An introduction to Transnet 13 October 2004. Agenda Strategy Overview of key businesses –Spoornet –SAPO –NPA –Petronet –SAA.

An introduction toTransnet

13 October 2004

Agenda

• Strategy

• Overview of key businesses–Spoornet

–SAPO

–NPA

–Petronet

–SAA

Strategy

Delivering on our commitments

“The public sector discharges its responsibilities to our people as a critical player in the process of the growth,

reconstruction and development of our country by reducing the cost of doing business in our country.”

President Mbeki : State of the Nation Address 21 May 2004

Why Port and Rail

Total throughput for 2003 in the South African economy that required logistics intervention = 745mt (1998 = 590mt)

Mining49%

Agriculture6%

Manufacturing

45%330mt

370mt

45mt

2003Manufacturing = 20% of GDP @ constant 1995

prices

2003Mining = 6% of GDP @ constant 1995 prices

2003Agriculture = 4%

of GDP @ constant 1995

prices

Key Sector Sub-Groups

Agriculture Grain, Vegetables, Fruit, etc

Mining Coal, Ferrous Metal, Nonferrous Metal, Non-metallic Minerals, Crude Petroleum

Manufacturing

•Heavy

•Light

Chemicals, Fuel & Petroleum Products, Fertilizer, Iron, Steel & Metal, Machinery & Equipment, Motor Vehicles, Parts & Accessories, Scrap

FMCG; Beverages, Textiles & Clothing, Wood & -Products, Furniture, Paper & -Products, Rubber, Plastic, Ceramics & Glass,

The 745mt results in a total transport cost of R135bn to the South African economy. The biggest portion of this cost is attributable to long haul road transport.

Pipeline & Water

0%

Air9%

Rail9%

Road - Corridor

38%

Road - Metro24%

Road - Rural20%

R11bn

R50bn

R30bn

R11bnR0.3bn

The challenge:

Rail corridor = R135/ton

Road corridor = R360/ton

R25bn

The R135bn transport cost has an associated logistics cost of R45bn, amounting to a total logistics cost of R178bn (14.7% of GDP).

Inventory opportunity

cost1%

Transport75%

Storage8%

Mngt & admin16%

Understanding the Road / Rail trend over the past decade

60

70

80

90

100

110

120

130

140

150

160

19

91

19

93

19

97

20

03

Index 1

991=

100

Total GDP Transportable GDPRoad ton Rail tonRail ton excl export coal & ore

Data depicted on an index basis

The last decade has seen growth in road traffic, while rail traffic (excl. the export lines) has declined

The structure of the surface freight transport market (2003 million tons):The “normal” macro economic model is to transport corridor freight on rail and rural freight on road. Structural myopia caused an unhealthy situation in South Africa.

Tonnage1105mt (270)

Road920mt (200)

Rail185mt (600)

Corridor140mt (750)

13%

Metropolitan570mt (70)

52%

Rural210mt (190)

19%

Corridor45mt (670)

4%

Metropolitan10mt (100)

1%

Rural30mt (500)

3%

Export lines100mt (650)

9%

Figure in brackets denotes average transport distance

Tonkm296bn

Road185bn

Rail111bn

Corridor105bn35%

Metropolitan40bn14%

Rural40bn14%

Corridor30bn10%

Metropolitan1bn0%

Rural15bn5%

Export lines65bn22%

IncomeR123bn

RoadR111bn

RailR12bn

CorridorR55bn45%

MetropolitanR29bn24%

RuralR27bn22%

CorridorR5.6bn

5%

MetropolitanR0.5bn

<1%

RuralR1.5bn

1%

Export linesR4.5bn

4%

Cape Town Port Elizabeth

Durban

Saldanha

Richards Bay

East London

Maputo

Sishen

Beitbridge

Gauteng

There are significant shifts in the SA economy that warrant a closer examination of the

supply chains necessary to support the economy. SA needs to reduce logistics costs by one third to sustain our

competitiveness.

