SAS Group Financial Result October-December 2001

Year-end report THE SAS GROUP www.scandinavian.net January - December 2001 On October 8, flight SK686 crashed in Milan and 118 people lost their lives in the worst air disaster in SAS's history. · Continued weak demand due to the events of September 11, the subsequent acts of war, and substantially reduced Business Class traffic, are the main reasons for the weak result in the fourth quarter. · Operating revenue for the full year amounted to MSEK 51,433 (47,540). · Earnings before depreciation and leasing costs for aircraft (EBITDAR) decreased during the period January-December to MSEK 3,168 (5,608). · Income before capital gains for the full year amounted to MSEK - 1,790 (1,291). · Income before taxes amounted to MSEK -1,140 (2,829). Income for the fourth quarter was MSEK -1,147 (1,721). · SAS strengthened its market position in a weak market. · Earnings per share for the full year 2001 for the SAS Group amounted to SEK -6.58 (12.98) and equity per share was SEK 96.06 (106.50). · SAS's assessment is that the weak demand will continue in the first half of 2002 and that there will be some improvement in the second half of the year. · Towards the end of 2001 a number of action programs were initiated within the Group, designed to enhance efficiency and productivity as well as reduce capacity. These measures are expected to be completed with the intended impact on earnings in 2002. · In view of the present situation in the market and SAS Airline's precarious situation as described above, the SAS Group's income before taxes, excluding capital gains, is expected to be negative for the full year 2002 but better than in 2001. Cash flow for the full year 2002 is expected to be positive. The SAS Group's annual report will be available on March 13, 2002 The complete report can be accessed on www.scandinavian.net PRESIDENT'S COMMENTS 2001 turned out to be the most difficult year the airline industry has ever experienced. A progressively deeper recession became more and more apparent in the second quarter. The terrorist attacks in the U.S. and the subsequent acts of war dramatically strengthened the decline in demand for air travel. It was not until December that some signs of recovery could be detected. For SAS Airline, which for the industry has a high proportion of business class, the loss of revenue was particularly large and the earnings trend was highly negative. Income before capital gains for the full year 2001 amounted to MSEK -1,790 and is in line with the forecast published on November 6, 2001. Efforts to adapt operations to this lower demand affected SAS during the autumn. It was decided to implement measures to reduce capacity in SAS Airline, resulting in a total redundancy of approximately 3,500 positions. Reduction of aircraft capacity and suspension of certain routes has an annual effect of MSEK 500 and other measures are expected to have an earnings improvement effect on an annual basis. of MSEK 2,400. Action has been taken to raise revenues by MSEK 2,200 on an annual basis. The action program in SAS Airline is going according to plan and cost reductions corresponding to MSEK 1,700 will be realized successively in 2002. In addition, cost-reducing measures with an earnings impact of MSEK 1,300 are planned in subsidiaries and affiliated companies. Apart from the negative earnings trend, SAS also suffered other major setbacks during the year. Most serious was the crash of SK686 in Milan where 118 people lost their lives. This event is the biggest disaster in SAS's history and the company will be saddened for a long time. Also the illegal market cooperation with the Danish carrier Maersk Air, which resulted in the EU Commission imposing a high fine and in the wake of which SAS's Board chose to resign, subjected SAS to obvious strain. The extraordinary general meeting appointed a new Board in November who took up their posts in what is perhaps the most difficult period in the history of the company. Among business events of a strategic nature, the acquisition of the Norwegian airline Braathens was the most important. Incorporating Braathens into the SAS Group will raise opportunities to work together to create an effective traffic network in Norway. SAS's agreement to increase its shareholding in Spanair to 74% will increase control and influence in Spain's second largest airline. This agreement is being examined by the EU Commission. A major program of change was implemented during the year, designed to create a better management