SAS AB (publ) (SASDF)

SAS AB (publ) (SASDF) CEO Rickard Gustafson on Q4 2020 Results

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SAS AB (publ) (OTC:SASDF) Q4 2020 Earnings Conference Call December 3, 2020 4:00 AM ET

Company Participants

Rickard Gustafson – President & CEO

Magnus Örnberg – Executive VP & CFO

Conference Call Participants

Jacob Pedersen – Sydbank

Achal Kumar – HSBC

Rickard Gustafson

Thank you, operator, and good morning, ladies and gentlemen, and welcome to this interim report from SAS. My name is Rickard Gustafson, and I’m the CEO of the company, and I will be — I’m here with our new CFO for the quarter, Magnus Örnberg.

And we plan to follow our normal procedures, which means that I will take you through the first part of this presentation and then hand over to Magnus to give you more details on the financial results for the quarter.

I hope that also you can follow us online and follow the presentation, and we’re going to try to prompt you to the right pages as clearly as we can.

So with that, I think we begin to it and I ask you to flip to the first page, which is highlights for Q4 ’20.

I’m not going to spend too much time on this page because I believe that no one is surprised that this quarter is, of course, very colored by the ongoing pandemic crisis around us. And we note that due to imposed travel restrictions and closed societies, we record a drop in number of passengers by 77% in the quarter, which is offset by a capacity reduction of 73%. Revenues dropped also 77% in the quarter. We try to countermeasure that through our operating expenses. That were managed down by 53% in the quarter.

But of course, we cannot fully meet the significant revenue shortfall and therefore, we end up with a significant loss of SEK 3.2 billion in the quarter.

Moving on to the next page.

And before I go down into more of what we have done in the quarter, since this is our fourth quarter, I thought it was appropriate also to just give you an overview of the full year. And I’d like to start by actually remind everyone of what actually was the foundation for this or the situation for SAS as we entered into the crisis. One tends to forget that. We have been living with this now since mid-March, and there was a life before mid-March, that was also part of our fiscal year. And we felt that we had a tailwind in the beginning and all the way until the pandemic hit in mid-March, where we recorded improved market shares, we were able to increase our unit revenue, we delivered a very solid operational performance in terms of punctual and the regularity.

Our customers enjoyed our experience, the experience on board and on ground and, again, with very solid feedback. And we were continuing to make inroads in our strive towards a more sustainable future. Of course, that headwind ended brutally by mid-March when the Board closed, and we were forced to actually pause a majority of our business, and we spent 90% of our people on furlough, followed by a significant permanent redundancy of 40% or 5,000 positions that we have also worked through since then.

The numbers for the full year are, of course, very disappointing, but they have the explanation from the pandemic, where you see that both passengers and revenue dropped significantly, and we record a very, very significant loss in the full year of 2020.

The good news, though, if I may put something, the tailwind that we saw, we hope that we were able to recapture once we get through this. And the reason why I say that is that even now, we maintain and take market share to some extent, even though the market is, of course, a fraction of what it normally is. And our customers, they still indicate in the service that we do, a very, very strong preference for our brand and for our services. So we bring that with us as we navigate through this crisis.

Following on to the next page. There has been — to take you through 4 focus areas that had been on top of mind for us as we have managed through this quarter.

Firstly has been how do we manage an efficient ramp up and ramp down because it’s been both during this quarter? How do we reduce our spend and manage liquidity? How do we conserve as much liquidity as possible? Of course, delivering our longer-term objective to transform our business to full competitiveness, and thereby deliver another SEK 4 billion in efficiency measures. And then, of course, there has been an enormous focus on finalizing the vital recapitalization of our balance sheet, which we also have concluded during the quarter.

So allow me to take you a few deep dives into each one of these 4 items to give you some more flavor, starting then with demand. These graphs that you see in this chart indicates the recorded number of COVID-19 cases across different markets.

And we divided it into the Nordics, what we call Europe North and Europe South. And as you can see, as of — in Europe, as of September, the curves were really climbing steeply upwards. And some countries even were off the chart, as you can see, which led to significant travel restrictions and close downs of those societies.

And I guess the good news is that some of those measures seem to have had an effect because you can see for many of these large European countries, the number of cases are rapidly coming down again, even though they’re still at very high level.

And for Scandinavia or the Nordics, where we have a main emphasis at the moment, we are also seeing a negative development, somewhat later. Somewhat by the end or mid-October, we start to see an accelerated number of cases in Norway and Sweden and Denmark, where Sweden stands out, in most cases. And if I put on my positive glasses, I’d say that it seems that the growth in number of cases seems to flatten out at the end of this reported period. Time will tell if that is true or not.