Aligning Strategic Focus with the Economy

PE

East London

Maputo

RichardsBay

Durban

Cape Town

Coega

Heavy Manufacturing zones

Mining zones

Micro-economic strategy:• Support SA’s export-led growth strategy• Reduce the cost of doing business

SA’s economy:1. Mining (6%) 49%2. Manuf. (20%) 45%3. Agriculture (4%) 6%

Why Strategic corridors?• Majority of export/ import traffic (excl.

containers) is typically bulk and heavy manufacturing on rail

• Majority of road haulage is for domestic distribution

• To support the export strategy and economic growth for current key sectors, connectivity between inland transportation systems and ports are critical

• Create efficient export systems for growing sectors

Freight Typology:Up to 70% of

economy is bulk, heavy-haul, long

distance and low to medium value

traffic

Production location of key sectors

Transnet Strategic Direction• Focus on Rail and Ports (Operations & Infrastructure)• Focus on improving key corridors/ clusters

TransnetFocus

Direction ofthe Business

1

RestructuredBalance Sheet

2

CorporateGovernance

3

RiskManagement

4

Direction ofthe Business

1

RestructuredBalance Sheet

2

CorporateGovernance

3

RiskManagement

4

Strategic direction

The Role of Transnet

Contribute to the sustainable economic development of

South Africa by providing the best connected and

efficient transport network run by world-class rail,

pipeline and port operators

An Integrated Transport Strategy

Transnet provides efficient, integrated transport services to the

bulk and manufacturing sectors

• Ensure that Transnet provides an efficient transport platform that

facilitates trade growth in SA

• Transnet is the custodian of Port, Rail and Pipeline Infrastructure

• Transnet serves specific industries to leverage its strength in assets

• Transnet collaborates with Customers to jointly design services and

invest in areas that improves the performance of all parties

Transport Portfolio

PipelineNetworkPipelineNetwork

PipelineOperations

PipelineOperations

Transnet Business Portfolio

RailInfrastructure

RailInfrastructure

RailOperations

RailOperations

Port Infrastructure

Port Infrastructure

Port Operations

Port Operations

HoldingCo

Investment Portfolio

Aviation

Other

Independent Regulators

Transnet into the future

Transport

Portfolio

TransnetInfrastructure

TransnetOperations

HoldingCo

RailInfrastructure

NPA RailOperations

SAPO

PipelineInfrastructure

PipelineOperations

Implementation plan

• Operational integration

with private sector (port

and rail)

• Partnerships (local and

global) established for

growth

Deliver the Mandate

2004/05 2006/072005/06

Implement New Business Model

• Operational synergy

between SAPO, NPA

& Spoornet

• Restructured portfolio

• Operational efficiency

• Vertical separation

• Corporate office

Restructuring

• Divestment

Building a SolidFoundation

Migration Path for Transnet Integrated, Inter-modal Transport Solution

Transnet Strategy

Effective & EfficientNational Logistics System

Effective & EfficientNational Logistics System

Economic GrowthEconomic Growth

Str

ateg

icC

orr

ido

rsS

trat

egic

Co

rrid

ors

Strateg

icC

lusters

Strateg

icC

lusters

Change ManagementChange Management

Financial StrategyFinancial Strategy

Frei

ght R

ailw

ays

Ports

Pipelines

• Vertical Separation• Infrastructure Planning• Head Office Restructuring• Divestment• Operational Synergies

• Vertical Separation• Infrastructure Planning• Head Office Restructuring• Divestment• Operational Synergies

Critical element of implementation

At the heart of the turn around plan is the operational efficiency of the core

businesses. Without efficiency in the core operations, reducing supply chain costs and changing the road rail mix in

transport will not occur.

Operational Themes

Operational Efficiency

Operational Efficiency

Customer & ThirdParty CollaborationCustomer & Third

Party Collaboration

Integration& Interface Integration& Interface

Infra-structureDevelopment

Infra-structureDevelopment

• Nodal efficiency • Increasing key Productivity indicators within the nodal points• Safety and Risk compliance • Efficient and streamlined operational processes

• Nodal efficiency • Increasing key Productivity indicators within the nodal points• Safety and Risk compliance • Efficient and streamlined operational processes

• Integration and optimisation of rail and port interfaces• Reduction of total logistics costs• Enhancing predictability and reliability

• Integration and optimisation of rail and port interfaces• Reduction of total logistics costs• Enhancing predictability and reliability

• Create capacity before demand arises• Implementation of CAPEX plans – rolling 5 / 15 year plans• Create capacity before demand arises• Implementation of CAPEX plans – rolling 5 / 15 year plans

• Strategic operational forums• Supply chain competitiveness (time and cost) • De-bottlenecking

• Strategic operational forums• Supply chain competitiveness (time and cost) • De-bottlenecking

• Portfolio Restructuring to establish Transport Co.

