Presentation to the Parliamentary Portfolio Committee

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Presentation to the Parliamentary Portfolio
Committee June 2007
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Contents

• Vision and Core Values
• Background
• Market Position
• Strategic Focus
• Current Fleet Network
• Domestic Strategy
• Regional Strategy
• Financial Performance and projections

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Our Vision, Mission and Values
Vision To be the most successful regional airline
in Africa
Mission To provide the best service to our
customers whilst optimising profits
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Background

• South African Express (SAX) was established in
  1994 as a regional feeder airline to South
  African Airways
• SAX operates predominantly on routes that are
  secondary within South Africa and the region,
  e.g. Bloemfontein, Kimberley, Richards Bay,
  George and Gaborone, Botswana. These routes
  cannot be served viably with larger aircraft
• SAX has suffered from historical
  under-capitalisation. It was highly geared,
  having a share capital of only R100 and therefore
  became reliant on Transnet guarantees
• The majority of SAX customers (75) are business
  travellers commuting between major hubs and on
  secondary routes (the Hub-and-Spoke system)

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Three categories of airlines

• Full Service Network Carriers (FSNC) operating
  mainline services on larger routes (e.g. South
  African Airways, BA/Comair and Nationwide)
• Legacy carriers with large hubs
• Segment customers into two groupings according to
  their sensitivity to timing of departure.
• Time sensitive Business Pax (mostly insensitive
  to price) and
• Time Insensitive Leisure / Discretionary pax that
  are very price conscious
• High costs resulting from high labor costs and
  hub inefficiencies
• Enjoy revenue premium driven by loyalty schemes,
  network and service product advantages
• Low cost carriers (LCCs) (e.g. Mango, Kulula.Com
  and 1Time)
• Single class service offering with minimal frills
  and simplified systems
• No hubs or interlining of traffic
• High productive use of aircraft, labor and
  facilities (frequency of operation increase units
  by which costs are recovered)
• Regional carriers (e.g. South African Express and
  Airlink )
• Feed and distribute pax traffic to and from
  mainline carriers at their hubs
• Operate point to point service in less dense
  markets with smaller gauge aircraft
• May be independent or partially spun off from
  mainline parent
• SAX is positioned as a regional/feeder carrier
  within the South African Network. Although SAX is
  adopting low cost approaches as a regional
  carrier, SAX is not a low cost carrier (LCC)

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Regional carriers

• Regional carriers mainly operate on shorter
  distance domestic and regional lower density
  routes with smaller gauge aircraft
• Less vulnerable to currency fluctuations
• Less dependent on leisure travel which can be
  impacted by the economic cycle
• Less vulnerable to general concerns accompanying,
  international terrorism instability and safety
  demands on large African airlines
• Regional carriers operate on a principle of
  higher frequencies with smaller aircraft than
  mainline carriers
• Incur substantially lower level of start-up
  losses on new routes than mainline carriers
• Regional carriers are ideal for development of
  profitable operations on thinner routes within
  the African context
• Despite economic environment and fluctuations in
  expenses, regional airlines have shown great
  resilience by reporting solid operating profits

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Strategic Focus

• Profitability is essential
• Continue to build a strong regional and feeder
  airline
• Identify opportunities for new secondary hubs in
  the African region where services are well suited
  to the 50 to 70 seater gauge aircraft
• SAX is amenable to co-operation with other
  African airlines to pursue joint venture
  opportunities
• This will add to the hub status of the OR Tambo
  International Airport and will provide additional
  feed to SAAs international network
• Apply a low cost focus without necessarily
  adopting no frills model
• Reduce distribution costs. Increase internet
  bookings
• Promote e ticketing to reduce ticketing costs
• Build efficiencies in aircraft maintenance
• Re-negotiate terms of the engine overhaul
  contracts
• Re-engineer process of management of spares

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Staff Numbers

• SAX employs a total of 687 employees
• Demographics
• PDI - 373 (48 male, 52 female)
• White - 314 (75 male, 25 female)
• SAX plays an important role in training young
  commercial pilots. To date 52 cadet pilots have
  passed through SAX
• SAX still employs the first woman pilot to fly
  for a South African commercial airline