Moving on to the next page. This is what the COVID — the implication from the COVID on our markets. And in a very simplistic way, what you see in the left-hand side of this chart is that we divided the — our different markets into 3 categories: red, green and amber. And red indicates that there is the countries it’s closed or it requires significant [Indiscernible] Yellow is more that there is a recommendation not to travel, and green is that it’s all open.

And by the end of — beginning of the quarter, 40% of the markets where we normally operate was treated as red or recorded as red, which grow to north of 65% by the end of the quarter. And what you don’t see is that, that has continued also into November. And as of today, we say that roughly 70% all our markets are in the red zone.

And unfortunately also, the green zone has dropped to 10% given that Norway has entered into our qualification as an amber country where they now recommend not to do domestic travel if it’s absolutely — if it’s not necessary.

That’s a direct implication, as seen on the right-hand side of this chart on the number of passengers. I took the also to give you the passenger numbers for the third quarter. We saw that we had a tendency that countries started to reopen again and very, very quickly demand came back, and we basically doubled the demand month-by-month through the third quarter.

Then in August, we were maintained at that kind of July’s level. And then in September and October, the demand started to drop, and we have seen — been on a negative trajectory since then. That continues. And bear in mind that we have a big emphasis on domestic market. Therefore, we have may not seen the massive passenger drop that we’ve seen in Europe already in September, October, given that a majority of our passengers actually operate domestically in Sweden and Norway.

Speaking about that, capacity is on the next page, where we have tried to adopt capacity according to demand. Again, in the third quarter, we scaled up capacity to meet the growing demand. And then as we entered into the fourth quarter, with the spread of the COVID, we were forced to reduce our capacity. And again, on the color coding here, you see that we have differentiated domestic and international traffic and the majority of the reduction that we’ve done in the quarter has been on the international markets and not the domestic market.

And that’s the reason why we have recorded more departures than many other carriers in Europe, which are normally much bigger than us, but that is due to the fact that we have a significant domestic market where we still have had a decent demand that we, of course, have been keen to capture.

But it is true that we do have some lead time to scale down our operation. It can’t happen overnight. Demand disappears overnight when a country imposes travel restrictions.

For us, it takes us a couple of weeks to really scale down because we need to honor those passengers that we have sold tickets to, we have roasters out for our crew and also the furlough schemes you apply for them in advance. So you basically have to pay — you can’t get rid of the cost that quickly. So there is a kind of a built-in delay or lead time in scaling down that has caused us to be a little bit have — little bit too much capacity in the fourth quarter than. But again, I think a decent balance has been achieved given that capacity is down 73%, while passengers are down 77% in the quarter.

Moving on then to our emphasis on reducing spend and managed liquidity. We start the quarter with a liquidity position of SEK 6.2 billion, and we end by SEK 10.2 billion, of course, related to the massive recapitalization that we have been through.

I’m going to focus on the operating expenses for a second. We believe that the operating expenses come in at just below SEK 2 billion, which is in — within the range that we have provided of SEK 500 million to SEK 700 million in cash burn per month. Even though we are in the upper range of that to somewhat explained by the fact that we have had a challenge to balance capacity at the same pace as demand has changed during the quarter. But again, we are within the range.

However, we have, which I believe is a good thing, been able to accelerate the pace of refund, which also eats into our liquidity position, but we do have an overdue in refunding a number of — a large number of passengers.

And we have been able to accelerate that, which I will come back to later on as well — or actually, I think it’s appropriate to take it on this page here, sorry.

Where we, at the end of this quarter, we had refunded 1.5 million customers, equating to close to SEK 4 billion. That has further accelerated since then.

And as of today, we report close to 2 million customers refunded, equating to just about SEK 5 billion.

And unfortunately, we still have a backlog to manage. 15% of the backlog still remains. That equates to around 350,000 customers. And we are determined to try to settle those as quickly as possible.

And as of December 1, we have reinstated for new claims. We still have the backlog of 350,000 customers. But for new claims, for future claims after December 1, we will honor the 7-day payback rule.

Moving on to the next page, which relates to our progress on the transformational program. We can report significant progress also here. In the quarter, we have finalized the massive redundancy of 5,000 positions.

Bear in mind that equates to 40% of the total workforce have now been finalized. And I think that is a great, but sad and regrettable achievement by the organization, but it has been absolutely necessary.

