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Edited Transcript of SAS.ST earnings conference call or presentation 8-Mar-17 9:00am GMT

Thomson Reuters StreetEvents

Q1 2017 SAS AB Earnings Call

Stockholm Mar 8, 2017 (Thomson StreetEvents) -- Edited Transcript of SAS AB earnings conference call or presentation Wednesday, March 8, 2017 at 9:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Rickard Gustafson

SAS AB - CEO

* Goran Jansson

SAS AB - CFO

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Conference Call Participants

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* Jacob Pedersen

Sydbank - Analyst

* Andrew Light

Citigroup - Analyst

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Presentation

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Operator [1]

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Good morning ladies and gentlemen, and thank you for standing by. Welcome to today's SAS first-quarter report 2017 webcast. (Operator instructions).

I must also advise you that this conference is being recorded today, Wednesday March 8, 2017.

Now, I'm handing the webcast to your presenter today CEO Rickard Gustafson. Please go ahead, sir.

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Rickard Gustafson, SAS AB - CEO [2]

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Thank you very much, and welcome everyone to our interim quarter report. We will follow the normal procedure today, which means that I will start by providing an overview of the quarter, and give you some insight on some of the activities that we're working on at the moment.

After that, I will hand over to our CFO, Mr. Goran Jansson, who will provide you some more in depth into our numbers. And then I will come back to wrap this up before the Q&A session, and provide a forecast for the remainder of the year.

So if we then start, and I hope that you can follow us on the charts on your screens, and I will try to prompt you to the right page. So let's start by clicking to the first page, which is the overview of the results -- an overview of the quarter.

As we guided for, we report a seasonally weak first quarter of our year. Our earnings before tax and non-recurring items ended up at roughly around negative SEK700 million, which is around SEK300 million worse than the year before.

We report a unit revenue on PASK that was down 5.6%, while our unit cost, including fuel -- on this chart is excluding fuel -- but including fuel, the number is negative 3.4%. So you can see the revenues declining faster than we are able to mitigate with cost activities. And therefore, we have a negative turnout of this quarter.

The main drivers of the negative development is primarily related to an accelerated yield development, or yield pressure. We report negative 12% in the quarter, which is further amplified by the recent implementation of the Norwegian tax.

In the quarter, we have paid SEK146 million in taxes in Norway, which we believe we have not been able to actually push to the consumer, but rather have had to mitigate by lowering prices.

Also, jet fuel. It's a tough quarter for us to compare with the first quarter of 2016. In this quarter we report an increased cost for jet fuel of north of SEK350 million. And again, from a comparison point of view, the first quarter of 2016 was a bit of an extraordinary quarter in terms of cost for fuel, and now we have a different situation.

But on the positive sides, I would also like to stress that we get great feedback for our target audience group. They also travel frequently to, from or within Scandinavia, and there are some strong numbers reported in that respect in this quarter.

Our revenues are up, as we can see by -- on an FX like-for-like basis of 5%.

We see that more and more passengers select us for their travel needs. We have an increase of 500,000 passengers in the quarter, while we've also seen more EuroBonus members joining our frequent flier program.

We continue to deliver our efficiency program of SEK145 million. But that is not enough and I will come back to that more. I will speak about further developments in our cost structure.

That gives you a flavor of the quarter. It's, as I said, it's a seasonal weak. It is in line with our own expectations, but of course, we are not satisfied with such a negative number.

But if we continue, and on the next page start a bit on our -- talking about our strategy to become as relevant as we can for our target audience, our frequent passengers, again I would say there are some positive things to report in this quarter.

We have increased our long-haul presence, and again you may think that that is old news. But then I need to remind you that we have -- a year ago, in the first quarter, we did not have Boston, Los Angeles and Miami on our route network.

