Outlook for the airline industry and SAS. Rickard Gustafson, CEO SAS October, 2013

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Preston Parker
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1 Outlook for the airline industry and SAS Rickard Gustafson, CEO SAS October, 2013

2 The airline industry is cyclical and challenging When Richard Branson ( ) was asked on how to become a millionaire, his answer was simply: There s nothing special about it. You start as a billionaire and then buy an airline If I'd been at Kitty Hawk in 1903 when Orville Wright took off, I would have been farsighted enough, and public-spirited enough -- I owed this to future capitalists -- to shoot him down." - Warren Buffett Airline industry EBIT margin, per region 8% 6% 4% North America Europe Asia Pacific 2% % % -6% Source: IATA 1

3 despite thin margins competition is increasing: the number of nonstop routes in Scandinavia is up 50% compared to ten years ago Summer 2003 Summer 2013 Source: IATA/DDS

4 National flag carriers are fighting to maintain their position in the European short haul market as low cost carriers continue to expand Market share on O&Ds within Europe PAX millions 2012, per cent share National flag carrier LCC Other France 36% 28% 36% 72 Baltics 35% 30% 35% 9 Switzerland & Austria 28% 16% Scandinavia 28% 33% 39% 70 56% 49 LCC market share on intra-european traffic has increased from 10% of PAX 2004 to more than 30% of PAX 2013 Germany 27% 28% 45% 108 Benelux Italy Ireland & UK Central Europe 18% 16% 13% 8% 27% 39% 47% 36% 55% 45% 40% 56% Source: Internal analysis, IATA (DDS); OAG 3

and some national flag carriers are taking actions to reduce their exposure to short haul Trimming unprofitable short haul routes Extensive outsourcing of short haul routes Shifting short haul routes

5 and some national flag carriers are taking actions to reduce their exposure to short haul Trimming unprofitable short haul routes Extensive outsourcing of short haul routes Shifting short haul routes to LCC subsidiary The airline is closing a number of unprofitable short haul routes in the hopes of ending short haul losses by 2014 The airline is outsourcing operation of 1/3 of its European routes to Flybe Nordic in a wet leasing agreement The airline is shifting all non-hub European traffic to Germanwings, a fullyowned subsidiary with ~20% lower unit costs Exiting the short haul market at the risk of losing feeder traffic for long haul routes Ensuring low-cost feeder traffic for long haul routes via wet leasing Reducing short haul traffic costs by moving traffic to a subsidiary with lower costs Source: Internal analysis, Financial Times 2012; CAPA Centre for Aviation 2012 and

6 Long haul market: Mega carriers join forces and consolidate through JVs as new players emerge and expand Middle Eastern carriers are rapidly expanding their presence Number of passenger aircraft in fleet Actual vs planned incl orders placed, excl options 836 Global legacy carriers are teaming up to build global highways where they pool long haul flows Coverage of core JVs per European O&D Share of market value, % Other Global Alliances* 19 x Emirates 81 Etihad Qatar North America Asia Other 5

There are 6 different business models in the market, each competing with different levers Definition Examples Network models LCC models Regional network Umbrella network International hub network

7 There are 6 different business models in the market, each competing with different levers Definition Examples Network models LCC models Regional network Umbrella network International hub network Connected LCC Value driven LCC Ultra low cost Primarily short haul focused Supplementary long haul operation Multi brand strategy Long haul exceeds short haul Long haul dominates strongly One major hub Offers connections into network Bonus program & extra amenities Flexible tickets offered Fly to primary airports No frills service Fly to remote, low cost airports 6

There is no clear indication that business model drives profitability Scale Effect in Airline Industry EBIT-margin compared to PAX, 2011 EBIT-margin (2011) 25% LCCS Networks 20% 15% 10% 5% 0% -5% 0

