SAS Group Interim Report January-March 2012

Strengthened cash flow but negative earnings as forecast
-    continued challenges in 2012
-    4Excellence measures corresponding to SEK 5 billion to be implemented

Key ratios January-March 2012

• Revenue: MSEK 9,591 (9,313)
• Number of passengers: increased by 323,000 (5.3%)
• Income before tax and nonrecurring items: MSEK -1,049 (-509)
• EBT margin before nonrecurring items: -10.9% (‑5.5%)
• Income before tax: MSEK ‑1,132 (‑558)
• Net income for the period: MSEK ‑729 (‑373)
• Earnings per share: SEK -2.22 (-1.13)
• SAS’s financial preparedness on March 31 amounted to SEK 8.6 billion

Important events in 2012

• The SAS Annual General Meeting was held on April 19.
  -    The Meeting resolved that no dividend would be paid to shareholders for the 2011 fiscal year.
  -    All of the Board members were reelected and the Meeting also voted in accordance with the proposals contained in the notification of the Meeting.
  -    SAS decided to change the fiscal year to comprise the period of November 1 - October 31 instead of the calendar year.
• SAS sold six properties to Swedavia totaling SEK 1.8 billion, with a cash-flow effect of MSEK 450 and a capital gain of MSEK 350, which will be recognized in the second quarter of 2012.
• SAS and Apollo signed a historic partnership agreement valued at MSEK 920.
• The Board of Directors of Spanair filed for bankruptcy and SAS recognized an impairment loss in 2011 corresponding to SEK 1.7 billion.
• SAS became the most punctual airline in Europe for the third consecutive year, according to the independent source FlightStats.
• Blue1 commenced a statutory conciliation process to reorganize its operations as part of the transition to a production company for Scandinavian Airlines.

A difficult to assess 2012 – Total of SEK 5 billion in measures
2012 is difficult to assess, primarily due to global economic trends. Jet-fuel prices and increased capacity in the market present additional challenges. As a result of the weaker economic climate, the measures under the 4Excellence strategy were accelerated in February 2012. In total, measures corresponding to SEK 5 billion will be implemented in the period 2012-2013. Agreements were signed with many of SAS’s trade unions regarding cost savings corresponding to SEK 1 billion for the period 2012-2013. The work on reducing the administration is progressing according to plan. The earnings effect of the combined measures in 2012 is estimated at approximately SEK 2 billion. Bookings for the summer period are high and the trend in cash flow was strong. The combination of the uncertainty regarding economic trends, high jet-fuel prices and intense pressure from competitors means that SAS will not present a profitability forecast for the full-year 2012.

 
Comments by the CEO

“Strengthened cash flow but negative first-quarter earnings as forecast”

As previously announced, SAS posted unsatisfactorily negative earnings for the seasonally weak first quarter of 2012. EBT amounted to MSEK -1,132, down MSEK 574 compared with the year-earlier period. The negative trend was due to sharp increases in jet-fuel prices, the uncertain economic climate and the fact that the earnings effects of the 4Excellence program will not be generated until the latter part of 2012. The year-earlier period was also impacted by a positive currency effect of MSEK 241. Accordingly, it is worth noting that underlying earnings for several key destinations reported a positive trend compared with the year-earlier period.

Unit revenue (RASK) was up 1.7% driven by a strong load factor and slightly weaker yield pressure. This result is particularly gratifying since we noted increased capacity and competition in the market throughout the first quarter. Furthermore, cash flow for the SAS Group was strengthened, mainly driven by the positive trend in future bookings. Otherwise, we also saw major improvements in working capital as a direct result of our focused work on reducing capital tied-up.

High fuel prices presented a significant challenge for the entire aviation industry, including SAS, and with the prevailing market situation it is difficult to fully offset this cost increase. In the first quarter alone, SAS’s jet-fuel cost rose approximately MSEK 350, primarily as the result of fuel hedging having less of an effect this year. However, yield pressure during the quarter declined slightly, which is a sign that the industry sees the necessity of adjusting to these higher fuel prices. As previously, SAS manages fluctuations in fuel prices by hedging jet fuel, introducing a jet-fuel surcharge and proactive yield management. In addition to the increase in jet-fuel cost, the quarter was charged with higher maintenance costs of about MSEK 80. 