We have now, so we have added capacity north of 70% in terms of long haul, and we've increased the traffic significantly. Of course, that has an impact on the PASK, in that you do more ASK, of course that drops the PASK further down. And also has a positive impact on the number of business passengers and EuroBonus members that we have been able to win in the quarter.

We have also made a decision that also, during the winter season, to expand our presence in the leisure market, and have added a number of seasonal destinations to our route network this year, especially to attract passengers during their holidays over Christmas, New Year, and also during the winter breaks in Scandinavia in February and early March.

So far, that has been also a success for us, and we have seen a good uptick and response in the market, which has further driven the number of passengers, and also Plus passengers, up north for us.

We have continued to improve our customer offering. And a few things I would like to highlight in that respect. But, we, after some long discussions with the Oslo airport, have been able to secure our own fast track capacity there, which is now a dedicated fast track support for SAS customers, which is important and has proven to be very appreciated by our customers in Norway.

We have also introduced a new offering that we call SAS Plus Favor, which is a more price-attractive offering for customers to experience our Plus product. And, again, you can see that that also shows in the number of Plus passengers in the quarter.

Our digitalization efforts continue. We have, in the quarter, rolled out a completely new web platform in Denmark and in Sweden. We have not seen any major issues as we rolled it out. But as always when you provide something new into the market, it takes some time to adjust, and you always find some smaller errors or bugs that you need to wash out.

Therefore, we decided to wait to roll it out into Norway and the rest of the world until we have identified most of these kind of early first bugs or issues that you identified, fix them, and we're planning then to roll it out shortly into the rest of the market.

But we are excited about this. It's an important milestone for us, because with this modern platform we have a much bigger or better opportunity in the future to be more agile in our product development, add new features and ancillary services to our customers, and also connect more one to one with our passengers than we have been able to do in the past. So it's an important step for us.

Moving on to what we are doing on our strategic pillar of ours, which is creating as an effective operating platform as possible. Here, we have continued to drive on our improvement program. We have set a target of SEK1.5 billion of savings by 2019. Out of those SEK1.5 billion, SEK700 million are due to be realized in this year. Out of those SEK700 million, we have completed SEK145 million in the first quarter, again in line with our own expectation and our own plans.

We have also welcomed some new aircraft into our family. We have received delivery of three additional Airbus A320neos, and were put into traffic, which has been appreciated by our customers, but has also, of course, helped in terms of fuel efficiency as those aircraft are 15% to 20% more efficient than a traditional A320ceo, as they now called.

In terms of productivity, there is son mixed numbers there. You see that some things go in our direction. Some actually go in the wrong direction when it comes to productivity. Aircraft utilization is up 5% in the quarter, which is a significant achievement.

That is driven primarily by our long-haul efforts, and also our new and increased presence in the leisure market where we fly some longer distances, which has driven up the utilization of the aircraft.

You also can see that the crew productivity has gone in the wrong direction in the quarter, and that is primarily driven by one thing that is underlying, a positive thing, which is that we have been able to reduce the sick leave of our crew. So we had more people available than we anticipated. But we also, given that we now take delivery of a number of new aircraft, that also generates a lot of training for us.

So we believe that when we will come into the summer program, i.e. enter into the end of March, April this year, we will start to turn that negative productivity development on crew. And that will also start to improve in line with the aircraft utilization going forward.

When it comes to our punctuality and regularity, we also have a mixed bag. We have seen the punctuality drop somewhat in the quarter, but still remain at a fairly high level at 82.2%, and we still compare -- score among the most punctual airlines in Europe.

And, of course, we always struggle a bit this time of the year due to the fact that in northern Sweden and northern Norway, where we have large operations, weather can be a bit tricky in December, January and February.

We are pleased, though, that our regularity is moving in the right direction. That's an area where we have put some huge efforts into work in the last 12 months or so. And it's rewarding to see that we are moving in the right direction in that respect.