• Core business restructuring within Transport Co.

– SAPO / NPA (port operations and infrastructure) already separated

– Spoornet initiatives

» Spoornet accounting separation of infrastructure and operations to make

costs visible and enable separate focus and reporting in progress

» Separation of high density and low and light density rail operations

(within Spoornet) to enable different operating models

Business Definition and Focus

Investment for Efficiency Improvements

Implementing Operational Improvement

• Systemic coordination and

consolidation of investments

• Coordinate Divisional strategies

along corridors

– Strategic focus

– Integrated investment models and

plans

– Value analysis and value engineering

• Drive value improvement

– Structure organisation and set targets

for new focus

– Inter-organisational measurement and

accountability systems and processes

– Strategic operational forums (multi

organisational)

Support Required

• Supporting legislation and policy

• Partnerships for funding and efficiency

improvement

– Private Sector Participation

– Customer / supplier / vendor initiatives

• Governance framework

R 37.2 bn TIM focussed on SAPO

NPA, Spoornet & Petronet• Backlog investments

• Expansions

• New developments (Coega)

• Efficiency improvements

Capex Committee to monitor these

processes

Collaboration, Partnering and Integration

• Collaboration initiatives and projects

– Interim Advisory Board to improve container supply chain efficiencies

– Analysis and prioritisation of key industries and customers to determine areas of

biggest impact taking place in Spoornet (will result in similar projects to Thuth’ihlathi –

timber, and Masibambane - domestic coal)

– Petronet managing depots and terminals for customers

• Inter-divisional integration

– City Deep / corridor container performance improvement (SAPO / Spoornet)

– Various NPA / SAPO / Spoornet commodity / corridor based initiatives (e.g granite and

ferros – Richards Bay)

• Private sector participation

– SAPO business model incorporates PPP’s to attract investments and

improve efficiencies

– Selective introduction of PPP’s in “branch lines”

– Commercial cold storage (SAPO)

Process Efficiencies, Systems and Technology

• New cranes in SAPO (twin lift capability) – improved container handling

efficiencies and throughput

• New locomotives with increased traction efficiency will

– Increase utilisation and reduce costs (e.g. fuel efficiency) and

– Enable implementation of additional technologies that will futher enhance efficiencies

• On-board signalling on new locomotives has major benefits in terms of

– Traffic density (number of trains on a line)

– Safety

• Changing of signal spacing on Sishen-Saldanha corridor will allow increased

traffic density

• NPA modelling and simulation of ports and terminals (ITE / G2)

improves investment decisions

• NPA strategic sourcing initiative

• Operational systems integration

Key businesses

FinancialsSpoornet

Positioning Statement

Spoornet is "mission critical" to the economy of the country.

Its service places it at the heart of it all. 

Country Description Activity United States 194,731 km mainline routes

Russia 87,157 km

China 71,600 km

India 63,518 km (15,009 km electrified)

Canada 49,422 km

Germany 45,514 km (21,000 km electrified)

Australia 41,588 km (4,612 km electrified)

Argentina 34,463 km (168 km electrified)

France 32,682 km

Brazil 31,543 km (1,981 km electrified)

Poland 23,420 km

Japan 23,168 km (15,995 km electrified)

Ukraine 22,473 km

South Africa 22,298 km (9,570 km electrified)

