SAS Group Annual Report with sustainability overview January–October 2012 Contents Events during the year 2012 in brief Outcome January−March: The shortened fiscal year January−October: The year in figures 1 Strengthened cash flow but negative Positive income before tax and nonrecur- President’s comments 2 income in line with expectations – 4Excel- ring items. The measures launched at the Goals and outcomes in 2012 4 lence measures corresponding to SEK 5 beginning of the year are now making an billion initiated to meet continued chal- impact: MSEK 23 in income before tax and lenges in 2012. nonrecurring items for January−October Strategy 4Excellence − The Board of Directors of Spanair filed for 2012. Passenger revenue up 5.6% (currency- Next Generation (4XNG) 6 bankruptcy and SAS made a provision of adjusted). Unit cost decreased by 4% (exclud- SEK 1.7 billion for outstanding receivables ing jet-fuel and currency adjustments). in the year-end report for 2011. Income before tax during the period, January− SAS customer offering 12 − SAS named Europe’s most punctual major October 2012, was MSEK −1,245. Previously airline for the third year in succession announced restructuring costs and other non- according to the independent source Flight- recurring items impacted income by MSEK Airline industry 16 Stats. 1,421, of which about SEK 1 billion pertained Policy framework for civil aviation 18 − Blue1started a statutory conciliation pro- to the upcoming restructuring program 4XNG. Quality and safety 19 cess to reorganize its operations as part of The airlines’ operations 20 the transition to a production company After the end of the fiscal year Risks and risk management 23 under the Scandinavian Airlines umbrella. November Financial position 26 SAS launched a new aggressive plan to The share and Outcome April−June: increase profitability and secure long- shareholder service 28 4Excellence started to deliver results – term financial preparedness Sustainability 30 the aggressive initiatives resulted in more 4Excellence Next Generation (4XNG), which passengers and increased revenue – unit addresses SAS’s structural and financial chal- cost decreased 4%. lenges, comprises: Formal financial accounts − The SAS Annual General Shareholders’ − Measures with an annual positive earnings Contents 35 Meeting on April 19 decided to change the effect of approximately SEK 3 billion; includ- Report by the Board of Directors 36 fiscal year to the period November 1−Octo- ing new collective agreements, changed Notes 48 ber 31 instead of the calendar year. All pension conditions and substantial stream- Corporate Governance Report 79 Board members were reelected and the lining of the administration. Board of Directors 84 meeting resolved in favor of the proposals − The divestment of assets with a liquidity Management 86 on the agenda on all other issues. The meet- effect of about SEK 3 billion. ing also resolved that no dividend be paid − The new pension terms reduce consider- for the 2011 fiscal year. ably the negative impact on equity of SAS in figures 90 − SAS sold six properties to Swedavia for SEK amended reporting rules for pensions. 1.8 billion, with a liquidity effect of MSEK − Core shareholders and banks have placed 439 and a capital gain of MSEK 334. credit facilities of SEK 3.5 billion at the − SAS signed a historic partnership agree- Group’s disposal until March 2015, contin- ment with Apollo valued at MSEK 920. gent on full implementation of the 4XNG A full version of the sustain- plan, the conclusion of new collective agree- Outcome July−September: ments and parliamentary approval. ability report for January to 4Excellence made an impact: MSEK 607 in − A unanimous Board decided on November October 2012 and an online income before tax and nonrecurring items 19 that the terms for the implementation of in the third quarter – Passenger revenue the submitted plan were in place. version of the financial rose 9% and unit cost declined 6.1%. accounts are available at: − SAS signed an agreement to sell and phase December out all MD-80 aircraft. − All parliamentary approvals and all condi- www.sasgroup.net − Star Alliance named world’s Best Airline Alli- tions were finalized for the new credit facility ance by Skytrax. of SEK 3.5 billion, which was secured until − The EFTA Surveillance Authority (ESA) in 2015. Brussels announced its view that the cur- rent ban on earning EuroBonus points on Norwegian domestic flights is a breach of EEA legislation. The Norwegian authorities contested this view. Focus on three main challenges to recreate full competitiveness The aviation industry is characterized by intense competition, pressure on prices and high fuel costs. SAS has successfully implemented a number of action plans to streamline and enhance the efficiency of operations as well as to strengthen its competitiveness. In 2011, 4Excellence was introduced, which started