I'm also certain you notice that in the quarter we have completed the divestment of our subsidiary Cimber, which is a regional jet provider, which completes our strategic plan to simplify our fleet structure around a 737 and Airbus A320 platform, and divest other types of aircraft and then use regional jets and turboprops on a wet lease basis to support our network.

That's an important step, and I'd like to double-click on that one and take you to the next page, because I think it's important to share that we have had a very clear strategic intent from day one with this, that we've now completed the divestment.

Just to avoid that you think -- like you might be confused, why we bought Cimber a few years back and then we sold it, I'd like to just remind you of our strategic direction.

Back in 2012, 2013, we made a decision where we said that SAS should focus its operation on flying larger jets, i.e. the 737 family, Airbus A320 family, and wide-body aircraft.

We however, in order to provide the best timetable and network for all the people that need to fly frequently to, from and within Scandinavia, we also need to have access to smaller aircraft -- turboprops and regional jets -- but we should not operate them in our own regime. We should do that on a wet lease basis.

So, we embarked on that journey. At that time, we had 12 CRJ-900s in our fleet that did not really fit our strategy. We had a couple of alternatives back in 2013. One was, of course, to outsource this, or sell these aircraft to a regional jet provider that then could wet lease that service to us. At that time, the market was not mature enough. There were no players, no takers for such a big operation available in the market, so that didn't work for us.

Another alternative would have been to close that down, and close that service. That would come with some very unattractive closedown costs that we were not prepared to go after.

So the third alternative back then was to then build a regional jet provider in our own regime, and when the time is right then divest.

In 2014, the regional jet provider Cimber, who operated CRJs, ended up in some financial troubles. We were able then to acquire it, and then use that platform to build this regional jet service. We did that in a couple of years, and now in 2017 the wet lease market has matured. It has changed significantly in the last few years, and now we have a strong strategic partner that we're prepared to take this over, continue to invest in this business, and then also invest in brand new aircraft going forward.

So I think that's an important picture to play, that this is a clear strategic direction of SAS, and we stay firm in what we call our two tier production strategy, which means large aircraft produced and operated by SAS, smaller and regional jet aircraft operated by wet lease partners.

Now, moving on then to the next page, and I think I used a similar chart a quarter ago when I tried to explain to you how we see the future. We have a target of SEK1.5 billion in cost savings until 2019.

We improved that. We increased that target by SEK700 million in the last quarter, when we ended up with that number, SEK1.5 billion, but given the profitability or, the lack of profitability that we see, and the continued price pressure in the market, we realized that that is not enough. We need to do more. We need to further find new ways to strengthen the profitability and the competitiveness of SAS, and our SK production. Therefore, we are digging deeper in all these different areas that is kind of arrowed here with the white background on this chart trying to find more efficiency and flexibility in our workforce.

We're going to simplify our administrative setups. We're going to further optimize our technical operations. We need to further automate and streamline our ground handling activities. And we also need to further improve our commercial offering to make sure that we charge -- provide a service that customers are willing to pay for.

On top of that, we are also adding a new production unit, or new bases outside of Scandinavia.

This work is now ongoing, and it will take us until the second half of 2017 to create a robust plan that we're prepared to be more transparent about the financial implications from that.

But to give a little bit of flavor on how to think about first, the additional measures that we are looking for, and also give an update on where we stand with this new AOC, with the base out of Ireland, I'll have a few pages for you.

So start with how we improve SAS. Right now, throughout the organization, there is an intense work ongoing where we are currently looking at north of 300 activities across the entire business, where we're really trying to detail actions on our -- either to improve productivity, improve flexibility, or further take out cost in our structure.

We're looking at every corner. And what we are preparing is to create together a robust plan that for each and every of these hundreds of activities, there will be a clear business case identified. We need to have an idea of the required investment and potential restructuring funding that will go -- will be required in order to complete it.