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Current Fleet

• Fleet size of 18 aircraft
• 7 Dash 8 aircraft (50-seater)
• 9 CRJ aircraft (50-seater)
• 2 Q400 aircraft (74-seater)
• Daily average utilisation per aircraft is 09
  hours 21 minutes
• The gauge of the current fleet operated by SAX is
  more efficient and profitable than larger gauge
  aircraft
• SAXs breakeven passenger number is significantly
  lower than the load required on a 120-seater A319
  aircraft
• Furthermore, SAXs turboprop aircraft are able to
  physically operate into smaller airports such as
  Richards Bay which cannot be operated with larger
  aircraft

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Current SAX Route Network
SAX operates to 7 regional destinations and 11
domestic destinations with over 120 flights per
day
Livingston
Vic Falls
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Domestic Routes

• Johannesburg Kimberley
• Johannesburg Richards Bay
• Johannesburg Hoedspruit
• Johannesburg Bloemfontein
• Johannesburg - George
• Johannesburg Nelspruit
• Johannesburg East London
• Cape Town East London
• Cape Town Port Elizabeth
• Cape Town Bloemfontein
• Durban Port Elizabeth
• Durban East London

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Johannesburg Bloemfontein

• This is a predominately a business route for SAX
  
• SAX operates 9 times daily utilizing a fleet mix
  of between 50 to 70-seater aircraft depending on
  peak and off peak times. Schedule begins at 06h00
  ending at 21h00
• 1Time operated the route using a 157-seater
  aircraft once per day. However, 1Time stopped
  services on this route 16 March 2007 due to the
  market demanding more frequency and flexibility
  than cheaper fares
• Other carriers such as Nationwide have attempted
  to offer services between Johannesburg and
  Bloemfontein but terminated operations after only
  a three week operation

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Cape Town - Bloemfontein

• SAX had no competition on the Cape Town
  Bloemfontein route until Mango began operations
  on 1st December 2006. Mango remains SAXs only
  competitor
• The majority of passengers are business
  travellers, with Mango on the route the leisure
  market has shown substantial growth as Mango
  targets predominantly the leisure market with
  lower fares
• SAX currently flies 3 daily services between Cape
  Town and Bloemfontein compared to one flight by
  Mango
• SAX utilizes a 50-seater aircraft while Mangos
  aircraft has a capacity of 186 seats

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Johannesburg George

• SAX operates 3 frequencies daily between
  Johannesburg and George. George, is mainly a
  leisure market which is highly seasonal
• SAX utilises a fleet mix of between 50 to
  74-seater depending on peak and off peak times
• Competitors are Nationwide Airlines, Kulula.com,
  1Time and Airlink
• The range and gauge of our current fleet is cost
  effective and has proven to be more profitable
  than when SAA operated this route

15
East London Market

• Johannesburg East London
• SAX operates 2 daily flights to East London
  utilising a 50-seater aircraft. SAX schedule and
  its utilization of a smaller gauge aircraft are
  ideal for the business market into and out of
  East London
• SAA operates larger gauge aircrafts on this
  route, SAX has positioned its schedule at off
  peak times for the mainline carriers and where
  the market conditions could be best met by SAX
  gauge aircraft
• Competitors on the route is 1Time and BA Comair
• Cape Town East London
• SAX operates this route daily utilizing a
  50-seater aircraft. This is the optimum aircraft
  for this route due to market size
• Majority of travel is business travel, and as
  such the schedule, frequency and service provided
  by SAX have maintained and protected market share
• The sole competitor on this route is the low-cost
  carrier 1Time who only operate on Fri, Sun and
  Mon mainly to capture the leisure market

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East London Market (ctnd.)