structure with a decentralized and business- oriented organization. The SAS Group now comprises four business areas, the largest of which is SAS Airline. In the new structure and according to control and corporate governance policies now in place, there will be greater scrutiny and follow-up of every unit and its competitiveness in an industry perspective. From a shareholder perspective, the transfer during the year to a single share is an important event. Ahead of the consolidation of the industry which will come in the wake of the current crisis, the ability to compare airlines' performance and prospects will be increasingly important. Following a difficult, and from an investment return viewpoint unacceptable, 2001, all efforts in 2002 will focus on achieving a competitive business. THE SAS GROUP NEW ORGANIZATION Starting in the fourth quarter of 2001 the SAS Group reports on four business areas. · SAS Airline comprises passenger transport including SAS Commuter. The business area includes the independent business units Scandinavian Ground Services and Scandinavian Technical Services. · Subsidiary & Affiliated Airlines comprises other airlines within the Group. Widerøe and Air Botnia were already SAS owned. On December 20, the shares were acquired in Braathens ASA, which is therefore included in the SAS Group's balance sheet at December 31, 2001. In the first quarter of 2002, the SAS Group will take over the majority shareholding in Spanair S.A. by acquiring an additional 25% of the company's shares. The SAS Group's holding will then amount to 74%, provided approval is obtained from the EU Commission. In such case, Spanair will be consolidated as a subsidiary in the SAS Group with effect from 2002. Affiliated companies include Skyways, Cimber Air, British Midland, airBaltic and Grønlandsfly. · Airline Related Businesses includes SAS Cargo, SMART, SAS Trading and Jetpak - all of which make most of their sales to external customers. SAS Flight Academy and SAS Flight Support sell services to both internal and external airlines. Scandinavian IT Group has most of its sales within the Group. · Rezidor SAS Hospitality is the SAS Group's hotel business. The company works with two hotel chains, Radisson SAS Hotels & Resorts and Malmaison. [REMOVED GRAPHICS] * Percentages refer to share of the SAS Group's operating revenue before Group eliminations. STRATEGICALLY IMPORTANT EVENTS FIRST QUARTER 2001 · The Swedish Market Court decided that EuroBonus points earned on Swedish domestic routes exposed to competition may not be redeemed for bonus offers. SECOND QUARTER 2001 · The shareholders of the three SAS parent companies were invited to exchange their shares for the same number of newly issued shares in SAS AB, the newly formed holding company for the SAS Group. · Jørgen Lindegaard took over as President and CEO on May 8, 2001. · SAS announced, in agreement with the principal owners of the Norwegian company Braathens, its intention to acquire Braathens' airline operations, excluding Malmö Aviation, for MNOK 1,127. THIRD QUARTER 2001 · The first day for listing and trading with shares in SAS AB was July 6, 2001. · The European Commission fined the SAS Group and Maersk Air MEUR 39.375 and MEUR 13.125 respectively for infringement of the EU's competition rules. · Following criticism of its handling of the SAS/Maersk affair, the Board of Directors of SAS AB decided to convene an extraordinary general meeting to elect a new Board. · The airline industry was hard hit by the events of September 11. · The first of eleven new, larger aircraft for intercontinental traffic, an Airbus A340-300, was delivered. FOURTH QUARTER 2001 · The Norwegian Competition Authority approved the SAS Group's acquisition of Braathens. · The SAS Group announced that an agreement had been concluded to increase its holding in Spanair from 49% to 74% of the shares. · A new Board of Directors was appointed at an extraordinary general meeting held on November 6. · Airport buildings were sold to Nordisk Renting and GE Capital for SEK 3 billion. · The acquisition of Braathens ASA was completed. EVENTS AFTER JANUARY 1, 2002 · The intercontinental route to Delhi was suspended on February 1, due to weak passenger development. · SUMMARY STATEMENT OF INCOME OCTOBER-DECEMBER JANUARY-DECEMBER Pro Pro forma forma (MSEK) 2001 2000 2001 2000 Operating revenue 12,810 12,809 51,433 47,540 Payroll expenses -4,825 -3,701 -17,792 -14,932 Other operating expenses -8,765 -7,803 -32,898 -28,898 Earnings before depreciation, -780 1,305 743 