We need to understand the cross-functional dependencies that we have, and we also need to have a thorough risk assessment of each of these initiatives. Even though I know that everybody is probably keen to hear more about what are the financial consequences and so forth of this, I have to keep that to ourselves a bit further. We need to complete this very comprehensive work, and then we'll come back to you with a robust plan in the second half of 2017.

But the idea is that we recognize that that needs to be on top of the SEK1.5 billion that we announced, and we need to do more in order to secure our ability to further invest and develop our business.

Then, moving on to -- to complement all of this, we are providing or establishing a new AOC out of Dublin. That will operate out of two bases in Spain and in London.

But before we go there, I provide you with this page as a backdrop and background to this.

As we can see on this chart, the market conditions that we face is the fact that in terms of capacity growth from Scandinavia to Europe in the last couple of years, it's primarily been driven by the so-called LCC providers -- the low cost carriers. While SAS and all kind of major carriers, or traditional carriers, or whatever you like to call them, have had a more flat development capacity growth.

On top of that, we also note that the demand for travel is shifting where the business travelers are more flat, while we see some significant growth in the leisure market.

We also notice that in order to go after this market, the European landscape is shifting, where some of the traditional network carriers, in order to be competitive and also to be attractive in the leisure market, are scaling down their services and providing more of a debundled offering to be price competitive in the leisure market. While we see some of the low cost carriers are also keen to get some of this business traffic on board, and they start to provide -- to bundle some of their services and also offer fast track capabilities, better legroom and so forth.

We can also acknowledge that SAS today is the only carrier with 100% of its operation based out of Scandinavia, flying from Scandinavia to Europe, while all other tails you see on this chart, 100% or close to 100% fly from outside in.

If we want to stay competitive, I guess we also need to think through how do we meet that, because the fact is that even the direct wages cost in Scandinavia is in many cases significantly higher than in many other EU countries.

Therefore, if you flip to the next page, that's why we said that we need to complement our SAS Scandinavian production, which will maintain the majority of what we do, because we are staying firm to our strategic intent to provide the best possible timetable and network for those that travel frequently to, from or within Scandinavia.

That means that a majority of production needs to be founded out of Scandinavia, and fly from Scandinavia and out. But to complement, we want to add a base in London and a base in southern Spain with the main purpose to make sure that we secure competitiveness on some key destinations -- key strategic destinations such as London so that we are not forced to reduce capacity there, or even leave that destination longer term.

Secondly, we also want to make sure that SAS is prepared to participate and take part of the growing leisure market, and create a competitive structure to go after that one as well.

We have now, for 70 years, been a significant part on the Scandinavian infrastructure, where you can see on this chart, where we offer maybe more than 80,000 journeys per day. We have more than 800 departures per day. We have more than 300 tons of cargo every day. If we want to sustain that position as the main, leading provider for air services to, from, within Scandinavia, we need to make some further steps.

And that means we need to further improve productivity and efficiency in our SK operation, and as a complement, we also need to make sure that we are competitive in the European landscape, and can compete on destinations such as London and the growing leisure market.

So I hope that gives you a flavor of the quarter and also our strategic direction. And with that I'd like to hand you over to our CFO, Mr. Goran Jansson, to give you some more details on the numbers.

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Goran Jansson, SAS AB - CFO [3]

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Thank you, Rickard. As usual, I will start to go through our income statement, and then provide you with more details -- commentary in relation to the development of our revenue and expenses.

The total operating revenue increased SEK682 million during the first quarter. Adjusted for currency, the increase was 3.7%.

Operating expenses increased by SEK970 million. This was driven by higher jet fuel costs, unfavorable currency development. I will provide further details in relation to the operating expenses shortly.

Moving down to the lease costs, these increased by SEK33 million compared to last year. However, adjusted for currency movements, the increase was only SEK12 million, as we took deliveries on operating leases terms on our new Airbus A320neos. Aircraft lease cost will increase gradually.

Depreciation increased slightly compared with last year, driven by more aircraft on our balance sheet.