Mexico 19,510 km

Italy 19,493 km

United Kingdom 16,893 km

Spoornet’s Position within the World

Source: www.nationmaster.com

In world terms, Spoornet is a smaller freight based

railway, seeking to leverage heavy haul

technology

Spoornet’s Position within Africa

Country Description Activity South Africa 22,298 km

Sudan 5,978 km

Egypt 5,105 km

Congo, Democratic Republic 4,772 km

Algeria 3,973 km

Tanzania 3,690 km

Nigeria 3,557 km

Mozambique 3,123 km

Zimbabwe 3,077 km

Kenya 2,778 km

Angola 2,761 km

Namibia 2,382 km

Zambia 2,173 km

Tunisia 2,152 km

Morocco 1,907 km

Uganda 1,241 km

Guinea 1,115 km

Source: www.nationmaster.com

However, Spoornet is a large railway business

and is the most significant player in

Africa

19901986 1992 1994 1996 1998 2003

FreightLogisticsSolutions

Vision

Deregulation of Road

Transport

Predictable Service

MUP retrenchment

Closing of regions

Management Interventions• Labour• GFB sustainability• COALlink & Orex

privatisation

SpoornetIntegrated

Freight Railway

Incremental improvements in operations

Loss of critical skillsLoss of Market Share

DecliningCustomerService

Financial difficulties surface

Declining Operational Efficiency & Safety

Poor morale and work ethic

Historical Background

Key Statistics

Key Statistics 1990/91 2002/03 2003/04

Traffic:

Total freight tons (millions) 173.6 179.5 180.6 Total net tonkm (billions) 94.3 105.7 106.8 Shosholoza Meyl passengers (millions)

3.52 3.06 3.08

Blue Train passengers 8 306 5 740

Resources:

Locomotives 3 897 3 253 3 256 Freight wagons 155 831 114 135 113 584 Passenger coaches Shosholoza Meyl 1 929 2 052 2 061 Blue Train 32 36 36 Rail network: Route km 20 604 20 041 20 041 Track km 32 155 30 400 30 400 Employees (March) ± 82 000 34 662 34 771

Finance: Turnover (R million) R 6.60 R11 165 R12 401 Shosholoza Meyl R262 R288 Luxrail R62 R32

Immediate Medium Term Long Term

04/05 05/06 06/07 07/08 08/09

Phase 1Phase 1

• Customer Service• Operational Efficiency• Safety• Profitability• Attracting and Retaining a skilled

Workforce

Mobilisation

Phase 2:

New Service OfferingsYield Management CapabilityIncreasing Capacity

Phase 2

Development

Phase 3:Phase 3 • Logistics and Supply Value Chain Management•Business Development Overborder

Value Extraction

Fixing the Basics

Growth

Value Add

Spoornet Strategic Direction

Customer Service1

Operational Efficiency2

Safety3

Profitability4

Skills5

Org

anis

atio

nal

Red

esig

n

Customer Orientation

Strategic Programme of Action

Overview of South African Port Operations

• SAPO operates 13 terminals in 6 ports of SA

• Revenue - R3.2 billion in 2004/05 financial year and expected to grow by 9% p.a

• Staff complement 5570

• Total Assets Employed R3.3 billion

Services Offered

• Cargo handling

• Storage

• Logistics Management Solutions

• Warehousing and Distribution Management

• Steverdoring

• Rail/Port Interface

• Value Added Services

Market Profile

• Operates in 4 Sectors viz. Containers, Bulk, B/bulk and Cars

• Volumes handled for 2003/04 were

Sector Performance Market share

a) 3 Container terminals handled 2.5 million Teu’s 100% market share

b) 6 Break bulk terminals handled 13.3 million tons 82 % market share

c) 2 Dry bulk terminals handled 44 million tons 32 % market share

d) 2 Car terminals handled 220,000 units 100% market share

Major Bulk Commodities Exported Through SA Ports

Port Major Bulk Commodities

Volume million tons

Source Approx. distance from

source

Richards Bay

Durban

Port Elizabeth

Cape Town

Saldanha

Coal and cokeWood ChipsRock PhosphateChrome ore

Steel Timber Chemicals Manganese Ore

Prepared Fruit Iron ore

674.10.30.8

2.20.4

1.81.7

0.4

24.9

KZN/MpumulangaNelspruitPhalaborwaRustenburg

MiddelburgPinetown

SecundaMeyerton

Ceres

Sishen

400 - 600km585km806km721km

856km30km

546km569km

110km

993km

Vision

To be a leading provider of terminal services in port operations

Mission

To provide efficient terminal services to our customers, the standard of which exceeds expectations of all stakeholders. We will

seek appropriate partnerships to ensure we grow our service offering and generate improved returns for our shareholder.