3,710 EBITDA Depreciation -711 -749 -2,443 -2,192 Share of income in affiliated -98 -49 -70 -1 companies Income from the sale of shares in subsidiaries and affiliated 1 1,016 -24 1,033 companies Income from the sale of aircraft and buildings 440 228 673 490 Operating income -1,148 1,751 -1,121 3,040 Income from other shares and 0 4 1 15 participations Net financial items 1 -34 -20 -226 Income before taxes -1,147 1,721 -1,140 2,829 Taxes 155 -383 103 -699 Minority interests -5 10 -27 5 Income after taxes -997 1,348 -1,064 2,135 Earnings per share (SEK)1 -6.16 8.19 -6.58 12.98 1 Earnings per share is calculated on 161,816,396 shares for 2001 and on 164,500,000 shares for 2000. INCOME BEFORE TAXES MARKET DEVELOPMENT The market for air traffic showed relatively strong development in the first quarter of 2001. Subsequently, a gradually weaker economic trend and demand were noted in the spring and summer. In the wake of September 11 the airline industry entered its worst crisis ever. In 2001 as a whole, the SAS Group's traffic growth remained higher than that of the rest of the airline industry. In the Swedish market, however, a continued sharp decline in demand was noted due to the general economic downturn and the weak Swedish krona. In the period September 11 through December 31, European airlines' international traffic fell 17.6% compared with the previous year. Traffic over the North Atlantic was most affected with a decline of 31%. SAS Airline, which is the single most important airline in the Group, was also badly affected by the reduced demand, although not to the same extent as its competitors. SAS Airline's international traffic declined by 9% and the company has thus captured market shares in the weak airline market. Some signs of recovery in total traffic were noted towards year-end. The recovery is slow, however, and business air travel remains very weak. The development in the market is putting further pressure on adjusting capacity to raise the cabin factor and emerge from the crisis. All airlines are making intensive efforts to reduce their costs and tens of thousands of employees have had to leave their companies. 2001 was a difficult year for all travel-related operations. Like the airline industry, the hotel industry was severely affected by the economic downturn and by events on September 11. FINANCIAL DEVELOPMENT Acquisitions and divestments In November 2001, SAS concluded an agreement to increase its holding in Spanair from 49% to 74%. The purchase price amounted to a total of MEUR 112, of which MEUR 52 in cash and MEUR 60 in conversion of loans. The agreement is under examination at the EU Commission. When access to these shares is provided, the company will be consolidated as a subsidiary in the SAS Group. In May 2001, SAS announced its intention to acquire Braathens' airline operations, excluding Malmö Aviation, subject to approval from the Norwegian Competition Authority. This approval was announced on October 23, 2001, and on December 20, 2001, SAS AB took over 98.48% of the shares. The remaining shares were acquired in January 2002. The purchase price was NOK 27 per share, a total of MNOK 869. Braathens' balance sheet is consolidated in the Group at December 31, 2001, and thus not included in the result for the year. As part of the review of tied-up capital and concentration on the core business, in December 2001 SAS sold aircraft-related properties such as hangars, flight kitchens, repair and storage buildings, as well as freight terminals at Arlanda (Stockholm), Landvetter (Gothenburg), Gardermoen (Oslo), Flesland (Bergen) and Kastrup (Copenhagen). These buildings were acquired by Nordisk Renting and GE Capital Real Estate and the purchase price totaled MSEK 3,020. The distribution between the countries is MSEK 1,400 in Sweden, MSEK 1,200 in Norway and MSEK 400 in Denmark. The capital gain amounted to MSEK 805. At the same time SAS leased back all the buildings via 20-year operating lease contracts and has an option to buy back the property portfolio at a fixed price after ten years, and subsequently subject to certain conditions all or parts of the portfolio after 20 years. The leasing cost, which is interest- rate dependent, amounts to MSEK 209 in the first year, including current running costs and is neutral compared with continued ownership. Currency effects The net effect of exchange rate fluctuations between January-December 2000 and 2001 is MSEK 200. The effect on operating revenue is MSEK 3,251, MSEK -3,368 on costs, and MSEK 317 on net financial