The pre-tax profit before non-recurring items was negative by SEK707 million. This is SEK303 million weaker than a year ago, which is unsatisfactory and shows the need for further structural measures, as discussed by Rickard.

Move to next slide. As mentioned, our total revenue was up SEK682 million. When adjusted for positive currency effects primarily relating to the stronger Norwegian krone, the total revenue increased by SEK323 million.

We increased the scheduled capacity by 11.3%, which would contribute to SEK1.7 billion in increased revenue, assuming the same yield as a year ago.

The higher load factor had a positive impact on our revenue by SEK286 million, while the significantly lower yield had a negative revenue effect of SEK1.7 billion. The yield is negatively affected by the increase in our long-haul operation that structurally has a lower yield than the shorter routes here in Europe. In fact, our currency-adjusted yield within Europe and Scandinavia was down by a mid-single-digit amount this quarter.

Within our traffic revenue we have a very positive development of civil revenues, which this quarter was offset by adjustments of inter-line revenues from other airlines. Overall, our traffic revenue was up SEK6 million during the quarter.

Other operating revenue was down by SEK12 million, which mostly relates to the outsourcing of ground handling stations employed last year.

Next slide shows a detailed breakdown of the development of our operating expenses during the first quarter compared with the same period last year. Adjusted for negative currency effect of SEK354 million, our operating expenses increased by SEK660 million. This was primarily driven by three factors.

Firstly, the capacity growth increased our expenditures by SEK413 million.

Secondly, our jet fuel cost, net of currency and volume, increased by SEK143 million.

And, thirdly, the inflationary component with our cost base increased our expenditure by SEK100 million.

The efficiency program contributed with SEK145 million during the quarter. In particular, we have increased productivity with our technical maintenance through the production of lean processes that has improved our efficiency by more than SEK20 million.

Facility costs have come down by close to SEK20 million through the renegotiation of contracts with lower energy use.

And within our flight operations, we have now achieved full-year effects of initiatives that were implemented a year ago.

In addition, our operating expenses were affected by higher IT costs relating to our investment in the digitalization and also a further phase out of cost of three Boeing 737s.

Finally, we incurred SEK23 million in restructuring costs within ground handling during the quarter, which affects the item, other, in this line. All together, our operating expenses in the quarter was SEK8.5 billion.

Moving to the next slide. If we move -- there we can see a breakdown of our largest single cost driver this quarter, which was the jet fuel cost. Firstly, due the capacity growth our costs increased by SEK131 million.

Secondly, the spot price for jet fuel were 31% higher this quarter than a year ago and that increased the cost with SEK166 million.

The cost increase partly -- also was partly mitigated by our hedging. That reduced our cost by SEK52 million. All together, our fuel cost increased with SEK351 million compared a year ago.

On the next slide you can see our jet fuel currency hedge positions. We have currently hedged 44% of our expected jet fuel consumption for the next 12 months, which is in line with our policy. We have hedged significantly more of our consumption in the near term to match the booking profile of our tickets.

The hedging has been done at a price level between $450 to $510 per metric ton. This is done through a mix of call options and swaps until June. With current jet fuel prices and the dollar exchange rate we expect jet fuel cost to increase relatively substantially in the financial year 2017 compared to last year.

Moving to our currency hedges, we have hedged 67% of our anticipated dollar deficit during the next 12 months and 73% of our expected surplus of the Norwegian kroner.

On the next slide you can see that our financial preparedness is 33%. This is well above our target of 20%, but 8 percent points lower than a quarter ago.

We have a cash position of SEK7.2 billion and, in addition, SEK3.2 billion of unutilized credit facilities. The reason for the financial preparedness lower than a quarter ago is because January is a seasonally low cash point of the year. In addition, we have paid about SEK0.7 billion in net liability during the quarter.

Looking at the equity ratio, it actually has improved despite the negative earnings during the quarter. This is driven by a revaluation of our net pension assets due to the increased discount rate, following higher interest rates in the market.