8 There is no clear indication that business model drives profitability Scale Effect in Airline Industry EBIT-margin compared to PAX, 2011 EBIT-margin (2011) 25% LCCS Networks 20% 15% 10% 5% 0% -5% PAX (2011) Profitability does not correlate with: Size Specific geography Business model -10% -15% -20% Source: Morten Veith Schroeder/Mads Wadstrøm Christensen Copenhagen Business School, Internal analysis, & Bloomberg 7

SAS regional network model is exposed to competition from all other models to a various degree SAS exposure to competition from airlines with different business models than SAS (illustrative) Current

9 SAS regional network model is exposed to competition from all other models to a various degree SAS exposure to competition from airlines with different business models than SAS (illustrative) Current network overlap 100% Umbrella network International hub network Connected LCC Value driven LCC Ultra low cost A sustainable regional network requires a targeted customer offering and a competitive cost level 8

As a response to this competitive environment, SAS has established three main strategic priorities Objective Strategic priorities Q3 2013 - deliverables Establish an efficient operating platform

10 As a response to this competitive environment, SAS has established three main strategic priorities Objective Strategic priorities Q deliverables Establish an efficient operating platform Improved cost structure, efficiency and financial preparedness A viable, profitable and sustainable airline connecting Scandinavia and the world Be the natural choice for Scandinavian frequent travellers Invest to stay competitive Optimized summer program and enhanced offering Secured a competitive fleet roadmap

By executing the comprehensive restructuring plan, SAS will create an efficient operational platform Initiatives Implementation status 1.

11 By executing the comprehensive restructuring plan, SAS will create an efficient operational platform Initiatives Implementation status 1. New agreements for flying crew & maintenance personnel 2. New pension schemes 3. Admin centralization & FTE reduction 4. Outsourcing of ground handling & call centers EBIT increase of SEK ~3 mn Cash/equity increase of SEK ~3 mn 5. IT restructuring 10

12 SAS target customer segment is the Scandinavian frequent traveler Why target frequent travelers? How to target them? Non-frequent travelers Frequent travelers Population of Scandinavia 20 89% 11% Population, million Market for air travel, to/from Scandinavia 66 30% 70% Market value, SEK bn Frequent travelers highly value time-related factors that low cost carriers may have difficulties responding to Schedule Shortest total travel time Accessible airports Punctuality Correct delivery Flexible terms Catering to these demands is fully in line with SAS value proposition focusing on simplicity, punctuality and great service 11

13 SAS will strengthen its market position among Scandinavian frequent travelers by focusing on five unique SAS differentiating factors Brand Position Loyalty Program Digital Offering Product & Pricing Makes Your Travel Easier new brand promise targeting frequent travelers preferences Enhance and align EuroBonus to increase attractiveness of program and drive attached revenue Extensive personalized interaction and services increasing revenue and stickiness New commercial concept simpler product & pricing with refreshed onboard experience Retain frequent travelers Grow Share of Wallet Gain new frequent travelers Network & Fleet Improved network with new point-to-point routes to relevant destinations 4 Excellence Sales Excellence Commercial Excellence 12

SAS has secured a competitive fleet roadmap Renewal of long haul fleet 4 A330-300E and 8 A350-900 First delivery in 2015 Renewal of short haul fleet 30 A320neo with first delivery in 2016 MD80 fully

14 SAS has secured a competitive fleet roadmap Renewal of long haul fleet 4 A E and 8 A First delivery in 2015 Renewal of short haul fleet 30 A320neo with first delivery in 2016 MD80 fully replaced (by B737NG/A320) already in October 2013 Cabin upgrade on existing fleet Long haul: New IFE-system and new seats (incl. fully flat business seats) Short haul: New seats for improved comfort and enhanced fuel efficiency Lower total fuel consumption due to increased engine efficiency Lower maintenance costs More competitive onboard product Network expansion, including potential new long haul flights 13

SAS REVIVING A BRAND AND GROWING MARKET SHARE

SAS REVIVING A BRAND AND GROWING MARKET SHARE Göran Jansson, Deputy President & CFO Agenda Transforming and turning a legacy carrier around SAS to increase capacity to/from US and Asia in 2016 Maintaining