Additional cost savings initiatives of SEK 2.0 billion and measures to strengthen the balance sheet including debt maturity extensions and a...

Additional cost savings initiatives of SEK 2.0 billion and measures to strengthen the balance sheet including debt maturity extensions and a proposed rights issue of approximately SEK 5 billion – Implementation of the Core SAS strategy has proceeded according to plan with approximately 66 percent of the SEK 5.3 billion of annual cost savings implemented with a significant cost reduction effect of SEK 2.2 billion achieved already in 2009

– New cost savings initiatives of SEK 2.0 billion have been identified bringing the Core SAS cost savings program to a total of SEK 7.3 billion. In addition to these cost savings initiatives, a letter of intent has been signed with the flight deck and cabin unions with the clear commitment of saving an additional SEK 0.5 billion. The remaining result effect, amounting to SEK 5.5 billion from the SEK 7.3 billion and the additional SEK 0.5 billion cost savings initiatives, should create earnings momentum in 2010/2011

– Agreement has been reached to improve terms with lending banks in particular to secure an extension of four revolving credit facilities by one year to 2013 (total of approximately SEK 5 billion) and adjust the covenant profile to provide additional flexibility

– Process initiated with the plan to secure refinancing or extension of maturities of majority of 2010 bond maturities (approximately SEK 2 billion) in the public and private debt markets in the coming months

– Rights issue of approximately SEK 5 billion with preferential rights for SAS shareholders which supports the implementation of the remaining parts of the Core SAS strategy. It is supported by SAS’ largest shareholders and a consortium of underwriting banks, subject to, amongst other things, the refinancing of the bonds and final agreement with flight deck and cabin unions. Terms of the rights issue, including subscription price, are expected to be announced on 6 April, 2010. The rights issue is subject to approval by an Extraordinary General Meeting planned for 7 April, 2010. The subscription period is expected to run from and including 15 April to and including 29 April, 2010

“We are confident that Core SAS is the right strategy. The unprecedented severity of the market downturn has been far worse than anticipated in the original Core SAS plan and has had an adverse impact on business travel, affecting yields and thus our revenues and liquidity position. In response to this, we are now enhancing the Core SAS strategy with an additional SEK 2.0 billion of cost savings initiatives, bringing the total cost savings program to SEK 7.3 billion. In addition, we have signed a letter of intent with the unions with a clear commitment to provide another SEK 0.5 billion in cost reductions. We are confident that these significant cost reductions, coupled with the refinancing and the proposed rights issue, will give SAS the strength and flexibility it needs to compete effectively and be well positioned for the market recovery” says SAS President and CEO Mats Jansson.

Background and reasons

Original Core SAS strategy progressing according to plan
In February 2009, SAS Group launched Core SAS, a renewed strategic approach in response to the weak macroeconomic environment and the internal challenges within SAS, with the aim of strengthening the Group’s long-term position as a competitive and profitable airline. At launch, Core SAS included a large cost savings program of SEK 4 billion, which was gradually increased to SEK 5.3 billion during 2009.

The implementation of the initiatives related to the original Core SAS strategy has proceeded according to plan and approximately 66 percent of the SEK 5.3 billion of cost savings have been implemented. Some of the most important actions taken during 2009 under the Core SAS strategy include the divestments of the holdings in Spanair, bmi and airBaltic, the reduction of the Group’s fleet by 18 aircraft, the closure of 45 unprofitable routes, the streamlining of the organisation and the completion of the rights issue of SEK 6 billion in April 2009.

As a result of the implementation of the Core SAS strategy, the Group has been able to lower its unit cost (CASK[1] – fuel and currency adjusted) by 1.5 percent in 2009 despite substantial capacity reductions. The new commercial concept “Service And Simplicity” has, together with the increased focus on business travellers, contributed to an improvement in customer satisfaction[2], and during 2009 SAS was the leading European airline in terms of punctuality[3] and baggage delivery[4].

New measures to strengthen the Core SAS cost savings program by an additional SEK 2.0 billion
In order to further improve the Group’s profitability and to reduce its cost base, the Core SAS cost savings program will be increased considerably with new initiatives representing a total of SEK 2.0 billion in annual cost reductions, bringing the Core SAS cost savings program to a total of SEK 7.3 billion. The implementation of the new measures has been initiated with earnings impact expected during 2010 through 2012, with the majority of the effects expected in 2010. The cost savings are estimated to affect results in seven main areas:

– Administration (a further centralization and efficiency enhancement leading to personnel reductions) – MSEK ~550

– Permanent personnel reductions in production – MSEK ~100

– Lean/efficiency program in SGS (efficiency improvements in process and planning) – MSEK ~250

– Efficiency measures within SAS Tech (structural changes such as maintenance program and set-up of line stations, and additional FTE reductions) – MSEK ~300

– Additional procurement related savings (e.g. stop-buying initiative, transportation and procurement process improvements) – MSEK ~250

– Blue1/Widerøe/Cargo initiatives (e.g. salary freeze) – MSEK ~50

– Efficiency measures dependent on changes in certain collective agreements (e.g. scheduling and process improvements) – MSEK ~500

In addition to the SEK 2.0 billion in new cost savings measures described above, a letter of intent has been signed with the flight deck and cabin unions with the clear commitment of saving an additional SEK 0.5 billion.