Let's move to the next slide. As we have noted previously, SAS needs to reduce its financing costs. During the next three years we have about SEK6 billion net interest-bearing liabilities that will mature. Most of this debt that remains this fiscal year is secured loans, i.e. aircraft financing that will roll over.

However, during the next two fiscal years, an unsecured bond and a convertible debenture matures.

In February 2018, the terms for redeeming our preference shares will also change. We are therefore currently reviewing the capital structure with the objective to, from a risk return perspective, optimize the ratio between equity and debt where possible.

This is also including -- includes consideration of alternative financing options that could result in lower costs for financing. How these mature -- maturities and the preferred shares will be dealt with is still too early to say and something is expected that we will come back later this year or potentially next year.

Finally, we maintain our guidance relating to the net CapEx for the fiscal year of about SEK1 billion.

One thing I would like to note is that we, in addition to the CapEx program, have commenced an overhaul of our -- a number of aircraft engines. This program will run during the fiscal years 2017 and 2018. We have already made cost provisions for these engines. This means that our working capital in our cash flow statement will affected by the payments for this program.

This concludes my part of the presentation. I would like to hand over to Rickard.

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Rickard Gustafson, SAS AB - CEO [4]

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Thank you, Goran. On the final page, then, to wrap this up, I'll provide the outlook for the full year of 2017. And there is nothing new on this page. We maintain our outlook for the full year, which is that we expect, despite a weak start, that we expect a -- to post a positive earnings before tax and non-recurring items for the full year, of course, given that nothing unidentified or unplanned activity would occur.

And we are facing a reality where we see a lot of uncertainty around the globe in terms of geopolitical unstable. We know that there are a number of rather significant elections going on in Europe and so forth. I have no reason to believe that they will have any direct implication on SAS, but you never know what might come.

And those outcomes may have implications on FX development and so forth and, of course, that could then have implication on SAS. But as far as we can say right now the circumstances that we see around us at this stage, we feel confident that we can reiterate our outlook as we stated in the beginning of the year.

Some things that we look forward to in the year to come, some of the major things that you -- we are working on going forward is, of course, the defining and detailing all these hundreds of activities that will together provide a good plan and platform for how we see the future of this Company. And you should expect to hear more from us in the second half of this year related to that.

We continue our digitalization efforts where the new platform will be rolled out globally, and then on top of that we will then also add new technology, new ventures and capabilities regarding our loyalty platform and then further strengthen our CRM capabilities in that regard.

And then of course the Airbus 320neo will continue to be delivered to us. We anticipate to take 12 aircraft during this year, so basically we will have one new aircraft delivered every single month in this year.

So, with that, we close the formal presentation part of this conference call. I now would like to hand back to the operator to help us facilitate the Q&A session. Thank you very much and, operator, please.

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Questions and Answers

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Operator [1]

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Certainly. Thank you. (Operator Instructions). We do have one audio question for now and it comes from the line of Jacob Pedersen from Sydbank. Please go ahead.

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Jacob Pedersen, Sydbank - Analyst [2]

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Hi guys. I have a couple of questions. Could you talk about the potential for moving bases outside Scandinavia in terms of the number of airplanes and what is the upper limit here? How do you see that?

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Rickard Gustafson, SAS AB - CEO [3]

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Right, good morning, Jacob. What we've said right now, that this is a complement to our existing Scandinavian production, and we foresee that that's going to be the case going forward. What we plan for right now is to have this new AOC out of Ireland should operate with two bases, one in London and one in Spain. We foresee that we will deploy seven to nine aircraft across those two bases. Exact numbers being defined, but in that range, seven to nine aircraft.

We are staying firm in our ambition to have our operation starting and up and running as of November 2017.