We have continued our strive to adopt our fleet to the best of our ability to match the number of aircraft with demand, and we have been able to delay some additional aircraft, delivery of some aircraft and also accelerated the pace of some of our other aircrafts, including our 737 engines and also our 340 aircraft.

We have continued a massive work with our vendors and suppliers in order to renegotiate a number of contracts, and we made progress, especially among our wet lease providers, where we have been able to both reduce overall cost, but also shift from fixed to variable cost to a large extent, which has been extremely important.

And then on our own productivity improvements, we are making inroads there. This is there where we still have more lead — more runway to go, more work to be done, which will happen in the year to come here.

But we have been able to realize efficiency gains where we can actually enforce them. We have engaged in a number of discussions with all our different unions. We have reached 2 new agreements that will honor the requirement to further uplift productivity by 15% to 20%, that has happened within our Irish operation in SAS Ireland and also among a small part of our technicians that are organized by [Indiscernible] Copenhagen.

And our dialogue with our remaining unions has remained, and we’re going to do everything in our power to find constructive solutions with all our unions because I believe we all fight for the common cause here to make sure that SAS is as competitive as it can be, and thereby conserve as many jobs as possible.

And finally, before I hand over to Magnus, just to give you an update on the recapitalization. This is well-known information, I assume to the audience. I’m not going to dwell into it. I think this pie chart now provides the recent ownership structure of this — of our company. This recapitalization, which adding SEK 12 billion of new liquidity and enhancing our equity by just about SEK 14 billion, has been absolutely vital and necessary for our survival, and we are grateful for the support, of course, from our main shareholders, but also from the response from private investors that really stepped up and participated in the rights issue.

So very pleased about that. And we’re also pleased that we have an obligation to ensure that we continue to deliver value to those shareholders as we move forward.

But we’re not going to be naive. I mean not going to rest on our hands and do nothing because we know no one can predict how this crisis will evolve. No one knows exactly how demand when it will come back. And to be on the safe side, we have said that we will continue to strive to find ways to further enhance our liquidity, to be on the safe side and build in some headroom for a longer winter than anticipated.

And therefore, we’re looking into both sale and leaseback of — sale of aircraft, especially in some of our older aircraft. We have had success with 3 737s that will be converted to all cargo operation. And we’re looking in to do similar things with a small bunch of additional aircraft.

We are attempting to apply for the credit facility backed by the State of Norway [Indiscernible] utilize that. We plan to utilize that opportunity.

And we’re also going to look into further opportunities in the sale and leaseback frame, both for aircraft and for spare engines. So again, to be on the safe side and constantly make sure that we have liquidity to also manage through a scenario where demand might take longer to come back.

With that, I’ll stop, and I hand over to Magnus to give you some more insights to our financials.

Magnus Örnberg

Thank you, Rickard. And let me start by giving a brief introduction of myself. My name is Magnus Örnberg. I joined on 1st of September. My background is I’ve spent some 23 years with ABB, in various positions in various countries. And my last assignment before SAS was as group CFO for the [Indiscernible] and security company.

So I’m very happy here to present my first report here for SAS, and I’ll start by turning into Page 12. And I will super summarize also the capacity. Rickard has been into some of it. But of course, very challenging numbers due to the COVID. The capacity down some 72% in the quarter, some 54% for the full year. We have a revenue passenger kilometer down by 85.

And of course, the capacity and the lower willingness of travel is impacting that, and some 63% for the full year. The unit revenue, of course, impacting also by the lower cabin factor, down by some 34% in the quarter and 12% — almost 13% for the full year.

And then the — we are working, as Ric has mentioned, strong efforts on cost reduction, and we are making good progress. But of course, with this massive volume downturn unit cost is increased for the quarter by 79% and for the full year, 43%. And of course, these weak traffic numbers are impacting our financials.

And the quarter ended at some SEK 3 billion in revenue and some SEK 20.5 billion for the full year.

And these are, of course, significant reductions from previous quarter and year, and I will come into that later.

The EBIT also with a lower volume, we ended up at some minus SEK 3 billion for the quarter. And this is before items affecting comparability, and minus SEK 8.6 billion for the full year.

And turning to cash, which probably is going to be our most important item to follow, both now and going forward. We ended up with a quarter of some minus SEK 2.9 billion and over SEK 5 billion for the full year.

And both outcomes are, of course, driven by the lower result, but also lower forward bookings. And as Rickard mentioned, we have increased the pace of refund and — to roughly SEK 1 billion in the quarter. And therefore, we are roughly in the range as we have communicated earlier.

