The airline industry worldwide continues to go through its most difficult period in history. The forecast of the International Air Transport Association is that airlines worldwide are expected to incur losses of approximately US$10 billion for the 2003 year.
This downturn commenced before 11 September 2001, which event served to significantly accelerate and further worsen the decline in the industry. The subsequent war in Iraq, the outbreak of Severe Acute Respiratory Syndrome, (SARS), during the first quarter of 2003 as well as the worsening international economic climate has further added to the challenges facing the industry. This has resulted in many of the major carriers worldwide posting significant operating losses for the first and second quarters of 2003 despite the support provided by certain governments to the aviation industry of their respective countries. Such support included assistance to offset the cost of mandatory security modifications to aircraft. SAA did not receive any support during this traumatic time for the industry.
Despite this environment of rapidly falling demand as well as spiralling costs, SAA achieved a record gross operating profit of R545 million for the year under review compared to the prior year gross operating loss of R834 million. Revenue increased 19.5% while operating cost only increased by 12.1%. This arose as a result of SAA realigning its structures, improving customer service, improving revenue management and yields, controlling costs, enhancing operating efficiencies and embarking on renewing its fleet, all key deliverables of its Perfecting the Basics strategy.
This significant operating profit was negatively impacted by the strengthening of the Rand, as accounted for under the airline’s current accounting policies, in relation to its net foreign monetary assets and derivative financial instruments. This is dealt with in greater detail below.
Service levels, both on the ground and on board, have been significantly improved and is evidenced by the favourable responses received from many of our regular travellers. These improvements in customer service have resulted in SAA winning the following five coveted awards - three awards from the Association for South African Travel Agents being: for Best African Airline, Best Domestic Airline and Best International Airline flying to South Africa; one from Skytrax: for Best airline in Africa; and one from OAG: for Best Airline in Africa.
The fleet renewal programme is well on track and the introduction of the Airbus product has already resulted in a significant positive impact on passenger comfort, operational efficiency as well as a major reduction in fuel consumption whilst dramatically increasing usable payloads to the destinations served by these aircraft.
Our marketing efforts which include sponsorships (SAA Supa 8, Cricket World Cup, SAA Golf Open, Special Olympics, World Summit on Sustainable Development) have continued to improve SAA’s image as a world class carrier and serve to further reinforce our corporate social responsibility objectives.
SAA increased revenue 19,5% (2002: 26.1%) for the year under review despite continued difficult global market conditions and a significant appreciation of the Rand in the last quarter of the financial year. The increase was mainly attributable to increased passenger and cargo revenue.
Passenger revenue increased 22,5% to R13 688 million (2002: R11 178 million). The increase is mainly due to an improvement in yields and increase in number of passengers carried. Average yield improved 13,8% from R1 660 in 2002 to R1 889 in 2003. Revenue paying passengers carried increased 6,1% to 6,5 million (2002: 6,1 million) and capacity utilisation (load factor) also increased to 68,4% (2002: 67,0%). Approximately 55% of revenues are foreign currency denominated.
SAA Cargo increased its revenue 12,4% to R1 567 million (2002: R1 394 million). The growth in revenue is mainly as a result of an increase in rates, and tonnages flown. The appreciation of the Rand in the last quarter also had a negative impact on Cargo’s revenue.
Third party revenue has decreased 11,7% to R470 million (2002: R532 million). The decrease is as a result of significant maintenance contract work that was lost with the demise of the SAir Group and the appreciation of the Rand in the last quarter of the financial year. SAA is in the process of evaluating opportunities to improve third party revenue.
Voyager revenue and commissions received
Voyager revenue and commissions received increased 6,9% to R599 million (2002: R560 million).
Operating costs increased 12,1% to R16 797 million (2002: R14 984 million). The increase in operating costs was mainly attributable to higher fuel, labour, distribution, aircraft lease, and depreciation costs. Approximately 51% of operating costs, excluding aircraft lease costs, are US$ denominated. The increase in operating costs was offset to a certain extent by the Rand’s appreciation against the US$ in the last quarter of the financial year ended 31 March 2003.
Fuel costs increased 16,0% from R2 807 million in the prior financial year to R3 255 million. The increase was as a consequence of higher fuel prices. This was partially offset by the appreciation of the Rand in the last quarter of the financial year and a profit earned on fuel hedges of R205 million (2002: R235 million). Labour costs increased 11,5% to R2 888 million (2002: R2 589 million). The escalation in labour costs was mainly attributable to the Flight Deck Crew receiving an increase of 15% and an average increase of 9,0% for other staff.
Distribution costs (including commission paid to travel agents and reservation system charges) increased 20,8% to R2 088 million (2002: R1 728 million). The escalation is as a result of the increase in passenger and cargo revenue and remains at an average of 11,0% of revenue.
IT costs increased 38,4% from R450 million in the prior financial year to R623 million. The increase was as a result of the new agreement entered into with Electronic Data Services (“EDS”) following the demise of the SAir Group (ultimate holding company of Atraxis Africa (Pty) Ltd). The airline is currently assessing alternative solutions to reduce costs.
Aircraft lease costs increased 16,3% to R1 578 million (2002: R1 357 million). The increase is attributable to new lease agreements entered into, in respect of 3 Boeing 737-800’s and 2 Airbus A330-200 aircraft.