Currently we are recruiting some key positions in order to have the right structure to apply for a new AOC and have the chance to get that approved. Currently, we are recruiting seven key positions and we're pleased to note that we have more than 300 applicants for those seven positions, so there seems to be a big interest for this. Recruitment of crew will start later this spring, early summer to then man the first aircraft that we have.

So that's what we're planning for. Over and beyond that, those two bases and that seven to nine aircraft, is not anything that we have decided or planned for. Whatever the future will bring, we don't know for sure.

I would not rule out that maybe there will be some alterations to that in the future. But the key for us is that we are not abandoning from our strategic intent to provide the best possible network for those that travel frequently to, from and within Scandinavia. And with that said, that means that in order to have a timetable to work for that customer group the majority of our production will continue to operate out of Scandinavia, and fly from Scandinavia and out, rather than from outside of Scandinavia and in.

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Jacob Pedersen, Sydbank - Analyst [4]

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Very clear, okay. You mention these new structural measures. I'm very excited to see what that will be when we get further out and how big the earnings impact. I don't see you mentioning that much about EuroBonus in this respect. How do you plan to expand the income streams from the EuroBonus? Is this ladder exhausted, or what are your ideas in this regard?

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Rickard Gustafson, SAS AB - CEO [5]

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Well, it's not exhausted. We continue to see a significant uptick in the membership base and, as you have probably noticed, we added 100,000 members to the base. We're now up to 4.8 million members in total and growing every quarter. We see a stronger uptick in ancillary services and attached revenues which are derived from that and which we foresee continuing as well.

But with that said, though, when we provide you with a more comprehensive plan in the second half of 2017, I would not be surprised if also we have more details on how we see the future with EuroBonus in such a plan as well.

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Jacob Pedersen, Sydbank - Analyst [6]

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Okay. Then more of a household question. The costs for technical aircraft maintenance are still very high. Should we expect the costs to stay at this higher level in the future, or when will that ramp down again to what we could call a normal level?

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Goran Jansson, SAS AB - CFO [7]

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As I mentioned also, the provisioning for these engine overhauls was implemented as of quarter two last year. That's why there's a big difference between Q1 and Q1 this year. I would say the recurring level of Q -- what we have in Q -- from Q2 and what we have now is, I think, expected to be continued. And of course in, if you say dollar-denominated amount it is, of course, will shift depending on what dollar level you have.

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Jacob Pedersen, Sydbank - Analyst [8]

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Of course, okay. Then my last question. I would like to hear your thoughts on the low cost, or the potential low-cost collaboration on the long-haul flights between Norwegian and Ryanair. What effect could this bring on your long-haul flights?

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Rickard Gustafson, SAS AB - CEO [9]

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Well, we see that we are operating in a highly-competitive environment where there are a number of competitors that do a number of interesting things. But when it comes to this particular effort of theirs, it doesn't change our strategic selection. We continue to provide a long-haul service where we focus on the northern hemisphere because that works for us from a location point of view.

We focus on destinations where there is a good mix of business and leisure traffic, because we have a very appreciated business product as well that we sell. We focus on daily operations rather than a few days per week type of operation, so that's another difference for us. Then, finally, we are looking for destinations where we see a significant direct demand for traffic to and from Scandinavia to those destinations where we're not dependent on a significant feeder traffic from Europe.

Of course, feeder traffic will always be welcome on board, but our business cases are not dependent on them as we develop our long-haul network. So that strategy of ours will not change if you start to see some collaboration where Ryan start to feed Norwegian in Gatwick and so forth. I don't see that that will impact our strategic direction. It will probably create a more competitive market, but that's -- I think it's a given regardless that we anticipate that.

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Jacob Pedersen, Sydbank - Analyst [10]

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Okay. Thanks so much.

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Rickard Gustafson, SAS AB - CEO [11]

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Thank you, Jacob.

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Operator [12]

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(Operator Instructions). We do have a further audio question and it comes from the line of Andrew Light form Citigroup. Please go ahead.