• Durban East London
• SAX operates 4 daily frequencies using a
  50-seater aircraft and the gauge of aircraft is
  the most profitable aircraft that can service
  this market
• 1Time was operating on this route, but have since
  stopped operations effective 15 April 2007
• SAX schedule offers flexibility to passengers due
  to the timing of its scheduling
• Business travellers constitute 75 of travel on
  this route

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Port Elizabeth Durban

• Competitors are Nationwide and the low-cost
  carrier Kulula.com
• SAX operates 4 daily flights with a 50-seater
  aircraft while Kulula.com only has 1 flight per
  day
• SAA operated this route prior to SAX commencing
  this operation, due to the size of aircraft it
  proved to be costly for the mainline carrier The
  size of SAXs aircraft allows for faster
  turnarounds and more frequency and benefits from
  economies of scale
• The range of the schedule allows for more
  frequency and additional capacity which are key
  on majority business travel routes

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Port Elizabeth Cape Town

• SAX currently operates 8 daily frequencies
  between the route utilizing a 50-seater
• Competitors include Nationwide and two low-cost
  carriers Kulula.com and 1Time
• SAA operated this route prior to SAX commencing
  this operation, due to the size of aircraft it
  proved to be costly for the mainline carrier
• The size of SAXs aircraft allows for faster
  turnarounds and more frequency and benefits from
  economies of scale

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SAX Domestic Strategy

• SAXs strategy in the domestic market is to
  consolidate its network and grow frequency on
  routes such as Bloemfontein, Richards Bay and
  Kimberley
• Fares are not projected to increase due to
  pressure from low fares airlines, however since
  SAX has adopted low cost carrier principles of
  cost containment, the lower fare tickets will not
  cause a major impact to profitability

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Current Regional Routes

• SAX has a greater role to play in providing
  intra-Africa operations which are safe and
  reliable
• SAX currently operates to Botswana, DRC,
  Mozambique, Zimbabwe and Namibia
• Johannesburg Gaborone
• Johannesburg Windhoek
• Johannesburg Walvis Bay
• Johannesburg Lubumbashi (DRC)
• Johannesburg Victoria Falls (to commence middle
  of financial year)
• Cape Town Windhoek
• Cape Town Walvis Bay
• Cape Town Maputo

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Johannesburg Lubumbashi

• SAX commenced flight to Lubumbashi in November
  2004 and is currently flying three frequencies a
  week
• The competitor on the route is Hewa Bora Airways
  operating on Day 1, 4 and 7. The market has an
  unfavourable perception of the competitors
  safety and reliability
• The route has proved to be very profitable and
  SAX has applied for additional frequencies to
  meet the demand of the Johannesburg - Lubumbashi
  route to bring the total frequencies to 5 per week

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Johannesburg Gaborone, Botswana

• SAX is the only South African carrier operating
  to Gaborone based on the single-designated
  bilateral
• SAX operates 5 daily frequencies from
  Johannesburg to Gaborone
• SAXs current competitor is Air Botswana who
  operate 4 daily frequencies
• The bilateral mentions possibilities of an
  open-sky policy between South Africa and Botswana
  as of May 2007

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Johannesburg Windhoek and Walvis Bay

• SAX operates 2 daily flights to Windhoek ideally
  suited for the market in the mornings and
  afternoons where SAA are not able to get optimum
  loads
• The SAA/SAX brand has a loyal customer base in
  Walvis Bay and Windhoek due to the frequency and
  the offering of seamless service
• Competitors on the route are Air Namibia and
  Kulula.com
• The range of the schedule allows for more
  frequency and additional capacity which are key
  on majority business travel routes

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Cape Town Windhoek

• SAX operates this route utilising a 50-seater
  which has proven to be the most optimum aircraft
  due to the market size
• The competition on the route is Air Namibia
  utilising a 737-200 aircraft type
• Majority of travel is business travel, and as
  such the schedule, frequency and service provided
  by SAX have maintained and protected market share

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Competitive Advantages

• SAX is ideal for the lower air traffic demand in
  Africa and due to its fleet, size and experience
  of operating secondary routes, will succeed. SAX
  has a favourable market perception, mainly due to
  
• Right gauge aircraft to operate profitably in
  developing these new routes as a feeder
• Adequate frequency into hubs as the aircraft
  utilised by SAX is better placed to implement
  such a strategy because of its competitive
  advantage provided by smaller gauge aircraft
  which will provide the required frequency
• Sourcing of aligned strategic partners in terms
  of joint ventures and partnership.
• No perceived threat to home carriers and gauge
  precludes it from pursuing African routes
• Lower break even load factor required thus
  operation can be profitable quite quickly

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Thank you