Stable liquidity
Cash flow from operating activities was strong during the quarter at MSEK 1,215. SAS had a financial preparedness of SEK 8.6 billion, corresponding to 20.6% of revenue, at March 31. Of this amount, SEK 3.7 billion comprised cash and cash equivalents. After the end of the quarter, we also completed the sale of six properties to Swedavia, corresponding to SEK 1.8 billion. This sale is part of our strategy to reduce capital tied-up and the transaction releases liquidity corresponding to MSEK 450. Accordingly, we have a sound financial position despite the weak quarterly earnings.

Improved customer offering and more passengers
We are continuing to develop our customer offering and the new Copenhagen-Shanghai route was opened in March, which was immediately well received in the market. In addition, SAS will launch 27 new routes in 2012. The ongoing rejuvenation and harmonization of the aircraft fleet have enabled these aggressive ventures. We recently signed an agreement for the lease of three A320s and we now have a total of 60 new aircraft that will join the fleet over the next few years. Within two years, all MD80 and B737 Classic aircraft will have been phased out and replaced by modern A320/B737NG aircraft. We are also looking forward to receiving delivery to our fleet of the market’s most efficient aircraft, the Airbus A320 neo. In pace with the rejuvenation of the fleet, we can expect lower jet-fuel costs, reduced maintenance costs and lower CO2 emissions.

At the start of the year, we reintroduced free coffee and tea for all levels of service, onboard WiFi is being gradually introduced to our fleet, SMART PASS is now available for all destinations throughout Scandinavia, new partners were added to our EuroBonus offering, Fast Track is now also available for our passengers in Gothenburg, our traffic between Scandinavia and Finland has been further strengthened and new partners were incorporated into the Star Alliance family.  All of these activities are specific examples of how SAS is continuously developing its product offering to always deliver value in terms of time and money to our customers. Even now we can see the results of our efforts, particularly in that we had the pleasure of welcoming 323,000 more passengers onboard our flights during the quarter.

Accelerated 4Excellence being implemented
At the end of 2011, we launched the new 4Excellence strategy with the aim of achieving Excellence in four core areas by 2015 – Commercial Excellence, Sales Excellence, Operational Excellence and People Excellence. One of the strategic targets of the 4Excellence strategy is to lower the unit cost by 3-5% per year. Many initiatives are now fully underway to lower the unit cost, enhance productivity and reduce complexity in the company as early as in 2012. Collective agreements were signed with many of our trade unions, which will ensure delivery of the announced savings corresponding to SEK 1 billion for the period 2012-2013. The work on reducing the administration is progressing according to plan and, during the quarter, 150 of the announced 300 FTEs were eliminated or are in the process of being eliminated from the business. Furthermore, our new modern IT platform went online in February, exactly as planned, meaning that many older systems can now be shut down, which will significantly reduce complexity.

Future outlook
2012 is difficult to assess due to the uncertain business climate, continued intense competition and high fuel prices. We expect passenger growth of 5-7%. The SAS Group’s capacity (ASK) is expected to grow in line with the market, meaning by approximately 5% in 2012. The aim for 2012 is also to remain the most punctual airline in Europe and customer satisfaction will be further improved. We forecast and are planning for continued pressure on yield and RASK in 2012. To meet these challenges, the 4Excellence strategy was accelerated in February 2012, under which measures corresponding to SEK 5 billion are being implemented in 2012-2013. The 4Excellence measures are expected to generate effects in the second half of 2012. Bookings for the summer period are high and cash flow will be strengthened in the second quarter as a result of the agreed property transaction with Swedavia. The combination of the uncertainty regarding economic trends, high jet-fuel prices and intense pressure from competitors means that SAS will not present a profitability forecast for the full-year 2012.

Rickard Gustafson
President and CEO

Direct questions to Investor Relations SAS Group:
Vice President Sture Stølen +46 8 797 14 51, e-mail: investor.relations@sas.se.

SAS discloses this information pursuant to the Swedish Securities Market Act and/or the Swedish Financial Instruments Trading Act. The information was provided for publication on May 3, 2012 at 8:00 a.m.

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