Strategic Objectives2. Diversify revenue streams by entering into strategic partnerships to

exploit new business opportunities that grow our revenue base by 2007 in real terms

3. Understand customer requirements and translate these into consistent and personalised service offerings that exceed their expectations

4. Anticipate market demand in order to timeously plan and create capacity in line with UNCTAD standards

5. Maintain our market dominance, by ensuring we are benchmarked as an efficient and cost competitive operator, prior to the introduction of competition

6. Reduce operating costs by 10% per unit of volume in the 2005/06 financial year

7. Create a performance management culture that unleashes the potential of our employees through a multi-dimensional human capital recruitment and development programme  

What has been the focus?

•Splitting the company into two, namely, NPASA and SAPO

•Setting up systems, corporate office (infrastructure)

•Creating an independent & sustainable SAPO culture

Focus Areas

• Upgrading terminal superstructure

• Business Ring Fencing

• Creating an e-business forum with clients

• Continuous Improvement

• SAPO Capacity Building Initiatives

• Shop Floor Development Program

• Women in Operations

• Freight Handling Learnership

• Tariff Reform

Way Forward through Strategic Alliances

• Lowering the cost and improving the service

• Reducing the burden on overstretched infrastructure

• Increasing total efficiencies by shifting to modes that have higher capacity

• Reduce cost and time and inconvenience

• Increased productivity and efficiency

• Improved energy consumption, air, and environmental quality

National Ports Authority

NPA Vision & Mission

• Vision:

– To be a transformed, collaborative port authority that leads economic growth in a world class port system.

• Mission:

– To create and sustain world class freight and logistics solutions.

Strategic Objectives

• Value and wealth creation

• Optimising infrastructure and business processes to enhance logistics chains timeously

• Create winning customers and stakeholders through service excellence

• Inculcate behaviour embracing NPA core values; and

• Develop people’s business skills and embed innovation as a core competence

NPA Business Overview

• Custodian of SA’s 7 commercial ports.

• The NPA provides the following functions:– Landlord (infrastructure provider, management of port industrial

complex)

– Maritime (marine, dredging, lighthouse )

– Control function (environment, IMO, ISPS, harbour master)

• Focus on functional efficiencies, systems & structures

• Trade facilitation & competitiveness.

Future Position Of SA Ports

Playing a leading role in the SA economy

• Occupy a central role in integrated logistics chains;

• Set, monitor & sustain efficiency standards to meet/exceed customer expectations

• Play a key developmental role in furtherance of national & regional objectives:

– economic growth & sustainability

– country competitiveness

– Broadening the economic base

Centrality of NPA in the Logistics Chain

NPA

Terminal operators Shipping agentsConcessionaires

Stevedores

Rail operators

Road operators

Cargo owners

Freight forwarders

Inbound Logistics

Outbound Logistics

Cargo owners

Ship owners

Consumers

Challenges

• Reduced tariff income vs. Increased Capital Investment – R16.3b for the next 5 years

• Lowering Cost of doing business– Whether the reduced cost trickles down to SA Inc.

Key Enablers

• Ring fencing of assets

• Corporatisation

• Funding plans

• Private sector participation

• Port Regulator

Petronet

OUR CORE BUSINESS

Bulk transportation of energy (energy carrier) : Range of petroleum products and gas

HOW ?

Through 3000km of high-pressure underground steel pipelines which we own, operate and maintain

•Of the 3000km – •2500km for conveying petroleum products and•500km for transmission of gas to KwaZulu Natal

PETRONET

3PPT-0998

Petronet

Pipeline network

6PPT-1001

Total products transported (2003/04):

All liquid fuel products : ± 17,2 billion liters

•Petrols and diesel: 10,5 billion liters

•Avtur (jet fuel): 0,9 billion liters

•Crude oil: 5,8 billion liters

• For perspective : This equates to 285 000 road tankers per annum (refined products only) = 5500 road tanker per week @ 40m per

tanker = 210km long “train” of tankers weekly or ± 30km long “train” daily

Activities

PETRONET

10PPT-1005

Petronet transports approximately 40% of the SA refined product fuel requirements and 100 % of the Natref refinery’s crude oil requirements (which is 21% of the total SA crude requirement)