The phasing of the result effects from the SEK 7.3 billion in cost savings, in addition to the SEK 2.2 billion in 2009, is approximately SEK 2.2 – 2.6 billion in 2010, SEK 1.7 – 2.1 billion in 2011 and the remaining effect in 2012. The restructuring costs for the amended Core SAS cost savings program, including the new cost savings measures, are expected to be approximately SEK 1 billion in total for 2010 and 2011, the majority of which are expected to be incurred in 2010.

The macroeconomic environment has deteriorated considerably more during 2009 than anticipated by the market at the beginning of 2009 and as estimated in the original Core SAS strategy. The airline industry has been severely affected, resulting in a substantial decrease in the number of passengers and passenger yields, leading to significantly lower revenues for the airline industry. As a consequence of these effects, the pre-tax profit for 2009 before non-recurring items for SAS was substantially lower than anticipated when the Core SAS strategy was launched in February 2009.

Further, restructuring costs in 2009 for Core SAS were significantly higher than expected, primarily due to the unexpected severe decline in air travel demand which forced SAS to ground aircraft faster than anticipated. Lease expenses for parked aircraft, which qualify as restructuring costs, increased further as the weak market made it more difficult to sublease leased aircraft. In addition, more pilots than expected accepted early retirement offers. The lower than expected revenues also led to higher net working capital outflow due to lower prepayments for tickets. These factors, together with lower than expected proceeds from asset disposals, have had a significant negative impact on the Group’s cash flow and liquidity position. This will be addressed by balance sheet strengthening initiatives.

Balance Sheet Strengthening

To secure SAS’ liquidity position and thereby provide support for the implementation of the remaining parts of Core SAS, the balance sheet is strengthened through (i) an agreement in place to improve terms with lending banks (representing SEK 5 billion of credit facilities), (ii) a plan to secure refinancing of the majority of 2010 bond maturities (approximately SEK 2 billion) and (iii) a rights issue of approximately SEK 5 billion.

In order to improve the Group’s liquidity, agreements have been reached with the Group’s lenders regarding four revolving credit facilities, whose maturities will be extended from 2012 to 2013. The overall amounts of the facilities will remain unchanged. These lenders have also agreed to provide improved covenant headroom. This is subject to the completion of the rights issue resolved upon by the Board of Directors.

Furthermore, the company is taking immediate steps to pursue a number of initiatives to secure refinancing or extension of maturities of the majority of 2010 bond maturities (approximately SEK 2 billion) in the public and private debt markets in the coming months.

To further enhance the Group’s liquidity position and to support the implementation of the remaining parts of the Core SAS strategy and a number of refinancing initiatives, the Board of Directors has resolved, subject to approval by the Extraordinary General Meeting, to undertake an issue of new shares with preferential rights for the Group’s shareholders. A completion of the rights issue, in which SAS intends to raise approximately SEK 5 billion, will strengthen the Group’s financial position and is expected to provide SAS with the financial and strategic flexibility it needs to pursue its long-term strategy and will, together with the new initiatives under Core SAS, ensure that SAS is well positioned for the market recovery.

Summary pro forma financial effects of the rights issue

Unaudited key Dec 31, 2009 Rights issue(1) Pro forma
financial items Dec 31, 2009(1)
and ratios pro
forma
(MSEK)
Equity 11,389 +5,000 16,389
Adjusted net debt 19,321 -5,000 14,321
(2)
EBITDAR before 2,626 2,626
nonrecurring
items(3)
Adjusted net debt 8.5x 6.3x
/ Adjusted
EBITDAR
(excluding lease
income)(4)

1) Excluding issue costs
2) Net debt adjusted for capitalised leases at 7x (net of lease income)
3) EBITDAR of MSEK 1,008 adjusted for restructuring charges of MSEK 1,547 and other non-recurring items of MSEK 71
4) EBITDAR as defined in footnote 3 less lease income of MSEK 347

Terms of the rights issue

Shareholders will have preferential rights to subscribe for new shares in proportion to their holdings. Subscription may also be submitted without preferential rights. Allotment of shares subscribed for without preferential rights will primarily be allocated to those who have subscribed for shares with preferential rights.

The rights issue is subject to approval of an Extraordinary General Meeting which is expected to be held on 7 April, 2010 (separate notice to be distributed). The record date for participating in the rights issue is expected to be 12 April, 2010. The subscription period is expected to run from and including 15 April, 2010 to and including 29 April, 2010, or such later date as decided by the Board of Directors.