And looking ahead, we will increase the pace, and we have already done that in November, as Rick has said, and then we will continue and — as quick as we can going forward.

I will turn page to Page 13. And I want to look at the revenue development in the fourth quarter and bring up some highlights, of course, we have SEK 13 billion last year, and we ended up at SEK 3 billion, so roughly SEK 10 billion lower. Currency impact somewhat within a weaker Norwegian krona, but of course, the main impact in the quarter is the passenger revenue, the capacity change and the load factor, small uptick on the yield.

On top of the passenger revenue, we also see cargo and other traffic revenue and other operating revenue impacting slight negative, and this is very much volume-driven. This is ground handling, this is charter revenue and fees for exit baggage, et cetera. We are estimating that the total COVID-19 revenue impact for the quarter is some SEK 9.7 billion.

Let’s turn to next slide and see how the results played out. We started — last year, we had a profit of some SEK 1 billion. We have a minor currency impact this quarter, but the main impact is, of course, the COVID-19. Revenue impact of some SEK 9.7 billion.

But of course, we have worked hard to mitigate that with cost reductions. A large part is, of course, volume-driven, like fuel or air traffic charges, but we are also working hard on reducing personnel costs, either through the redundancy program, but also temporary lay-off scheme, and other expenses throughout and trying to mitigate as much as we can. But of course, with this massive revenue increase, there is a gap.

Some smaller comment also on IFRS 16. This is the first year we are reporting under that, and we had an effect of some SEK 153 million in the quarter. Other here consists mainly of some lower fuel cost or prices on the actual consumption and items affecting comparability.

Here, it’s positive, but that’s more because we have a bigger negative. Last year was actually a slight negative there in the actual result.

So let’s look at the full year numbers and see how that played out. We had SEK 46 billion last year. We have currency effect of some SEK 1 million. Again, the Norwegian krona impact towards the Swedish krona, but the main item, of course, is the passenger revenue with the capacity change, the load and a little bit uptick on the yield, and the same additional effects on the revenue on cargo, other traffic and other operating revenue. The total effect here, we are estimating for the COVID-19, is some SEK 26 billion, which is basically more than the difference, and part of that reason is, of course, that we were when we entered into the crisis. So we had actually good start.

So what we the development, next slide, 16. We see that we started or ended last year with some SEK 800 million positive. We have a currency positive with the change between U.S. dollar and Swedish crown, of course, now. But the main effect, again, is, of course, the COVID-19 revenue impact and against that cost reduction, again, volume-driven, cost reductions, plus all the efforts we are doing now to decrease the cost.

I want to highlight the IFRS 16 effect. Also, we estimated, I think, 1 year ago that we will end up something like between SEK 400 million and SEK 500 million impact. We ended up at SEK 470 million, and the introduction of IFRS 16 has worked according to our plan. The other here is a positive. It’s more that we had last year a strike that maybe half of that amount and also, again, lower fuel prices lately, and that’s a positive effect.

On items affecting comparability, you all know that we took charge in Q3, which was relatively large, more than SEK 1 billion. That was basically impairment of aircraft and some restructuring. And we have also done some in Q4, much smaller amount, but the net effect here now comparing to last year is a little bit more than SEK 1 billion.

So we end up at negative SEK 10 billion for the year, which, of course, is a massive number and probably one of the lowest in history that we have seen.

Okay. Let me run through some of the fuel and currency hedges and just give you some feedback. There is an uncertainty, of course, now on the future volumes, and that will have an effect on our hedge levels going forward.

Also to remind you, we took a charge in Q2 for over hedges, which, of course, was due to the big decrease in volume. And in Q4 now, we have a smaller impact, SEK 130 million of over hedges, which we closed now in Q4.

We — looking ahead, we have some 48% of our expected fuel consumption hedged for the next 12 months. And on the currency side, the Norwegian krona, we have hedged some 45% of the surplus estimation and 43% of the dollar. It’s important to note that we have no hedging beyond 12 months.

And of course, now with the uncertainty and the volatile market conditions, we may temporarily deviate from our hedging policy and then towards the lower end, of course.

I want to highlight also a bit on the debt, which is on Page 18. We have, of course, gone through a massive recapitalization now and, I think, in a very good way.

And I’ll give credit to the team that has worked on that, including my predecessors. We have now, already in Q4, paid back — repaid in full the credit facility that we took in May. So that is already done now in Q4, and that was in accordance with the terms at that time. And also, following the recapitalization, it could be good to note that we have the senior bond that was due in fiscal year ’23, we — was now converted partly to common shares, SEK 600 million, and partly to new commercial hybrid, SEK 1.6 billion.