Approximately 80% of Johannesburg international airport’s requirements are supplied by Petronet’s Avtur pipeline from the Natref refinery and Durban

Petronet in perspective

PETRONET

11PPT-1006

Major international and local oil companies and government:

BP, CALTEX, SASOL OIL, SASOL GAS, SHELL, TOTAL and CEF

Clients

PETRONET

14PPT-1009

Fuel tax 111.000 c/l24.449%

Basic Price 214.732 c/l47.298%

Wholesale Margin 37.268 c/l 8.209%

Transport Cost 13.000 c/l 2.863%(Based on Petronet’s Tariffs)

Road Accident Fund 26.5 c/l5.837%

Slate Levy 1.000 c/l 0.220% Customs & Excise 4.0 c/l 0.881%

Retail Margin 39.800 c/l 8.767%

Service Cost recoveries 6.700 c/l 1.476%

BASED ON PETROL PRICE : 93 - OCTANE (ULP)GAUTENG : 454.00c/l (SEPTEMBER 2004)

COMPONENTS OF THE PUMP PRICE OF PETROL

What costs do we add to price of fuel

PETRONET

17PPT-1012

FinancialsSouth African Airways

• Financial overview

Revenue by Route (FY2005F)

Domestic 23%

Regional (Africa) 16%

Intercontinental 61%

Revenue by Route

R14,818M

0

5,000

10,000

R15,000M

SAA Passenger & Cargo Revenue (FY2005F)

Intercontinental routes accounted for ~60% of passenger revenue.

Note: Revenue is a forecast for FY2005, and includes passenger and cargo revenue onlySource: SAA Finance

Revenue by Sales Region

Asia6.9%

Africa10.8%

Americas13.4%

Europe16.8%

South Africa52.1%

Passenger Revenue

100%

0

20

40

60

80

100%

SAA Passenger Revenue

Roughly 50% of SAA’s sales are generated outside of South Africa.

Note: Data is for FY2005YTD; 48% of sales (i.e. originating from outside RSA) are denominated in foreign currencySource: SAA Finance

Cost Overview

2,950675

794

928

1,205

1,666

2,409

2,931

3,102

Operating Expenditure

R16,660M

0

5,000

10,000

15,000

R20,000M

SAA Expenditure (FY2005F)

FuelLabourAircraft DistributionMaintenanceNav, Landing

Purchaseof capacity

Accom &refresh.

Other

Fuel, labour and aircraft capital costs are the three largest cost components, accounting for 51% of operating expenses.

Note: Data is for FY2005F; Roughly 50% of SAA’s costs are incurred in foreign currenciesSource: SAA Finance

• Route structure

• Serves 600 intercontinental destinations

• Serves 30 African destinations

• Serves 21 domestic destinations

• Offers 358 daily frequencies

• SAA has 9 route specific alliances

SAA Network Reach

Johannesburg/Cape town

Atlanta

NewYork

London

Dubai

Perth Sydney

São Paulo

Hong Kong

Frankfurt

SAA network structure

Utilising alliances and code shares, SAA serves over 600 destinations.

SAA Route Network - Intercontinental (1Q2006)

Asia/Australia

• Mumbai – 7

• Hong Kong – 7

• Perth – 4

Europe

• Paris - 7

• Frankfurt (JNB) - 7

• Frankfurt (CPT) - 3

• Milan* - 3

• Zurich - 7

• London (JNB) - 14

• London (CPT) - 9

Americas

• Sao Paulo – 7

• Atlanta – 7

• New York - 7

Note: Figures represent flights per week and excludes code shares; *To be cancelled after Southern summer due to poor profitability

SAA Route Network - Africa (1Q2006)

Eastern/Islands

• Nairobi - 9

• Dar-es-Salaam – 7

• Mauritius – 9

• Entebbe - 3

• Kigali - 1

Southern/Central

• Luanda – 3

• Kinshasa – 3

• Blantyre – 2

• Lilongwe – 5

• Maputo – 9

• Windhoek – 17

• Lusaka – 12

• Harare – 13

• Victoria Falls - 11

Western

• Dakar – 7N/3S

• Cape Verde – 7N/3S

• Lagos – 4

• Accra/Abidjan – 4

Note: Figures represent flights per week and excludes code shares

SAA Route Network - Domestic (1Q2006)