The maximum amount by which the share capital will be increased, the maximum number of shares to be issued and the subscription price are expected to be determined by the Board of Directors not later than 6 April, 2010. The newly issued shares will rank pari passu in all respects with the existing ordinary shares. In order to facilitate the rights issue, the Board of Directors has also decided to put forward related proposals at the Extraordinary General Meeting including amendments to the articles of association and a reduction of the share capital and, if required in order to complete the rights issue as planned, a bonus issue without the issuance of any new shares.

Commitments and underwriting

The Swedish Government, the Danish Government and the Norwegian Government have separately expressed to the Board of Directors their support for this process and stated that they will, where necessary, ask their respective parliaments for approvals to, subject to certain conditions, subscribe for their respective pro rata shares in the rights issue and, at the Extraordinary General Meeting, vote in favour of all proposals by the Board of Directors related to the rights issue. The participation of the three states in the rights issue is subject to, amongst other things, all three states deciding to subscribe on a pro rata basis, refinancing of the bonds maturing in 2010, final agreement with the flight deck and cabin unions and parliamentary approvals (where necessary).

The Knut and Alice Wallenberg Foundation, through Foundation Asset Management (FAM), has expressed its support for the rights issue and its willingness to, subject to the three states subscribing to their respective pro rata shares, refinancing of the bonds maturing in 2010 and final agreement with the flight deck and cabin unions, participate in the rights issue on a pro rata basis and, at the Extraordinary General Meeting, to vote in favour of all proposals by the Board of Directors related to the rights issue.

The three states and FAM represent in total 57.6 percent of all outstanding votes and shares in SAS.

J.P. Morgan, Nordea and SEB Enskilda, acting as Joint Global Coordinators, Joint Lead Managers and Joint Bookrunners, DnB NOR Markets and The Royal Bank of Scotland, acting as Joint Lead Managers and Joint Bookrunners, and Danske Markets, acting as Co-lead Manager, have confirmed their expectation, subject to certain conditions, to enter into an underwriting agreement on a several basis in respect of the remaining 42.4 percent of the shares to be issued in the rights issue.

Indicative timetable for the rights issue 2010

6 April
Subscription price and subscription ratio are decided and announced through a press release

7 April
Extraordinary General Meeting approves the rights issue resolved by the Board of Directors and resolves on all other proposals by the Board of Directors related to the rights issue

8 April
First day of trading in the shares, excluding right to participate in the rights issue

9 April
Publication of the prospectus

12 April
Record date for participation in the rights issue, i.e. shareholders registered in the share register of SAS as of this day will receive subscription rights for participation in the rights issue

15 April – 26 April
Trading in subscription rights

15 April – 29 April
Subscription period

5 May
Announcement of outcome

For further information, please contact
Claus Sonberg, Executive Vice President Corporate Communications, +46 8 797 1660
Sture Stølen, Head of SAS Group Investor Relations, +46 70 997 1451

SAS Group Corporate Communications, +46 8 797 2440

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 February 9, 2010, at 08:00 am CET

Disclaimer
This document is not being distributed to persons in any state or jurisdiction where the offer or sale of the rights or shares is not permitted.

These materials are not an offer for sale of securities in the United States. Securities may not be sold in the United States absent registration with the United States Securities and Exchange Commission or an exemption from registration under the U.S. Securities Act of 1933, as amended. The issuer of the securities does not intend to register any part of the offering in the United States or to conduct a public offering of the Rights or the Shares in the United States.

This document is only being distributed to and is only directed at (i) persons who are outside the United Kingdom or (ii) to investment professionals falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (the “Order”) or (iii) high net worth companies, and other persons to whom it may lawfully be communicated, falling within Article 49(2)(a) to (d) of the Order (all such persons in (i), (ii) and (iii) above together being referred to as “relevant persons”). The Rights and the Shares are only available to, and any invitation, offer or agreement to subscribe, purchase or otherwise acquire such securities will be engaged in only with, relevant persons. Any person who is not a relevant person should not act or rely on this document or any of its contents.

This document is an advertisement and is not a prospectus for the purposes of Directive 2003/71/EC (such Directive, together with any applicable implementing measures in the relevant home Member State under such Directive, the “Prospectus Directive”). A prospectus prepared pursuant to the Prospectus Directive will be published, which, when published, can be obtained from the SAS Group. Investors should not subscribe for any securities referred to in this document except on the basis of information contained in the prospectus.

In any EEA Member State that has implemented the Prospective Directive, this communication is only addressed to and is only directed at qualified investors in that Member State within the meaning of the Prospectus Directive.

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[1] Cost per available seat kilometre
[2] Source: Studies conducted by the Group
[3] Source: Flightstat
[4] Source: Association of European Airlines