Also seen in the graph, a fairly balanced maturity profile in the years to come here, which is good, of course. And most of it, if not all, almost, is related to aircraft financing. And beside the debt from, with the contractual maturity, we also raised SEK 7.6 billion in hybrid notes through the recapitalization, and these are treated as equity. And you can see those towards the left-hand side there.

I also want to comment a bit more in detail on the aircraft orders. We have worked hard during this crisis to manage the timing of delivery. And we have previously communicated that, and that we have managed to defer some 320 NEOs and 350 aircraft through a constructive dialogue with Airbus.

And to be more detail, we have moved 2 A350 from — 1 from ’21 to ’22 and 1 from ’21 to ’23; 4 A320s from ’22 to ’24; and 4 A320 from ’23 to ’25, I should say here. In addition, we are also having some shorter 2 to 5 months deferrals.

All these are very important and it will reduce our capital expenditure need for ’21 to ’24. And we will also be better aligned with the deliveries of new ACOs, with the expected return in demand. So what we cannot see here, and Rick had mentioned it, we are also in a — working hard on phasing out ’21 all older and less fuel-efficient aircraft earlier than planned, and this includes 15 Boeing 737, 5 Airbus 340 and 1 Airbus 330.

And this will also support liquidity and will reduce spend on maintenance and leasing. So let’s turn into the cash development. It has, of course, been a year with significant changes. And we started the year with some SEK 8.8 billion in cash. We have mentioned that we had lower cash operation, SEK 5 billion, due to earnings and lower forward bookings.

We have also taken delivery of 3 A20 and 4 350s. And we have paid PDPs or payments to — about SEK 1.1 billion, and the deliveries were about SEK 5.9 billion. So a big portion of those SEK 7.3 billion is basically deliveries of new aircraft.

Against that, of course, we have the borrowings and repayments. We have some new borrowings of more than SEK 11 billion. But we have also repaid and amortized around SEK 7.6 billion. So the net effect is the SEK 3.6 billion in the picture.

And then recapitalization after some transaction costs added some SEK 11.9 billion to our cash. And then we have some other impact, which is some pension effect of some SEK 0.3 billion; some interest on the hybrid, SEK 0.1 billion; and also some collaterals for risk and financing when we have renewed some of the financing. And in the end, all totaling up to closing the year with some SEK 10 billion in cash.

I would end my part of the presentation by going through the financial targets. And here, we — I want to be a little bit detail on standard, but this is now — from now on, we’re going to be into IFRS 16. But in this picture, it’s more of a mix. And all numbers are rolling 12 months, and we are replying now in the new IFRS standard using the modified retrospective approach, meaning the historical numbers are not restated. And after the quarter, we present a revised financial target accordingly to new standard definition.

The return on invested capital, of course, with a very, very negative EBIT. We see a negative number here. So here, we have to come back, of course, when we start to turn into profit.

But when we calculate it is negative SEK 27 million ending the quarter. And the same comment on the leverage metric, financial net debt-to-EBITDA, with a negative EBITDA, of course, difficult to calculate, ended up some 9x, but with a negative one. So it’s — We, of course, have to come back on that or report back on that when we start to turn into positive numbers.

On the financial preparedness, though, we have seen an increase and strengthening. We have now some 67% here. And this is both related to the increase in cash from the recap, but also lower fixed costs now in the last 12 months. So it’s a double impact there.

And with that, I think I’ll stop and hand over to Rickard again to summarize the morning’s presentation before we take the Q&A.

Rickard Gustafson

Thank you, Magnus. And I’ll be very brief. The summary page is now displayed to you where we can conclude that this quarter was highly impacted by the ongoing COVID-19 crisis.

Of course, having impact both on our revenues and the bottom line, as we described. We have seen, unfortunately, accelerated pace in number of COVID cases, creating further or additional travel restrictions, which has actually maintained beyond the end of this quarter, so into our Q1.

That’s what we live with as we speak. Means that we have demonstrated, we believe, cash control and good progress in now our transformational program, and we remain committed to that, and that’s also going to be part of our operational activities going forward.

And then, of course, we have finalized a very vital and much important refinancing of our company during the quarter, and as I mentioned, with further actions being assessed going forward.

So with that, we end the formal part of the presentation, and we’re going to hand back to the operator and ask for help to facilitate the Q&A session. So operator, please.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Jacob Pedersen of Sydbank.