to deliver positive results in 2012 – both in the form of passenger growth and through a reduced cost base. Despite the above, three main challenges remained: The SAS Group’s historical legacy and a geographical home base in three countries have created an overly costly and inflexible cost structure. SAS has also been overly dependent on external credit facilities to be able to maintain an adequate financial preparedness. In addition, it became apparent that the new accounting rules for pensions, which will be applied from November 1, 2013 will have a substantial negative impact on the SAS Group’s equity. SAS has now faced these challenges through the 4Excellence Next Generation strategic plan, with the accep- tance of employees, owners and creditors. The implementation of this plan will deliver lower and more flexible costs, while the announced divestments will provide adequate financial stability and resources to continue to strengthen the Group’s customer offering. 2012 2011 2011 2012 2011 2011 SAS Group key figures Jan–Oct Jan–Oct Jan–Dec Financial key figures Oct 31 Oct 31 Dec 31 Revenue, MSEK 35,986 34,979 41,412 CFROI, 12-month rolling, % 9 17 17 EBITDAR before nonrecurring Financial preparedness, % of fixed items, MSEK 3,629 3,401 4,089 costs 29 38 33 EBIT margin –0.8 2.9 1.6 Equity/assets ratio, % 30 35 32 Income before tax and non- Adjusted equity/assets ratio, % 24 29 26 recurring items, MSEK 23 96 94 Financial net debt, MSEK 6,549 4,143 7,017 Income before tax, EBT, MSEK –1,245 381 –1,629 Debt/equity ratio 0.59 0.29 0.56 EBT margin before tax and non- Adjusted debt/equity ratio 1.54 0.93 1.33 recurring items, % 0.1 0.3 0.2 Interest coverage ratio –1.6 0.5 –0.6 Net income for the period, MSEK –985 338 –1,687 Cash flow from operating 2012 2011 2011 activities, MSEK 2,562 363 –482 Other key figures Jan–Oct Jan–Oct Jan–Dec Investments, MSEK 1,273 1,500 2,041 Number of passengers, millions1 24.0 23.0 27.2 Earnings per share, SEK –2.99 1.03 –5.13 Average number of employees 14,897 15,184 15,142 Share price at end of fiscal year, of which, women, % Händelser38 38under året 38 SEK 6.45 10.85 8.0 Total sick leave, %2 7.1 7.0 Dividend (proposal for 2012), SEK 0 n/a 0 Carbon (CO2), 000s tonnes 3,340 3,284 3,863 SAS Group financial goals Nitrogen oxides (NOX), 000s tonnes 13.6 13.2 15.6 Operating margin, EBIT >8% Climate index3 98 – 100 Equity/assets ratio >35% 1) Pertains to scheduled passengers Financial preparedness >20% 2) Applies only to Scandinavian Airlines (excl. Blue1) 3) Full year 2011 new base year. The result consist of November 2011–October 2012. President’s comments The platform has been laid for a new and sustainable SAS 2012 entailed continued exacting conditions for the European aviation “Nevertheless, the results are far from industry. Even if performance in the Nordic region, our home market, was relatively stable, the surrounding macroeconomic turbulence satisfactory and it has become increasingly continued for the fifth consecutive year. Above all, the trend in the clear that major structural changes are euro zone created a generally unsettled operating environment for all companies to navigate – not least for the airline industry, which is necessary to create a functional and sus- extremely sensitive to business cycles. New, more stringent require- ments across the entire banking system have added a level of com- tainable business model.” plexity, that also ultimately impacts the preconditions for funding. During the year, business travel volumes were under pressure intercontinental production. This means that SAS must primarily be from a softening economy and competition for leisure travel vol- able to compete under the conditions that prevail in the regional umes intensified, not just from regional low-cost carriers but also market to create long-term profitability and shareholder value. This from traditional network airline companies, which are all doing their requires salaries, terms of employment and pension solutions that utmost to fill their aircraft. In addition, well-capitalized competitors, are fully adapted to market levels. Customers are not prepared to primarily from the Middle East, have aggressively advanced their pay for employment terms and conditions that are more expensive positions. Despite the global economic slowdown, jet-fuel prices than the competition. We must make further increases in our pro- remained at historic highs albeit with a somewhat more stable trend ductivity, lower our cost levels, reduce the complexity and bureau- during the year. cratic inertia as well as more rapidly adapt operations to changes in I can state that SAS has managed relatively well in this challeng- our business environment. ing climate, particularly due to its solid commercial platform, high Furthermore, the business model must be attractive for the capi- levels of customer satisfaction and customer loyalty.