items. January-December 2001 The SAS Group's operating revenue increased by MSEK 3,893, or 8.2%, from MSEK 47,540 to MSEK 51,433. MSEK 937 of this increase was higher passenger revenue, lower other income MSEK -295 and MSEK 3,251 currency effects. SAS's passenger traffic measured in RPK, revenue passenger kilometers, increased by 1.4% compared with 2000. Unit revenue, yield, increased by 0.7% adjusted for currency effects. Payroll expenses increased by MSEK 2,860, or 19.2%, and amounted to MSEK 17,792 (14,932). The number of employees in the SAS Group increased by 3.9% and, adjusted for currency effects, payroll expenses were 12.3% higher. In addition to increases in volume and salary costs, payroll expenses were affected by higher pension costs. The Group's other operating expenses increased by MSEK 4,000 or 13.8% to MSEK 32,898. Excluding currency effects, the increase was 5.7%. Costs related to the accident at Linate airport in October 2001 amounted to MSEK 124. Compensation from insurance companies of MSEK 235 is included in other income. As a result of the events on September 11, SAS has been charged with MSEK 140 higher insurance costs compared with the previous year. Earnings before depreciation, EBITDA, amounted to MSEK 743 (3,710). The gross profit margin fell from 7.8% to 1.4%. Depreciation amounted to MSEK 2,443 (2,192), an increase of MSEK 251 mainly due to investments in aircraft. Share of income in affiliated companies amounted to MSEK -70 (-1). Income for the year includes reversal of a stock reserve of MSEK 80. Affiliated companies' reported earnings decreased from MSEK -1 to MSEK - 150. This decline in earnings mostly occurred in Spanair where the SAS Group's share of income was MSEK -153 (7). Goodwill amortization is included in a total amount of MSEK 29 (32). The Group's net financial items amounted to MSEK -20 (-226). Net interest was MSEK -300 (-154). The currency effect was MSEK 332 (15). The weak development of the Swedish krona affected the Group's currency result by MSEK -160. The part of the capital gain from sale and leaseback of aircraft which arose due to the high rate for the U.S. dollar had a positive effect on net financial items of MSEK 492. Income before capital gains was MSEK -1,790 (1,291). The Group's capital gains from the sale of aircraft and buildings amounted to MSEK 673 (490) during the period. This includes the sale of aircraft through sale and leaseback of one Boeing 767, nine Boeing 737s, three deHavilland Q400s, one Airbus A340 and the sale of one Fokker F28 and one Dash 8 with MSEK 488. After deduction for phasing in and phasing out costs of MSEK 684, income from the sale of aircraft is reported at MSEK -196. Airport buildings were sold in December for MSEK 3,020, which provided a capital gain of MSEK 805. The sale of a hotel property in Manchester and adjustment of an earlier gain on a property in Düsseldorf amounted to MSEK 63 net. Income before taxes amounted to MSEK -1,140 (2,829) MSEK. The change in income before taxes is due to: Currency effect 200 Operating income before depreciation -2,850 Depreciation, share of income -320 Net interest -111 Capital gains -888 -3,969 Fourth quarter 2001 The Group reports significantly negative operating income for the fourth quarter. The continued downturn in demand in passenger traffic and reduced Business Class traffic led to falling revenues. Lower capacity utilization, a decline in the cabin factor of 4.4 percentage points to 59.9%, also contributed to lower earnings since capacity cutbacks did not have a full effect on costs in the fourth quarter. In addition, selling costs and costs for traffic disruptions due to the weather increased. Operating revenue was unchanged compared with the fourth quarter in 2000 and amounted to MSEK 12,810 (12,809). Taking currency effects into account, operating revenue decreased by 5.8%. Passenger traffic, RPK, decreased by 7.2% compared with the previous year. Operating expenses increased by MSEK 2,086 or 18.1%. Adjusted for currency effects, the increase was 10.2%. Income before capital gains was MSEK -1,588 (473). After capital gains of MSEK 441 (1,248) income before taxes was MSEK - 1,147 (1,721). ------------------------------------------------------------ This information was brought to you by Waymaker http://www.waymaker.net The following files are available for download: http://www.waymaker.net/bitonline/2002/02/12/20020212BIT00860/bit0002.doc The full report http://www.waymaker.net/bitonline/2002/02/12/20020212BIT00860/bit0002.pdf The full report