Jacob Pedersen

Welcome to you, Magnus. Look forward to dealing with both of you also in the future. I have a couple of questions.

First of all, regarding your payroll cost. You’ve laid off around 50% of your employees. How much of a payroll decrease should we expect that to result in if we’re looking into 2021?

Rickard Gustafson

Magnus is going to answer this one.

Magnus Örnberg

yes. Yes. I can take that. Of course, we have — we will have, over time, that impact to start with. And even though that we have handled all that now and it’s a very tough discussion with employees and very sad to have to do that, of course, we see now the impact increasing over time.

And I would say that the impact — even though we haven’t gone out with any numbers, it’s a relative large part of the SEK 4 billion. I think I’ll leave it like that because we haven’t done all those sort of exact communications on that volume. But a large portion of the program that we’re now going to strengthen.

Jacob Pedersen

Okay. Okay. That actually could lead to my next question. Your savings of SEK 4 billion, if I look at what’s to be expected of the business traveling in the future, it might not be enough for you to get back to your former capacity — sorry, your former way of filling up the aircraft if they are much more leisure passengers than business passengers? So how do you look at the SEK 4 billion savings plan? Is that really enough to take you to positive earnings and to value creation?

Rickard Gustafson

Well, Jacob, this is Rickard. I’ll try to answer you on that one. The way I see this is that we have set this very ambitious program in place to deliver on these SEK 4 billion in additional savings. That will require a significant uplift in productivity in the business in the range of 15% to 20%, which I believe is a fairly sizable shift in transformation.

We are determined to deliver on that one. We believe that is reasonable or very likely that we should be able to accomplish that. Once we’ve done that, we, of course, need to answer your question. We need to digest what are the circumstances for our business going forward? How has demand shifted once we’re through the COVID 19? How is the competitive situation? What is that looking like? And based on the environment that we’re going to face then, we will take the necessary measures. Exactly what those are, I don’t know. But rather than to be too distracted, my focus and the management team focus is to deliver on these SEK 4 billion, then going to take stock, and then we’re going to look forward.

Jacob Pedersen

Okay. Yes. Okay. If I could dive into the competitive situation as well. What are your thoughts regarding the future without Norwegian air shuttle in the Nordic region?

Rickard Gustafson

Well, Jacob, I haven’t rolled out that Norwegian will remain — continue to exist in some shape or form also after this. So — and I don’t want to second-guess how that’s going to play out. But what I do know is that every time there’s been a void in the market anywhere in Europe, it has taken a nanosecond for someone else to come in and fill it. And I don’t think that — this would be any difference.

So we have to plan for and expect that regardless, we’re going to face significant competition also after COVID-19, and regardless if Norwegian will be around or not.

Jacob Pedersen

Okay. Okay. Coming to my last question. I’ll leave you then. If we look at your business model, you’ve been relying far more on sub-suppliers and partners than historically for the past couple of years, which has been a part of, as I see a part of your success.

How confident are you that these sub-suppliers will survive this COVID-19 problem and situation? You’ve got help from the Danish and the Swedish government, and also some private initiatives, but not all your partners are equally lucky.

Rickard Gustafson

That’s correct. And I agree with you. I think these partners that we have used and the business model that we have built, has proven its work and created the necessary cost efficiency and flexibility to feed into our broader network.

And we are determined to maintain that to start with that. But then you’re right, we don’t know how some of this is going to play out. I can note though that X-Fly, for example, they have received some support from the Baltic states. And also being another key supplier to us, they have been through already what Norwegian is going through right now, and they come out alive on the other side, backed by a very strong share owner.

So I can’t second guess, Jacob. But as of now, it seems that there is a reason to believe that our key suppliers will manage through this crisis together with us.

Operator

And the next question comes from the line of Achal Kumar from HSBC.

Achal Kumar

So I had a couple of questions actually. So first of all, I wanted to understand about this vaccine and the optimism.

So although it is too early, but did you see any kind of optimism in the demand post U.K. announced about the vaccine? And what are your thoughts on how do you see the pickup in demand once the vaccine comes to the market, which is expected next week? So if you could please talk about that?

Rickard Gustafson

Sure. I’d be happy to. I personally was thrilled to learn that the U.K. has approved the vaccine. And I think that the vaccine will be vital in order for governments to dare to reopen their societies and reopen borders and thereby allow for travel to come back again.

And we know that there is a buildup, a massive build up demand for travel, both among corporates and leisure passengers. However, though, I can’t see that in our booking numbers, especially if you take the announcement has changed dramatically.