• JNB – George

Note: *Coastals = CPT-DBN, PLZ-CPT and PLZ-DBN; E. Cape = JNB-PLZ and JNB-ELS

• 3

• JNB – CPT

Daily flightsRoute

• 22

• Coastals* • 12

• E. Cape** • 11

• JNB – DBN • 16

• Fleet structure

A/C Type Number

A340-300e 6

A340-200 6

747-400 8

A319-100 11

737-800 21

A340-600 9

61

SAA Fleet Composition (by 2005)

Note: All but 7 of SAA’s aircraft are leased; Owned aircraft include A340-600 (6) and B747-400 (1)

A/C Type Number Delivery

A340-600 2 2005

A340-300e 3 Done

A340-300e 3 1Q2005

A319-100 11 From 1 Sep 2004

A340-600 7 Done

26

Deliveries to date

• When fleet renewal is completed average fleet age will be 4 years

• The products and services will be world-class

– Lie-flat seats

– Premium service

• Cost efficiencies enormous

– Lower fuel consumption

– Fewer pilots (no flight engineer for long haul)

– Lower maintenance

SAA’s ‘new fleet’ benefits

• Personnel

SAA Employee Headcount

Overhead 1,452

Cargo 684

Flight Deck Crew 894

Cabin crew 2,244

Airport staff 2,535

Technical 2,990

Employee Headcount

10,800

0

2,500

5,000

7,500

10,000

12,500

SAA Headcount

Technical staff, airport staff and cabin crew account for ~72% of SAA’s employee headcount.

Note: Headcount is for March 2004; Airport staff includes international station staff; Overhead includes sales, marketing, finance, IT, HR and executive managementSource: SAA HR

• Technical issues

Financial Lease

• Substantially all the risks and rewards associated with ownership of the asset are transferred from the lessor to the lessee

• Obligations under the finance lease agreement are capitalised onto the balance sheet

• Asset is depreciated over the remaining useful life

• Periodic lease payments applied to reducing capital portion of the lease liability and expensed as finance cost

• Finance lease is in substance a loan (with simultaneous purchase of asset)

Operating Lease

• Substantially all the risks and rewards are not transferred to the lessee (e.g. SAA)

• Lease payments are expensed as operating costs

• Asset is not on the balance sheet of the lessee

• An operating lease is in substance similar to a rental agreement

Hedging

• Financial term used to describe the process of covering financial exposures faced by a company

• Much the same as buying insurance to cover personal risk

• Financial exposures arise as a result of the ongoing activities of a company

• Nature of such risks: foreign currency, interest rate, inflation, commodities (e.g. oil) – any financial instrument whose price fluctuates and therefore whose value in the future cannot be known with certainty

• A market exists for “insurance” products to cover these risks – e.g. forward exchange contracts (FECs), swaps, options, futures contracts, etc.

• An example would be where a South African company buys an asset whose price is in Euro, for delivery at a future date. The South African company can either carry the exposure, and at the future date sell Rand to buy enough Euro to pay for the asset. Alternatively, the South African company can choose to fix or cap the Rand price at which it needs to buy Euro in the future to pay for the asset.

SAA Hedges

• Hedging should in most instances be used by companies to cover their exposures and to create certainty. This is desirable as it makes robust and value creating decision making possible. It also makes long term decision making possible. So called derivatives, which is the term used to describe many of these hedging instruments used to achieve certainty in financial risk, are actually powerful tools used appropriately and responsibly

• Hedging should be in respect of all exposures in one particular financial risk area. For example, one should first offset foreign currency outflows against foreign currency inflows, with only the residual (net exposure) amount being considered for hedging unless there is market failure

• Deliberately hedging one side (inflow or outflow only) in the absence of market failure is not really hedging, but speculation, or taking a bet

• In the case of the hedging issue at SAA, the failure to assess the net exposures by looking at both inflows and outflows was at the heart of the problems they then faced in the future. Rather than hedging, they turned out to have taken a bet, which they subsequently lost

• As is normally the case in situations where companies lose a lot of money because of financial decisions, it is usually not the fault of the derivatives, but that of management

Transnet

Investment Portfolio

Metro rail Autopax

SAA/SAX Others

Financials

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