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Andrew Light, Citigroup - Analyst [13]

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Yes, good morning, two questions. First of all, on the new bases, do you have to seek union agreement to pursue that strategy, or is it just something you have to agree internally within SAS?

And then, secondly, as part of the initiatives and options that you have to present later in the year, is potentially reducing capacity growth on the table given that unit revenues are generally falling faster than unit cost?

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Rickard Gustafson, SAS AB - CEO [14]

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Could you repeat your second question, Andrew? I'm not sure if I got that correctly.

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Andrew Light, Citigroup - Analyst [15]

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You plan a capacity growth this year of 6% to 8%. Do you have options to reduce that capacity growth should unit revenue continue to be so weak and, perhaps, be worse than the reduction in unit costs?

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Rickard Gustafson, SAS AB - CEO [16]

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Alright. Okay, I got that. I'll try to give you a flavor. On the new bases it's a yes and a no to that question, to be honest with you. To establish them does not require a union consent as such, but of course that may not stop them from maybe have ideas or bring that into their -- when we have ordinary collective bargain and discussions and negotiations. That could be of course a theme brought to them. As we have seen in other carriers, where there have been discussions around establishing new entities and that has then triggered some indirect discussions related to that, but in separate negotiations.

In terms of that, yes, there will be discussions on this within SAS. However, though, I am confident that our employees and our unions, they also want to see a growing and well -- and profitable company. I believe that they see a further need for continuous enhancement of SAS, to stay competitive and stay in the game.

And we've demonstrated in the past that we are able to do something with transformation, maybe even more than other players in Europe, and to that, actually, together and in effective collaboration. And that's what we aim to do also when it comes to this discussion. So that's a bit of a complicated answer, maybe, to a simple question, but I hope that gives you a flavor for the story there.

In terms of growth, well, of course we always reduce, but I would like to remind you that the capacity growth what we provide are primarily driven by two things this year. Firstly, a full-year effect of our long-haul expansion, and that one is working out well for us.

And, secondly, we are having more seats in our neo's that we are entering into the fleet versus the ones that retire. So it's more a replacement of aircraft, and the new aircraft have a few more seats. So in terms of lags I think our growth is around 1%, 1% or 2%, so it's rather limited. So that's -- I hope that gives you an answer to your growth question as well.

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Goran Jansson, SAS AB - CFO [17]

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And just on ability to move capacity, of course, with the increased -- with more than 30 aircraft on wet lease with very good contracts when it comes to flexibility that enabled us to flex our capacity more than in the past.

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Rickard Gustafson, SAS AB - CEO [18]

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Correct.

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Andrew Light, Citigroup - Analyst [19]

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To be clear on these new bases, then, this is additional capacity. It's not replacing anything in Scandinavia, so it's going to be taken from the new aircraft orders that you have outstanding?

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Goran Jansson, SAS AB - CFO [20]

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Yes.

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Rickard Gustafson, SAS AB - CEO [21]

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Yes.

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Andrew Light, Citigroup - Analyst [22]

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Rather than additional orders on top of what you've already got on order, if you know what I mean?

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Rickard Gustafson, SAS AB - CEO [23]

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That's correct. That's absolutely correct. So of those 13 neo's that we have on order, we will place -- seven or nine of them will be placed in London and in Spain.

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Andrew Light, Citigroup - Analyst [24]

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Okay, great. Okay, thank you very much.

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Operator [25]

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Thank you. There are no further questions, gentlemen, please continue.

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Rickard Gustafson, SAS AB - CEO [26]

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Okay, if there are no further questions, then I thank you for joining us this morning and I wish you all a good day. Thank you very much.

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Goran Jansson, SAS AB - CFO [27]

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Thank you. Goodbye.

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Operator [28]

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Thank you. And that concludes the webcast. Thank you all for participating. You may now disconnect. Have a good rest of the day. Thank you.