But I’m a firm believer that once we’re going to see a broader distribution and acceptance of vaccine, there will be a reasonable governments to start to reduce the travel restrictions, and then we know that demand will come back.

We saw that this summer. We saw what happened when Europe started to reopen again by the end of June. And then a massive uptick in passengers in July and August that then stopped once we had the second wave in Europe.

And I believe that with the vaccine, we’re going to hopefully see more permanent reopening of other countries. And therefore, that’s the driver for not just our industry, but for the broader societies to come back to a more normal situation.

Achal Kumar

All right. Okay. The other thing I wanted to understand. So coming back to the previous question about the competitive landscape. So basically, of course, looks like Norwegian has been shrinking. And then, of course, the Wizz has started to base their aircraft in Norway, and then there’s new Norwegian airlines.

So how do you see the sort of competitive landscape changing? And what does that imply for SAS? So please help understand that?

Rickard Gustafson

I believe that what it’s — my best guess would be that the competitive landscape is actually going to be maintained and maybe even further accelerated beyond COVID-19, and especially in our markets. We now have a new player in our domestic backyard with Wizz, which is a very, very serious competitor that we take extremely seriously.

But we believe that they’re going to primarily compete for some of the traffic that is a bit outside or on the edges of our core business. And I’m not disregarding or saying that in disrespectful way, but that will impact overall gene perception in the market and also the overall willingness to pay for sure.

So that’s the fact. As I said to Jacob Pedersen to this question, I have no idea if Norwegian is going to succeed with what they’re up to or not. But I don’t find it completely unlikely that they will reemerge and maintain and continue to operate domestically in Norway or also within Scandinavia.

That means it’s going to be rather crowded. And I’m also sure that there might be other players that once COVID-19 starting to become more of the part of the history books and the vaccines are helping the world to reopen, there is a lot of capacity that has been grounded, and many plane carriers will be extremely eager to get those seats up and start to earn some revenue and rebuild liquidity.

And I’m sure many might be prepared to sell that seat fairly aggressively to rebuild liquidity. So we’re planning for a tough competitive situation beyond COVID-19.

Achal Kumar

So sorry to ask a bit of a nonsense question, which I usually do. So what — in that situation, what kind of plan do you have? I mean do you have a plan B sort of when you — are you planning to have more regional players flying for you in the domestic market with smaller aircraft, which saves you — which can save you some few dollars. And then in terms of what sort of plan do you have in case you believe that the competition could price? Do you have any plan to cater or to counter that?

Rickard Gustafson

Well, we have our main plan is what I can reveal and discuss with you. And that is, of course, that we need to drive further efficiencies in our core business. The SEK 4 billion is absolutely necessary, and that implies more flexibility i.e., to enable to have more flexibility to adapt our capacity to seasonality in demand, which will increase due to the fact there will be more lesser traffic and less business traffic going forward, and we need to uplift productivity significantly to meet this new competition.

That is the main plan. We remain focused to leverage the different production platforms we have within our operating model with SAS Ireland, that’s an important complement. We’re going to continue to develop that as we want to develop our other business.

And before COVID, we also talked about establishing to appoint a regional production unit, or what we call a midsize, to maintain these thinner flows and figure into our Scandinavian network.

That has been integrated in our traditional business when we have flown the smaller 737s and the 219s. Those aircraft are now leaving our fleet. We need to replace them longer-term with a similar-sized aircraft to be defined which one. But as of now, those plans are put on ice, given that we need to go through this.

And at the moment, we have more aircraft than we can deploy. So it’s not an urgent need as of now. But once we get there, that production unit needs to be fully competitive with terms that are defined for that purpose to operate a regional operation, and that will require conditions and CBAs that reflects that.

Achal Kumar

Right. And moving on to the employees — I mean employee cost, so following up on the previous question. So you are saying that the employee cost will be the significant part of this SEK 4 billion savings. So what I wanted to understand is — so first of all, what sort of challenges do you see in achieving that SEK 4 billion or whatever the major part of employee cost savings? I mean what kind of union agreement challenges do you expect? And by when do you think you’ll close all this SEK 4 billion?

And secondly, related to this, how do you see this cost to evolve over the year as you restart or as you start building up the capacity further? I mean — so would you be able to operate with 50% employed? Or also how do you think your employee cost would evolve over the next 12 to 24 months?

Rickard Gustafson

Well, that’s a difficult question to answer in detail. I’ll try to give you an overview answer, and then Magnus, if you want to complement some of this.

