with
  corporates/agents
• Non negotiable it will be cheaper

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Summary
that was reflected in the changes that occurred

• Zero commission was implemented on 01 May 2005
• SAA provided the XP tax box for seamless
  transactions
• This was well received
• Other airlines are now following our lead
• BA, AF, KLM, LH
• We are refining the process as we proceed
  (corporate fares etc)
• The move has overall benefit for the industry