Some of this. In terms of how difficult is to deliver on the SEK 4 billion. Of course, it’s an aggressive ask, and it’s a big transformational program, but we have done it in the past.

And in this time, the majority is — can be done without renegotiated or labor agreements. I don’t have exact number, but a vast majority are within our own kind of control, if I put it that way. We have said that we need this year and 2021, to accomplish this.

And as we move in from 2022, they should have full effect. And some of the tricky ones are, as always, with our flying colleagues, cabin crew and pilots, where we need to find ways to make some adjustments to our current CBAs to not reduce salaries, but to lift productivity.

And also, we have a work to do with our technicians, where also it’s not about fact, it’s more about scheduling and that we have the right resources at the right time during the 24-hour cycle of the day.

So — and of course, that will require negotiations, and some of them will be trickier than others. But as I said, at the end of the day, we [Indiscernible] to serve as many jobs as possible while staying competitive.

So we’re confident that we will deliver on this. Exactly how the cost base will evolve over the next year, so you can put that into kind of a monthly schedule for your spreadsheet, it’s going to be hard for us to provide that for you.

Magnus Örnberg

I can comment additionally, just say that, of course, like Rick has said, in ’21, we are definitely going to go through the whole plan and come to sort of close it in that sense. But the important thing is how — and you are alluding to that, how to handle it when the volume starts again?

And that’s why it’s so important, what Rickard was also saying, that the productivity part of these savings are essential, and that is what we must secure during next year.

Achal Kumar

Right. On the liquidity part, so previously, you guided to a cash burn of SEK 500 million to SEK 700 million.

Now with — having said that — I mean — so on the refund, you said that most of the refunds have been paid off.

And now you have [350,000] customers due, which is around less than a billion. So now what is the updated cash burn, particularly when it sort of could be there — there could be some pickup in the demand and the traveling cost, you’ve done a bit of cut on the cost? So what kind of liquidity or cash burn are that you expect over the next 3 to 6 months?

Rickard Gustafson

Well, this time we don’t guide on cash burn. I’d like to make sure, though, that it’s clear that you’re right that we have settled a big amount of the refunds.

And significant amount was actually done in November, which is outside of this reporting period. So that is not reflected in the numbers you have seen. So you bear that in mind.

Furthermore, we believe that we are entering into the low season, our low season in November, December, January and February.

That low season will be further amplified due to the ongoing COVID. So we believe that we’re going to have a rather weak Q1 that’s going to eat into our liquidity.

But then the cash burn going forward will be heavily dependent on the success of the vaccine and the distribution of vaccine because I think that’s the foundation for the reopening of countries and thereby allowing for the traffic to come back up again.

And it’s too early to second-guess that. So we are a bit conservative here, and we don’t really guide for the cash burn for the full year or for the next few months. We will have come back to that once we know more and have more confident in how demand will come back.

Achal Kumar

Okay. Perfect. I’m so sorry, I have 2 more questions. One, on the — what is your sort of CapEx guidance given that now you have delayed the deliveries and also probably you’re more confident about or more certain about your CapEx number?

So what sort of capacity CapEx guidance you have? And then second question, I wanted to go you slide 18 that you’re showing the aircraft order. So what I wanted to understand that the graph you’re showing, is that after the deferrals?

Or is that — does that include the deferrals? So we need to remove 4 aircraft from your FY ’22 deliveries and all? And so if you could be clarify that?

Magnus Örnberg

That includes the changes. Yes. So this is the updated version after the deferrals, that’s correct, on the aircraft. Yes.

Achal Kumar

Okay. So that means 14 aircraft will be delivered in FY ’22 now after the deferrals, right?

Magnus Örnberg

Correct. Correct. That’s correct.

Achal Kumar

And on the CapEx guidance

Magnus Örnberg

I mean on the CapEx guidance, we don’t give that guidance. But obviously, with these deferrals, we can see a lower CapEx than originally planned. And I think I’ll leave it like that. I think that’s sort of our planning now.

Rickard Gustafson

Thank you very much. Unfortunately, we are coming close to the hour, and we need to round off because I’m scheduled for other interviews and meetings.

But I know there are some unanswered questions that came in through the web. And if you have any additional questions, please submit them through the web, and we’re going to make sure through Michel that you all receive the answers to your questions.

So with that, I thank you so much for your attention this morning, and I wish you all a very good day. Thank you very much.

Magnus Örnberg

Thank you very much from my side as well.

Credit: SeekingAlpha

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